Tax Court affirms that expert witnesses need to know the business

27 May 2021

In Allegro Wireless[1] the Tax Court of Canada ("TCC") highlighted that, to qualify as an expert, a witness must be able to demonstrate sufficient knowledge of the business and the factual foundation for the tax dispute before the TCC.

Allegro Wireless is a scientific research and experimental development ("SR&ED") case and the TCC referenced the usual five criteria used to determine whether a particular activity constitutes SR&ED, as follows:

  1. Was there a technological risk or uncertainty which 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 procedure adopted accord with the total discipline 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 tested and results kept as the work progressed?

In this case, the taxpayer carried out a number of projects to develop software to address various needs of its clients, focusing on providing a software platform that enabled its clients to communicate remotely with their workers.  Hand-held devices allowed information to be transferred, through cellular networks, between the field workers of the taxpayer's various clients and databases maintained by the clients. This was a new product that had not previously existed. The software development necessitated in-depth research and knowledge of the individual and unique needs of each client, engaging significant technological challenges and uncertainties, including arising from not having access to the underlying software that operated the various hand-held devices.

Both the taxpayer and the Crown called witnesses who had provided expert opinions. In determining the admissibility of the expert opinions, the TCC applied the well-known two-step test. The first step of the test requires the party putting the proposed expert forward to establish that the evidence satisfies four threshold requirements: (i) relevance; (ii) necessity in assisting the trier of fact; (iii) the absence of any exclusionary rule; and (iv) a properly qualified expert. The second step requires a cost-benefit analysis be done to determine if the otherwise admissible expert evidence should be excluded because its probative value is overborne by its prejudicial effect, which requires considerations such as consumption of time, prejudice and risk of causing confusion.

The TCC allowed the expert witness called on behalf of the taxpayer to testify, concluding that all of the requisite elements of the test for admissibility were satisfied. There was no issue that he was properly qualified and his independence was not questioned.  Moreover, the TCC held that the factual foundation underpinning his testimony was adequately proven by admissible evidence before the TCC.

The Crown called two expert witnesses. Although the TCC qualified them as experts in the field in which they provided their opinions, counsel for the taxpayer objected that their reports were based on only limited factual information and argued that they were not provided with the key documents they needed to make informed opinions. After reading their reports and hearing their testimony, the TCC agreed with the taxpayer's position and disregarded the evidence of the Crown's two expert witnesses, concluding as follows:

"The [taxpayer] was attempting to develop a new product (its platform) that would work seamlessly with a multitude of devices using different operating systems and operating on various client operating systems. Neither [of the Crown's two expert witnesses] was aware of this difficult environment. As a result of this weak factual foundation, especially when compared to [the taxpayer's expert witness'] factual foundation for his opinion, I have given no weight to the expert reports of [the Crown's two expert witnesses]. The only expert report that I have placed any reliance on is the expert report of [the taxpayer's expert witness]."

Perhaps not surprisingly, after having reached this conclusion, the TCC ultimately held that the work performed by the taxpayer on the identified projects constituted SR&ED. The decision underscores the critical importance of ensuring that all expert witnesses have the benefit of a full and robust understanding of the factual matrix giving rise to the tax dispute. This could be enhanced if all of the expert witnesses conferred with one another before the hearing, to try to narrow the issues and identify the points on which their views differ.


[1] Allegro Wireless Canada Inc. v Her Majesty the Queen, 2021 CarswellNat 884, 2021 TCC 27 ("Allegro Wireless").

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