AMENDED
REASONS FOR JUDGMENT
Campbell J.
Introduction
[1]
The Appellant claimed Scientific Research and
Experimental Development (“SR&ED”)
expenditures of $278,104 and $269,690 in respect to the 2005 and 2006 taxation
years, respectively and corresponding refundable Investment Tax Credits (“ITCs”) of $125,858 and $113,573. These amounts were
claimed in relation to a project conducted in Belize that resulted in the
establishment of the world’s first nation-wide health information system (“HIS”).
[2]
The Appellant is a company based in Fredericton,
New Brunswick. Its business activities focus on the development of health
information systems, resource management software and process improvement
consulting. This includes the creation of software applications for the
centralized management of national, regional and local healthcare sectors.
[3]
In 2004, Belize sought the assistance of the
Appellant in implementing a national healthcare system in that country. The
parties executed a contract on October 28, 2004. After commencing the project,
the Appellant encountered a number of challenges in Belize, including poor
telecommunication infrastructure. As a result of these challenges, the
Appellant was unable to utilize its Electronic Health Record (“EHR”) solution to address the project’s goals,
primarily because of the inability of the limited infrastructure in Belize to
support this EHR technology. Consequently, the Appellant was unable to link the
various health institutions, including health care centres, rural clinics, labs
and pharmacies for the comprehensive exchange of data, as required pursuant to
the terms of the project contract.
[4]
According to the Appellant, it engaged in
organized experimental and developmental activities to establish a new
technology, the Accesstec Capacity Strengthening Information System, in order
to adapt its existing EHR technology in an attempt to overcome the
infrastructure challenges. The Appellant contends that this new technology
represents a significant advancement for which it claims that it incurred
SR&ED expenditures, consisting primarily of wages.
[5]
The Minister of National Revenue (the “Minister”) denied the Appellant’s claims for both
taxation years because the work performed did not meet the definition of “SR&ED”
pursuant to subsection 248(1) of the Income Tax Act (the “Act”) as the activities did not resolve any
scientific or technical uncertainties.
The Issue
[6]
The issue is whether the Appellant is entitled
to the SR&ED ITCs for its 2005 and 2006 taxation years.
The Evidence
[7]
Four witnesses testified on behalf of the
Appellant: John Nicholas Rutter, President and Chief Technology Officer, Colin
Kilburn, the software developer in charge of the Belize project, Jeffrey James
Bearisto, an engineer who acted as project manager and Timothy Warren MacLean
Ellis, a SR&ED advisor working for Grant Thornton. The Respondent relied on
the testimony of Thomas Edward Hayman, a research and technology advisor for
the Canada Revenue Agency (the “CRA”). I did not
qualify the Appellant’s proposed expert, John Michael Dedourek.
[8]
Mr. Rutter testified that, shortly after the
contract was signed, the Appellant discovered that severe connectivity issues
existed throughout Belize. In addition, Belize had limited funding for this
project because of economic conditions in the country. The Appellant had no
prior knowledge of these limiting conditions but they placed such significant
restrictions on the project that the Appellant had to make a decision as to
whether to proceed with or to abandon its contract with Belize.
[9]
The contract called for the integration of the
various health care modules within Belize, including prescriptions, drug
supplies, clinical orders and accounting, into one nation-wide system. In
deciding to proceed with the contract, Mr. Rutter testified that the
Appellant had no specific expectation of success in resolving these limitations
because new knowledge had to be acquired in order to support an integrated
system due to the severity of the connectivity issues. According to
Mr. Rutter, the Appellant needed to be sensitive to the fact that “mission-critical integrity” was of paramount
importance in transmitting data in a health care system as lives were at stake.
Mr. Rutter testified that the technological challenges were not reasonably
predictable of resolution using standard procedures or routine engineering. The
Appellant searched unsuccessfully for an existing “off-the-shelf”
replication software system. It formulated a plan to develop a multi-write
database where each ‘node’ (of which Belize had more than fifty) could write to
the main file. The replication systems that were available were intended for
different purposes and were not appropriate to achieving the Belize project
goals. Those existing replication systems did not account for the nature of the
severe underlying network problems. Due to the unprecedented technological
problems, the Appellant “… undertook experimental
development to attempt to create technology that could mimic the availability
of stable communications infrastructure in a hostile network environment where
nodes must optimize the utilization of the minimal network resources.” (Exhibit
A-1, Tab 4, page 2 of 12).
