Citation: 2012 TCC 366
Date: 20121017
Docket: 2010-2038(IT)G
BETWEEN:
LABORATOIRE DU-VAR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1]
This is an appeal
regarding expenses related to various research and development projects. The
parties came to an agreement regarding part of the case in question. The
parties agreed to a consent to judgment in favour of the appellant for the 2003
and 2004 taxation years.
[2]
Since the consent to
judgment in question is part of this judgment, it shall be reproduced in whole.
[translation]
The
parties consent to the Court rendering judgment, allowing the appeal from the
assessments for the 2003 and 2004 taxation years and referring the case to the
Minister of National Revenue for reconsideration and reassessment, accepting
the following additional expenses as eligible experimental research and development
expenditures for the purposes of calculating the investment tax credit:
|
|
2003
|
2004
|
|
Salary for undetermined employees
|
$18,842
|
-
|
|
Material
|
$131
|
$371
|
|
Contractors
|
-
|
$2,420
|
|
Salary for determined employee (Pierre
Trudeau)
|
$5,486
|
$2,794
|
|
Salary for determined employee (Louise
Nadon)
|
$6,171
|
$8,488
|
|
Total:
|
$30,630
|
$14,073
|
On
all other matters, the reassessments remain unchanged.
WITHOUT
COSTS.
Ile-des-Sœurs,
July , 2012
By:
_______________________________
Richard
Généreux
Counsel
for the appellant
MONTREAL,
July , 2012
Myles
J. Kirvan
Deputy
Attorney General of Canada
Counsel
for the respondent
By:
________________________________
Christina
Ham
Counsel
for the respondent
[3]
As a result, the appeal
pertains essentially to the 2005 and 2006 taxation years; the appellant also
stated that certain research projects for 2005 and 2006 were no longer at
issue. They are the following projects: for 2005, project number 11, [Translation] "Control Panel"; project number
12, [Translation]
"Air/electricity
Project"; project number 13, [Translation] "Preventive Maintenance" and project number
34. For 2006, project number 34, identified as [Translation] "Control Panels".
[4]
Therefore, the only
issue is the following: were the salaries of Pierre Trudeau and his spouse
Louise Nadon considered eligible expenditures? The respondent disallowed, in
part, the salary expenditures claimed for Mr. Trudeau and all the salary
expenditures for Ms. Nadon, Mr. Trudeau's spouse. Should the salary
expenditures claimed by Mr. Trudeau and his spouse as eligible expenditures be
allowed?
[5]
For the 2003 and 2004
taxation years, all the salary paid to Mr. Trudeau and his spouse as salary
expenditures for various research and development projects was allowed; for the
2005 and 2006 years, the Canada Revenue Agency (the Agency) allowed Mr.
Trudeau's expenditures at 25% and disallowed all of Ms. Nadon's.
[6]
The President and sole
shareholder of the appellant, Mr. Trudeau, is a civil engineer with vast
knowledge in management and productivity. Throughout his career, he developed
many management niches.
[7]
A turn of events led to
his being offered the business operated by the appellant.
[8]
Despite its many years
in business, excellent reputation and sought-after expertise, the appellant had
significant financial problems. Presented with this offer, Mr. Trudeau assessed
his situation; he made a plan and recruited reputable and credible individuals
in order to face a new challenge: acquiring the appellant.
[9]
Mr. Trudeau's drive,
interest and passion for the commercial activity of the business meant he
quickly developed and acquired an expertise and vast knowledge in the research
and development of toiletry and cosmetic products in all its forms. He became a
leader in the field despite the small size of his company and also his lack of
academic training in biochemistry.
[10]
The president, Mr.
Trudeau, explained that the appellant's success resulted from the company's
deep and sincere concern for its clients and its ongoing desire to grow with
them, supporting and accompanying them through all the stages of the process
leading to the marketing of a new product created at those clients' request.
[11]
Mr. Trudeau explained
that the business received clients with ideas for new products that often
belonged in the realm of dreams.
[12]
An idea generally
targets a finished product. The appellant receives the mandate to undertake all
the steps that would lead result in the desired product being ready to market.
For the expected outcome, many steps are required and often involve a bona fide
research and development project.
[13]
The appellant's success
depends also on the quality and abundance of multiple experiences in terms of
products to improve and develop, in a context and environment that meet very
strict quality standards.
