http://decision.tcc-cci.gc.ca/en/2013/2013tcc201/2013tcc201.html 
CalAmp Wireless Networks Inc. v. The Queen[1] (June 25, 2013) dealt with whether large bonuses ($1,990,036) payable by one of the taxpayer’s predecessor corporations to its SR&ED employees shortly prior to the sale of all of that predecessor’s shares to a wholly-owned Canadian subsidiary of an American parent corporation were qualifying expenditures entitling it to an investment tax credit ($131,260).
The underlying facts are somewhat complex:
[7] During the years prior to the month of May 2006, [the appellants predecessor corporation] (“Old Dataradio”) was a corporation incorporated under the Canada Business Corporations Act and was headquartered in the Metropolitan Montreal, in the Province of Quebec.
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[11] At the end of 2005, or at the beginning of 2006, Dataradio requested that its taxation year be modified to February 28th of each calendar year to make it correspond to the taxation year end of a potential purchaser: CalAmp Corp.
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[13] CalAmp Corp. is incorporated under the laws of the State of Delaware and is headquartered in the State of California. Its shares are publicly traded on the NASDAQ stock market.
[14] 4308093 Canada Inc. (4308093) was incorporated under the Canada Business Corporation Act and a wholly‑owned subsidiary of CalAmp Corp.
[15] On May 9, 2006 CalAmp Corp. acquired all of the outstanding shares of Old Dataradio through its wholly‑owned subsidiary 4308093 for USD$54,291,000 (or CAD$60,1 million).
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[18] An amount of US$5,355,000 (or CAD$5,900,000) in Old Dataradio was allocated to bonuses destined to Old Dataradio’s workforce; said bonuses were not conditional on staying with CalAmp Corp.
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[21] On May 30th, 2006, Old Dataradio was amalgamated with 4352491 Canada Inc. into a new corporation bearing the corporate number 4366361 (pursuant to the Canada Business Corporations Act). This amalgamated corporation, the Appellant, herein continued to be named Dataradio Inc. until February 5th, 2010, at which time it changed its corporate name to CalAmp Wireless Networks Inc.
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[23] For the taxation year which started on March 1st, 2006 and ended on May 9th, 2006, the Appellant declared that Old Dataradio had undertaken SR&ED with respect to fourteen projects which required the participation of fifteen scientists and engineers, twenty‑two technologists and technicians, five managers and administrators and finally one person acting as technical support staff (SR&ED employees).
[24] For the taxation year which started on March 1st, 2006 and ended on May 9th, 2006, the Appellant declared that Old Dataradio had paid an amount of $2,589,681 in salaries to its SR&ED employees (excluding the salaries paid to specified employees).
[25] The amount of $2,589,681, which was declared as having been paid as salaries to Old Dataradio’s SR&ED employees, included an amount of $1,990,036 which represented bonus incentives referred to at paragraph 18 above.
[26] In the years prior to 2006, Old Dataradio had often paid bonuses to SR&ED employees. However, the evidence revealed that: i) prior to 2006, Old Dataradio’s policy was to pay modest Christmas bonuses to salaried employees irrespective or whether their contracts provided for such measures (Exhibit A‑1, Tabs 7 and 8); ii) the amounts of these bonuses would vary according to Old Dataradio’s annual financial performance and Mr. Robert Rouleau (the Appellant’s president during the relevant period) testified that, in the case of SR&ED employees, Old Dataradio’s objective was to pay bonuses that would amount to a little more than two weeks salary. A typical example was reviewed during the cross‑examination of Mr. Rouleau, namely the case of Mr. Jonathan Beaulieu who received a $2,500 bonus, $1,500 bonus, a $2,020 bonus and a $2,020 bonus in 2002, 2003, 2004 and 2005, respectively; iii) in total, Old Dataradio paid bonuses totalling $201,233 in 2002 and $140,171 in 2003 (Exhibit I‑2); iv), Old Dataradio paid Mr. Jonathan Beaulieu a bonus of $24,242 in 2006 (Exhibit I‑1, Tab 2, p. 1) and his annual salary on a calendar year basis was approximately $52,530 (Exhibit A‑1, Tab 9, p. 2); v) for the 2006 taxation year, the bonuses totalling $5,900,000 were paid to several different categories of employees and not only to SR&ED employees.
[27] The bonus granted for the year 2006 was determined by Old Dataradio’s management (the “Vendor”), with the consent of CalAmp Corp. (the “Purchaser”), on the basis of the number of years of service, current salary and merit.