[10]
Mr. Rutter testified that the Appellant’s
approach was to conduct planned testing and trials, in accordance with its
goals and objectives, which consisted of creating a robust replication system
capable of handling the infrastructure challenges in Belize. This would allow
critical medical data to be moved successfully between nodes. Because Belize
presented a hostile network environment, the challenge was to find the best
approach to successfully moving critical data located at multiple locations.
This included changes that were made to medical records, as well as ensuring
that those records could be preserved without loss of critical medical data,
despite frequent interruptions in connectivity. Maintaining integrity of the
data was critical because the system had to work each and every time as lives
depended on it.
[11]
Mr. Rutter stated that the focus was on the
requirements of a replication system that would support an integrated health
information system. He described the levels of trials that were conducted but
testified that it was not a process of trial and error. The initial
investigative trials revealed that algorithms were vulnerable to lost data due
to poor connectivity. Measurement occurred at the design stage and, according
to the testimony of both Mr. Rutter and Mr. Kilburn, preliminary testing
occurred at the pseudo-code stage prior to using actual code. At the pseudo-code
stage, vulnerabilities were reviewed and solutions looked at to make these
aspects more reliable.
[12]
Mr. Kilburn testified that he kept notes,
whiteboard photos and computer script notes, which were completed
contemporaneously with the planned testing being conducted. In conducting test
cases, some of them were embedded in the software through unit tests, while
others were developed through “idea development”
from initial brainstorming to prototyping design of the various aspects of the
health information system that had to be integrated within an environment of
unreliable network connectivity. Unit tests and staging tests led to algorithms
that could be refined and installed to try to simulate and validate theories
based on available connectivity. Mr. Kilburn testified that logs, or notebooks
of the software, tracked events and if there were errors or connectivity
issues, an analysis of the logs was conducted. The code was modified to address
the problems so that eventually, based on the anticipated environment, the code
would behave as expected at every facility in Belize. In addition to
constructing algorithms that would synchronize data across a multi-write network
and ensure that mission-critical patient data had complete availability and
absolute correctness, Mr. Kilburn stated that he kept journal notes and
whiteboard photos regarding the thought processes and planning that went into
devising a workable system over a two-year period. When he commenced work on
this project and was confronted with these technological uncertainties, he had
no reasonable expectation that the health information system for Belize could
be successfully developed through normal procedures.
[13]
Mr. Bearisto testified that his duties included
framing a problem, establishing the parameters that could be adjusted and
setting up experiments to test the potential outcomes. However, on cross-examination,
he stated that although he kept notebooks throughout the Project, he did not
know their present whereabouts. He and his colleagues would devise experiments
in a controlled manner to create many different conflicts so that they would be
detected and addressed. For example, where a hospital and laboratory in Belize
are quite close together geographically, a patient could be referred to the
laboratory and could walk there faster than that patient’s data moved from the
hospital to the laboratory.
[14]
Since it was a fixed-price contract, Mr.
Bearisto testified that they avoided a haphazard approach to finding a solution
and that they were required to think very carefully about their approach in
trying to reach a workable solution due to monetary constraints. He was careful
to apply a systematic approach to overcome technological uncertainties because
they “bet everything on” the Belize project
(Transcript, April 9, 2015, page 109). Mr. Bearisto testified that the
technological uncertainties that were overcome for this project were not
addressed through trial and error or through de-bugging an existing system but,
instead, were resolved by following a systematic investigation and through
experimental development.
[15]
Mr. Ellis provided testimony respecting the
approach that he adopted in assisting the Appellant in identifying the monetary
amounts of the SR&ED claim based on the work of those individuals who were
involved with the Belize project.
[16]
The Respondent’s witness, Mr. Hayman, reviewed
the general process that he followed in assessing the Appellant’s claim and
authoring the technological review report.
Applicable Law and
Analysis
[17]
The term “SR&ED”
is defined in subsection 248(1) of the Act in the following manner:
“scientific research and
experimental development” - “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;
The relevant portion of this definition for
the purposes of these appeals is contained in paragraph 248(1)(c).
[18]
Justice Hogan, in
1726437 Ontario Inc. o/a Airmax Technologies v The Queen, 2012 TCC 376, 2013
DTC 1008, at paragraph 13, described the definition in the following manner:
[13] SR&ED is defined in subsection 248(1) of the ITA as
follows:
[…]
The definition is based on a “catch and release” concept. The
definition first includes a broad category of development activities under
paragraphs (a) to (c), then items otherwise included are excluded
under paragraphs (e) to (k).
