Tax Court Of Canada's Rejection Of Solar Panel Shingles As SRED

• Published date: 06 July 2021
• Subject Matter: Tax, Energy and Natural Resources, Energy Law, Income Tax, Tax Authorities
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction: What activity qualifies as scientific research and experimental development ("SRED") under the Income Tax Act?

What constitutes scientific research and experimental development ("SRED") under the Income Tax Act, s. 248(1), will depend significantly on not only the possibility of scientific advancement, but also whether the process involved to reach the advancement involved scientific hypothesis, testing, and measurement of results. Section 248(1) of the Income Tax Act defines scientific research and experimental development as "systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:

• Basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
• Applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
• Experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing materials, devices, products or processes, including incremental improvements thereto."

However, the definition also notably excludes "the commercial production of a new or improved material, device or product or the commercial use of a new or improved process". Lack of scientific process and documentation may result in an activity's expenses being disqualified for a tax credit under the scientific research and experimental design incentive program. This was the case in Logix Data Products Inc. v. The Queen, 2021 TCC 36 [Logix Data Products], where the Tax Court of Canada disallowed the taxpayer's appeal due to lack of scientific process.

The Case of Logix Data Products: The Importance of a systematic and scientific method in SRED activity

In Logix Data Products, the court dismissed the taxpayer's appeal that their expenditures qualified as SRED expenses and were thus entitled to research and development tax credits under the Income Tax Act. The SRED in question was the development of a solar panels product which would be attached to roofs and would replace the need for shingles.

While the CRA had accepted Logix's expenditures to test the development of fabricating a solar panel with PVC rather than glass in the previous 2011 and 2012 taxation years, they challenged the work done in 2013 to create solar panel shingles. The purpose of the research activity...