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Citation: 2003TCC674
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Date: 20030924
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Docket: 2002-1991(IT)I
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BETWEEN:
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MARITIME-ONTARIO FREIGHT LINES LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] This is an appeal by
Maritime-Ontario Freight Lines Limited from a reassessment of its
1996 taxation year. In computing income for that year, the
Appellant claimed Scientific Research and Experimental
Development (SR & ED) expenditures and the related investment
tax credit (ITC) in the amounts of $54,188 and $10,838,
respectively. By Notice of Reassessment dated June 10, 1999, the
Minister of National Revenue (the Minister) disallowed the
Appellant's claim.
Facts
[2] The Appellant is in the trucking
business hauling general freight from Ontario and Quebec across
Canada. In this business the Appellant and others charge their
customers by the weight they ship. However, according to
Doug Munro (Munro), the Appellant's president, a major
problem exists in that many customers do not have scales and
consequently, the declared weights on their bills of lading are
often found to be inaccurate. It was therefore desirable to
attempt to develop a device that among other things would
correctly ascertain weight and thereby permit accurate billing of
customers. In the late 1980s, a company, Alert-O-Brake Systems
Inc. (Alert-O-Brake)[1], was established for the purpose of developing an
electronic monitoring system for use in association with load
handling vehicles such as, for example, forklift trucks. Munro
was involved in the project as was Zeljko Ted Jurca (Jurca). In
1987, a patent was issued to Jurca with respect to such a device,
the rights to which were subsequently assigned by him to
Alert-O-Brake.[2]
The Accu-Data system was marketed by Alert-O-Brake as early as
1990.
[3] In or about 1994 the assets of
Alert-O-Brake, primarily Accu-Data, were sold to the Appellant.
It made further attempts to market the system but according to
Munro sales were few because the customers would not accept the
accuracy levels. Efforts were made to improve the weighing
accuracy with the objective of developing a scale that could be
sold to third parties as well as used in the Appellant's own
business. Munro noted that to be "legal" for trade, the
weight had to be accurate to 1/10 of 1% and that was their
objective.[3]
Difficulties were encountered and in 1995 the Appellant retained
Jurca to provide the technical expertise and to do the
development and necessary testing. Ultimately, it was unable to
achieve its objective and in 1997 the project was
discontinued.
[4] Jurca, an engineer, completed
courses at an electro-technical college in Zagreb, Croatia, and
subsequently took industrial engineering courses in Toronto. He
specializes in instrumentation design for vehicles such as cars,
buses, trucks, helicopters, etc. and said that one particular
area of his expertise was the development of "black
boxes", i.e. small computing devices which, when hooked up
to a host machine such as a truck or forklift, collect and record
the desired information while the machine is in use. Accu-Data,
the "black box" unit in respect of which the patent had
been received, when connected to a typical-material-handling
vehicle regardless of make or type analysed, in Jurca's
words, "raw data from the forklift as far as the vehicle
utilization, movements of the vehicle, lifting, driving, loaded,
unloaded, lift and so forth, but the function -- one of the
functions of the system was a weighing function as well". He
added that this enabled management to obtain "automatic
information for vehicle utilization, productivity, overloads,
that type of thing. So the idea was to provide management
information, that's about it, that utilization of the
equipment".
[5] Jurca's mandate when retained
by the Appellant in 1995 was to "design and to come up with
the weight measuring system that would be more accurate than we
had prior to that year, basically, the improvement of the
existing system". He said that Accu-Data when designed:
... had accuracy already, depending on the lift truck,
that was the funny part of it. That's why it was so easy to
do it. On some forklifts it was, let's assume, not a brand
new vehicle but a really old used vehicle, I would get really
good results, because everything was, what I call it - the
hydraulic cylinder, chain, and everything else, everything was
loose.
So, in other words, the way that my software was working, I
would get pretty good results, believe me, 1%, but the problem
was if I would take up - pick up that same load, let's
assume, ten times - let's assume I was picking 1,000 pounds,
sometimes I would get 1,010 pounds, sometimes 1,050 pounds. So if
you take 1,000 pounds, 50 pounds, it's quite a big error, and
that would happen, as I say, for whatever reason. I wasn't
aware of what it was. Was it mechanical problems, was it software
problems, was it design of the ... , that type of thing.
Thus, the objective project was
... to design the system to register 1% of applied loads.
So, in other words, if I would pick up 1,000 pounds, 1% of the
applied load would be 10 - 10 pounds. So that was my goal.
...
He went on to say that the technological uncertainties were
both mechanical and software and that he intended to look at
... possibilities to improve my hardware on this side,
maybe better amplifiers that are different technology or a change
in the software as well, because the way you're catching
those things, it's obviously a lot to do with the software as
well. So it's a combination of all those three things, so
that's what I was trying to do.