[19]
To be successful,
the Appellant must show that it incurred qualified expenditures as part of its
SR&ED activities in order to obtain the investment tax credits as outlined
in subsection 127(9) of the Act. A “qualified expenditure” is defined in
subsection 127(9).
[20]
As noted by
Justice Little in Zeuter Development Corporation v The Queen, 2006 TCC
597, 2007 DTC 41, at paragraph 20:
[20] The
provisions of the Act essentially create a two-part test. First, it must be
determined whether the project as a whole meets the requirements set out in
subsection 248(1). If it does not, that is the end of the matter. However, if
the project as a whole is eligible, then the specific expenditures and
activities must be vetted against the objectives of the project. …
[21]
The landmark case
remains Northwest Hydraulic Consultants Ltd. v The Queen, 98 DTC 1839,
where Justice Bowman, as he was then, outlined, at paragraph 16, five criteria
that will assist a court in determining whether a taxpayer’s particular
activities constitute SR&ED:
[…]
1. Is there a
technical risk or uncertainty?
[…]
2. Did the person
claiming to be doing SRED formulate hypotheses specifically aimed at reducing
or eliminating that technological uncertainty? …
[…]
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?
[…]
4. Did the process
result in a technological advance, that is to say an advancement in the general
understanding?
[…]
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.
[…]
[22]
These criteria
were approved by the Federal Court of Appeal in R I S‑Christie
Ltd. v Canada, 99 DTC 5087, and also in C.W. Agencies Inc. v Canada,
2001 FCA 393, 2002 DTC 6740.
[23]
Justice Bowman,
at the same paragraph of his decision in Northwest Hydraulic, explained
what is meant by the terms “technological risk or uncertainty”:
[…]
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.
[…]
[24]
In Zeuter
Development, Justice Little, as he was then, made the following comment,
concerning software development, at paragraph 22:
[22] Software development can certainly be eligible as
SR&ED on the basis that its goal is to advance computer science or
information technology. …
[25]
However, Justice
Bowman also noted in Northwest Hydraulic, at paragraph 82, that technological
uncertainty is something that exists in the mind of the specialist “… who identifies and articulates it and
applies its methods to remove that uncertainty.”
[26]
The onus is on
the Appellant in these appeals to show that, on a balance of probabilities, the
expenditures it incurred in the 2005 and 2006 taxation years related to
SR&ED within the meaning of subsection 248(1) of the Act.
[27]
Based on the
facts before me, I am satisfied that the Appellant’s activities constituted
SR&ED within the meaning of subsection 248(1) of the Act, that
expenditures were properly incurred and claimed in the 2005 and 2006 taxation
years and that corresponding refundable ITCs were properly claimed in respect
of the Belize project.
[28]
When the
Appellant decided to proceed with the Belize project, rather than abandon it, the
project necessitated consistent and dependable service despite the persistent
and irregular connectivity issues encountered in Belize. Despite the constant
interruptions in network service, each individual node had to function
autonomously while maintaining the integrity of each patient’s medical data in
the absence of replicated data. In addition, the Appellant had to focus on
protecting critical data where potential conflicts could arise when data from
another node had been significantly delayed. The technology that the Appellant
was required to develop was meant to support and accommodate the applications
that would preserve, transmit and store critical medical data with certainty
and predictability in an unstable network environment.
[29]
The replication
solutions that were available in the field at the time did not suit the
required objectives of the Appellant for this project. The most commonly-used
replication solution was a system of master/slave replication. This solution
permitted changes on the master database only while replicating or mirroring
those changes to the slave databases. However, the Belize project required
replication technology that would support changes to any database with those
changes being exchanged asynchronously because of the connectivity issues. As
Mr. Rutter explained:
The master
doesn’t know that the node has connection. And the node doesn’t know if the
master has a connection. So, they’ve got to act independently or asynchronously
– asynchronously to move the data.
(Transcript, April
8, 2015, page 86)
Existing solutions for relational databases
were designed to operate in an environment of “… strong connectivity infrastructure and
powerful hardware ...” (Exhibit A-1, Tab 4, page 2 of 12). The Appellant
required a “write everywhere” replication system and “… undertook experimental
development to attempt to create technology that could mimic the availability
of stable communications infrastructure in a hostile network environment where
nodes must optimize the utilization of the minimal network resources.” (Exhibit
A-1, Tab 4, page 2 of 12). In any event, as Justice Woods noted in Logitek
Technology Ltd. v The Queen, 2008 TCC 145, 2008 DTC 2989, at paragraph 29,
where SR&ED activities are undertaken in order to solve a technological
problem, those activities should qualify, even if they were not necessary
because a solution already existed in the marketplace that the taxpayer may not
have been aware of:
[29] … I
think the wording of the definition of SR&ED in the statute supports this
view, and I quote from the relevant definition in the statute: “work undertaken
for the purpose of achieving technological advance.” The emphasis in the
statute on the purpose of the work suggests that the SR&ED activity should
qualify based on what the taxpayer was trying to achieve, and the means that
the taxpayer used to do so. It should not be disqualified merely because there
was a solution available in the marketplace if the taxpayer was unaware of it.
