Citation: 2012 TCC 133
Date: 20120424
Docket: 2010-3646(IT)I
BETWEEN:
MURRAY
ARLIN DENTISTRY
PROFESSIONAL CORPORATION,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1]
The appellant is a professional
corporation that operates the dental practice of Dr. Murray Arlin, a periodontist
who specializes in implants.
[2]
The appellant made claims under
the Income Tax Act for investment tax credits in respect of scientific
research expenditures in the amount of $103,950 for each of the 2007 and 2008
taxation years. Following an audit by the Canada Revenue Agency, the claims
were disallowed.
[3]
The appeal has been instituted
under the Court’s informal procedure even though the claims exceed the monetary
limits for this procedure. The appellant has accordingly agreed to limit the
relief to $12,000 per year, and to forego the balance of the $21,000 claims.
[4]
The appellant had three witnesses,
Dr. Arlin, Julie Bond, a consultant who prepared the claims, and Alfred
Kucharski, a scientific consultant who was retained to provide an expert
opinion. The only witness for the respondent was Punita Aneja, a research and
technology advisor for the CRA who reviewed the claims on audit.
Background facts
[5]
Dr. Arlin, a periodontist, specializes
in dental implants. He carries out approximately 1,000 implant surgeries each
year.
[6]
In addition to seeing patients
during regular work hours on Monday through Thursday, Dr. Arlin manages to be
very active in professional development and marketing activities. For many
years, he has been prolific in writing articles, lecturing and participating in
study clubs. His curriculum vitae is impressive.
[7]
Fifteen years ago, Dr. Arlin
purchased a computer software program called the Tritan Dental Implant
Management System, which is designed to track the success rate of various types
of dental implants. The program contains approximately 200 potential inputs for
every implant. According to the testimony, Dr. Arlin uses about 50 of these. By
offering patients free follow up examinations, Dr. Arlin is able to track the
success rate of many implants for several years. Currently he has records for approximately
12,000 implants.
[8]
Dr. Arlin uses the software to
compare the success rate of implants in different circumstances. Some of the variables
relate to the patients’ circumstances (e.g. smokers versus non-smokers) and
other variables relate to the characteristics of the implant device.
[9]
Dr. Arlin believes that by
studying this data he can provide a useful addition to scientific knowledge. He
expressed the view that studies done by manufacturers of implants are
susceptible to bias. Although Dr. Arlin has accumulated a significant amount of
data, he acknowledges that his studies would be more valuable if they included
data from other practitioners.
[10]
The information that Dr. Arlin
develops is useful to him in his practice, and it is also useful to other
dentists through dissemination in publications and lectures.
[11]
For purposes of the claims for
2007 and 2008, Dr. Arlin estimated that he spent 350 hours per year on
scientific research, which is slightly less than one day per week. The basis
for the estimate is that Fridays were spent by Dr. Arlin on research when he does
not see patients. Dr. Arlin testified that this estimate is conservative
because he also works during evenings and weekends.
[12]
As mentioned earlier, claims were
made for scientific research expenditures in the amounts of $103,950 for each
year. This is comprised of (1) $70,000, which represents approximately one-fifth
of Dr. Arlin’s salary, excluding bonus, (2) plus $45,000, which is a proxy
amount determined under the legislation, and (3) less $11,500, representing government
assistance.
Position of appellant
[13]
The appellant submits the claims
qualify as expenditures on applied research, which is included in clause (b) of
the definition of “scientific research and experimental development” (SRED) in
s. 248 of the Act.
[14]
The appellant also submits that to
the extent that there is insufficient documentation to support the claims, leniency
should be given because the appellant is a first time claimant.
Position of respondent
[15]
The respondent submits that the
research is not sufficiently documented to qualify as “systematic
investigation” for purposes of the SRED definition. In particular, it is
submitted that Dr. Arlin failed to develop specific hypotheses prior to the
data collection. Reliance is placed on Northwest Hydraulic Consultants
Limited v The Queen, 98 DTC 1839 (TCC).
[16]
It is also submitted that there is
insufficient evidence of time spent by Dr. Arlin on research in the
relevant years.
Analysis
[17]
This appeal engages two elements
of the SRED requirements: whether there was systematic investigation, and
whether the allocation of Dr. Arlin’s time was reasonable.
[18]
A significant focus at the hearing
was on the requirement of systematic investigation in the definition of SRED in
s. 248(1) of the Act. The definition is reproduced below.
248. (1) In
this 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;
(Emphasis added)
[19]
Northwest Hydraulic is the seminal judicial decision as to the meaning of
“systematic investigation.” At paragraph 16, Chief Justice Bowman states:
[16] Although
I do not presume to have the technological expertise of the persons who
assisted in the preparation of the circular, or the witnesses who appeared
before me, including the highly qualified experts who appeared on behalf of the
appellant and the respondent, I should like to set out briefly my own
understanding of the approach to be taken:
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.
[20]
It is the position of the
respondent that there was insufficient evidence of systematic investigation
because hypotheses were not determined prior to the data collection. This
position is very narrow and I am reluctant to agree with it.
[21]
The main problem that I
have with the appellant’s position is
that there was very little detailed evidence regarding the analysis done in the
years at issue and the time spent.
[22]
Dr. Arlin testified that he
updated his research for all of his lectures. This testimony was very brief and
it should have been possible to provide greater detail and documentary support.
I would note that many of the lectures were not given to implant specialists
and they had a marketing component.
[23]
Further, the evidence was far too
vague to establish the time spent by Dr. Arlin on either analysis or data
collection in the years at issue. It is quite possible that some applied
research was undertaken, but the brief and vague evidence is not sufficient to
justify any allocation of the appellant’s salary to this endeavour. I would
also note that the Tritan program is designed to present comparative tables at
the press of a button. The actual time spent on applied research potentially
might be very small.
[24]
In order to support the
appellant’s claims, the evidence as to actual research done, and the amount of
time spent, would have to be much more detailed.
[25]
I would also comment briefly
concerning the expert report of the appellant’s witness, Dr. Kucharski. The
report discussed an article by the appellant that was published in the Journal
of the Canadian Dental Association in November 2007. I tend to agree with Dr.
Kucharski that SRED was undertaken in preparing this article. However, there
was not sufficient evidence that the work was done in the years at issue.
[26]
Dr. Arlin testified that he could
not remember when he prepared this article. The evidence as a whole is not
sufficiently detailed to justify an SRED claim in 2007 or 2008 in relation to
this article.
[27]
Finally, the appellant submits
that there should be leniency with respect to documentation requirements
because it has not filed SRED claims before. Even if I were to accept that some
leniency is appropriate, lack of documentation is only one of the problems in
this case. The evidence as a whole, oral and documentary, was not sufficient to
justify the SRED claims.
[28]
The appeal will be dismissed.
Signed at Toronto, Ontario this 24th day of April 2012.
“J. M. Woods”
Email this Content