Tax Court Affirms That Expert Witnesses Need To Know The Business

• Published date: 01 June 2021
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Tax Authorities
• Law Firm: Gowling WLG
• Author: Mr Stevan Novoselac

In Allegro Wireless¹ the Tax Court of Canada ("TCC") highlighted that, to qualify as an expert, a witness must be able to demonstrate sufficient knowledge of the business and the factual foundation for the tax dispute before the TCC.

Allegro Wireless is a scientific research and experimental development ("SR&ED") case and the TCC referenced the usual five criteria used to determine whether a particular activity constitutes SR&ED, as follows:

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?

In this case, the taxpayer carried out a number of projects to develop software to address various needs of its clients, focusing on providing a software platform that enabled its clients to communicate remotely with their workers. Hand-held devices allowed information to be transferred, through cellular networks, between the field workers of the taxpayer's various clients and databases maintained by the clients. This was a new product that had not previously existed. The software development necessitated in-depth research and knowledge of the individual and unique needs of each client, engaging significant technological challenges and uncertainties, including arising from not having access to the underlying software that operated the various hand-held devices.

Both the taxpayer and the Crown called witnesses who had provided expert opinions. In determining the admissibility of the expert opinions, the TCC applied the well-known two-step test. The first step of the test requires the party putting the proposed expert forward to establish that the evidence satisfies four threshold requirements: (i) relevance; (ii) necessity in assisting the trier of fact; (iii) the absence of any exclusionary rule; and (iv) a properly qualified expert. The second step requires a cost-benefit analysis be done to determine if the otherwise admissible expert evidence should be excluded because its probative value is overborne by its prejudicial effect, which requires considerations such as...