[30]
The technological
uncertainties were summarized at Exhibit A-1, Tab 4 and consisted of fourteen
in number. However, in light of the necessity of preserving the integrity of
the database, the primary uncertainties included:
1. Database
replication in an unreliable network environment had to be explored as
available tools were inadequate and research was scarce;
2. Approaches
had to be formulated to transport data, merge changes to database records from
multiple databases, preserve and merge changes to records at multiple locations
without loss of critical data while overcoming frequent network interruptions;
3. The
unknown implications that multi-site, asynchronous data manipulation would have
for the real world applications that it would need to support;
4. Even
if uncertainties could be overcome, it was unknown if their developed
hypothesis would be sufficient to enable the nation-wide, mission-critical data
applications;
5. Recovery
from data integrity problems when nodes were offline for any extended period of
time; and
6. After
extended periods of dis-connectivity and large amounts of changes queued up,
how to exchange those changes to other nodes in an environment of infrequent
connectivity.
[31]
Although the
Respondent argued that some of the uncertainties were not technological and
that possible available solutions were restricted by budgetary constraints and
licensing considerations, the evidence of the Appellant’s witnesses, which was
not challenged on cross-examination, demonstrated that it was impossible to
resolve the uncertainties, encountered by the Appellant, through routine
engineering or standard procedures. The Appellant had no reasonable expectation
of success with the Belize project unless new knowledge could be obtained.
According to the evidence, the Appellant developed a new approach by creating a
multi-write database replication system. There is no doubt that this system was
innovative, as evidenced by the accolades given to the Appellant’s
comprehensive HIS in the Vital Wave Consulting report of May, 2009 (Exhibit
A-1, Tab 18, Health Information Systems in Developing Countries). This
report, commissioned by the Bill & Melinda Gates Foundation, completed a
landscape analysis of the health information systems in developing countries
and concluded that Belize’s innovative HIS system is perhaps the most
comprehensive system in the world. However, the “result achieved” for SR&ED purposes is not a measure of
a technological uncertainty. As noted in Northwest Hydraulic, the
inability to achieve an objective invalidates neither the hypotheses formulated
nor the methods used. I am satisfied, based on the evidence, that the project
problems and uncertainties could not be reasonably resolved using routine
engineering or standard procedures, as the Respondent suggested. The first
criterion of technological risk or uncertainty, as enunciated in Northwest
Hydraulic, has been satisfied.
[32]
I am also
satisfied, in respect to the second criterion, that the Appellant formulated
and tested hypotheses to address the technological uncertainties it encountered
in the Belize project. Mr. Rutter testified that the approach adopted by the
Appellant was in accordance with planned testing that included several levels
of trials or tests being conducted. Trials that were conducted were
distinguished from a trial and error approach. Mr. Kilburn testified that his
journal notes, whiteboard photos and computer script notes corroborate his
testimony that he and his colleagues engaged in planned testing. On
cross-examination, Mr. Rutter stated that the Appellant did not “measure these connectivity issues”, except through observation and experience,
because the Appellant had no control over the private company in Belize that
was in charge of connectivity in that country. When asked how the Appellant
measured effectiveness, Mr. Rutter testified that this measurement related more
to the integrity of the data and the accuracy with which it reached its
destination despite connectivity challenges:
… the record had
to be what was sent. It had to be the same. So what was sent is what was
received.
The test was, is
it the same information? So, did – what was it – at the node, is that what
ended up on the master?
(Transcript, April
8, 2015, page 106)
[33]
Mr. Bearisto
testified that his approach as manager of the Belize project was scientific “… rather than just throwing things against
the wall and seeing what sticks …” (Transcript, April 9, 2015, page 106). He testified that experiments were devised
in a controlled manner to re-create environments in order to reproduce the
problems which generally led to code changes and further testing. Because of the
fiscal and time constraints:
… we didn’t have nearly enough time to
approach this in a haphazard way … on this endeavour. And we didn’t have the
time to fool around with just trying stuff. We had to think very carefully
about what is it that’s in our way here.
