Citation: 2009 TCC 190
Date: 20090407
Docket: 2004-2360(IT)G
BETWEEN:
ADVANCED AGRICULTURAL TESTING INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Bowie J.
[1] The appellant
corporation appeals from assessments under the Income Tax Act (the Act)
for the taxation years 1995, 1996, 1997, 1998 and 1999. In each of those years,
it claimed a deduction from income on account of expenditures for scientific
research and experimental development (SRED). By the time of trial the issues
in dispute had been somewhat narrowed. The appellant claimed deductions for
SRED in respect of two trials, referred to as trial #48, and trial #49, in the
year 1998, and for trial #50 in the year 1999. The Minister of National Revenue
has disallowed these. For the taxation years 1995, 1996, 1997 and 1998, the
appellant elected to report its expenditures for SRED by the proxy method, as
is permitted by clause 37(8)(a)(ii)(B) and subsection 37(10) of the Act.
It later sought to revoke these elections. The Minister says that it cannot do
so. Certain expenses related to SRED claimed in the taxation years 1995, 1996
and 1997 are also in dispute.
[2]Neither the pleadings nor
the written arguments of counsel define the issues in these appeals as
precisely as I would wish. As I understand these documents, and the opening
statements of counsel, the issues are:
(a) Do trials #48, #49 and
#50, or any of them, qualify as SRED as that expression is defined in section
248 of the Act?
(b) Can an election duly made
under clause 37(8)(a)(ii)(B) and subsection 37(10) of the Act
later be revoked by the taxpayer?
(c) Are bedding for cattle and
diesel fuel “material consumed” and therefore deductible under section 37, or
are they overhead expenses not deductible by a taxpayer reporting by the proxy
method?
[3]Subsection 37(1) of the Act
reads as follows:
37(1) Where a taxpayer carried on a business in
Canada in a taxation year, there may be deducted in computing the taxpayer’s
income from the business for the year such amount as the taxpayer claims not
exceeding the amount, if any, by which the total of
(a) the total of all amounts each
of which is an expenditure of a current nature made by the taxpayer in the year
or in a preceding taxation year ending after 1973
(i) on scientific research and
experimental development carried on in Canada, directly undertaken by or on behalf of the
taxpayer, and related to a business of the taxpayer,
(i.1) by payments to a corporation resident
in Canada to be used for scientific research and experimental development
carried on in Canada that is related to a business of the taxpayer, but only
where the taxpayer is entitled to exploit the results of that scientific
research and experimental development,
(ii)
by payments to
(A) an approved association that
undertakes scientific research and experimental development,
(B) an approved university, college,
research institute or other similar institution,
(C) a corporation resident in Canada
and exempt from tax under paragraph 149(1)(j), or
(D)
[Repealed, 1996, c. 21, s. 9(4)]
(E) an approved organization that makes
payments to an association, institution or corporation described in any of
clauses A to (C)
to be used for scientific research and
experimental development carried on in Canada that is related to a business of
the taxpayer, but only where the taxpayer is entitled to exploit the results of
that scientific research and experimental development, or
(iii) where the taxpayer is a corporation,
by payments to a corporation resident in Canada and exempt from tax because of
paragraph 149(1)(j), for scientific research and experimental
development that is basic research or applied research carried on in Canada
(A) the primary purpose of which is the
use of results therefrom by the taxpayer in conjunction with other scientific
research and experimental development activities undertaken or to be undertaken
by or on behalf of the taxpayer that relate to a business of the taxpayer, and
(B) that has the technological potential
for application to other businesses of a type unrelated to that carried on by
the taxpayer, and
(b) the lesser of
(i) the total of all amounts each of
which is an expenditure of a capital nature made by the taxpayer (in respect of
property acquired that would be depreciable property of the taxpayer if this
section were not applicable in respect of the property, other than land or a
leasehold interest in land) in the year or in a preceding taxation year ending
after 1958 on scientific research and experimental development carried on in
Canada, directly undertaken by or on behalf of the taxpayer, and related to a
business of the taxpayer, and
(ii) the undepreciated capital cost to
the taxpayer of the property so acquired as of the end of the taxation year
(before making any deduction under this paragraph in computing the income of
the taxpayer for the taxation year),
(c) the total of all amounts each
of which is an expenditure made by the taxpayer in the year or in a preceding
taxation year ending after 1973 by way of repayment of amounts described in
paragraph 37(1)(d),
(c.1) all amounts included by virtue
of paragraph 12(1)(v), in computing the taxpayer’s income for any
previous taxation year,
(c.2) all amounts added because of
subsection 127(27), (29) or (34) to the taxpayer’s tax otherwise payable under
this Part for any preceding taxation year, and
(c.3) in the case of a partnership,
all amounts each of which is an excess referred to in subsection 127(30) in
respect of the partnership for any preceding fiscal period,
exceeds the total of
(d) the total of all amounts each
of which is the amount of any government assistance or non-government
assistance (within the meanings assigned to those expressions by subsection
127(9)) in respect of an expenditure described in paragraph 37(1)(a) or
37(1)(b) that, at the taxpayer’s filing-due date for the year, the
taxpayer has received, is entitled to receive or can reasonably be expected to
receive,
(d.1) the total of all amounts each
of which is the super-allowance benefit amount (within the meaning assigned by
subsection 127(9)) for the year or for a preceding taxation year in respect of
the taxpayer in respect of a province,
(e) that part of the total of all
amounts each of which is an amount deducted under subsection 127(5) in
computing the tax payable under this Part by the taxpayer for a preceding
taxation year where the amount can reasonably be attributed to
(i) a prescribed proxy amount for a
preceding taxation year,
(ii) an expenditure of a current nature
incurred in a preceding taxation year that was a qualified expenditure incurred
in that preceding year in respect of scientific research and experimental
development for the purposes of section 127, or
(iii) an amount included because of
paragraph 127(13)(e) in the taxpayer’s SR&ED qualified expenditure
pool at the end of a preceding taxation year within the meaning assigned by
subsection 127(9),
(f) the total of all amounts each
of which is an amount deducted under this subsection in computing the
taxpayer’s income for a preceding taxation year, except amounts described in
subsection 37(6),
(f.1) the total of all amounts each
of which is the lesser of
(i) the amount deducted under section
61.3 in computing the taxpayer’s income for a preceding taxation year, and
(ii) the amount, if any, by which the
amount that was deductible under this subsection in computing the taxpayer’s
income for that preceding year exceeds the amount claimed under this subsection
in computing the taxpayer’s income for that preceding year,
(g) the total of all amounts each
of which is an amount equal to twice the amount claimed under subparagraph
194(2)(a)(ii) by the taxpayer for the year or any preceding taxation
year, and
(h) where the taxpayer is a
corporation control of which has been acquired by a person or group of persons
before the end of the year, the amount determined for the year under subsection
37(6.1) with respect to the corporation.
