What was the impact of the LGL decision (99 DTC 675, aff’d [2000] FCA No. 166) on Case C of Application Policy 1996-02 - Testing and Studies Required to Meet Requirements in Regulated Industries, which read:
The testing or engineering is performed in Canada to meet regulatory requirements, but the project is conducted outside Canada.
Where the project is conducted outside Canada, the taxpayer has not performed SR&ED in Canada. Therefore, the testing, even if done inside Canada, is considered ordinary testing or engineering in itself and is not eligible.
In this case, it does not matter whether the activities performed outside Canada are SR&ED.
However, if the studies required to meet the regulatory requirements meet all three eligibility criteria, as in Case B, they would be considered eligible and would constitute an SR&ED project.
CRA stated:
The approach of the Federal Court of Appeal in Tigney and that of the Tax Court of Canada and the Federal Court of Appeal in LGL can be summarized as follows. The first step is to determine whether a project, as a whole, is carried on in Canada or outside Canada. If the project is carried on in Canada under subsection 248(1) of the ITA (formerly section 2900 of the Income Tax Regulations), thereby satisfying one of the criteria for the project to be considered an SR&ED project, the next analysis is to determine what portion of the expenses were incurred in Canada. Only these expenses will qualify for a deduction pursuant to subsection 37(1) and an ITC pursuant to section 127. This analysis is consistent with Justice Bowman's decision in LGL.
Consequently, we are of the view that your interpretation - as set out above - is correct and that there is no need to change Case C of our enforcement policy.