Bowman
T.C.J.:
The
issue
in
these
appeals
from
assessments
for
the
appellant’s
1993
and
1994
taxation
years,
which
ended
on
January
31
in
each
year,
is
whether
certain
activities
of
the
appellant
constitute
scientific
research
and
experimental
development
(“SR&ED”)
for
the
purposes
of
sections
37
and
37.1
of
the
Income
Tax
Act.
SR&ED
is
defined
in
part
XXIX
of
the
Income
Tax
Regulations.
The
portion
of
section
2900
of
the
regulations
that
is
relevant
to
this
case
is
as
follows:
2900.
(1)
For
the
purposes
of
this
Part
and
sections
37
and
37.1
of
the
Act,
“scientific
research
and
experimental
development”
means
systematic
investigation
or
search
carried
out
in
a
field
of
science
or
technology
by
means
of
experiment
or
analysis,
that
is
to
say,
(b)
applied
research,
namely,
work
undertaken
for
the
advancement
of
scientific
knowledge
with
a
specific
practical
application
in
view,
(c)
experimental
development,
namely,
work
undertaken
for
the
purposes
of
achieving
technological
advancement
for
the
purposes
of
creating
new,
or
improving
existing,
materials,
devices,
products
or
processes,
including
incremental
improvements
thereto,
or
(2)
For
the
purposes
of
clause
37(8)(a)(i)(B)
and
subclause
37(8)(a)(ii)(A)(II)
of
the
Act,
the
following
expenditures
are
directly
attributable
to
the
prosecution
of
scientific
research
and
experimental
development:
(c)
other
expenditures,
or
those
portions
of
other
expenditures,
that
are
directly
related
to
such
prosecution
and
that
would
not
have
been
incurred
if
such
prosecution
had
not
occurred.
The
appellant
was
incorporated
in
1991
by
Mr.
Paul
Aumuller
who
had
started
the
business
in
1990.
Broadly
speaking,
the
business
of
the
appellant
is
safety
—
environmental,
occupational
and
public.
The
President,
Mr.
Aumuller,
has
had
extensive
experience
in
the
fields
of
occupational
health
and
safety
and
environmental
safety.
He
has
obtained
a
Bachelor
of
Environmental
Studies
from
Waterloo
University,
has
taken
a
two-year
course
in
chemistry
from
Ryerson
Polytechnical
Institute
of
Technology
and
holds
a
Post
Graduate
Diploma
in
Industrial
Hygiene
from
the
University
of
Toronto.
He
has
been
employed
in
the
industrial
safety
field
since
1981,
with
Woodbridge
Foam
Corporation,
Canada
Metal
Company
and
the
Construction
Safety
Association
of
Ontario.
The
two
projects
with
which
we
are
concerned
here
have
to
do
with
waste
urethane
chemicals
used
in
the
manufacture
of
foam
automotive
seating.
The
waste
generated
by
this
industry
was
either
left
in
barrels
on
the
property
of
the
manufacturer,
such
as
the
Woodbridge
Foam
Corporation,
or
sent
to
a
landfill
site
or
incinerated.
Mr.
Aumuller
decided
to
develop
a
more
economic
and
environmentally
acceptable
means
of
disposing
of
the
waste
chemicals,
which
fell
into
four
categories:
•
resin
waste
°
isocyanates
•
solvent
flushes
•
oily
water
wastes.
Two
projects
relating
to
the
above
wastes
that
are
in
issue
here
are:
(a)
The
Chemical
Waste
Dispositioning
Alternatives
(“CWDA”)
(1993
and
1994
taxation
years);
(b)
Solvent
Flush
Distillation
Process
(1994).
So
far
as
CWDA
was
concerned,
the
objective
was
to
improve
the
disposition
of
waste
chemicals
of
three
companies
that
manufactured
foam
for
automotive
seats.
It
cannot,
of
course,
be
denied
that
a
more
economic
and
environmentally
acceptable
means
of
disposing
of
such
materials
than
leaving
them
in
drums
or
disposing
of
them
in
landfill
sites
is
a
desirable
and
commendable
initiative.
The
first
step
was
to
determine
the
nature
and
quality
of
the
waste.
This
necessitated
an
on
site
inspection
of
the
drums
and
a
sampling
of
the
contents
in
each
drum.
450
cc
of
waste
were
taken
from
each
drum
and
tested
in
the
appellant’s
laboratory.
This
testing
was
done
by
Mr.
Aumuller.
The
only
other
person
on
the
staff
of
the
appellant
was
Mr.
Accettone,
a
chemi-
cal
engineer
who
had
graduated
in
1991
from
the
University
of
Toronto,
and
who
had
been
hired
by
the
appellant
in
1993.
The
only
detailed
record
that
we
have
in
evidence
of
the
testing
that
was
done
is
Mr.