[14]
According to Mr.
Trudeau, although they are few in number, the people assigned to research and
development are the heart of the business. The research and development
component is not significant in terms of labour and revenue, but is absolutely
fundamental and strategic for the financial health of the business and its
growth.
[15]
As for the years in
question, the research and development component and department were directed
by Marie‑Claude Nadeau, biochemist with a degree from the University of
Sherbrooke.
[16]
As for the appellant's
commercial activities, Mr. Trudeau stated that the business hired 50 to 80
people, depending on the period.
[17]
Over the years, the
appellant submitted many research and development projects. The vast majority
were received favourably by the Canada Revenue Agency that usually accepted
them as submitted. Mr. Trudeau explained that the appellant had developed a
high level of expertise for preparing, presenting and managing research and
development projects.
[18]
Considering the
importance of research and development projects for the appellant, Mr. Trudeau
added that he invested heavily in order to obtain relevant information so the
various research projects would be accepted and to stay up to date with the
ever-changing requirements, and also because this was the most important
component of the business.
[19]
He noted that the
Agency had modified and restricted the qualification criteria by tightening the
control mechanisms on one hand, and adding an array of new elements on the
other. Aware of the new requirements and constraints clearly designed to allow
for better control, he made every effort to conform thereto.
[20]
The president, who was
directing a business in which every detail counts, where competition is fierce
and efficiency is indispensable, stated that he implemented an accessible,
reliable and well-documented system that allowed for the number of hours spent
on each research project to be calculated and accurately tracked, and also
explained the reason for the hours invested by each intervenor.
[21]
The appellant
repeatedly insisted during the examination by the respondent's representatives
that they should have considered the prior records where the president and his
spouse's salaries were fully allowed, in particular for 2003 and 2004.
[22]
The appellant invested
a great deal of energy to show the business had a good reputation in terms of
research and development projects; almost all the projects submitted having been
accepted, in particular for the salary claimed for Mr. Trudeau and his spouse,
Louise Nadon, the respondent should have allowed the salary claims underlying
the appeal according to the appellant. Counsel for the appellant asked multiple
questions on the previous experiences, claiming that was where the relevant and
conclusive evidence was, in terms of the validity of the appeal.
[23]
From the beginning, the
analysts clearly indicated that, one one hand, they were not aware of the
details of the files that preceded their analysis work that was at the basis of
the assessments and, on the other, it was not relevant to the files they
audited. Nevertheless, the appellant, through its counsel, vigorously
criticized this approach, expressed frustration and severely attacked the lack
of continuity in the acceptance process for the president's and his spouse's
salary expenditures, in terms of the research projects at issue.
[24]
Marc-André Paquin and
Gilles Caron, financial analyst and scientific analyst respectively, were in
charge of the case analysis that led to the notice of assessment and explained
the work they did. Mr. Paquin was in charge of analyzing the amounts
claimed that were invested in the research projects in question; Mr Caron was
to ensure that the scientific aspect met the relevant criteria.
[25]
Finally, the analysis
and audit were to establish whether all the expenditures, including Mr.
Trudeau's and his spouse's salaries, were directly related and necessary to
properly conduct the research projects in question.
[26]
The analysts explained
and repeated that their work, essentially and exclusively, focused on the
projects under their analysis and audit mandate. They repeated that they did
not consider or take into account prior experiences. Their work and analysis of
the salaries claimed by Mr. Trudeau and his spouse led them to find there was
no relationship between the significance of the work and the research and
development projects to which the appellant wished to relate them.
[27]
In other words, the
salary claims were exaggerated for Mr. Trudeau and completely inadmissible for
his spouse. According to the auditors, these expenditures were not relevant to
the completion of the research and development projects.
[28]
Meeting such a burden
of proof requires not only presenting the most precise details possible but
also the most reliable and credible. The fact that the respondent already
allowed the claims for work attributed to other research projects does not have
a determinative or sufficient impact to modify the rules regarding the burden
of proof. Such information has no impact one way or the other. One thing is for
sure, this complaint is not sufficient to disqualify or discredit the facts
that were taken into consideration to explain or justify the assessments under
appeal.