In
the context of this case an amount, in order to be deductible, must be shown to
have been expended on activity that comes within the meaning of the expression
“SRED”, which is given the following definition by section 248 of the Act:
“scientific
research and experimental development” means systematic investigation or search
that is carried out in a field of science or technology by means of experiment
or analysis and that is
(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, or
(c) experimental development,
namely, work undertaken for the purpose of achieving technological advancement
for the purpose of creating new, or improving existing, materials, devices,
products or processes, including incremental improvements thereto,
and, in applying this definition in respect of a
taxpayer, includes
(d) work undertaken by or on
behalf of the taxpayer with respect to engineering, design, operations
research, mathematical analysis, computer programming, data collection, testing
or psychological research, where the work is commensurate with the needs, and
directly in support, of work described in paragraph (a), (b), or
(c) that is undertaken in Canada by or on behalf of the taxpayer,
but does not include work with respect to
(e) market research or sales
promotion,
(f) quality control or routine
testing of materials, devices, products or processes,
(g) research in the social
sciences or the humanities,
(h) prospecting, exploring or
drilling for, or producing, minerals, petroleum or natural gas,
(i) the commercial production of
a new or improved material, device or product or the commercial use of a new or
improved process,
(j) style changes, or
(k) routine data collection;
[4] In Northwest
Hydraulic Consultants v. The Queen,
Bowman J. considered this definition and postulated the following as the
correct approach to be taken in applying it.
1. Is
there a technical risk or uncertainty?
(a) Implicit
in the term "technical 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.
It 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 Income 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.
This
approach was later endorsed by the Federal Court of Appeal in RIS-Christie
Ltd. v. The Queen.
[5] Robert Bechtel is the
president and the sole shareholder of the appellant company. He operates it
with the assistance of his sons. Mr. Bechtel is a graduate of the Ontario Agricultural
College (now the University of Guelph); he
has been engaged in farming for many years, and founded the appellant in 1987.
He and his two sons also own the shares of Hyplains Feedyard in Kansas. The
appellant carries out its operations at Baden,
Ontario. It has four buildings there,
with 55 pens, each accommodating 8 cattle. There is also a central weighing
facility. Dr. Ken Bateman is a doctor of veterinary medicine and a member of
the faculty of the University of Guelph. He is described in one document as a cattle health
management consultant. At the material times, he was engaged on retainer by the
appellant. In his evidence Mr. Bechtel described Dr. Bateman as being “… almost
an employee of mine…”.
The appellant also engaged the services of Dr. Kenneth Eng, a feedyard
consultant in the United States, and Dr. Hutchison, a statistician, of Amarillo, Texas.
The
Expert Evidence
[6]Three expert witnesses
testified at the trial of this matter, one for the appellant and two for the
respondent. They all were qualified to give opinion evidence on the subject of SRED
in the field of animal health science. Dr. Smith testified for the appellant.
He graduated in veterinary medicine from the University of Guelph in 1965,
and earned his Ph.D. from Cornell University in 1974. Since then he has gained some 35
years experience in the field as an employee of pharmaceutical companies, and
as an entrepreneur. For the past eight years he has operated his own consulting
company, Maurice Smith Consulting Inc. In that capacity he has been engaged in
assisting companies with obtaining product approvals. He has been extensively
involved in research work, and from time to time has done consulting work for
the appellant.
[7] Dr. Kenneth Koots and
Dr. Benjamin Lobo gave opinion evidence for the respondent. Dr. Koots has a Ph.D.
from the University of Guelph, where
his thesis was the construction of a bioeconomic model of a beef herd, dealing
with the many facets of beef production. His career has included both academic
and provincial government experience, and at the time of the trial he had spent
8½ years as a research and technology advisor for
Revenue Canada reviewing SRED claims in the Prairie Region. He has
worked in the field of beef cattle research for approximately 25 years.
[8] Dr. Lobo graduated
from the University of Guelph in Veterinary Medicine in 1977, and obtained a
graduate diploma from the Ontario
Veterinary College in 1979. Since 1981 he has been a drug evaluator in
the Veterinary Drugs Directorate of Health Canada, reviewing the submissions of pharmaceutical
companies for approval of new products. In that capacity, he reviews the
proposed trial protocols for the testing of drugs for cattle and swine, and
also for aquaculture applications.
[9] Neither counsel took
issue with the qualification of the other party’s expert witnesses; indeed none
of them were cross-examined as to their qualifications either before or after I
ruled them to be qualified to give opinion evidence. All of these witnesses are
well qualified by both their education and their subsequent experience to
assist the Court in understanding and applying the statutory definition given
by Parliament to the expression “SRED”. Unfortunately, none of them expressed
an opinion in the abstract as to the criteria that characterize systematic
investigation or search, or otherwise shed light on the meaning to scientists
of the language used by Parliament in the statutory definition. Instead, they
all simply reviewed what was involved in the conduct of each of trials 48, 49
and 50, and then gave their opinions as to the ultimate issue before me, namely
whether in each case the trial qualified as SRED carried out by the appellant.
[10] In R. v. Mohan, Sopinka J. said at page 23:
In R. v. Abbey, supra,
Dickson J., as he then was, stated, at p. 42:
With respect to
matters calling for special knowledge, an expert in the field may draw
inferences and state his opinion. An expert's function is precisely
this: to provide the judge and jury with a ready‑made inference
which the judge and jury, due to the technical nature of the facts, are unable
to formulate. "An expert's opinion is admissible to furnish the
Court with scientific information which is likely to be outside the experience
and knowledge of a judge or jury. If on the proven facts a judge or jury
can form their own conclusions without help, then the opinion of the expert is
unnecessary" (Turner (1974), 60 Crim. App. R. 80, at p. 83, per
Lawton L.J.)
