VLN Advanced Technologies v. R. – TCC: No SRED allowed for purchased capital equipment

VLN Advanced Technologies v. R. – TCC:  No SRED allowed for purchased capital equipment


VLN Advanced Technologies Inc. v. The Queen (February 15, 2018 – 2018 TCC 33, Lyons J.).

Précis:   In its taxation year ended December 31, 2012 the taxpayer claimed the amount of $453,323 as a scientific research and experimental development (“SRED”) capital expenditure.  The expenditure represented the purchase price of “automated Pure Pulse Waterjet System equipment” from Pratt and Whiney Military Aftermarket Services Inc. (“Pratt”).  As part of the purchase agreement the taxpayer agreed to provide $450,000 of research and engineering services to Pratt using the equipment.

CRA denied the SRED claim on the basis that the property was not purchased to be used for all or substantially all of its operating time for the prosecution of SRED in Canada.  CRA’s position was that the property was acquired to provide services to Pratt and others as an R&D subcontract provider.  On the evidence the Court accepted CRA’s position and dismissed the appeal with costs.

Decision:   The taxpayer’s evidence as to the use of the property was as follows:

[32]         Dr. Vijay [the taxpayer’s principal] testified that the appellant received parts of the System from Pratt in March 2012, assembled it by May 2012, debugged it by August 2012, and, before using it for any research activities, showcased it at a conference in November 2012.[12]

[33]         He indicated that from September 2012 to July 2015, the appellant used the System for the following activities totalling 108.8 hours:

Activities in using the System





Demonstrate functionality of System at conference.




Debug System and train personnel to use it.




UO Research




Feasibility study for Sellafield




Feasibility study for Toronto Transit Commission




Test nozzles - a key component in proprietary hardware developed by the appellant in respect of other approved SRED claims not under dispute.


[34]         As none of the activities were performed for the purposes of earning income, the appellant said paragraph 13(27)(a) should apply to exclude from the analysis of actual use the 17 hours spent on the demonstration (activity 1) and the debugging and training (activity 2) for the purposes of assessing the appellant’s intention. Of the remaining activities (3 to 6), the appellant submitted that Dr. Vijay’s evidence that each of them was for SRED was credible, clear and uncontradicted. From the inception of its business to current activities, the appellant has engaged in SRED activities because each of them were related to the appellant’s business, not for commercial use. It has obtained patents through its SRED work. One patent has been sold and eight other patent applications are under review, one of which relates to the 40kHz compact nozzle tested using the System.

The Court rejected the taxpayer’s contention that this met the statutory requirement of property purchased “to be used for all or substantially all of its operating time for the prosecution of SRED in Canada”.

Generation of information is scientific advancement?

[58]         The appellant’s final argument is that the generation of information using the System contributed to scientific advancement and therefore constituted SRED activities. It referred to subsection 248(1) which provides that for an activity to be SRED, it must be for advancing scientific knowledge or achieving technological advancements and then referred to the CRA’s internal interpretive guide that states that scientific advancement includes the generation of information or the discovery of knowledge that advances the understanding of scientific relations or technology.

[59]         Except for demonstration, debugging and training purposes, the appellant submits its actual uses of the System were all tied to the generation of information that advances the understanding of scientific relations or technology. Such information was essential in furthering its mission to develop innovative technology or new uses of existing technology. Therefore, the actual use of the System was for SRED, thus at all times it intended to use the System all or substantially all for the prosecution of SRED.

[60]         The appellant’s argument is an oversimplification. Since “SRED” is a defined term in subsection 248(1), for actual uses of the System to constitute SRED, and therefore evidence of the appellant’s intention to use the System for SRED, there must be, amongst other things, a “Systematic investigation or search”. No evidence was proffered to show that the System was used in a systematic way for a particular purpose.

As a result the appeal was dismissed with costs in accordance with the Tariff.