The appellant, 1726437 Ontario Inc. o/a Airmax Technologies, is an installer of heating, ventilation and air conditioning systems in residential homes.

STANDARD PRACTICE: At the time it began its development work, the appellant had determined that existing HVAC systems used for townhouse installations did not operate efficiently. The systems that were on the market at the time did not distribute heating evenly throughout the living space of multi-storey townhouses and they operated at high noise levels.

OBJECTIVES: The appellant set out to correct these problems with the development of a new HVAC system. The appellant’s goals were to:
Achieving a sound level reduction from 60 to 40 dB
Achieving constant static pressure
Adapting a foreign boiler to meet North American standards
Achieving the required BTUs
Adapting an electronically commutated motor (ECM) for use in the system
In 2007 and 2008, the appellant worked on an SR&ED project named “High Static High Velocity Fan Coil System Development” (HVAC System).

ELIGIBLE WORK: During the 2007 taxation year SR&ED activities focused on the design of a quieter air diffuser. The Minister accepted that this work was eligible SR&ED.

INELGIBLE WORK: To reduce noise levels further, the appellant undertook testing of the flexible duct used as the conduit to move the hot air generated at the heating source. The appellant put holes in the core of the flexible duct for that purpose, experimented with the size, number and position of the holes, and adopted those variables which reduced noise levels the most. In 2008, the appellant incurred expenses to bring a European-sourced boiler into conformity with North American standards & undertook testing of ECMs to ensure that they could be programmed at the speeds necessary to meet the design requirements

The Minister of National Revenue (the “Minister”) disallowed most of the expenses claimed by the appellant on the grounds that the activities constituted routine engineering.


1) Was work SR&ED?: Other than those recognized as such by the Minister, did the appellant’s activities in the 2007 and 2008 taxation years constitute SR&ED?
2) Effects of informal appeal: What are the consequences of the appellant’s election to have its appeal heard under the informal procedure?

Relevant legislation and analysis:

1) Was work SR&ED?

The definition of SR&ED is based on a “catch and release” concept. The definition first includes a broad category of development activities under paragraphs (a) to (c), then items otherwise included are excluded under paragraphs (e) to (k).

The judge commented,

“The evidence shows that the system was unique in the market insofar as it utilized:
higher than usual pressure in response to narrower duct work used in narrow multi-storey townhouses &
an unconventional heat source unlike more commonly used indirect-fired furnaces &
there was technological uncertainty with respect not only to noise, but also to space and efficiency with those types of systems.
2) Effects of informal appeal

The judge referred to the limits under the Tax Court of Canada Act, which reads as follows:

“Every judgment that allows an appeal referred to in subsection 18(1) shall be deemed to include a statement that the aggregate of all amounts in issue not be reduced by more than $12,000 or that the amount of the loss in issue not be increased by more than $24,000, as the case may be.”

Ruling & Rationale: WIN – Variables of Experimentation = Hypotheses

The judge then ruled,

1) Was work SR&ED?

“Considering the evidence as a whole, I am of the opinion that the appellant has demonstrated that it maintained a level of record-keeping that illustrates that it identified a problem, developed hypothetical solutions, tested them, and modified its approach in response to the results.”

2) Effects of informal appeal

“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.”

Implications and author’s commentary

1) Was work SR&ED?

Since this was an informal appeal it did not provide the degree of detail which we might see under a general procedure.

The judge sited the experimentation of the different variables as “hypothetical solutions.”

In the author’s opinion the client would have had an easier time if it had been able to:
identify & rank the
key variables of uncertainty / experimentation.
As a result, we have developed a project rewrite illustrating issues which might have been present in this or similar SR&ED projects.

2) Effects of informal appeal – limited to $12,000/year but decision within 1 year!

Despite the fact that the client would have been entitled to federal credits of ($387,553 x 35% = $135,643) under the general procedure the settled for $12,000 under the informal procedure.

In effect they settled for less that 10% of total credits in dispute however, the following advantages of the informal vs. general procedure made this a necessary decision:

General procedure
Generally cost $40,000+
Require use of a lawyer (tax litigator)
Take 3+ years
During which period all SR&ED claims will be held if similar issues
Informal procedure
$100 application fee
Client or accountant can represent
No lawyer required
Takes < 1 year
Limited to $12,000 / year
Provides legal precedent for future years
As a result there are few incentives & huge barriers to prevent taxpayers from using the general procedure no matter how much their claim has merit.

In the author’s opinion the CRA desperately needs an arbitration method to get disputed claims settled quickly.

Sadly the informal procedure seems to be the best current method to achieve any type of “justice.”

Recommendation: Until a better method is developed perhaps the threshold amounts could be raised for SR&ED related claims?

1726437 Ontario Inc. (AirMax Technologies) v. The Queen     2012