This pre-condition is often expressed
in terms as to whether the evidence would be helpful to the trier of
fact. The word "helpful" is not quite appropriate and sets too
low a standard. However, I would not judge necessity by too strict a
standard. What is required is that the opinion be necessary in the sense
that it provide information "which is likely to be outside the experience
and knowledge of a judge or jury": as quoted by Dickson J. in R.
v. Abbey, supra. As stated by Dickson J., the evidence must be
necessary to enable the trier of fact to appreciate the matters in issue due to
their technical nature.
At page 24 he added this:
Although the [ultimate issue] rule is no longer of general
application, the concerns underlying it remain. In light of these concerns, the
criteria of relevance and necessity are applied strictly, on occasion, to
exclude evidence as to an ultimate issue.
[11] In RIS-Christie,
Robertson J.A. put it this way at paragraph [12]:
What constitutes scientific research for
the purposes of the Act is either a question of law or a question of
mixed law and fact to be determined by the Tax Court of Canada, not expert
witnesses, as is too frequently assumed by counsel for both taxpayers and the
Minister. An expert may assist the court in evaluating technical evidence and
seek to persuade it that the research objective did not or could not lead to a
technological advancement. But, at the end of the day, the expert’s role is
limited to providing the court with a set of prescription glasses through which
technical information may be viewed before being analyzed and weighed by the
trial judge. Undoubtedly, each opposing expert witness will attempt to ensure
that its focal specifications are adopted by the court. However, it is the
prerogative of the trial judge to prefer one prescription over another.
[12]In the present case, the
opinions of the experts are in evidence without objection, but I find them to
be of very limited usefulness. In relation to trials #48 and #50, the result
depends primarily on the determination of whose research it was. In large
measure, this turns on the interpretation to be given to the documents relating
to these trials that were put in evidence by agreement between the parties, and
on the evidence of Mr. Bechtel and Dr. Bateman. This is certainly an instance
of the experts being asked to give opinion evidence in an area that is the
exclusive province of the court.
[13] There is another
difficulty with the evidence of the expert witnesses. None of them demonstrated
the level of objectivity that is expected of a person called to testify as an
expert. My impression was that all of them, while sincere in the evidence that
they gave, were well aware of where the interests of the party calling them,
and paying them, lie, and that they were there to assist that party rather than
the court. This in itself rendered their evidence less useful than it should
have been. The problem was compounded, in my view, by their instructions. If
they had been asked to give their opinion as scientists as to what constitutes
“systematic investigation or search” then their evidence could have been
helpful, particularly in relation to trial #49. Instead they were all asked the
most general of questions, and thereupon launched into lengthy and rambling
speeches in which they purported to answer the ultimate question that is before
me in respect of each trial, rather than confining themselves to scientific
opinion. Contributing to the imprecise nature of their evidence was the failure
of the pleadings to define adequately the issues as to which opinion evidence
might be addressed. All these factors leave me reluctant to give significant
weight to any of the opinion evidence.
trial
#48
[14] Mr. Bechtel described
trial #48 as having resulted from discussions that he had with representatives
of Schering-Plough Animal Health Corporation at a trade conference. The object
of the study was to compare the effectiveness of different strength hormone
implants in promoting cattle growth. According to Mr. Bechtel’s evidence
Schering-Plough’s interest was limited to examining the question in the context
of cattle during what is referred to in the evidence as the pasture stage. His
own interest was in examining the effectiveness of the implants during the
feedlot stage. For purposes of this test, the pasture stage for the cattle was
from approximately mid-May to mid-September.
[15] There is a protocol
for the pasture stage of this trial.
It clearly was prepared by Schering-Plough. In paragraph 14, it names Dr. K.
Bateman as investigator, and Terry Katz of Union,
New Jersey as Statistician. A Study
Agreement was entered into between Dr. Bateman and Schering-Plough a month or
so before the protocol was finalized. Mr. Bechtel and Dr. Bateman both
testified that trial #48 was carried out by the appellant for Schering-Plough,
and they conveyed the impression that Dr. Bateman’s involvement in it was
simply as a veterinary consultant to the appellant. Counsel for the appellant
argues that in the absence of any contrary evidence from a representative of
Schering-Plough, I must accept this characterization of the relationships. I
disagree. The relationship between Dr. Bateman and Schering-Plough is
established by the written contract (“Study Agreement”) that they entered into
and that the parties put into evidence by agreement. A copy of the contract,
signed by Dr. Bateman, is found at Exhibit A‑1, Volume 1, page 78.
Dr. Bateman testified that a copy was signed on behalf of Schering-Plough as
well. By the terms of that agreement, Dr. Bateman is named as “Investigator”,
and he agreed to conduct the study described in the protocol. He agreed to
provide the animals, the feed, the facilities and the care and management of
the animals, and to provide Schering-Plough with all the records, documents and
raw data. The final provision of the agreement is that it may only be amended
by a written instrument.
[16] Dr. Bateman said
in his evidence-in-chief that he regarded trial #48 as having been conducted by
the appellant and Schering-Plough. On cross-examination, he acknowledged both
the protocol that named him as “Investigator” and the Study Agreement entered into
by him and Schering-Plough. However much they might wish to, neither he nor Mr.
Bechtel could by their evidence change the legal relationships created by those
documents. When the appellant participated in the carrying out of trial #48, it
did so for Dr. Bateman who was obliged by his agreement with Schering-Plough to
carry out the functions specified in the documents. His statement that he was
carrying on these functions on behalf of the appellant is simply not correct.
No matter what arrangement Mr. Bechtel and Dr. Bateman had, or
thought that they had, between them, their evidence as to the legal
relationships is quite contrary to the effect of the documentary evidence that
the parties put in by agreement. It is also inconsistent with Mr. Bechtel’s evidence
to the effect that Schering-Plough insisted on having a qualified veterinarian
fill the role of principal investigator. As there was no written contract
between the appellant and Dr. Bateman, and they gave only the most vague
evidence as to their arrangement, I am left to infer that Dr. Bateman, having
contracted with Schering‑Plough to conduct the trial, then subcontracted
to the appellant almost all the work, reserving to himself only the functions
of overseeing the work done by the appellant and attending to the health needs
of the animals. Mr. Bechtel stated that Dr. Bateman was only made principal
investigator
… because they
needed somebody with a lot more letters behind their name in order to be the
principal investigator than I had. So, Dr. Bateman, who was almost an employee
of mine, became the principal investigator.