(Transcript, April
9, 2015, page 109).
… [W]e were burning money if we waste any
time trying things, rather than experimenting.
(Transcript, April 9,
2015, page 110).
[34]
Mr. Kilburn
explained that the Appellant’s approach to even the simplest component of
detecting when connectivity existed had to change because “… this was a
different level of replication than … the Internet’s not always on. It’s on sometimes.”
(Transcript, April 9, 2015, page 38). The challenge was one of providing equal
access to predictable data integrity where connectivity issues ran far deeper
than would be encountered in a stable and secure environment such as Canada.
… There was [sic]
health outposts in Belize that you need a four by four to get to, they don’t
have power all day, maybe not every day. They do not have phone lines. They do
not have satellite Internet. Nor do they ever anticipate getting it.
(Transcript, April
9, 2015, page 38).
Mr. Kilburn also explained how conducting
unit tests eventually led to staging tests where algorithms were tested and
refined in simulated environments. In summing up what the Appellant was doing,
he stated:
A. We would
attack things, you know, our methods didn’t change. We formulate some
assumptions. You develop your solution based on this and then you test the
theories and see if it solves your problems.
(Transcript, April
9, 2015, page 51)
[35]
When conducting
tests and formulating its hypotheses, the Appellant focussed on the following
objectives:
1. Design
and develop a system that would preserve, manage, transmit and store
mission-critical data;
2. Achieve
superior data security, stability and reliability within a hostile and volatile
communications environment;
3. Achieve
superior data confidentiality and protection;
4. Achieve
system functionality on technologically-limited hardware;
5. Facilitate
user self-reliability in order to achieve the solution user-adoption goals of
system efficiency and data security;
6. Achieve
perpetual and secure software updates in a volatile communications environment;
7. Ensure
any source code released to users does not compromise the Appellant’s ability
to self-protect against intellectual property infringement;
8. Maintain
failsafe conditions in an unpredictable environment;
9. Achieve
solution functionality despite a low cost target; and
10. Advance
the project’s objectives while maintaining data integrity.
(Summarized from Objectives listed at
Exhibit A-1, Tab 11, pages 4 and 5)
[36]
Based on the
evidence, which was not contradicted, I am satisfied that the Appellant
conducted systematic investigations with respect to the Belize project. The
technological uncertainties and problems were clearly outlined and defined. Initially,
the Appellant attempted to duplicate the target environment conditions of
Belize in the laboratory, focussing on the correct operation of replication
algorithms, without the burden of network problems, in order to isolate
potential defects in the algorithms. Transitioning of the replication
algorithms to the conditions of the target environment required the algorithms
to be more fault‑tolerant in an attempt for the system to seize the
advantage of connectivity when it was available. Specific objectives and
hypotheses were formulated that could potentially address the uncertainties
inherent in a project that became the Appellant’s focal point during this
period. Brainstorming sessions occurred, theories evolved and testing was completed
with respect to different hypotheses.
[37]
Mr. Kilburn
explained how refinements to ideas for prototypes occurred and how “implementation notes” were kept for the various components
contained in the documents (Transcript, April 9, 2015, page 39). He referred to
the content of these notes, which list “rough algorithms” for network behaviour, the three stages of full synchronization
using the mobile connector, the operative requirements of the node manager in
order for it to manage sequences and subscriptions, and node and master
behaviour (Exhibit A-1, Volume 2, Tab 22). This exhibit contained copies of
handwritten notes respecting such items as whiteboard sessions and online
replication ideas in February, 2005, thoughts on conflict detection in June,
2005, potential concepts on how to implement automatic software updates in
July, 2005, staging tests and data integrity completed in August, 2005, accounting
data bootstrapping in September and October, 2005 and file transfer and file
splitting. Attached to those notes was a SR&ED activity sample that
elaborated on the systematic investigative process that occurred with respect
to a particular task, of observing and analyzing replication functionality over
dial-up, which was part of the larger project. This was meant to serve as an
example of one experiment of many project elements that took place over a
three-week period in early 2006. The document outlined the objectives,
procedures, observations conducted and investigative techniques that were
pursued and utilized in respect to this one element. These various documents
showed how the project evolved in respect to developing hypotheses, conducting
various testing of theories, installing and refining algorithms and evaluating
the outcome.
