Canafric Inc. v HMK, TCC 2023 108 (“Canafric”) is the most recent addition to the Tax Court of Canada’s jurisprudence on Scientific Research and Experimental Development (“SR&ED”). The appellant in this case, a frozen pie manufacturer, claimed SR&ED expenditures and investment tax credits for its efforts to develop new recipes for frozen pies and other food products. The CRA reassessed the appellant, concluding that 7 of the projects claimed as SR&ED over the 2013 to 2016 tax years did not meet the criteria for SR&ED eligibility. The appellant appealed to the Tax Court of Canada and Chief Justice Rossiter determined that all 7 of the projects in dispute qualified as SR&ED.

While the term “Scientific Research and Experimental Development” is defined with great detail under section 248(1) of the Income Tax Act, both the CRA and courts have, for the past 25 years, relied on a set of 5 criteria questions proposed by Justice Bowman (as he then was) for assessing SR&ED eligibility in the case of Northwest Hydraulic. Since that decision, in order for a project to qualify as SR&ED, it must meet all 5 of the criteria described in Northwest Hydraulic. Perhaps most critically, these criteria include the existence of a Technological Uncertainty and that the taxpayer employs the Scientific Method to achieve Technological Advancement.

These “Criteria Questions” tend to be strictly applied to SR&ED claims regardless of what field of research or development the work is related to. This form of assessment may be suitable for a scientist working in a research lab setting but presents challenges for taxpayers working in other industries who, while still making meaningful discoveries in their fields, may not employ a methodology that perfectly comports with the Criteria Questions.

Despite the weaknesses of the Criteria Questions and even recent challenges to the validity of those questions as the test for SR&ED (this was part of our argument on behalf of the appellant in National R&D Inc. v Canada, 2022 CAF 72), courts continue to rely on them to assess SR&ED eligibility. Unsurprisingly, this is also the basic approach taken by CJ Rossiter in Canafric.

It is interesting to note, however, exactly how CJ Rossiter goes about recognizing SR&ED in the appellant’s project through the lens of the Criteria Questions.

As a preamble to his application of the Criteria Questions, Rossiter draws on the FCA’s reasoning in National R&D as saying:

Parliament and the legislatures rely on the courts to give definition, amplitude and precision to statutory language as required by the circumstances of the case. The resulting understanding of legislation as expressed in the jurisprudence is not an improper exercise of judicial legislation, rather it is precisely what courts are required to do… (National R&D at para 12, emphasis added).

It seems noteworthy that CJ Rossiter would choose to preface his use of the Criteria Questions with this particular quote. On the one hand, the excerpt is part of the FCA’s justification for relying on the 5 criteria questions from Northwest Hydraulic to determine eligibility for SR&ED. But the excerpt also clearly states that the interpretation of statutory language should be done in a context-sensitive (i.e. case by case) manner. We would argue (and in National R&D, we did argue) that the insistent use of a one-size-fits-all test like the Criteria Questions fails this mandate to interpret the legislated definition of SR&ED according to the needs of a particular case. But if the 5 Criteria Questions are to be used as the test for SR&ED eligibility, the heretofore crusty edges of that test should be softened enough to accommodate the unique nature of the SR&ED performed in different fields of research and development.

The field of research and development in the case of Canafric was frozen pie manufacturing. Considered in the abstract, the challenge of developing or modifying a recipe to reduce fat and salt content, replace certain ingredients, extend shelf-life or reduce cooking time may not seem all that technologically uncertain or ground-breaking and the techniques used to achieve these goals may seem largely transferable from one project to the other. This was the position of the RTA, who remarked: “A pie is a pie what is the big deal about it.” CJ Rossiter rejected this simplistic view of the appellant’s work favoring the evidence of the appellant whose witness testified convincingly to the unique challenges of developing recipes that meet demanding customer criteria in the field of frozen food manufacturing.

While still sticking to the 5 Criteria Question format, CJ Rossiter’s SR&ED eligibility analysis seems to generously accommodate the appellant’s research and development efforts in the field of frozen pie manufacturing. Without much difficulty at all, CJ Rossiter determines that the challenge of developing new recipes represented technological uncertainty, and that the appellant was following the scientific method as they made modifications to those recipes. In short, the projects in dispute satisfactorily answered each of the five criteria questions.

Canafric is a valuable example of how courts should be able and willing to look past apparent incongruence with the Criteria Questions to recognize meaningful discoveries or advances in unique fields and industries as SR&ED. While the test for SR&ED eligibility itself remains unchanged for the moment, Canafric evinces a softening of the rigid edges of that test to accommodate non-traditional research and development.

From Dominion Tax Law’s perspective, although we went down swinging at the Federal Court of Appeal and our appeal to the Supreme Court of Canada was rejected, if the Tax Court of Canada, led by Rossiter CJ, continues to cite National R&D as standing for the proposition that the 5-point test (which sorely needs to be revised… we will never give up on that front… ) has to be interpreted “as required by the circumstances of the case” i.e. in light of the specifics of the industry at hand with a more generous approach to the taxpayer, then the long hard up-hill fight (that is inherent to all tax litigation) will have all been worth it.