The
fact remains, however, that Dr. Bateman was the principal investigator under a
contract with Schering-Plough to carry out the research pursuant to that
company’s protocol, and he was not an employee or other representative of the
appellant in doing so.
[17] The fee agreed to between
Schering-Plough and Dr. Bateman was $47,000. I have no doubt that Dr.
Bateman discussed that fee with Mr. Bechtel before agreeing to it. It is
evident that from the start, it was intended between them that Mr. Bechtel, or
more precisely the appellant, would purchase the animals for the study and do
much of the work that Dr. Bateman contracted to do, such as implanting, feeding
and otherwise caring for the animals. He also found and rented the pasture
facility that was used for the trial. Mr. Bechtel’s evidence was that Dr. Bateman
kept sufficient of the $47,000 fee to cover his expenses, by which I take
it he meant not only the expense related to traveling to the pasture several
times to oversee the trial, but also compensation for his time spent doing
that. Mr. Bechtel and Dr. Bateman were both remarkably vague in giving
their evidence, and neither of them could remember how the $47,000 was divided
between them. Nor did they produce a written contract between Dr. Bateman and
the appellant dealing with the division between them of either the work or the
fee for this trial.
[18] Mr. Bechtel testified
that he found and rented the pasture at Hanover, Ontario at which the trial was to be conducted. He bought 250
heifers and 250 steers, which were shipped to the appellant’s facility
where they remained for 60 days until they had recovered from any disease they
may have been suffering from. The animals included some British and some exotic
breeds. They were divided into random groups, each animal was weighed, and the
cattle in each group were implanted with one of the implants to be tested, or,
in the case of the control group, no implant. Every 35 days the animals were
caught, weighed and observed. In particular, their ears were examined for
abscesses at the site of the implant. At the end of the summer they were
weighed for the last time, then shipped back to the appellant’s premises. At
this point, the trial for which Schering-Plough had contracted was completed
and the company had no further interest in the animals. Mr. Bechtel, having
collected the data throughout the trial, which consisted of the weights of the
animals and the observations as to the existence of abscesses in their ears,
turned it over to Dr. Bateman who in turn sent it to Schering-Plough. There is
no evidence that either the appellant or Dr. Bateman made any statistical
analysis of the data.
[19] When asked about the
observations and the results of trial #48 at the end of the pasture phase, Mr.
Bechtel replied:
Well, to be
kind of blunt, the implant was no good at all. There was no improvement on any
level of the implants at all.
He
did make the observation, however, that at the end of the trial there were
three times as many exotic breed animals as British breed in which the implants
had not been absorbed. He also observed that certain of the cattle contracted a
disease known as pink eye during trial #48, and that those that contracted it
and were treated had weight gain similar to those that did not contract it,
while those that were not treated could be expected to show significantly less
weight gain.
[20] Following the end of
the pasture phase of trial #48, Mr. Bechtel removed the white Charolais cattle from
the trial and sold them in Canada, and then shipped the remaining animals to a
feedlot in Kansas where they were fed for a further four months before
being slaughtered. Before they left Canada they were retagged, and they were implanted once
again with a stronger implant, Synovex +. On arrival in Kansas, they
were weighed, not individually but by the truckload, and they were weighed
again every 28 days, and at the end of the feedlot phase.
[21] The appellant’s
position is that Mr. Bechtel developed the protocol for both the pasture and
the feedlot phases of trial #48, and that he carried out the trial as the
investigator, in cooperation with Schering-Plough. In a letter to Dr. Gantotti
of the Canada Revenue Agency (CRA) in March 2006, he states that he carried out
the trial according to a protocol that he and Schering-Plough had jointly agreed
upon, and that both he and Schering-Plough had made an analysis of the data
that he had collected. His evidence at trial made no reference to any such
analysis by him, and his claim that he was the investigator is not consistent
with the “Study Agreement” between Schering-Plough and Dr. Bateman that I have
referred to above. My conclusion with respect to the pasture phase of trial #48
is that the appellant did not conduct SRED as that expression is defined for
purposes of the Income Tax Act, either alone or in partnership with
Schering-Plough, for the reasons that I have given at paragraphs 6 and 7 above.
I accept that the appellant had an interest in the subject matter, and that
Mr. Bechtel had discussions concerning it with representatives of
Schering-Plough prior to the beginning of trial #48. His ideas on the subject
may have contributed in some measure to the development of the protocol, but
the research was that of Schering‑Plough, from the protocol through to
the statistical analysis. The appellant’s role was one of routine data
collection, which is specifically excluded by the definition in
section 248 from qualifying as SRED.
[22] Dr. Maurice Smith is
qualified by his education and experience to testify about matters relating to
animal health. However this does nor qualify him to determine the legal
relationships that arise out of the Study Agreement and the protocol in this
case, as he purported to do. He stated that Schering-Plough was not the company
carrying out the research and cited in support of that the absence of an
experimental studies certificate issued to it. The evidence does not address
the question whether Schering-Plough applied for an experimental studies certificate.
It does, however, make it quite clear that the contractual relationship in
respect of the conduct of the pasture phase of trial #48 is between
Schering-Plough and Dr. Bateman, that Schering-Plough paid $47,000 to Dr.
Bateman to conduct the study for it, and that Dr. Bateman paid some
unspecified part of that amount to the appellant for its services.
[23] So far as the feedlot
phase of trial #48 is concerned, if there was any SRED then it was the appellant’s,
as Schering-Plough clearly was neither interested nor involved after the
conclusion of the pasture phase. There are a number of problems with the
appellant’s claim, however. The first of those is the absence of anything that
could reasonably be described as a protocol governing the feedlot phase. Among
the documents entered into evidence by consent is what appears to be a draft
protocol for trial #48 dated December 1997. It is unsigned, and is at best
rudimentary in its description of the methodology. It may have provided the idea
for the protocol that Schering-Plough and Dr. Bateman signed in April 1998, and
the appellant placed some reliance on it at the trial. All that it has to say
beyond the pasture phase of the trial is this cryptic comment:
If possible
the feedlot performance will be measured following the pasture season.
The
Schering-Plough protocol, of course, did not speak to the feedlot stage at all
as that company had no interest in carrying the trial beyond the pasture phase
for which it had contracted with Dr. Bateman. The requirements to define and
articulate a technological risk or uncertainty and to formulate a hypothesis to
be tested that Bowman J (as he then was) referred to in Northwest Hydraulic
are simply not met.
