Court Case Clarifies SR&ED Eligibility Criteria for a Food Sciences Claim

Canada’s largest single source of business funding comes from the Scientific Research and Experimental Development (SR&ED) tax credit program, which recently underwent some large eligibility changes after a recent decision made by the Tax Court of Canada in Biscuiterie Dominic Inc. and La Petite Bretonne Inc. vs. His Majesty the King (2024 CCI 97).  

This court case further tests the key SR&ED eligibility requirement of establishing a technological uncertainty. It was an informal hearing in the judge’s chamber as there is no dispute regarding the material facts of the case. Consequently, the Canada Revenue Agency (CRA) does not consider such cases to be precedent setting. If there is a decision favorable to the appellant, the decision quantum is limited to ~$25,000.  

A Short Overview of the Court Case 

Biscuiterie Dominic Inc. and La Petite Bretonne Inc. (“Appellants”) appealed their 2017 and 2018 SR&ED claims that were denied. The Minister of National Revenue (“Minister”) disallowed two of the Appellants’ claimed SR&ED projects in 2017 and four of the Appellants’ claimed SR&ED projects in 2018 on the basis that they did not meet the definition of SR&ED pursuant to subsection 248(1) of the Income Tax Act (ITA). In denying the claim, the Minister contended that the Appellants’ disallowed projects did not address a technological uncertainty and that the Appellants increased their own knowledge but did not advance food science knowledge of the industry in general. Based on the evidence adduced, Justice Gagnon concluded that a technological uncertainty had not been established by the Appellants and that the six projects reviewed were not SR&ED. 

Overview of the Rejected SR&ED Project 

The Appellants are related companies, and their appeal centred around two projects in their 2017 taxation year (Projects One and Two) and four projects in their 2018 taxation year (Projects Three to Six).  

Project One involved replacing sodium propionate as a preservative in their mini-croissant with a fermented yeast spray to produce a more natural product without impacting shelf life and the implementation of this additional step in their production process; and Project Two involved developing a cookie product containing quinoa. 

Project Three involved improving the shelf life and texture of a chocolatine product; Project Four involved developing a cinnamon-raisin-filled croissant and incorporating the filling step in their production process; Project Five was a continuation of Project One and involved further testing with fermented starch; and Project Six was similar to Project Five but involved replacing sodium propionate as a preservative in a cake product with fermented wheat to produce a more natural product without impacting shelf life. 

The Case for Further Defining SR&ED Eligibility Criteria 

Project eligibility is established if it meets the requirements of subsection 248(1) of the ITA. In determining SR&ED eligibility, Justice Gagnon relied upon Northwest Hydraulic Consultants Ltd. vs Her Majesty the Queen (98 DTC 1839), which included the “Five Questions” that formalized how SR&ED eligibility was to be assessed: 

1. Was there a technological risk or uncertainty that could not be removed by routine engineering or standard procedure? 

2. Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty? 

3. Did the procedures 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 were results kept as the work progressed? 

During the hearing, the Appellants described the work done in each of the six projects, asserting that there was uncertainty around controlling shelf life while removing certain ingredients (Projects One, Five, and Six) or how changes to product formulations would impact organoleptic properties (Projects Two, Three, and Four).  

For example, in spraying fermented yeast to improve mini-croissant shelf life (Project One), the Appellant faced uncertainty on how this new ingredient would impact croissant texture and flavour profile due to the high-fat, layered structure of the product, as well as how to incorporate the spraying step in their existing process. However, the Appellant conceded that they often used their external suppliers for guidance on how to overcome technological challenges in developing new or improving the existing products associated with the six SR&ED projects at issue.  

The Appellant further conceded that during the years that these projects were undertaken, their means for testing were primarily qualitative in nature (taste and texture), and they did not collect or analyze scientific data.  

In its submissions, the Minister re-asserted that none of the projects met the SR&ED eligibility criteria because the products and ingredients the Appellants experimented with were known and any changes to processes involved standard and well-known strategies. Because the Minister’s basis for denying the SR&ED claims was that there was no technological uncertainty, Justice Gagnon only considered Question 1 above. 

The Court Case’s Legal Findings 

Was there a technological risk or uncertainty that could not be removed by standard procedures or engineering studies? 

In reviewing the evidence, Justice Gagnon determined that there were similarities among the projects and combined Projects Two, Three, Five, and Six into “Group One” and Projects One and Four into “Group Two.” With regards to the Group One projects, Justice Gagnon opined that they were more likely based on a lack of knowledge. Specifically, while the Group One projects presented challenges, unknowns, and uncertainties, the products targeted by the projects did exist and the tools, methodologies, processes, and ingredients were, on the whole, available to the Appellants.  

Justice Gagnon further opined that based on the evidence, the Appellants attempted to use known methods to solve problems, often suggested by their suppliers who had more knowledge than the Appellants. Furthermore, ingredient adjustments based on quantity or volume were not sufficient to establish a technological uncertainty; the ingredients used were known and the properties of the ingredients were available, and while this was not enough to eliminate risks and uncertainties, it was also not enough to establish that uncertainty could not be eliminated through standard procedures. Justice Gagnon determined that with regards to the Group One projects, there was no technological risk or uncertainty that could not be eliminated by standard approaches or procedures.  

With regards to the Group Two projects, Justice Gagnon opined that the distinction with these projects was in the inclusion of a production line aspect, with many issues arising in how the production line was to integrate the proposed recipe changes. Justice Gagnon agreed that the evidence supported the Appellants’ concern that costs associated with changes to the production line were legitimate; however, the evidence did not support that the production line itself presented a technological uncertainty that could not be eliminated by standard procedures or routine engineering studies. 

How This Decision Affects Future SR&ED Eligibility 

The Biscuiterie Dominic Inc. and La Petite Bretonne Inc. decision is of importance to existing and potential SR&ED claimants for the following reasons: 

• Technological uncertainty is an uncertainty that cannot be eliminated by standard procedures or routine engineering studies. If the resolution is foreseeable using usual procedures or using routine techniques, there is no technological uncertainty. 

• Food science SR&ED requires projects to be represented with an emphasis on the technological uncertainties around the underlying science of the interactions of the ingredients and, where applicable, how subsequent process steps are impacted by these interactions. 

• Having quantifiable metrics/results associated with food science experimentation is crucial for establishing SR&ED. These could include testing by accredited organoleptic testers. 

• Involving suppliers to help solve problems associated with recipe formulation and process development is not fatal to SR&ED eligibility; however, the relationship between the claimant and the supplier needs to be collaborative in nature. 

• Developing new knowledge in and of itself is not sufficient to establish SR&ED if there is no technological uncertainty. 

• The judge commented that the claimant did not keep notes on the research project. (In other words, claimants need to fulfill question 5 of the “Five Questions” related to the Northwest Hydraulic Consultants Ltd. vs Her Majesty the Queen (98 DTC 1839) decision.) 

The Future of SR&ED Tax Credit Eligibility 

The Canadian government has further defined their technical uncertainty criteria for the Scientific Research and Experimental Development (SR&ED) tax credit program, making it clearer which research and development projects are eligible for funding through this program. The Ryan team of SR&ED consultants and government funding experts have been following changes to the SR&ED tax credit program and would be happy to speak with your business about potential funding opportunities through this program and others. Reach out to us.