Formadrain Inc. v. The Queen

The case of Formadrain Inc. v. The Queen, 2017 CCI 42, recently determined that a new approach to making tubing used in repairing drains involved SR&ED.

The Crown argued that the project’s technological uncertainty was “entirely in the chemical composition of the material [forming the mandrel], a task which was delegated to a rubber manufacturer,” but Justice D’Auray referred to paragraph 248(1)(d) contemplated work delegated to others provided that work was done in Canada. The Court found that the taxpayer’s employees were too systematic for their work to be rightly called “trial and error”. They had kept detailed notes of the tests that had been planned and also the results of these tests.

The Last Question

The fifth question which CRA uses to assess the eligibility of a SRED claim is whether there was kept a record of the hypothesis and the test results while the work was being done. CRA wants the docs to have been created at the time the work was happening, and I know from experience that they have ways of determining the age of documents if they want to do a forensic test on them.  Basically, they want to see why the work claimed was necessary for the resolution of the technological uncertainties. There are many docs routinely created in a business, and if you have done SRED, you probably have a lot more evidence of your work than you realize.

One reason for the documentation, and the one I hear CRA reviewers most often tendering, is so that they have proof that the work was done. I don’t accept that and usually ask how did this product come into existence if the work wasn’t done?  A more reasonable reason for this requirement is to ensure that the knowledge is preserved and that what has been accomplished can be replicated.