[24] In fact, what
happened here is that the appellant simply embarked on, or perhaps more
accurately continued on, the path of commercial production when he shipped the
cattle to be finished at the feedlot, and ultimately slaughtered, in Kansas. That
Mr. Bechtel’s interest at this stage was in commercial production rather than
research is borne out by his decision to remove the white Charolais cattle
before shipping the remainder to Kansas. He explained this decision on the basis that the
Charolais were not well suited to the United States market and, therefore, did
not grade as well there as they did in Canada. He defended the decision on the basis that the
Charolais were equally dispersed among the trial groups, but the fact is that
he compromised the test result to some degree by making this variation in the
test groups for what was simply a commercial advantage.
[25] The appellant also relies
upon two observations made by Mr. Bechtel during the course of trial #48. He
testified that he observed that while certain animals developed pink-eye during
the pasture phase of the test, if they were treated for the disease then they
performed as well in terms of weight gain as those that had not developed
pink-eye. The other observation concerned the absorption of implants differently
by different breeds of cattle. Mr. Bechtel testified that when he examined the
ears of the cattle at the end of the summer, that is at the end of the pasture
phase, he found that among the exotic breed of cattle there were about three
times as many unabsorbed implants as in the British breed cattle. These, he
said, were discoveries that emerged from trial #48. These were not, however,
matters that the appellant investigated in a systematic way. There is again no
risk or uncertainty articulated, and no hypothesis formulated and tested. Dr.
Smith was asked during his examination-in-chief whether he considered each of
these two findings to be “… a scientific advancement …”, and on each occasion
he answered in the affirmative.
The credit that the Act allows, however, is not for the discovery,
accidental or otherwise, of something that may be described as a scientific
advancement; it is for an expenditure made on SRED carried out by the taxpayer,
as defined in section 248. Much that is of scientific value has been learned by
accident and observation. Alexander Fleming did not set out to test the
antibiotic properties of penicillium mould when he left on holiday
without first cleaning his Petri dishes, and the serendipitous observation that
he made on his return did not amount to scientific research or experimental
development. Over the next decade, however, he and others did conduct
scientific research, and a useful product was the result of it. Mr. Bechtel’s
observations concerning pink-eye treatment and the unabsorbed implants in
exotic breeds of cattle may well have led to research in later years that would
meet the requirements of the Act, but his observations alone do not. Dr. Smith’s
evidence on this point does not assist the appellant, because he was not asked
the right question. If he had been asked whether the appellant carried out any
systematic examination or search in respect of these matters, he would have had
to answer no.
Trial
#49
[26] On March 8, 1998 the
appellant and Brookover Ranch entered into an agreement whereby the appellant
would carry out this trial and Brookover would pay it $25.00 per animal to do
so. Under the agreement the appellant had the right to retain the trial results
for its own use. The purpose of the trial was to compare the pasture
performance, and the subsequent feedlot performance, of heifer calves receiving
four different strength hormone implants, and those receiving none. The four
implants compared were Synovex C, Synovex H, Ralgro, and Revalor H, each of
which contained a different strength hormone. A fifth implant was a placebo
that contained no hormone. Superimposed on this trial was a test of something
called a Rumensin rumen bolus, (the bolus) which administers an antibiotic to
cattle by dissolving over a lengthy period of time in the animal’s rumen, or
first stomach. The trial was conducted using 425 heifer calves which the
appellant purchased from breeders in Saskatchewan and Eastern Canada. After preconditioning at the
appellant’s premises, they were divided into five random groups of 85 each, and
each group was given one of the five implants. Half the cattle in each group
were also given the bolus. The cattle were then weighed and sent to one of
three pastures rented by the appellant. The evidence is not entirely clear, but
it seems that a third of each group went to each of the three pastures.
According to Mr. Bechtel, the animals were weighed and observed at intervals
during the pasture phase. At the end of it they were weighed again and each
group was reimplanted. The various versions of the protocol do not make clear
what implant was to be used in the feedlot phase. At page 405 of Exhibit A-1,
it is said that “[t]he same implant will be used on all cattle during
fattening”. According to Dr. Smith’s evidence they were all implanted with
Synovex + prior to the feedlot phase.
The cattle then were shipped to Coe County Feedyards, a custom feedlot in Nebraska, where
they were fed for a further 158 days before being slaughtered. They were
weighed individually before shipment. On arrival in Nebraska they
were not weighed individually, but in bulk by the truckload. Individual weights
at the end of the feedlot phase were lost due to a computer error at the
packing plant, but the total live weight of the shipments and individual
carcass weights were available. From these the individual live weights at the
end of the feedlot phase were computed based upon an estimate of shrinkage
during transit (4%) and the ratio of total carcass weight to total live weight.
[27] Mr. Bechtel
summarized the result of trial #49 as showing that none of the implants
produced any significant benefit during the pasture phase, but that there was a
significant difference in performance during the feedlot phase, depending on
which implant had been used during the pasture phase. That significant
difference, he said, was in the quality of the carcass; the more potent the
implant used in the pasture phase, the less fat cover and marbling there was on
the carcass.
Dr. Smith characterized this as scientific advancement resulting from applied
research and experimental development.
Specifically, the appellant’s claim that trial #49 qualifies as SRED is based
on the proposition that the purpose of this trial was to develop a successful
implant strategy for use with heifer calves.
[28]There was disagreement
among the expert witnesses as to the quality of the design and the
implementation of this trial. Dr. Smith found no fault with it, and declared
the trial to qualify as meeting the definition of SRED. Dr. Koots was critical
of trial #49 on a number of grounds related to its design and execution. The
three pastures used for the study were of poor and uneven quality; the animals
at the start were of very different weights, varying between 509 and 587 lbs.;
the animals were weighed only twice in the pasture phase, at the beginning and
at the end. It is not clear from the evidence whether Mr. Bechtel or Dr. Koots
is correct about this. Dr. Lobo voiced most of the same criticisms of trial
#49. He added that in his view there were too many variables, and that by
including the rumen bolus comparison the appellant departed from sound practice
by making the different groups too small and thereby diluting the validity of
the results.
