https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/364433/index.do
A & D Precision Limited v. The Queen (February 28, 2019 – 2019 TCC 48, Russell J.).
Précis: This decision is similar to the Concept Danat case blogged recently on this site, with the exception that the numbers involved are bigger and the work was being done for a third party customer. The taxpayer claimed SRED expense in connection with 4 specific projects. Two projects were abandoned before trial. The Court found that 2/3 of the projects described as Matteo lathes involved normal engineering and lacked the innovation necessary to qualify for SRED treatment while the remaining 1/3 did qualify for SRED treatment. The fourth project did have the requisite element of innovation and the appeal was allowed in in full respect of it. There was no order as to costs in light of the mixed success. Nevertheless it was largely a good day for the taxpayer which made, I understand, about a 70% recovery of the amounts it chose to take to trial.
Decision: The Courts view of the fourth project (Project # 6) essentially tells the tale:
[30] All of the Project #6 work claimed by A&D for each of its 2006, 2007 and 2008 fiscal periods relates to design and ultimately abandoned development of this one machine, called a “double wheel roll grinding machine” (Exhibit R-15).
[31] The novel concept, advanced by Mr. Derbedrosian, was to have the grinding head capable of being moved to either side of the middle of the workpiece for grinding. Removing and repositioning the workpiece could take 16 to 18 hours and realignment could occur. A&D knew of no other grinding machine in the world that could do this. The machine would not grind the workpiece on opposite sides of the middle of the workpiece simultaneously. But there were covers on opposite sides of what would be the middle of the particular workpiece for the two positions the grinding wheel could be moved to.
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[87] The second of the five Northwest Hydraulic criteria is whether A&D formulated hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
[88] Again, Mr. Predoiu’s testimony satisfied me that his highly knowledgeable and experienced input in his position as chief engineer in the design and manufacture of the double wheel grinder was quite focused on reducing risks. That is, he in combination with Mr. Derbedrosian did formulate theories and or plans seeking to minimize anticipated risks pertaining to vibration.
[89] The third of the five Northwest Hydraulic criteria is, did the procedure adopted in each project accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses? Having heard their testimony I am fully satisfied that Mr. Predoiu, teamed with Mr. Derbedrosian - each able, knowledgeable and highly experienced in the field of machine tools - approached this project in a wholly disciplined and organized manner. Conceptual drawings and drawings of necessary parts could be said to illustrate their methodical and comprehensive approach in seeking to defeat the risk of excessive vibration in developing this new concept machine.
[90] The fourth Northwest Hydraulic criterion is, did the process result in a technological advancement? A technological advancement is the gaining of new knowledge that advances general understanding. In this instance the project was concluded before any successful outcome. This was due to the cost of this project to A&D. A business decision was taken by Mr. Derbedrosian to end the work. This is the prerogative of, particularly, a private sector entity. I would be reluctant to deny SR&ED recognition because the project did not continue to any natural conclusion.
Thus, as in the Concept Danat case the essential issue boiled down to experimental uncertainty: research or normal engineering? Project #6 met the test. Project #4 met the test in part. Two other projects were withdrawn before trial. In light of the mixed success there was no order as to costs. The taxpayer achieved about a 70% recovery on the items it chose to pursue at trial which is a very good batting average in the sometimes abstruse world of SRED credits.