SR&ED Tax Clips: Federal Court of Appeal allows SR&ED ITC carryforward to be reduced for ITCs disallowed in statute-barred years

The Federal Court of Appeal found that investment tax credits (ITCs) disallowed in statute-barred years can reduce the ITC carryforward balance in a subsequent year that is not statute-barred. This allowed the Canada Revenue Agency to recover the disallowed ITCs in a subsequent non-statute-barred year.

In The Queen v. Papiers Cascades Cabano Inc., the Federal Court of Appeal (FCA) overturned the Tax Court of Canada's (TCC) decision. The FCA held that scientific research and experimental development (SR&ED) investment tax credits (ITCs) from statute-barred years can be examined and subsequently disallowed in a taxation year that is not statute-barred. As a result, in a non-statute-barred year the taxpayer was disallowed $206,000 of SR&ED ITC claimed in prior taxation years that were statute-barred.

Facts
The Canada Revenue Agency* (CRA) disallowed $206,000 of SR&ED ITCs for the 1993 to 1995 taxation years, which the taxpayer did not dispute. Because these years were statute-barred, the CRA issued notices of reassessment for the 1993 to 1995 taxation years without amending the taxpayer's tax payable. However, these reassessments stated that "[w]here necessary, we have adjusted the subsequent years for carry-forward balances, interest and the balance due date." The CRA then reassessed the 1996 taxation year and disallowed $206,000 of ITCs by reducing the taxpayer's 1996 opening ITC carryforward balance by $206,000.

The Minister argued that for the purposes of computing ITCs, a taxpayer must include, pursuant to the definition of ITC under paragraph 127(9)(c), the amounts that legally qualify for a deduction under the Income Tax Act (the Act), and not the ITC actually claimed under the Act and already assessed by the CRA. In the Minister's view, the ITC carryforward balance should reflect the correct ITC and not the assessed ITC.

History
In Papiers Cascades Cabano Inc. v. The Queen, the TCC ruled in the taxpayer's favour, finding that the assessed ITCs for 1993 to 1995 should be used to determine the ITC carryforward balance for 1996. The TCC reasoned that an assessment is presumed valid until it is corrected by another assessment.

Decision
The FCA allowed the Minister's appeal, finding that only valid ITCs are included in the definition of ITC under paragraph 127(9)(c) because paragraph 127(9)(a) refers to "certified property or qualified property" and that only those properties qualify for ITCs.

PricewaterhouseCoopers Comments
The decision implies that if the Minister assesses a prior year incorrectly and that year becomes statute-barred, the Minister is prevented from reassessing that taxation year, but not a subsequent year that is not statute-barred, to correct the error.