[29] In my view, there are
two fundamental reasons that trial #49 cannot qualify as scientific research or
experimental development. The first is that its purpose and effect was simply
to compare the results achieved by using four different implants during the
period that the cattle were on pasture. Paragraph (f) of the definition
specifically excludes:
… work with
respect to
…
(f) quality
control or routine testing of materials, devices, products or processes,
One
purpose of this exclusionary provision clearly is to prevent claims in respect
of products that have already been developed, where the work done is simply to
put existing products to use rather than to develop a new product or to improve
an existing one. The appellant’s trial #49 was simply a comparison of the effectiveness
of the four commercially available implants used during the pasture phase to
see what results they would produce when used in combination with another
implant that was also commercially available. All of these implants were
purchased by the appellant for use in this test. Mr. Bechtel chooses to
describe this as developing a strategy for the use of implants, but his own
documents describe trial #49 as “a
comparison of various implants on the pasture performance of grazing heifer
calved and impact on subsequent feedlot performance and carcass characteristics”.
That, or a minor variation of it, is the title of the various documents in
Exhibit A-1 that describe this trial.
[30] The second
fundamental problem is the inability of the appellant to point to anything in
the evidence that can properly be called a hypothesis to be tested, or a
protocol by which to conduct the trial. In RIS-Christie Ltd., Robertson
J.A. stated at paragraph 15 that:
…it is
reasonable to expect a taxpayer to adduce documentary evidence of systematic
research, including testing. If, however, the taxpayer has a plausible
explanation for the failure to adduce such evidence, it is still open to the
court to hold that, on a balance of probabilities systematic research was
undertaken. For , example, where research notes are accidentally destroyed, it
should be permissible for the trial judge to infer that systematic research was
conducted, having regard to the totality of the evidence.
In
Exhibit A-1, there are four documents that at first look might appear to be the
protocol for this trial. All of them appear to have been created at some time
after the trial was completed. The first, which is between pages 386 and 391,
includes the Research Agreement with Brookover Ranch Feedyards. Page 3 of it is
titled experimental design, and
consists of eight lines in total, telling virtually nothing of the methodology.
Some of it is written in the future tense, as one would expect of an
experimental protocol, but much of it, including two pages devoted to results
and discussion, is in the past tense. Pages 402 to 407 are an expanded version,
and again some of it is written in the future tense, while much of it is in the
past tense and describes results. The other two, at pages 409 to 411 and at pages
412 and 413, appear to be essentially repetitive of the first. Mr. Bechtel
stated that the actual protocol for this trial is the three pages 409 to 411, and like the others it is
written primarily in the past tense. I conclude that these documents were all
prepared after the completion of the trial, and that their purpose was not so
much to govern the conduct of the trial as to make the case for a deduction
from income under section 37 of the Act.
[31] Nor do I find in the
evidence any clear statement of a hypothesis to be tested by the experiment.
The protocol at page 402 does state four objectives at page 404, and at pages
405-6 it states seven technological uncertainties.
OBJECTIVE:
·
To determine if an implant program on heifers will improve
pasture performance as it does in steers. (New implants are now available)
·
To determine if increasing the strength of the implant will
increase performance.
·
To determine if the addition of a Rumensin Bolus will
economically improve performance of heifers on pasture.
·
The following feedlot-finishing phase it [sic] will
determine the effect of each pasture implant on grade, gain, consumption, yield
and dressing percentage.
TECHNOLOGICAL
UNCERTAINTIES:
·
Will the use of hormonal implants increase the weight gain of
pasture heifers at the same rate as in steers.
·
The advantages of the use of a Rumensin rumen bolus are
unavailable in North America.
·
Will an implant strategy during the pasture life of heifers
affect the rate of gain during the fattening period?
·
Will an implant strategy during pasture affect feed consumption
during the fattening period?
·
Will an implant strategy during the pasture affect the conversion
of feed to meat during the fattening period?
·
Will an implant strategy during pasture affect the federal grade
or yield of the heifers?
The protocol at pages 409 to 411 contains none of this
material.
[32] The stated objectives
at pages 405-6, rather than formulating a hypothesis to be tested, amount
simply to a proposed comparison of the effectiveness of the four implants
tested during the pasture phase of the trial, and of the bolus. The appellant’s
case for trial #49 is based on the proposition that it was applied research
designed to develop an “implant strategy”. The only references to implant
strategy to be found here, however, refer to the pasture phase. There was no
variation in the way that the implants were used in the pasture phase; the
single difference was the particular product that was applied to each group.
Neither in the documents nor in the testimony of Mr. Bechtel do I find that the
appellant has formulated a hypothesis to be tested. Nor am I satisfied that
before the trial took place the appellant had any plan that could be described
as a protocol for systematic investigation to test a hypothesis. It simply used
four different commercial products at the pasture stage, and one at the feedlot
stage, to compare their effectiveness.
[33] As to the bolus, Mr.
Bechtel’s evidence was:
So at that
time we decided we could superimpose the rumen bolus on top of the other trial
with no effect because it was two entirely different things. So half of each
treatment had it and half didn't.[14]
To
administer the bolus to half of each group of cattle, therefore, was not an
element of formulating an implant strategy; it was a separate test of a
different commercial product, superimposed on a trial whose purpose was to
compare the effectiveness of other commercially available products. Moreover,
Mr. Bechtel stated in one of the documents that he authored:
This is also
the second year of the Rumensin Bolus study. In the previous year we showed no
advantage in using the product which was in sharp contrast to the company data
so it was decided to repeat the trial to see if results were specific to that
year only.
In
other words, the bolus aspect of the study was simply testing a commercial
product that the appellant had already established the year before did not
work. Nothing in the evidence suggests that it was now being used in a
different way. That is certainly not systematic investigation; it is simply
repetition of routine testing of a commercial product that had previously
failed to perform.
Trial
#50
[34] The subject matter of
trial #50 was a study of the relationship between the occurrence of undifferentiated
bovine respiratory disease and titer changes to Haemophilus somnus and Mannhelmia
haemolytica. The results of the study were published in the Canadian
Journal of Veterinary Research, under the names of Annette O’Connor, S. Wayne
Martin, Éva Nagy, Paula Menzies, all of the University of Guelph, and Richard Harland of Novartis Animal
Health Inc. The issue with respect to this trial, as with #48, is not whether it
was SRED, as defined in the Act, but whether it was the appellant’s
research or someone else’s.
