Expert Witness Perils In SR&ED Appeals

• Published date: 13 July 2022
• Subject Matter: Tax, Income Tax, Tax Authorities
• Law Firm: Gowling WLG
• Author: Mr Stevan Novoselac

Persuasive expert opinion evidence is critical in scientific research and experimental development ("SR&ED") appeals before the Tax Court of Canada ("TCC"). This article discusses:

1. Some general considerations for SR&ED appeals;
2. The Federal Court of Appeal ("FCA") and TCC decisions in National R&D;¹ and
3. Certain practical guidance to successfully resolve SR&ED appeals, both through negotiations with the Canada Revenue Agency ("CRA") and, when a settlement is not achieved, at hearings before the TCC and if necessary the FCA.

General considerations for SR&ED appeals

The five-part test for determining eligibility of SR&ED expenditures has been well established for many years and is consistently applied:

1. Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
2. Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
3. Did the procedure adopted accord with the total discipline of the scientific method, including the formulation, testing and modification of hypotheses?
4. Did the process result in a technological advancement?
5. Was a detailed record of the hypotheses tested, and results kept as the work progressed?

When marshalling evidence aimed at meeting these criteria, certainly one of the most critical aspects is obtaining expert testimony. It can be highly problematic, even fatal, not to retain an expert, or to have a proposed expert that does not get qualified by the TCC to testify. Experts have an overriding duty to assist the TCC impartially on matters relevant to their area of expertise. This duty overrides the expert's duty to the taxpayer, even though they are retained and paid by the taxpayer. The expert must be independent and objective and not merely an advocate for a party.

National R&D

The sole issue in National R&D, a TCC decision that was affirmed by the FCA, was whether expenditures incurred on a certain project were SR&ED eligible. The only witness who testified before the TCC was the taxpayer's sole shareholder and president, who conducted all of the subject activities himself, with a student helping. Given his subject matter expertise, he was accepted by the TCC as a litigant expert, which enabled him to provide opinion evidence, as an expert witness, in addition to providing evidence on matters within his personal knowledge, as a regular fact witness. The taxpayer had also retained an expert...