Last updated: November 07 2012

Sometimes it’s all about the proper procedure

If you are disputing a re-assessment of your income tax filing with the Canada Revenue Agency (CRA), failing to choose the appropriate appeal procedure can prove very costly.

Take, for example, Airmax Technologies v The Queen (2012), a recent decision from the Tax Court of Canada (TCC). Airmax chose the less costly “informal” procedure to settle its dispute with the CRA rather than the more formal “general” procedure (Knowledge Bureau Report, Jan. 25). Although the dispute was settled in Airmax’s favour, unfortunately for Airmax, the relief provided by the informal procedure is capped at $12,000 per assessment; the amount in dispute was $387,553.

In the years in issue, 2007 and 2008, Airmax — an installer of heating, ventilation and air conditioning systems in residential homes — worked extensively on the development of a high-static, high-velocity fan coil system, or HVAC. The company succeeded and, when filing its income taxes for 2007 and 2008, claimed scientific research and experimental development (SR&ED) credits for the expenses incurred. The CRA disallowed most of these expenses, however, claiming that they were incurred only for routine engineering.

Airmax disputed the CRA’s reassessment, choosing the less time-consuming informal procedure and appealing to the independent Appeals Branch of the CRA. To use the informal procedure, the disputed amount of federal taxes and penalties must not exceed $12,000 per assessment and relief is capped at $12,000. Furthermore, in order to go the informal route, Airmax made an irrevocable election that surrendered its right to appeal to an appellate court, although judicial review by the Federal Court of Appeal was still permissible.The TCC hears appeals in the informal procedure.

Airmax also clearly elicits the criteria used to determine which activities constitute SR&ED credits as defined in subsection 248(1) of the Income Tax Act. Five criteria enunciated in the case of Northwest Hydraulic Consultants Limited v. The Queen were employed in this case. The questions to be answered were:

  1.        Was there a technological risk or uncertainty that could not be removed by routine engineering or standard procedures?
  2.        Did the person claiming to be doing SR&ED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
  3.        Did the procedures adopted accord with the established and objective principles of the scientific method, including the formulation, testing and modification of hypotheses?
  4.        Did the process result in a technological advancement?
  5.        Was a detailed record of the hypotheses, tests and results kept as the work progressed?


       Following a thorough examination of these questions, the TCC concluded that Airmax had $387,553 of qualified SR&ED expenditures. Airmax, however, paid none of the eligible expenses incurred in 2007 within 180 days of the end of that taxation year. As a result, for the purpose of determining Airmax’s refundable income tax credits (ITCs), it was deemed Airmax had incurred those expenses in the 2008 taxation year.

Even more unfortunate for Airmax was the decision to use the informal procedure, which limits the aggregate of all amounts in issue to $12,000 or the amount of loss in issue to $24,000.

Legislation and precedent tied the TCC’s hands in this case. A Federal Court of Appeal decision from 2009, Innovations et Intégrations Brassicoles Inc. v. The Queen, held that, even though Innovations et Intégrations Brassicoles had established $19,000 of qualified SR&ED expenses, it was limited to $12,000 as a result of using the informal procedure. In the Airmax decision, Justice Hogan concluded: “I am bound to follow that decision. Therefore, the amount of the appellant’s additional refundable ITCs for the 2008 taxation year is limited to $12,000 notwithstanding the fact that its qualified SR&ED expenditures for that year totaled $387,553.”

The importance of choosing the appropriate procedure appeals procedure cannot be taken too lightly. The wrong choice cost Airmax $386,353 of lost ITCs.

Greer Jacks is updating jurisprudence in EverGreen Explanatory, an online research library of assistance to tax and financial professionals in working with their clients.