[35] Mr. Bechtel’s
evidence was that he was concerned about the high mortality rate of cattle
shipped from Canada to his feedlot in the United States resulting from
respiratory disease, and that he decided that he should study the causes and
possible prevention of it through immunization. He purchased 300 or more cattle
(he was uncertain about the number) with such a study in mind. At about the
same time, a postgraduate student at the University of Guelph, Annette O’Connor, required a topic for her
doctoral thesis. She had been required to find a new topic and her faculty
advisor, Dr. Wayne Martin, had funding available for a study of corona virus,
but this was not a sufficiently extensive study for a doctoral thesis. As Dr. Bateman
put it in his evidence, he was able to connect Dr. Martin and Annette O’Connor
with Mr. Bechtel for the project.
[36] Mr. Bechtel described
the work that he did on the project. When the cattle arrived at the appellant’s
premises he recorded their weights and temperatures, took blood samples, and
checked them for respiratory disease. Annette O’Connor was there and labeled
the blood samples, which she then took to the University of Guelph where the blood analysis was done. Two vaccines were
tested, each individually and the two in combination. A control group had no
vaccination. Throughout the 45-day trial period blood samples and temperatures
were taken, the cattle were observed twice per day for signs of respiratory
disease, and their feed consumption and mortality was recorded. When symptoms
of respiratory disease were observed the animals were treated for it.
[37]Mr. Bechtel testified
that he and Annette O’Connor jointly prepared a protocol for this study, which
she took to her faculty advisor. The protocol was modified by him, or on his
advice, to conform to the University’s requirements, after which it could only
have been changed with Dr. Martin’s approval. The protocol under which the
study then proceeded is the one appearing at pages 572 to 576 of Exhibit A-1,
Vol. 3. It names Dr. Wayne Martin as principal researcher; the only other
researcher named is Dr. Ken Bateman. The results of this study and the corona
virus study that together made up Annette O’Connor’s doctoral thesis were both
published in the same issue of the Canadian Journal of Veterinary Research. The
only reference to the Appellant is in the acknowledgments at the end of the
paper:
The help of …
the staff at Advanced Agricultural Testing … is gratefully acknowledged.
Mr.
Bechtel’s explanation of the failure to name him as an author of the paper was
this:
Q.
Was this their study or your study?
A. I initiated the study and if they wanted to publish it, it
didn’t make any difference to me.
[38] It is correct that
Mr. Bechtel initiated the study, in the sense that he first had the idea to do
a study of that subject matter, and he took the initiative to acquire cattle
for the purpose of doing the study. That, however, does not mean that he or his
company can be said to have engaged in systematic investigation or search that
meets the definition of SRED in the Act. As with the other trials, there
are a number of draft protocols in Exhibit A-1 that appear to have been
prepared by Mr. Bechtel at unspecified times, but he clearly identified the
protocol that names Dr. Martin as principal researcher as being the one under
which the study proceeded. Page 697 of Exhibit A-1, Vol. 3 is a letter from Dr.
Annette O’Connor and Dr. S. Wayne Martin to the appellant. It begins:
Dear Bob,
Thank you for
all your help with our research project over the past few months. Your
assistance has been invaluable.
There
is nothing in the evidence to suggest that Mr. Bechtel replied to this letter
to assert that it was his research, not theirs, as one would expect if that
were the case.
[39] On July 10, 2000, Dr.
O’Connor sent a fax to Mileada Abdelmalik of the Canada Revenue Agency in which
she described the appellant’s part in trial #50 this way:
The technical
support provided by the staff of Advanced Agricultural Testing included
provision of cattle for the study, handling cattle for purposes of data
collection and identification, the recording of diagnoses according to our
profiles, as well as handling and treatment of sick cattle. The staff also
maintained records about the individual cattle during the study period.
During
cross-examination Mr. Bechtel acknowledged the accuracy of this statement. Mr.
Bechtel’s understanding of the meaning of the expression “scientific research”
is somewhat different from the meaning assigned to it by section 248 of the Act.
On re-examination by his counsel the following exchange took place:
Q. Is it accurate for us to assume that all research trials
that you’re involved in, that is advanced is involved in, involve some great
measure of data collection?
A. Of course, that’s what research is collection of figures and
miles of them.
[40] I have no doubt that
Mr. Bechtel had the idea to examine the subject of respiratory disease in
cattle and the effectiveness of vaccines to prevent it. However, the evidence
overwhelmingly demonstrates that it was Dr. Martin and Annette O’Connor and
their colleagues at the University of Guelph who did the research, if research it was.
It may be that they were simply doing routine testing of vaccines. That is not
something that I have to decide. But if it was research it was their research,
not the appellant’s. The appellant’s role, as in trial #48, was limited to data
collection, and that is specifically excluded from the definition in section 248.
Revocation of the election
[41]Section 37 of the Act
permits a taxpayer, when filing a claim for SRED expenses, to elect to compute
the claim by what is referred to in the evidence as the proxy method rather
than the traditional method. The traditional method requires the taxpayer to
attribute an appropriate portion of its actual overhead expenses to the SRED
claim. Under the proxy method, it may claim a percentage of the direct wage
expense incurred in the research in lieu of overhead. The appellant’s
accountant, Allan McDougall, testified that he prepared and filed the
appellant’s income tax returns, and that in doing so he had elected the proxy
method in the taxation years 1993, 1994, 1995, 1996, 1997 and 1998. There was a
dispute between the appellant and Revenue Canada as to the application of the proxy method for the
years 1993 and 1994 which required some years to resolve. Thereafter, the
appellant sought to revoke its election of the proxy method for the years 1995,
1996, 1997 and 1998. The Minister’s position is that the appellant, having duly
elected to use the proxy method, cannot later revoke the election.
[42] Counsel for the
appellant, in his written argument, relies on the fact that in resolving the
dispute concerning the taxation years 1993 and 1994, the Minister permitted the
appellant to use the traditional method, notwithstanding the earlier election,
and he takes the position that it is unfair for the Minister now to refuse to
permit it to revoke the election for the years after 1994. Counsel for the
respondent relies on subsections 37(10) and 220(3.2) of the Act and Regulation
600.
37(10) Any election made under clause (8)(a)(ii)(B) for a taxation
year by a taxpayer shall be filed by the taxpayer on the day on which the
taxpayer first files a prescribed form referred to in subsection 37(11) for the
year.