The methodology utilized by Jurca for this purpose essentially
consisted of lifting known loads repeatedly with different makes
of forklifts under different conditions in order to obtain data
from the weighing function which could then be plotted and
analysed. He said a number of modifications, both mechanical and
computational, were made and their effects examined. One of the
difficulties he faced was locating the source of discrepancies
observed in the data reported by the weighing function of the
"black box". He testified that attempts to weigh the
same load often produced vastly different results and that the
nature of these discrepancies could have been mechanical (i.e.
that is due to the forklifts or computer hardware) or
computational (i.e. due to the computer software). Ultimately,
the result was
... that we got very close to 1% what I was trying to get
to 1% of the lift/truck capacity, and I just didn't know
anymore what to do next in order to get to 1% of the applied load
type of thing, which I was trying to do. I felt, you know, that
chance is that it's possible that something can be done in
there, and more or less I don't know, I thought I was losing
maybe.
As a result, it was conceded that it was unlikely the criteria
of 1% of the applied load could be met and the project was
abandoned.
[6] The Respondent's position is
based on a report prepared by Yashvant S. Parmar[4] and his testimony before this
Court. His qualifications include a Bachelor of Science (Honours)
degree (1974) in electrical and electronic engineering at the
University of Leeds, Leeds, England. He has extensive experience
in systems engineering in a number of areas including developing
Requirements and Data Analysis, System Architecture design,
Built-in Test design, System Test and Integration, Fault-tree
Analysis, Failure Mode and Effect Analysis, Electrical Circuit
Analysis, Software design and Analysis and Specifications
(MIL-STD-490) ICDs. He has been employed by various technology
companies since 1974 most recently as a senior system engineer by
Spar Aerospace Limited and Honeywell Canada (1987 - 1995; 1995 -
present). I should also note that Parmar has been a research
and technology adviser to CCRA since September 2001.
[7] It is also relevant to note at
this point that the Appellant chose not to provide an independent
expert's report and thus, Parmar's written report was
based on one meeting with Jurca and his review of several
documents which had been submitted by the Appellant to CCRA.[5] Included in that
material was a "brief technical description of the
Alert-o-Brake unit" captioned "Truck Check Weighing
System" dated December 27, 2000 (author unknown) and a
document referred to as a technical response with respect to the
"SR & ED claim; Maritime Ontario Freight Lines
Limited" dated August 17, 2001, prepared by
Tino Sequeira. In this document, Sequeira made references to
issues such as technological uncertainties, advancements and
scientific and technical content to demonstrate the
Appellant's conformity with the legislation. It was utilized
by the Appellant's representative in his cross-examination of
Parmar as though the positions expressed therein were
unchallenged evidence. The fact is that there is nothing before
the Court to establish that Sequeira was qualified in any manner
to express an opinion. Furthermore, although he was in Court
assisting Munro in some capacity, he was not called as a witness
and thus, there is no evidence as to the source of the
information contained in that document.
[8] Parmar's opinion was that the
work undertaken by the Appellant did not involve systematic
investigation or experimental development intended to resolve the
technological uncertainties, and resulting in technological
advancements. He testified that on the basis of the material
submitted and Jurca's testimony, it was difficult if not
nearly impossible to determine whether there was a technological
uncertainty. He said there could have been, however, the only
evidence of uncertainty presented was the vague commitment on the
part of the Appellant to improve the accuracy of the weighing
function. This failure was compounded by a serious lack of
documentation to establish what specific activity was undertaken
to reduce or eliminate the factors identified by Jurca to have
affected the accuracy of the device. He specifically referred to
the failure by the Appellant to identify what technological
barriers had to be overcome and stated that unless there was some
evidence as to what these barriers were and what was done to deal
with them, it was not possible to conclude that there existed a
type of uncertainty that could not be resolved by routine
engineering procedure. He further took issue with the
Appellant's contention that the failure of the project itself
was prima facie proof of technological uncertainty since
there was such a paucity of documentary evidence or other
material to establish the actual basis for the project's
failure.
[9] Reservations were also expressed
by Parmar with respect to the development of hypotheses or any
other plan in conjunction with the "scientific method"
in order to confront the challenges faced. Although the Appellant
listed a number of factors which could affect the weighing
accuracy, none of the documents submitted indicated the
formulation of any hypothesis. As well, Parmar also noted that
none of the documents before the Court indicated that a procedure
in accordance with established scientific methods was employed
since no test data and/or analysis was presented for review and
only general statements had been made. Parmar concluded that the
result of the process was that no technological uncertainty had
been established and thus no technological advancement had been
made.
