http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/234967/index.do
Flavor Net Inc. v. The Queen (September 12, 2017 – 2017 TCC 179, D’Auray J.).
Précis: The taxpayer had previously been in the flavouring business but sold those lines and was now working on plant sterol beverages and other health foods. The taxpayer claimed SRED expense on two projects: Project 705—the Plant Sterols Beverage Project, and Project 806 - a Partial Hot Fill System. The Tax Court found that the evidence in relation to Project 705 did not disclose true scientific research. In the case of Project 806 the evidence was unclear, both in terms of when the work was done and the nature of the project. As a result the appeal was dismissed. Although the Crown asked for costs under the Informal Procedure Rules, the Court declined to award them.
Decision: The Crown’s position was quite basic: Project 705 did not amount to scientific research sufficient to support a SRED claim and Project 806 was not properly documented:
[27] The respondent argues that the activities undertaken by the appellant do not constitute eligible SR&ED within the meaning of the definition of SR&ED in subsection 248(1) of the Act.
[28] With respect to project 705, the Plant Sterols Beverage Project, the respondent argues that there were no technological uncertainties and no technological advancements since the appellant was using a methodology and techniques that were based on existing technology.
[29] In addition, the respondent argues that the evidence established that the appellant did not understand the concept of a hypothesis. Therefore, no clear hypothesis was formulated and the overall procedure followed by the appellant did not accord with the established principles of the scientific method.
[30] With respect to project 806, the Partial Hot Fill System Project, the respondent argues that the evidence did not establish that the project was developed during the years under appeal. In addition, she argues that the documents submitted by the appellant at trial generated even more confusion, relating to what project was under review for SR&ED purposes.
The Court agreed with the Crown’s submissions:
[72] In my opinion, the Partial Hot Fill System developed by the appellant was not materially different from the hot fill process widely used in the beverage industry at that time. The essence of the partial hot fill system was to heat the essential (i.e., non-water) ingredients separately to accomplish pasteurization and then add sterile water to cool the mixture and attempt to achieve the correct level of dispersion for bottling in individual two-ounce units. However, it was the basic principles of the hot fill process that were being used to heat the mixture in the side kettle. The system was designed using standard practices and routine engineering.
[73] Thus, I conclude that the appellant has failed to discharge its onus of proving that there existed with respect to the design of the Partial Hot Fill System a technological uncertainty which could not be removed by routine engineering or standard procedures.
[74] With respect to the formulation of a hypothesis, as with the Plant Sterols Beverage Project, the appellant did not formulate one, that is, it did not formulate an assumption to be tested in order to remove the technological uncertainty. In addition, there was no technological advancement since the appellant used means known to the industry to develop its system.
[75] The burden is on the appellant to establish that a project constitutes SR&ED within the meaning of subsection 248(1) of the Act. Project 806 was presented in a manner that was so confusing that it was impossible for me to determine if that project had to do with the dual-chambered bottle or the Partial Hot Fill System during the years under appeal. In any event, I am of the view that the Partial Hot Fill System did not meet the requirements for qualifying as SR&ED within the meaning of subsection 248(1) of the Act.
As a result the appeal was dismissed. Although the Crown asked for costs under the Informal Procedure Rules, the Court declined to award them.