Lehigh Hanson Materials Limited v. R. – TCC: Court rejects Rule 58(1) application for complex SRED issues

Lehigh Hanson Materials Limited v. R. – TCC:  Court rejects Rule 58(1) application for complex SRED issues


Lehigh Hanson Materials Limited v. The Queen (October 6, 2017 – 2017 TCC 205, Lyons J.).

Précis:  In a rather odd application the taxpayer wanted a ruling under Rule 58(1) on whether the character of research it conducted was affected by similar research done by its competitors.  Not surprisingly the Tax Court declined jurisdiction leaving the matter to the trial judge who would have a greater command of the underlying facts once the evidence was adduced.

Decision:   The taxpayer sought an answer under Rule 58(1) to a rather peculiar question:

[11]         Lehigh’s position is that its Project constitutes SR&ED because it was a systematic investigation of the technical uncertainties related to the use of alternative fuels and the “experimental development work undertaken […] was for the purpose of achieving technological advancements to improve its existing processes to manufacture cement at its Delta plant.”[13] All expenditures it incurred were undertaken on experimental development and applied research related to Lehigh’s business in Canada. Therefore, its activities qualify as “experimental development” pursuant to paragraph (c) of the definition of SR&ED in subsection 248(1) of the Income Tax Act (the “Act”).

[12]         The respondent’s position is that none of Lehigh’s activities meet the definition of SR&ED within the meaning of subsection 248(1), as it failed to meet the criteria in the test (“five-factor test”) enunciated in the decision of Northwest Hydraulic, the leading authority for determining whether an activity constitutes SR&ED. Lehigh’s activities constituted routine engineering and standard practice. Using alternative fuels in its cement kilns was a common practice and any challenges arising therefrom could have been resolved by Lehigh by applying known practices, techniques and methodologies.  There was no technological uncertainty nor was technological advancement sought or achieved.

[15]         In its Notice of Motion (“motion”), Lehigh seeks a determination of the following proposed question:

Does “experimental development” as defined in paragraph (c) of the definition of “scientific research and experimental development” (“SR&ED”) in subsection 248(1) of the Income Tax Act (Canada) (the “Act”) constitute SR&ED [even] if other industry participants (located in or outside of Canada) have achieved the particular or a similar “technological advancement” in their particular circumstances [the “Question”]?

[16]         In the Question, Lehigh asks the Court to determine “the correct legal test” for “experimental development” described in paragraph (c) of the definition of SR&ED in subsection 248(1) of the Act. The definition, it submits, appears to be silent about whether “experimental development” exists if other cement industry participants (“industry participants”) have achieved the same or similar technological advances in their particular circumstances. Neither term “experimental development” nor “technological advancement” are defined in the Act. The debate centers on whether experimental development should be analyzed based on the activities carried on by Lehigh alone or the activities of others in the same industry. Lehigh asserts the former.

[Footnotes omitted]

This appeared to be an attempt to get the Court to essentially ignore a good deal of settled law.  The Court did not take the bait:

[51]         In the present case, the pleadings reveal a complex case. Material facts are disputed by both parties, a substantial number of facts pled by Lehigh have been denied by the respondent and no discovery has taken place. Extensive findings of fact will need to be made. Determining the relevance and weight to be given to the practices of other industry participants is best left to the trial judge tasked with determining the overall issue so as to consider the evidence in the context of the overall SR&ED analysis. In my view, such circumstances warrant a trial with the benefit of the evidentiary protections afforded to both sides at a trial to obtain a fair hearing.

[52]         For these reasons, I am of the view that the proposed Question was not properly raised in the pleadings thus fails to satisfy the condition in subsection 58(1). Also, the Question cannot be answered conclusively, in either direction, and has no reasonable prospect of success, therefore, does not satisfy the conditions in subsection 58(2) in that it appears that the determination may not dispose of all or part of the proceeding, result in a substantially shorter hearing or result in substantial costs savings.

[53]         I conclude that it is not appropriate that the Question be set down for determination under the Rule 58 process.

As a possible mark of the Court’s displeasure the Crown was awarded costs in any event of the cause.