[29]
Every case is unique
and the approach used to verify whether it was executed in compliance with the
legal requirements to which it is subject is not a purely mathematical
exercise. A direct relationship between the various components and the claim
submitted is required and must be established on a balance of probabilities, so
it would seem that each research and development project is a specific case
with specific data.
[30]
The many previous
approvals, the usual quality of the business' files, the confusion and possible
ambiguity of certain regulatory instruments concerning the requirements, and
the lack of clear and precise criteria are not sufficient to explain or justify
the lack of a record or documents that show exactly what the president and his
spouse contributed in terms of the various research projects accepted.
[31]
The appellant insisted
on the fact it generally presented impeccable, even exemplary, research and
development files. It noted that the claims submitted for the research and
development project were always well received and, generally, obtained what it
claimed, in particular regarding the salaries of the president,
Mr. Trudeau and his spouse.
[32]
The president of the
appellant claimed to have been careful, vigilant and precise regarding the data
pertaining to his work and that of his spouse allocated to various research
projects. To validate his claims he testified in a rather general manner; he
insisted on his good reputation in such matters, on his knowledge, expertise
and mastery of the requirements. Although the president, Mr. Trudeau, claimed
to have implemented a system or registry that would allow the contribution of
each individual to be verified, in terms of time, reason and manner, he was not
able to explain exactly why or how he and his spouse contributed or what the
impact of their contribution was on the various research and development
projects in question.
[33]
The evidence of good
conduct, the fact he had previously presented and submitted proper files with
near-perfect marks, has nothing to do with a particular assessment for specific
projects. It is, at best, a neutral element in itself and possibly useful for
context, but certainly not a determining factor regarding the validity of a new
file.
[34]
In this case, the
assumptions relied on at the basis of the challenged part of the assessment
have not been refuted or disqualified. To the contrary, the evidence showed
that the work was carried out properly based on the available elements and
information.
[35]
Research and
development is a complex area in which there is no magic recipe to establish
eligibility for all elements. Parliament provided criteria that, over the
years, have been clarified, qualified and made easier to understand so that
those concerned are better able to submit claims without being disappointed.
[36]
Having criteria and
conditions means there are constraints and restrictions that require all
expenditures to be shown as having a direct relationship with the research
projects and also as being essential to their completion.
[37]
The expenditures
claimed must have a direct and relevant relationship with the project submitted
and accepted. The expenditures must be required, necessary and relevant. They
cannot be circumstantial, indirect or relevant simply according to the promoter's
analysis and understanding.
[38]
The various directives
the Agency issues are for ease of understanding and accessibility, but also to
allow the parties involved to structure and organize the implementation of
their records, clear and precise minutes that make it easier to verify the
level of the interrelationship and relevance.
[39]
In this case, relying
on past experiences and the success of the business he directs, the president
himself assessed his participation and that of his spouse in the various research
projects. The evidence has established the amounts claimed for the taxation
years in question were much higher than the usual claims. Mr. Trudeau
essentially justified these gaps by stating they were very important research
projects that required more of his and his spouse's involvement.
[40]
When he was questioned
in cross-examination on the exact details of his participation to better
understand the relevance, reasonableness and eligibility, he responded that the
time invested met the criteria and respected the requirements established by
the Agency.
[41]
When questioned so that
he could clarify his responses, he answered that he respected one or another of
the directives formulated by the Agency, referring to a number or series of
numbers.
[42]
The president made note
of the number of hours invested for each project in a computerized report;
according to him, such entries signified that the work in question met one or
another of the paragraphs from the statement. To illustrate this, I shall
reproduce an excerpt from Mr. Trudeau's testimony.
[translation]
…
Q. O.K.
A. It's surprising, yes.
Q. But it's...
A. And nobody has duplicated it on the
market.
Q. But the six hours specifically that are
mentioned for January 8?
Mr. GÉNÉREUX: In fact, Your
Honour, it isn't January 8.
C. HAM: Or the week of January 8.
Mr. GÉNÉREUX: Yes, the week of.
A. I cannot specify. It was five. Four or
five. It's always...
Q. When you say "four, five"…
A. 95%, it's... At tab 30, ---
Q. Hm.
A. ---it's---
Q. In your task description?
A. ---review, results analysis,
discussions and "scale-up" drafts, theories for formulas with the
client or with Du-Var and reviewing lab tests.
