http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110901/index.do
R&D PRO-innovation Inc. (July 23, 2015 – 2015 TCC 186, Masse D.J.).
Précis: The taxpayer claimed SRED credits in respect of a project to develop a chocolate spread made from cocoa butter and milk protein. The Tax Court held that while the project was methodical and systematic it did not involve sufficient technological risk or uncertainty to amount to SRED. The appeal was dismissed without costs as this was an informal procedure appeal.
Decision: The taxpayer’s position was that the production of a cold-tempered chocolate spread amounted to SRED:
[11] The appellant’s spread project is completely different. It starts with pure cocoa butter chocolate, hence a solid. Then, 35% cream and maple syrup is added. A [Translation] “natural” product is desired so that no artificial ingredients are added. Unlike speciality spreads that are not tempered, the appellant’s spread is tempered: it is cold-tempered. Mr. Remon explained that tempering, or crystallization, is crucial and extremely difficult. Tempering changes the colour, the texture and the taste of the spread, and therefore, is extremely important. Untempered, the crystallization of the chocolate is unstable; it has an unpleasant taste, a dull colour, and there is migration of fat and sugar. It is therefore not very appetizing. Mr. Remon stated that the technological advancements and uncertainties involved cold-tempering. Mr. Remon told us that the standard crystallization curves for chocolate are well known, but unknown when ingredients such as cream and maple syrup are added. The texture, the taste the colour are closely related to the molecular structure, including crystallization, of the chocolate. The various instabilities of the product therefore become technological uncertainties as there is no knowledge either in the industry or in the literature. Mr. Remon’s hypothesis is that cold-tempering is necessary to avoid these problems.
[12] Mr. Remon submits that it is a technological advancement that differs from standard practice. Indeed, in standard practice, the ingredients are heated and the product is jarred and then the jar is cooled. The new process is to use cold‑tempering to develop a product that is completely different from commercial spreads. According to Mr. Remon, the taste, colour and texture of a cold-tempered spread is superior to all other spreads.
[13] All commercial spreads are jarred while hot. There are no cold-tempered spreads. Mr. Remon has inquired with experts in the chocolate and dairy products industry and, according to him, cold-tempering is not standard practice. Cold-tempering per se is known, but the technological problem is encountered when other foods or ingredients are added. This is where the tempering problem lies, i.e., the problem of stability. To date, no one in the chocolate industry has been able to resolve this issue of technological uncertainty. According to Mr. Remon, the development of a pure cocoa butter spread that is cold-tempered and jarred while cold is so complex that there is none on the market.
The Tax Court held that there was simply not enough inherent risk or uncertainty to amount SRED activity:
[37] I am of the view that, in developing the spread, the appellant formulated hypotheses designed to reduce or eliminate the uncertainty. I accept that the appellant conducted extensive testing to try to find solutions to these difficulties. The documents submitted to the Court show this. The testing, in my opinion, was methodical and systematic.
[38] But the question is whether there was technological uncertainty. According to the case law, when uncertainties can be removed by standard procedures or routine engineering, the project does not qualify for SR&ED. Novelty or innovation in a product is not sufficient to illustrate technological advancement.
[39] In the case at bar, the appellant wanted to develop a spread superior to commercial spreads and specialty spreads. It used as ingredients food products that are well known, such as cocoa butter, maple syrup, cream and other dairy products, carbohydrates and proteins. It modified the ingredients or their proportions in developing the spread. It then used the cold-tempering process, which is a known process, by changing the velocity, time and temperature of the tempering. It observed the results and collected data. The appellant’s work was centered on the use of existing manufacturing processes and existing materials in an attempt to improve its spread. The work involved routine engineering and standard procedures. Having considered all the evidence and the case law, I am not persuaded that the work in issue involved technological risk or uncertainty that could not be removed by standard procedures or routine engineering.
[40] In this case, while the experimental program was methodical and systematic, the appellant did not persuade me that this project met the SR&ED criteria within the meaning of subsection 248(1) of the Act.
As a result the appeal was dismissed but without costs as this was an informal procedure appeal.