Aumuller’s
hand-written
notes
in
tab
2
of
exhibit
A-l.
The
tests
were
as
follows:
(a)
a
field
test:
adding
10
cc
of
the
waste
to
10
cc
of
MDI
(diphenylmethane
diisocyanate
-
a
virgin
isocyanate
to
determine
the
reaction;
(b)
a
bench
test:
50
cc
of
waste
and
30
cc
of
MDI.
This
test
resulted
in
a
bad
reaction,
essentially
smoke;
(c)
a
%o
combination
of
waste
and
isocyanate;
(d)
a
compression
test
which
involved
putting
a
weight
on
the
foam
produced
to
determine
its
degree
of
resiliency;
(e)
a
blending
test
in
which
50
cc
of
waste
were
blended
with
a
virgin
(unused)
isocyanate.
The
objective
of
these
tests
was
to
determine
the
properties
and
composition
of
the
contents
of
the
barrels,
with
a
view
to
classifying
them
in
7
different
disposition
categories:
l.
“Supplier
Return”
—
unopened
barrels
of
virgin
chemicals
to
be
returned
to
the
supplier.
2.
“Work
Away”
—
use
of
the
contents
in
the
manufacturing
process.
3.
“Secondary”
or
“Surplus”
—
the
use
in
the
manufacture
of
other
products,
such
as
under
cushion
carpet.
4.
“Recyclable”
—
these
were
usually
solvents
used
for
flushing
and
cleaning
equipment
which
could
be
separated
from
the
waste
mixture
and
reused.
5.
“Incineration”
or
“Fuel
Blended”
—
mostly
resins,
waxes
and
oils.
6.
“In
Situ
and
Stabilisation
Treatment”
—
for
small
quantities
of
in-
organic/laboratory
chemicals:
insignificant
and
not
explained
in
the
evidence.
7.
“Landfill”.
The
second
project
was
the
Solvent
Flush
Distillation
Process,
which
involved
the
transportation
of
a
sludge
of
solvent
(usually
methylene
chloride
or
trichloroethane),
resin
and
isocyanate.
The
solvent
had
been
used
to
clean
robotic
heads
that
were
used
in
the
manufacture
of
foam,
through
the
combination
of
resin
and
isocyanates.
The
objective
was
to
separate
the
solvent
from
the
resin
and
isocyanates
so
that
the
solvent
could
be
used.
The
sludge
would
be
picked
up
at
the
factory
of
one
or
other
of
the
foam
manufacturers
and
transported
to
Anachemia
Ltée
where
it
would
be
processed.
Certain
tests
were
performed
to
determine
the
composition
and
properties
of
the
material,
such
as
its
viscosity
and
specific
gravity
following
which
it
would
be
processed
and
the
solvent
returned
to
the
manufacturers
or,
in
the
case
of
the
residue,
blended
to
form
fuel
and
sold
to
cement
kilns
for
its
calorific
content.
Different
methods
were
tried
to
separate
the
solvents
from
the
sludge:
(a)
a
centrifuge;
(b)
a
spinning
screen;
(c)
bag
liners
that
were
resistant
to
high
temperature.
No
method
was
particularly
successful.
In
Northwest
Hydraulic
Consultants
Ltd.
v.
R.,
[1998]
3
C.T.C.
2520,
98
D.T.C.
1839
(T.C.C.),
I
set
out
a
number
of
criteria
that
I
found
useful
in
determining
whether
a
particular
activity
constituted
SR&ED.
They
were
as
follows:
1.
Is
there
a
technological
risk
or
uncertainty?
(a)
Implicit
in
the
term
“technological
risk
or
uncertainty”
in
this
context
is
the
requirement
that
it
be
a
type
of
uncertainty
that
cannot
be
removed
by
routine
engineering
or
standard
procedures.
I
am
not
talking
about
the
fact
that
whenever
a
problem
is
identified
there
may
be
some
doubt
concerning
the
way
in
which
it
will
be
solved.
If
the
resolution
of
the
problem
is
reasonably
predictable
using
standard
procedure
or
routine
engineering
there
is
no
technological
uncertainty
as
used
in
this
context.
(b)
What
is
“routine
engineering”?
It
is
this
question,
(as
well
as
that
relating
to
technological
advancement)
that
appears
to
have
divided
the
experts
more
than
any
other.
Briefly
it
describes
techniques,
procedures
and
data
that
are
generally
accessible
to
competent
professionals
in
the
field.
2.
Did
the
person
claiming
to
be
doing
SRED
formulate
hypotheses
specifically
aimed
at
reducing
or
eliminating
that
technological
uncertainty?