Q. O.K. But you say that...
A. To go more in depth, to tell you what I
did specifically, it began in 2008, in 2008 with Mr. Pâquin's report that
stated: [Translation] "Give
me a backup." He told me this in December or January 2008, and we started
in January 2008 to specifically take notes in the agendas of each
intervention.
Q. Hm.
A. As I told you, I wrote: [Translation] "S-4d-2 hours."
Q. O.K.
A. But before that, it didn't exist.
Q. So Monsieur Trudeau...
A. We were asked to create a computer
system, we put it in the computer system, and those were the instructions we
got in 2004, to do it that way.
Q. So Mr. Trudeau, for the two Excel files
that are at Tab 35, that involve you, ---
A. Yes Ma'am.
Q. ---for 2005 and for 2006, is it true to
say that you cannot tell me exactly which tasks were carried out in regard to
the hours indicated?
A. It...
Q. Specifically for which project?
A. It is summarized in tasks 1 to 10.
Exclusively one of those tasks, which is at Tab 30. It is one of those tasks
that was carried out.
Q. Hm. And if I am correct, earlier
you...
A. Did I talk to the client to tell him
the product turns blue, we came back… We never went into details and it was not
requested.
Q. The list of tasks at Tab 30 you are
referring to, ---
A. Yes.
Q. ---that specifically concern you, you
said earlier that this list of tasks was developed in 2008, is that correct?
A. Yes, at the request of the Department.
Q. Hm.
A. Before that, if we look at the reports
I presented, it's… Basically it's… I described those tasks. I said: [Translation] "Here are the tasks I
performed" and these are the tasks described in my presentations. In the
answers to Mr. Pâquin, including my letter in 2007, I described my tasks, and
in general it is those tasks that are indicated.
Q. O.K.
A. Also, to Mr. Bougie, it was the tasks I
described on... We talked a bit earlier, at the Department, and it is the same
description, always.
Q. Hm.
A. The difference here is that I put a
number in front of each task.
Q. O.K. Mr. Trudeau, I will show you
Exhibit A-3, A-3 which is the R&D technical report we looked at this
morning.
A. Hm.
Q. More specifically at page 37.
C. HAM: Your Honour, the pages are
numbered on the top right.
HIS HONOUR: I've got it.
Q. So at page 37 here, it says:
[Translation] "Annex - Task description for
employees." – As read.
Q. Then around the middle of
the page, we see your task description.
A. Yes.
Q. For you.
A. Yes.
Q. You agree with me that the
task description there is very different than these...
A. No, it is the same tasks.
It's just that here, they are numbered and here they are described with more
verbs, longer, in a paragraph. But it is essentially the same tasks.
Q. O.K.
A. Because to write that, we
relied on the 1996 enforcement policies.
Q. O.K. If I show you Exhibit
I-1, submitted this morning… I will show it to you now, ---
A. Yes.
Q. ---so you have the context.
A. Hm.
Q. This is the document Mr.
Pâquin says he received as the task description as financial examiner.
A. Yes.
Q. O.K.? You agree with me
that the task description for you in particular here at I-1 is the same one we
find at page 37 of Exhibit A-3?
A. Yes.
Q. Take the time to read it…
A. Essentially, I remember. I
helped write it.
Q. Hm.
A. It was Marie-Claude, Ms.
Nadeau who wrote them. Then, I revised them and it is essentially the same
description. I-1, 37 and annex D, I mean...
Q. At...
A. At A-1, at Tab 30, ---
Q. 30.
A. --- it is essentially the
same descriptions, but with slightly different words. Over time we learned that
certain words… The government does not want us to use certain words.
Q. Thank you.
C. HAM: I do not have any
other questions for the witness Your Honour.
HIS HONOUR: Thank you Mr.
Trudeau. This is your evidence?
Mr. GÉNÉREUX: This is
my evidence, Your Honour.
…
[43]
Meeting a burden of
proof requires credibility, indeed, but the basis of this credibility must not
be consist essentially of prior non-relevant experiences and general
explanations that can be interpreted in many ways.
[44]
The president can be
credible when he states that he invested the number of hours defined in such
and such a project. However, this quality in itself is not sufficient because
the evaluation must be validated so that it can be determined whether the time
and energy spent were directly related to the research and development project.