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[29] The Share Purchase Agreement (Exhibit I‑1, Tab 9) is clear at section 6.5 that CalAmp Corp. intended to continue the employment of all employees of Old Dataradio on an at will basis; however, the bonuses paid were not conditioned on a commitment from the employees to stay with CalAmp Corp.
The Tax Court rejected the taxpayer’s claim to investment tax credits in respect of the bonuses:
[39] In this case, Mr. Rouleau testified that the method of calculating the bonuses was based on the number of years of service, current salary and merit of each employee.
[40] However, the evidence reveals that the bonuses were paid mainly on the basis of two factors:
a) the belief by Old Dataradio’s shareholder that salaried employees should share in the financial success resulting from the sale of the company (Exhibit I‑1, Tab 8, p. 2);
b) the corresponding benefit to the purchaser CalAmp Corp. of creating conditions which would favour the retention of employees following its acquisition of Old Dataradio (Exhibit I‑1, Tab 4, pp. 50 and 51: Tab 5, p. 4 (3rd par.: “[…] In addition, with a changeover of management, many employees tend to leave or retire. The payment of their bonus represented a strategic decision, that was agreed upon by the purchaser. […]”; Tab 9, p. 43, par. 6.5.
[41] I am of the opinion that there is no connection with the payment of the bonuses at issue and the bonus policy followed in the past by Old Dataradio, with any SR&ED work carried on during the year at issue. Old Dataradio’s traditional policy stand in stark contract to the payments made to its employees for the taxation year at issue, which represents a period of approximately two months. For example, Mr. Beaulieu was paid a bonus of $24,242 in 2006, an amount which was almost ten times higher than any bonus he had ever previously received.
Much of the court’s reasoning was based on a published position of CRA and an earlier decision of the Tax Court in Alcatel Canada Inc. v. Canada:
[44] I want also to point out that my analysis is also consistent with the CRA’s published “SR&ED Salary or Wages Policy” (SR&ED Salary or Wages Policy, Canada Revenue Agency: December 19, 2012) which, in particular, specifies that:
“[…]
There would be no reasonable link between the expenditure and the prosecution of SR&ED where, for example, an employee […] receives:
• salary, including a bonus, when the income that was used to pay the amount was not earned from the ongoing, normal activities of the business. This would include an amount paid to an employee that was earned from a capital transaction such as the sale of the business, the sale of shares or the sale of an asset. […]
Such amounts do not have the capacity of being allocated to SR&ED (cannot be SR&ED expenditures). In other words, the allocation of salary or wages to SR&ED is made after such amounts are excluded from remuneration.”
[45] In addition, the payment of the bonuses at issue does not satisfy the criteria set out in Alcatel Canada Inc. v. Canada, 2006 TCC 149, par. 36, which held that an expenditure would in particular be allowable in circumstances where there existed “a recurrent need to compensate employees engaged” in SR&ED activities. In this case, the payment of the bonuses at issue was an isolated event and not the result of the application of Old Dataradio’s traditional policy in respect of Christmas bonuses.
This decision does not seem entirely satisfactory. Where, as was the case here, both vendor and purchaser agreed to the payment of the bonuses with the intention of encouraging valuable SR&ED employees to stay with the reorganized company the result of this decision seems to be to second guess their business judgment. CRA’s published position is what one would expect and one would think that it should be treated with some distance. It could be argued that CRA’s position hints at these expenditures being capital in nature, although that argument was not explicitly raised in this appeal. The Alcatel decision allowed the taxpayer’s claim for investment tax credits on stock option plan benefits and the passage cited does not seem to easily bear the weight attributed to it:
[36] The Respondent, in reliance on a passage from the reasons of the Federal Court of Appeal in The Queen v. Kaiser Petroleum Ltd. v. [sic], 90 DTC 6603 argued that though employee compensation was a factor motivating the Appellant the means adopted involved the reshaping of the capital structure of the Appellant’s organization. In my opinion there is nothing in the evidence here which could conceivably justify an assertion that the issuance of the shares pursuant to the options could be described as a “reshaping” of the Appellant’s capital structure as was the case in Kaiser. Here, the options were issued to satisfy a recurrent need to compensate employees engaged in the day-to-day operations of the business. The cost of the option program was an ordinary current expense.
Ultimately this decision may be correct but it certainly seems to raise a number of questions about the role of bonuses in the internal business affairs of a taxpayer.
[1] 2013 TCC 201.