When Negligent Documentation Triggers A Decade-Late Reassessment, Penalties, And Shareholder Liability: Les Éléments Chauffants Tempora Inc. v. The King (2025 TCC 173)

Overview: Reassessing SR&ED Claims Beyond the Normal Limitation Period

In Les Éléments Chauffants Tempora Inc. v. The King (2025 TCC 173), the Tax Court of Canada addressed a critical issue affecting corporate taxpayers who rely on SR&ED tax credits: when can the Canada Revenue Agency (CRA) reassess a corporation outside the normal tax reassessment period?

Under subparagraph 152(4)(a)(i) of the Income Tax Act, the answer depends on whether a misrepresentation is attributable to neglect, carelessness, or wilful default. Even negligent mistakes, rather than intentional misconduct, can trigger reassessment.

Background Facts: Plagiarized SR&ED Documentation and CRA Reassessment

Tempora, a Quebec-based manufacturer of industrial heating components, claimed SR&ED expenditures and ITCs for four taxation years—2006 through 2009. By the time the CRA reassessed, all four years were statute-barred under normal reassessment rules.

Despite prior cooperation and refunds, a later CRA audit revealed serious deficiencies. CRA determined that Tempora's SR&ED technical reports were largely copied from publicly available online materials published by suppliers such as Watlow, Tempco, and Durex Industries. These submissions were presented as if they reflected Tempora's original experimentation.

The CRA concluded that Tempora had misrepresented its SR&ED entitlement through negligence, allowing reassessment under 152(4)(a)(i). As a result, most SR&ED credits were denied, gross negligence penalties were applied, and section 160 derivative liability was assessed on shareholder-directors who received corporate funds for personal tax debts.

Taxpayer vs. Crown: Documentation Quality as a Compliance Issue

Tempora argued that SR&ED entitlement depends on technological advancement, not report formatting, and that copied background theory should not negate genuine experimentation. The Crown argued that SR&ED is an evidence-based incentive program, and submitting plagiarized documentation constitutes misrepresentation. Proper, authentic documentation is not optional; it is essential to substantiate claims.

The Tax Court's Decision: Statute-Barred Years Reopened

The Tax Court sided largely with the CRA, holding that plagiarism and misleading technical reporting amounted to a misrepresentation attributable to neglect, allowing reassessment of four otherwise statute-barred years. Portions of projects in 2007 and 2008 were accepted where Tempora provided physical evidence, including consumables and documented test results.

Outcomes:

• SR&ED claims for 2006 and 2009 denied
• Gross negligence penalties upheld
• Section 160 shareholder assessments confirmed

This underscores that negligent reporting can reopen years long thought closed and potentially affect shareholders personally.

Negligent SR&ED Documentation Can Reopen Statute-Barred Years

The judgment reaffirmed CRA's power to reassess beyond the statutory limitation period. In Tempora, the CRA obtained documents showing that Form T661 submissions were largely copied from suppliers and lacked project-specific, contemporaneous scientific data.

This case demonstrates that generic industry theory or boilerplate content cannot substitute for proper evidence of experimentation. Taxpayers should ensure records demonstrate the actual work, uncertainties, hypotheses, and results, and should consider consulting a tax lawyer before filing or responding to reassessments.

SR&ED Requires Science, Not Storytelling: Evidence Is Everything

Claims must reflect systematic scientific inquiry, not just internal assessment of innovation. Without evidence of hypotheses, testing, or measurable results, SR&ED claims are likely to fail. This evidentiary standard also underpins CRA's gross negligence penalties, demonstrating that misrepresentations in technical reports can trigger severe consequences.

Shareholder Exposure Under Section 160: When Corporate Tax Debts Become Personal

Reassessments can create personal liability under section 160. Tempora used corporate funds to pay shareholder tax obligations, which triggered strict joint liability. For owner-managed corporations, this highlights the risk of transferring value while corporate tax debts exist. Shareholders should consult a tax lawyer before making such transfers.

3 Pro Tax Tips for SR&ED Claimants and Private Corporation Shareholders

1. Document the scientific method from day one—records must show uncertainties, hypotheses, experiments, and results.
2. Never rely on supplier or manufacturer websites as project evidence.
3. SR&ED credits are high-risk; consult a tax lawyer before filing, amending, or appealing claims to mitigate reassessment and penalty exposure.

FAQ: SR&ED Compliance and Section 160 Liability

If a company believes it is innovating, is that enough to qualify for SR&ED?

No. Objective evidence of scientific methodology is required; commercial success or subjective belief is insufficient.

How does section 160 make shareholders personally liable?

Transfers from a corporation with outstanding tax debt to a non-arm's-length person can result in joint and several liability for the recipient, up to the amount received. No due diligence defense applies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.