This
involves
a
five
stage
process:
(a)
the
observation
of
the
subject
matter
of
the
problem;
(b)
the
formulation
of
a
clear
objective;
(c)
the
identification
and
articulation
of
the
technological
uncertainty;
(d)
the
formulation
of
an
hypothesis
or
hypotheses
designed
to
reduce
or
eliminate
the
uncertainty;
(e)
the
methodical
and
systematic
testing
of
the
hypotheses.
lt
is
important
to
recognize
that
although
a
technological
uncertainty
must
be
identified
at
the
outset
an
integral
part
of
SRED
is
the
identification
of
new
technological
uncertainties
as
the
research
progresses
and
the
use
of
the
scientific
method,
including
intuition,
creativity
and
sometimes
genius
in
uncovering,
recognizing
and
resolving
the
new
uncertainties.
3.
Did
the
procedures
adopted
accord
with
established
and
objective
principles
of
scientific
method,
characterized
by
trained
and
systematic
observation,
measurement
and
experiment,
and
the
formulation,
testing
and
modification
of
hypotheses?
(a)
It
is
important
to
recognize
that
although
the
above
methodology
describes
the
essential
aspects
of
SRED,
intuitive
creativity
and
even
genius
may
play
a
crucial
role
in
the
process
for
the
purposes
of
the
definition
of
SRED.
These
elements
must
however
operate
within
the
total
discipline
of
the
scientific
method.
(b)
What
may
appear
routine
and
obvious
after
the
event
may
not
have
been
before
the
work
was
undertaken.
What
distinguishes
routine
activity
from
the
methods
required
by
the
definition
of
SRED
in
section
2900
of
the
Regulations
is
not
solely
the
adherence
to
systematic
routines,
but
the
adoption
of
the
entire
scientific
method
described
above,
with
a
view
to
removing
a
technological
uncertainty
through
the
formulation
and
testing
of
innovative
and
untested
hypotheses.
4.
Did
the
process
result
in
a
technological
advance,
that
is
to
say
an
advancement
in
the
general
understanding?
(a)
By
general
I
mean
something
that
is
known
to,
or,
at
all
events,
available
to
persons
knowledgeable
in
the
field.
I
am
not
referring
to
a
piece
of
knowledge
that
may
be
known
to
someone
somewhere.
The
scientific
community
is
large,
and
publishes
in
many
languages.
A
technological
advance
in
Canada
does
not
cease
to
be
one
merely
because
there
is
a
theoretical
possibility
that
a
researcher
in,
say,
China,
may
have
made
the
same
advance
but
his
or
her
work
is
not
generally
known.
(b)
The
rejection
after
testing
of
an
hypothesis
is
nonetheless
an
advance
in
that
it
eliminates
one
hitherto
untested
hypothesis.
Much
scientific
research
involves
doing
just
that.
The
fact
that
the
initial
objective
is
not
achieved
invalidates
neither
the
hypothesis
formed
nor
the
methods
used.
On
the
contrary
it
is
possible
that
the
very
failure
reinforces
the
measure
of
the
technological
uncertainty.
5.
Although
the
/ncome
Tax
Act
and
the
Regulations
do
not
say
so
explicitly,
it
seems
self-evident
that
a
detailed
record
of
the
hypotheses,
tests
and
results
be
kept,
and
that
it
be
kept
as
the
work
progresses.
These
criteria
were
referred
to,
without
apparent
disapproval,
by
the
Federal
Court
of
Appeal
in
RIS-Christie
Ltd.
v.
R.
(1998),
99
D.T.C.
5087
(Fed.
C.A.).
Both
counsel
accepted
those
criteria
as
appropriate
in
this
case:
l.
Was
there
a
technological
risk
or
uncertainty?
Dr.
Blair,
the
expert
called
for
the
appellant,
said
that
in
his
opinion
there
was
“some
uncertainty”,
I
agree.
There
was
uncertainty
concerning
the
best
method
of
disposition
of
the
wastes.
I
do
not,
however,
see
on
the
evidence
a
type
of
uncertainty
that
cannot
be
removed
by
routine
engineering
or
standard
procedures.
The
testing
of
the
contents
of
the
barrels,
recorded
at
tab
2
of
exhibit
A-l,
was
methodical
and
systematic.
It
was
however
something
that
a
knowledgeable
and
competent
chemist
could
do.
The
fact
that
the
method
of
testing
is
routine
is
of
course
not
fatal
to
a
claim
for
SR&ED.
However,
the
objective
was
not
to
test
novel
or
untested
hypotheses.
It
was
to
determine
what
was
in
the
barrels.
2.
With
respect
to
paragraph
2
of
the
Northwest
criteria.
I
am
not
sure
just
what
technological
uncertainty
was
identified
or
articulated,
or
what
hypotheses
were
formulated
to
eliminate
that
uncertainty.
3.
It
may
be
assumed
that
the
methods
of
testing
in
the
appellant’s
laboratory
was
in
accordance
with
established
methods
of
scientific
method,
insofar
as
they
were
methodical
and
analytical.
