Tax Court Opens Canned SR&ED Tax Credit Claim 

The Tax Court of Canada (TCC) released its decision in Manning Canning Kitchens Inc. v. His Majesty the King¹, which further tests the key Scientific Research and Experimental Development (SR&ED) tax credit eligibility requirements of establishing a technological uncertainty, demonstrating a systematic investigation, and achieving a technological advancement. 

Manning Canning Kitchens Inc. (the appellant) appealed its 2020 SR&ED tax credit claim, which was disallowed by the Minister of National Revenue (minister) on the basis that the project 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 appellant’s disallowed project did not address a technological uncertainty or use an approach consistent with a systematic methodology. Instead, the appellant’s approach involved product development using non-scientific procedures. Based on the evidence adduced, the TCC concluded that the appellant established a technological uncertainty, formulated and tested hypotheses through a systematic investigation, maintained records of the results, and achieved a technological advancement. 

The SR&ED Project 

The appellant’s activities carried out in its 2020 taxation year related to developing a canned, vinegar-based drink containing cold-pressed juice that was shelf-stable at room temperature. The appellant contended that no such product existed at the time and that comparable products were heat-treated and stored in glass bottles, making them more expensive. Initial attempts by the appellant to develop such a drink resulted in exploding cans due to the cold-pressed juice creating microbial growth and releasing oxygen. The appellant asserted that it undertook experimentation to control microbial growth and achieve a vinegar-based drink that was shelf-stable at room temperature. 

Project Eligibility 

Project eligibility is established if it meets the requirements of subsection 248(1) of the ITA. In determining SR&ED eligibility—and despite the “how and why” approach to SR&ED claim assessment introduced by the Canada Revenue Agency (CRA) in August 2021—the TCC relied on the decision in Northwest Hydraulic Consultants Ltd.², which included “five questions” to formalize how SR&ED eligibility is to be assessed: 

1) Was there a technological risk or uncertainty which 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 procedure adopted accord with the total discipline of the scientific method including the formulation, testing, and modification of the hypotheses? 
4) Did the process result in a technological advancement? 
5) Was a detailed record kept of the hypotheses tested and results obtained as the work progressed? 

In its testimony, the appellant asserted that it faced a technological uncertainty in developing a room temperature, shelf-stable, vinegar-based drink containing cold-pressed juice due to the fruit being “dirty by nature,” leading to undesired microbial growth and container failure due to oxygen generation. The appellant experimented with known preservatives (potassium sorbate and sodium benzoate); however, initial testing resulted in the drink having a milky appearance and an undesirable taste profile. The appellant next experimented with a white button mushroom extract called Chiber, which had previously only been used in dairy products and not in a vinegar-based, cold-pressed juice drink. Testing under both refrigerated and room-temperature conditions resulted in no container failures, demonstrating improved shelf stability with this preservative. In denying the claim, the minister specifically asserted that the appellant used preservatives known to competent professionals in the field, had not undertaken a systematic investigation or search in developing the product, and had not maintained records of the hypotheses tested and results. 

Legal Findings 

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

The minister asserted that the objective of the appellant’s project was to increase the shelf life of the drink without pasteurization and that it was known that this could be achieved using refrigeration. The minister cited the appellant’s T661 SR&ED filing, which did not specifically state that the objective was to develop a non-refrigerated product. However, TCC Justice Bodie opined that the SR&ED filing also stated that the objective was to develop a refrigerated product as evidenced by observations made by the appellant of cans stored at both refrigerated and room temperatures.  

The appellant asserted that the objective at the outset of the project was to develop a cold-pressed juice product that would be shelf-stable at room temperature, and that refrigeration and room temperatures were used to evaluate the product under various conditions. The minister did not challenge this evidence. Justice Bodie further opined that the challenge facing the appellant (microbial growth caused by the cold-pressed juice component) was significant; however, being faced with an uncertain path towards an objective was not enough for SR&ED eligibility. The minister asserted that the appellant’s experiments to overcome this challenge used generally available preservatives known to competent professionals in the field. However, Justice Bodie disagreed. The appellant’s testing of Chiber was not routine engineering because it had only been used in dairy products and never in a vinegar-based, cold-pressed juice beverage. The justice found that, in undertaking the development of its product, the appellant faced a technological uncertainty that could not be resolved by routine engineering or standard procedure.  

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

The appellant asserted that there were numerous suppositions developed and tested; for example, that shelf-stability could be achieved using a preservative instead of the more widely used heat pasteurization. This led to the appellant experimenting with potassium sorbate, sodium benzoate, and then, ultimately, Chiber. Justice Bodie found that the appellant had formulated hypotheses throughout its development work aimed at eliminating a technological uncertainty. 

Did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing, and modification of the hypotheses? 

Justice Bodie referenced findings from the decision in Joel Theatrical Rigging Contractors Ltd.³, which discussed three indications that a scientific method had been adopted: trained and systematic observation; measurement and experiment; and the formulation, testing, and modification of hypotheses. The appellant testified that it had worked with a food scientist to develop tests to achieve its cold-pressed juice drink, varied the quantities of the drink components in its development work, and tested and modified hypotheses based on results from its experiments. Justice Bodie was satisfied that the appellant had adopted a scientific method in carrying out the project. 

Did the process result in a technological advancement? 

Justice Bodie noted that the appellant had experience in the field of food and beverage production and that the work it did was to fill a gap in the good-for-you beverage industry. To accomplish this, the appellant could not use existing knowledge in the industry and had to undertake experiments formulated with its food scientists to develop a new application for a unique preservative that had not been done before. Justice Bodie found that the general knowledge of those in the field was advanced through the efforts of the appellant. 

Was a detailed record kept of the hypotheses tested and results obtained as the work progressed? 

The minister challenged the existence of adequate documentation to support the appellant’s assertion that it had followed the scientific method. During the hearing, the appellant introduced examples of records that indicated the dates on which various tests were conducted, the hypotheses of such tests, and the results. The TCC found that, while the records may be difficult to understand for someone unfamiliar with the goals, methods, and research path of the appellant, that is not the purpose of supporting documentation; rather, it is for the appellant to keep track of hypotheses formulated, tests conducted, and results obtained to enable follow-up experimentation. Justice Bodie found that the appellant had kept sufficient records of the hypotheses tested and results obtained as its work progressed. 

Based on his analysis, the TCC ruled that the appellant had discharged its burden on the five questions and that the project undertaken qualified as SR&ED. 

Implications 

This decision is of importance to existing and potential SR&ED claimants for the following reasons: 

• It demonstrates that a scientific or technological uncertainty can be established even where a publicly available solution exists, provided it has never been used in the specific context.  
• It clarifies that contemporaneous documentation is meant to keep track of the hypotheses generated, experiments undertaken to test those hypotheses, and results obtained. It does not need to be designed for someone unfamiliar with a specific field of science or technology to replicate results. 
• Despite the “how and why” approach to SR&ED claim assessment introduced by the CRA, the five questions used in jurisprudence to date remain a relevant and valid methodology in determining SR&ED eligibility. 

¹ Manning Canning Kitchens Inc. v. His Majesty the King, 2024 TCC 159 (CanLII). 
² Northwest Hydraulic Consultants Ltd. v. The Queen, 1998 CanLII 553 (TCC). 
³ Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, 2017 TCC 6 (CanLII). 

Jeffrey Stewart 
Senior Manager, Scientific Research and Experimental Development 
jeffrey.stewart@ryan.com