[45]
The subjective
assessment of his use of time is not sufficient and determinative. The work
must meet the test of relevance and of having a direct and useful relationship
with the research project to which it is attached.
[46]
That is certainly not
an easy task; therefore it is important to be able to refer to notes, records,
minutes, etc., so that the evidence submitted is optimally direct.
[47]
In this case, the
appellant's evidence is based essentially on past experiences with the Agency
in terms of projects that have absolutely nothing to do with the present case,
on the business's reputation, on the quality of the projects submitted, meeting
the program's objectives and lastly, on vague and general theories that do not
allow for an assessment of compliance with the requirements.
[48]
Despite the many
questions the president, Mr. Trudeau, was asked, he was never able to provide
specific explanations to establish a direct and unequivocal relationship in
terms of the work attributed to the research project for which he billed hours
of work that were disallowed, thereby giving rise to the sole issue under
appeal.
[49]
As to the hours of work
also claimed for Mr. Trudeau's spouse, she did not testify. The reasons given
for her absence were that she was seriously ill a few years ago.
[50]
It was noted that she
has since recovered, but she stopped taking on full loads at the business,
working only a few days a week. Moreover, she avoids stress whenever possible;
her presence in Court would have caused her great stress and she was not able
to take this on.
[51]
Clearly, these are very
touching reasons, but unfortunately they are not sufficient to lead to the
conclusion that if she had testified, she would have shown that the work
attributed to the various research projects was in compliance, genuine and
should be granted as allowable expenses.
[52]
However, if there were
good, or excellent records, and if notes or minutes had been taken, the
auditors could have verified the relevance and established a direct
relationship with the projects being audited.
[53]
In case of doubt or
confusion, and in a far less stressful environment than court, they could have
obtained clarifications and explanations from Ms. Nadon, which would have
allowed them to draw conclusions.
[54]
If the conclusions were
neither hoped for nor desired, the Court could have then consulted the
documents and, in doing so, it would have been in a better position to assess
the relevance of the work in terms of the relationship required to be eligible.
[55]
Since Ms. Nadon was
absent, and there were no reliable or detailed records showing the validity of
the appellant's claims, and since the explanations submitted by Mr. Trudeau and
Marie-Claude Nadeau as heads of the research and development department are
insufficient to find, according to the preponderance of evidence, a direct
relationship or the relevance of the expenditures related to his work and that
of his spouse, the appeal must be dismissed for the 2005 and 2006 taxation
years. However, the appeal shall be allowed in accordance with the content of
the document, "Consent to Judgment" that provides the following:
[translation]
The
parties consent to the Court rendering judgment, allowing the appeal from the
assessments for the 2003 and 2004 taxation years and referring the case to the
Minister of National Revenue for reconsideration and reassessment, accepting
the following additional expenses as eligible experimental research and
development expenditures for the purposes of calculating the investment tax
credit:
|
|
2003
|
2004
|
|
Salary for undetermined employees
|
$18,842
|
-
|
|
Material
|
$131
|
$371
|
|
Contractors
|
-
|
$2,420
|
|
Salary for determined employee (Pierre
Trudeau)
|
$5,486
|
$2,794
|
|
Salary for determined employee (Louise
Nadon)
|
$6,171
|
$8,488
|
|
Total:
|
$30,630
|
$14,073
|
On
all other matters, the reassessments remain unchanged.
WITHOUT
COSTS.
Ile-des-Sœurs,
July , 2012
By:
_______________________________
Richard
Généreux
Counsel
for the appellant
MONTREAL,
July , 2012
Myles
J. Kirvan
Deputy
Attorney General of Canada
Counsel
for the respondent
By:
________________________________
Christina
Ham
Counsel
for the respondent
[56]
For all these reasons,
the appeal is allowed in part, in that the assessments for the 2003 and 2004
taxation years shall be subject to a correction on the basis of the changes
noted in the Consent to Judgment reproduced above.
[57]
In regard to the 2005
and 2006 taxation years, the assessments made are confirmed as valid and the
appeal is dismissed for those two years, with costs to the respondent.
Signed at Ottawa,
Canada, this 17th day of October 2012.
"Alain Tardif"
Translation
certified true
on this 6h day of
February 2013.
François Brunet,
Revisor
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