[38]
Mr. Kilburn
testified that the “scientific
method”, when applied to
computer programming, does not have the same structure that would be employed
in a science such as chemistry, where measurement is used in a different
context. When asked on cross-examination if he tracked the number of tests that
he ran, he stated that the tests conducted take many forms, average in the
hundreds and “… there’s
a tests [sic] that’s written once and is executed a thousand times.” (Transcript, April 9, 2015, page 70).
[39]
Although the
documentation was not as detailed as I would like to see, particularly with
respect to the types of tests performed and the results achieved, I am
satisfied with the oral testimony of the Appellant’s witnesses. For the most
part, their evidence was not challenged on cross-examination and Mr. Rutter,
Mr. Kilburn and Mr. Bearisto provided credible explanations respecting the
scientific investigation and method they adopted in order to develop the HIS.
In fact, Respondent counsel acknowledged that credibility was not in issue
(Transcript, April 10, 2015, page 31). While it will always be preferable that
an appellant maintain contemporaneous documents to support its systematic
investigative procedures and methods, as noted by Justice D’Auray in 6379249
Canada Inc. v The Queen, 2015 TCC 77, [2015] TCJ No. 62, at paragraphs 71,
72 and 92, the Act contains no legislative requirement to file those
documents in order to qualify for the deduction of expenditures. Justice Jorré
in Les Abeilles Service de Conditionnement Inc. v The Queen, 2014 CCI
313, 2014 DTC 1219, made a similar observation and Justice Archambault in 116736
Canada Inc. v The Queen, 98 DTC 1816, at paragraph 41, stated:
[41] However,
the Act and the Regulations do not require that such written reports be
produced in order for a taxpayer to qualify for the deduction of such
expenditures: it is possible to adduce evidence by way of oral testimony.
Whether the Minister or a judge could conclude that the activities purported to
have been carried out by the taxpayer were actually carried out then becomes a
question of credibility.
[40]
The documentary
evidence, that I do have, coupled with the oral testimonies of these three
individuals, support my finding that the Appellant engaged in systematic
investigation and undertook tests to resolve the technological uncertainties.
This is not to say that taxpayers should ignore detailed record keeping. Such
documentary evidence is always to be preferred and each case will vary in
respect to how the evidence will be viewed. Taxpayers who come to court without
proper documentation will always remain in the unenviable position of
persuading a court that systematic investigation did occur. My conclusion
respecting the testing also arises from my finding that the Appellant’s
research efforts, in resolving numerous technological uncertainties by creating
a multi-write database, led to a technological advancement.
[41]
The solution to
the technological uncertainties that existed with the Belize project resulted
in the creation of a multi-write database replication system. This approach was
not only innovative but leading-edge in that it produced an integrated health
information system that resulted in the successful establishment in Belize of
the first nationwide health information system of its kind. The evidence
suggested that the available open source replication solutions were
inappropriate as they were meant for very different purposes within the field,
designed to work with strong connectivity infrastructure. Since an appropriate
replication solution was not available, the Appellant undertook experimental
development work to create technology that could mimic a stable communications
infrastructure in the hostile environment that existed in Belize.
[42]
Finally, in
respect to the records that were retained as the testing progressed, as already
discussed in my reasons, I am satisfied that the Appellant maintained records
that, together with the oral testimony, sufficiently demonstrate that it had
identified the problems with the project, developed its objectives, formulated
hypotheses and testing scenarios and modified or re‑developed its
approach in response to the results it was obtaining. Although records were not
available for every test conducted, the evidence of the three witnesses,
together with those records that I do have, support a conclusion that testing
occurred in the manner outlined in the oral testimony. Although the Appellant
may not have kept detailed records, as a scientist may have done, its approach
is similar to the scientific method in that uncertainties and objectives were
identified and hypotheses, trials and testing were formulated. It is important
that we do not lose sight of the fact that this was a small company operating
out of Fredericton, New Brunswick, engaged in an international project that necessitated
almost total engagement of its employees on the project. It was a contract that
could make or break the Appellant as a viable business. In circumstances such
as these, I am of the view that the proper approach should be a global overview
of the project and the associated activities rather than a minute dissecting of
each elemental component. I am also satisfied that the evidence of Mr. Ellis
established the proper financial amounts of the Appellant’s claim.
[43]
In summary, the
Appellant has established that its activities met the definition of SR&ED
contained in subsection 248(1) of the Act. As a result, the Appellant’s
expenditures were incurred for SR&ED and the Appellant will be entitled to
the ITCs. The appeals are allowed, with costs.
Signed at Ottawa,
Canada, this 1st day of December 2015.
“Diane
Campbell”
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