[10] Although the Appellant introduced
several photocopied pages from Jurca's logbook[6] as well as some copies
of software changes and software diagrams[7] they provided little information to
the Court. Parmar testified that in the normal course any
scientist working on a complex problem keeps a logbook which will
contain a substantial amount of information including technical
data without which it is not possible to determine what was being
done and what was the reason for doing it. The documentation
presented consisting of three pages from Jurca's logbooks was
of little value. According to Parmar "one of the pages
indicated that they modified the three version (sic) of
software, does not tell me what was the reason for
modifications". He added that it was not clear from
reviewing the documents what steps were being taken and what the
reason was behind the changes made and spoke of being unable to
see "what techniques they were trying to use to
improve" the accuracy of the weighing function.
Analysis
[11] For the purposes of subsection 37(1),
the term "scientific research" is defined by Income
Tax Regulation 2900 as follows:
(a) basic
research, namely, work undertaken for the advancement of
scientific knowledge without a specific practical application in
view,
(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
(d) work with
respect to engineering, design, operations research, mathematical
analysis, computer programming, data collection, testing and
psychological research where that work is commensurate with the
needs, and directly in support, of the work described in
paragraph (a), (b) or (c),
...
[12] In C.W. Agencies Inc. v. The
Queen,[8]
Sexton J.A. observed:
Both sides in front of us relied on the test outlined in
Northwest Hydraulic Consultants Limited v. Her Majesty the
Queen, 98 DTC 1839. In that case, Judge Bowman of the Tax
Court outlined five criteria which are useful in determining
whether a particular activity constitutes SR & ED. Those
criteria have been approved by this Court in RIS-Christie v.
Her Majesty the Queen, 99 DTC 5087 at page 5089. The
criteria are 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?
[13] Was there a technological risk or
uncertainty?
On the evidence before me, I am not able to conclude that there
was no technological risk or uncertainty in the Appellant's
attempt at improving the weighing function of the "black
box". However, there is a substantial question as to whether
that uncertainty could be removed by routine engineering or
standard procedures. In considering whether there was a
technological uncertainty which was clearly identified by the
Appellant, it must not be ignored that Accu-Data was a patented
"electronic monitoring system for load handling" that
in fact had a capacity of weighing the load. The issue insofar as
the Appellant was concerned was that the performance of the
system was not acceptable and, therefore, steps were taken to
bring the weighing accuracy system within plus/minus 1% of the
vehicle lift capacity. There is some merit in Parmar's
comments that the manner in which the Appellant proceeded was
akin to the use of "routine or standard engineering"
practices in that efforts were undertaken to modify a
pre-existing technological product.
[14] Did the Appellant formulate
hypotheses specifically aimed at reducing or eliminating that
technological
uncertainty:
A hypothesis is a tentative assumption or explanation to an
unknown problem and, as a rule, this requirement is met by the
existence of a logical plan devised to observe and resolve the
hypothetical problem. Jurca, in a very general sense, did
articulate certain matters affecting the desired objective as
well as the experiments he carried out, which included both
mechanical and computational problems. Although it was difficult
to follow his testimony, it was apparent that the isolation of
the various factors created problems as there were a number of
unknown variables at any one time (control valves, hydraulic
leakage, differences in the make of the lift truck, inadequate
programming, etc.). There is, however, almost no documentary
record of the steps taken by Jurca in this context. Parmar
testified as to the necessity of having a plan and of analysis
preceding design. Not the least of these is the formulation of a
clear record intelligible to third parties which would allow them
the opportunity of verifying the results independently. Parmar
testified that neither the available documentary material or the
testimony of Jurca provided him with sufficient cogent
information to determine whether a hypothesis defining a clear
objective and articulating the technological uncertainty had been
formulated. After hearing Jurca's testimony, Parmar observed
"it was difficult for me to understand what hypothesis was
really made" and what steps were being proposed to eliminate
the technological uncertainty if one existed. Parmar's
reservations with respect to the absence of any clear hypotheses
or other plans designed to confront the challenges faced by the
Appellant are well founded.
[15] Was a detailed record of the
hypotheses tested and results kept as the work
progressed:
It is fair
to say that one of the main requisites of proper scientific
experimentation is to produce recorded results which can be
independently verified under identical conditions. An acceptable
minimum is that the required level of documentation be one which
illustrates the methods utilized and the results obtained so that
these can be duplicated independently by a reasonable third
party. There are virtually no documents before the Court which
provide any comprehensible evidence of the nature of the
experimentation carried out. Indeed, given the evidence of Jurca,
no detailed records were kept and any that existed, such as the
items presented in these proceedings, were intelligible only to
Jurca but not to Parmar or to any other reasonable party. It is
not surprising that the Appellant's objective, hypotheses and
methods were unclear to the Respondent's scientific advisor
and why the Appellant's theoretical results were not
discernible from the practical ones.
[16] The evidence before me fails to
establish that the Appellant's project meets the criteria set
out in the SR & ED regulations under Part XXIX of the
Act. Accordingly, the appeal is dismissed.
Signed at Toronto, Ontario, this 24th day of September,
2003.
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