220(3.2) The Minister may extend the time for making an
election or grant permission to amend or revoke an election if
(a) the election was otherwise
required to be made by a taxpayer or by a partnership, under a prescribed
provision, on or before a day in a taxation year of the taxpayer (or in the
case of a partnership, a fiscal period of the partnership); and
(b) the taxpayer or the
partnership applies, on or before the day that is ten calendar years after the
end of the taxation year or the fiscal period, to the Minister for that
extension or permission.
600 For the purposes of paragraphs 220(3.2)(a)
and (b) of the Act, the following are prescribed provisions:
(a)
section 21 of the Act;
(b) subsections 7(10), 12.2(4),
13(4), (7.4) and (29), 14(6), 44(1) and (6), 45(2) and (3), 50(1), 53(2.1),
70(6.2), (9), (9.1), (9.2) and (9.3), 72(2), 73(1), 80.1(1), 82(3), 83(2),
104(5.3) and (14), 107(2.001), 143(2), 146.01(7), 164(6) and (6.1), 184(3) and
256(9) of the Act;
(c) paragraphs 12(2.2)(b),
66.7(7)(c), (d) and (e) and (8)(c), (d) and
(e), 80.01(4)(c), 86.1(2)(f) and 128.1(4)(d), (6)(a)
and (c), (7)(d) and (g) and (8)(c) of the Act;
(d) subsections 1103(1), (2) and
(2d) and 5907(2.1) of these Regulations.
She
argues that subsection 220(3.2) and Regulation 600 specifically provide
authority for the Minister to permit revocation of certain elections made under
the Act, and since they do not include an election made under subsection
37(10), the Minister has no such power. An election that is made under a
provision not mentioned cannot be revoked or amended at all.
[43] The Minister’s power to permit revocation of an election made under
the Act is limited to those election provisions that have been named in Regulation
600, and they do not include subsection 37(10). The maxim espressio unius
est exclusio alterius applies. Parliament’s intention is very clearly to
limit the Minister’s discretion to permit revocation of elections to those that
the Governor-in-Council chooses to prescribe for that purpose. In Miller v.
The Queen,
the Federal Court of Appeal reached that conclusion in respect of an amendment
to an election under the forward-averaging provision in section 110.4 of the Act.
Mahoney J.A. said at page 5037:
To allow
amendment of the election, either by the Minister as part of the assessment
process or the taxpayer after assessment, would, in my opinion, require an
inadmissible reading into the Act of words that were not there.
Mr.
Thrasher points out that in dealing with the objections filed following the
assessment of the appellant for the 1993 and 1994 taxation years, the Minister
did allow the appellant to revoke the election of the proxy method. That may be
so, but it does not affect the years now under appeal. It is well-settled that
the Minister, if he makes an error in the course of assessing, is not bound, or
even entitled, to continue making the same mistake in perpetuity: see Ludmer
v. Canada.
[44] In his written
argument, counsel for the appellant argues that this court should exercise its
discretion to declare that the appellant should be permitted to use the
traditional method of reporting for 1995 to 1998. This submission presupposes
that the court has some equitable jurisdiction, perhaps akin to relief from
forfeiture, that would permit it to relieve the appellant of what it now sees
as an improvident exercise years ago of its right to choose between the two
reporting methods that the Act permits. Unfortunately, I have no such
jurisdiction. It is trite that this court must apply the provisions of the Act
and the Regulations as they were written. It has no power to change
them, or to declare them inapplicable in the circumstances of particular cases,
on grounds of fairness or equity.
Bedding and diesel fuel
[45] The Minister takes
the position that bedding for the cattle and diesel fuel are overhead items,
and so not accountable separately under the proxy reporting method. The
appellant’s position is that they are both direct costs. There was no specific
evidence as to the conduct of trials other than #48, #49 and #50, all of which
I have found not to qualify as SRED. The scant evidence that there was about
bedding for the cattle leads me to conclude that it should be treated as a
direct cost. As I understand it, all the bedding used would be attributable to
a specific trial, and after use it would be of no value. For these reasons, I
would classify it as a direct cost of goods consumed, and not as an overhead
cost to be apportioned among numerous trials, or encompassed by the overhead
amount under the proxy method.
[46] There was no evidence
at all from which I can make a determination as to the appropriate way to
account for the cost of diesel fuel. If, for example, the same vehicle was used
in the yard to perform functions in connection with maintenance and several
trials that were being conducted concurrently, then the cost of operating that
vehicle, including the fuel used in it, would properly be considered overhead.
On the other hand, diesel fuel used in shipping cattle that were the subject of
one of the trials to a pasture or to a feedlot would more properly be
considered a direct cost of that trial. As I have no evidence concerning the
actual use of the fuel in question, I am unable to make any determination of
the proper treatment of it.
[47] While there was reference in the pleadings and in the written
arguments of counsel to purchase of cattle for SRED in all the taxation years
under appeal, the only evidence of cattle purchases are those related to the
three trials #48, #49 and #50, that I have found not to be SRED carried out by
the appellant. I therefore have no basis upon which to decide what amount, if
any, the appellant is entitled to deduct in respect of purchases of cattle for
other SRED trials in any of the taxation years under appeal.
[48] There was a potential
issue as to whether fees paid to Dr. Eng, a feedyard consultant resident in the
United States, would qualify under paragraphs 37(1)(a) and 127(9)(g)
of the Act as SRED expenses. Mr. Bechtel said in his evidence that Dr.
Eng supplied “… all the nutritional and implant and any other additives that we
need”,
and that he was paid “… so much a month …”.
It is not possible on the basis of these fragments of evidence to decide that
question. Nor is it necessary to do so, as it appears from the appellant’s reply
to the respondent’s written argument that the issue only arises in connection
with trials #48, #49 and #50, which I have found do not qualify as SRED.
[49] In the result, the
appeals fail in respect of all issues except that relating to the cost of
bedding for cattle. It is impossible to tell from either the pleadings or the
evidence the extent to which this entitles the appellant to some relief from
the assessments under appeal. Counsel for the respondent may prepare a judgment
giving effect to these reasons, to be approved as to form by counsel for the
appellant. If the parties are unable to agree as to costs they may make
submissions in writing, not to exceed five pages.
Signed at Ottawa, Canada, this 7th day of April, 2009.
“E.A. Bowie”
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