Nonetheless
their
objective
was
to
determine
the
nature
and
composition
of
the
drums
of
waste,
with
a
view
to
disposing
of
it
in
a
better
way
than
taking
it
to
a
landfill.
4.
Was
there
a
technological
advance?
There
appears
to
have
been
an
environmental
advance
in
that
a
significant
reduction
of
materials
going
to
a
landfill
occurred.
This
is
not,
however,
a
technological
advance
that
could
not
have
been
achieved
by
routine
engineering.
I
do
not
read
Dr.
Blair’s
report
as
identifying
any
new
hypotheses
that
were
tested
or
methods
that
were
developed
that
could
not
have
been
tested
or
developed
by
routine
experimentation.
5.
The
records
are
very
scant
indeed.
We
have
Mr.
Aumuller’s
notes
at
tab
2
of
exhibit
A-l,
and
nothing
more.
If
any
testing
was
done
at
the
plant
of
Anachemia
Ltée
it
is
not
apparent
from
the
evidence.
Tab
5
of
exhibit
A-l
is
an
analysis
of
the
waste
that
was
delivered
to
it
for
processing.
This
analysis
does
not
constitute
SR&ED.
By
far
the
largest
part
of
the
claims
was
for
transporting
the
material
to
Anachemia
Ltée,
for
processing
and
the
cost
of
processing.
There
is
simply
no
evidence
of
what
portion,
if
any,
of
these
costs
were
for
testing
or
the
nature
of
the
tests,
if
any.
It
may
be,
as
was
held
in
RIS-Christie
(supra)
that
written
records
in
some
cases
are
not
necessary,
but
their
absence
in
this
case
makes
it
impossible
for
me
to
determine
whether
any
SR&ED
went
on
at
the
Anachemia
Ltée
plant.
While
I
tend
to
agree
with
the
respondent’s
expert,
Dr.
Ritchie,
that
some
of
the
work
done
on
CWDA
in
1993
may
(I
emphasize
may)
have
met
the
definition
of
SR&ED,
the
evidence
falls
of
establishing
short,
on
a
balance
of
probabilities,
that
the
work
done
was
SR&ED.
So
far
as
the
Solvent
Flush
Distillation
Process
is
concerned
I
am
prepared
to
accept
Dr.
Ritchie’s
conclusions,
which
are
as
follows:
2.
Solvent
Flush
Distillation
Process
(1994
Tax
Year)
Objective
To
develop
an
on-site
system
for
recycling
methylene
chloride
solvent
flush
material
at
a
flexible
foam
manufacturer’s
facility.
Background
The
solvent
flush
material
is
a
sludge
of
solvent,
resin
and
isocyanate
in
which
there
is
some
on-going
slow
polymerization
(see
solvent
recovery
part
of
1993
tax
year
project
1).
The
flexible
foam
manufacturer
had
switched
from
trichloroethylene
to
methylene
chloride
in
April
1993.
About
70,000
L
trichloroethylene
and
5000
L
methylene
chloride
solvent
flush
material
had
previously
been
distilled
at
Anachemia,
with
80-90%
returned
as
process
solvent
(li).
Activities
and
Comments
Various
filter
systems
were
evaluated,
but
polymerization
and
hardening
of
the
flush
system
caused
filtration
problems.
This
was
routine
development
because
the
filter
systems
were
commercially-available,
filtration
is
well-understood
technology,
and
the
polymerization
and
hardening
characteristics
of
the
solvent
flush
material
were
known.
Sources
of
commercially-available
solvent
recovery
systems
and
related
equipment
were
reviewed,
and
a
unit
fabricator
was
selected.
Tests
provided
data
for
unit
design,
and
showed
that
a
high-temperature
liner
bag
prevented
adhesion
of
distillation
bottoms.
Design
and
samples
(distillate
and
still
bottoms)
were
provided
to
the
flexible
foam
manufacturer.
This
was
standard
practice
engineering
evaluation
and
design
of
commercially-available
equipment
in
a
mature
and
well-understood
area
of
technology.
Adapting
known
distillation
technology
and
applications
for
on-site
use
at
the
source
of
the
solvent
flush
material
involved
standard
engineering
practice
with
a
high
certainty
of
success.
Conclusions
The
project
is
not
SR&ED
because
it
involved
standard
engineering
practice
and
routine
development,
none
of
which
resulted
in
technological
advancements.
While
it
is
“possible”
as
was
stated
in
a
letter
from
the
Department
of
National
Revenue
to
the
appellant’s
accountants,
that
there
was
“a
core
of
eligible
work
embedded
in
project
#1”
(the
CWDA),
the
evidence
simply
does
not
establish
it.
The
appeals
are
dismissed
with
costs.
Appeals
dismissed.
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