Hamlyn,
T.C.C.J.
(orally):—This
is
an
appeal
from
a
reassessment
for
the
1985
taxation
year.
Facts
Eta
performance
Systems
Corporation
is
a
"taxable
Canadian
corporation”
within
the
meaning
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63,
and
was
incorporated
pursuant
to
the
laws
of
Canada
on
June
20,
1984.
The
appellant
carried
on
business
under
the
name
Eta
Performance
Systems
Corporation
at
the
material
times,
being
the
1985
taxation
year.
The
appellant
filed
income
tax
returns
for
the
1985
taxation
year
including
the
return
required
under
Part
VIII
of
the
Act.
Pursuant
to
subparagraph
194(2)(a)(ii)
of
the
Act,
the
appellant
claimed
scientific
research
expenditures
of
$294,153
in
respect
of
its
1985
fiscal
period.
The
claim
of
$294,153
satisfied
$147,076.50
of
the
appellants
1985
refundable
Part
VIII
tax
liability
leaving
a
refundable
Part
VIII
tax
liability
of
$83,923.50
as
at
October
31,
1985.
By
notice
of
assessment
dated
July
3,
1987,
number
RT
426146,
the
Minister
of
National
Revenue
assessed
the
appellants
Part
VIII
return
for
the
1985
taxation
year
as
follows:
(a)
The
Part
VIII
tax
liability
of
the
appellant
was
increased
by
$147,076.50,
resulting
in
a
total
refundable
Part
VIII
tax
liability
of
$231,000;
and
(b)
Late
filling
charges
in
the
amount
of
$19,744.04
and
interest
in
the
amount
of
$55,770.77
were
imposed.
The
Minister
of
National
Revenue
provided
the
following
in
respect
of
the
assessment:
Explanation
of
Changes:
“The
tax
assessed
is
the
amount
payable
under
subsection
194(1)
(being
the
summation
of
amounts
payable
under
subsection
195[2]),"
and
"Late
filing
penalty
of
$19,744.04
is
included
in
Part
VIII
Tax.”
The
appellant
objected
to
this
assessment
by
notice
of
objection
dated
September
28,
1987.
By
notice
of
confirmation
dated
March
20,
1990,
the
Minister
of
National
Revenue
confirmed
the
part
VIII
tax
assessment
for
the
1985
taxation
year
on
the
following
basis:
The
Minister
of
National
Revenue
has
considered
the
facts
and
reasons
set
forth
in
your
notice(s)
of
objection
and
hereby
confirms
that
the
assessment(s)
has
(have)
been
made
in
accordance
with
the
provisions
of
the
Income
Tax
Act
for
the
following
reasons:
Expenditures
of
$294,153
incurred
in
the
computer
aided
learning
research
project
do
not
constitute
scientific
research
and
experimental
development
expenditures
within
the
meaning
of
paragraph
37(1)(a)
and
Regulation
2900(1)(f)
of
the
Income
Tax
Act.
The
issue,
therefore,
in
this
case
is
whether
the
scientific
research
expenditure
claimed
by
the
appellant
of
$294,153
constituted
scientific
research
expenditures
for
the
purpose
of
the
Income
Tax
Act.
The
appellant's
position
The
appellant
states
that
the
corporation
was
incorporated
in
Canada
for
the
"purpose
of
developing
new
and
unique
computer-based
learning
programs".
The
appellant
asserts
that
it
was
advised
by
the
Minister
that
if
the
program
had
been
completed,
the
activities
undertaken
would
have
qualified
as
activities
in
support
of
scientific
research.
The
appellant
submits
that
the
Minister
erred
in
its
finding
that
the
activities
of
the
appellant
did
not
qualify
as
scientific
research
activities
under
the
provisions
of
Regulation
2900
and,
specifically,
that
the
Minister
failed
in
its
finding
that
the
activities
of
the
appellant
were
activities
with
respect
to
routine
data
collection.
The
appellant
further
submits
that
the
frustration
of
the
scientific
research
program
did
not
disqualify
the
activities
in
support
of
that
program.
The
Minister's
position
is
found
within
the
assumption
of
facts
in
the
reply.
In
summary,
(a)
The
appellants
submitted
a
research
plan
which
indicated
that
the
research
to
be
done
was
in
the
area
of
social
sciences
or
the
humanities;
(b)
The
research
plan
was
designed
to
have
six
phases,
but
the
plan
itself
gave
no
description
of
the
methods
to
be
followed
or
the
work
to
be
done;
(c)
Only
phases
zero
and
one
of
the
research
plan
were
undertaken;
(d)
Phase
zero
was
routine
data
gathering
of
rapidly
changing
high
technology
and
was
not
directly
for
the
resolution
of
technological
uncertainties;
(e)
Phase
one
consisted
of
education
research;
(f)
Neither
routine
data
collection
or
education
research
qualify
as
scientific
research
and
experimental
development.
The
significant
facts
in
the
evidence
that
was
brought
forth
at
the
hearing
are
that
the
appellant
corporation,
in
late
1984
or
early
1985,
prepared
a
paper
called
“Computer
Aided
Learning
Research
Plan.”
The
plan
was
directed
towards
finding"the
optimal
learning
style
for
adults
in
a
retraining
situation
and
in
finding
the
best
method
of
applying
microcomputer
technology
to
these
learning
styles.”
That
is,
the
best
method
to
deliver
the
existing
product.
This
plan
was
to
become
the
project
that
the
corporation
sought
to
qualify
incurred
scientific
research
expenditures
that
could
offset
the
Part
VIII
tax
liability.
The
corporation
acquired
personnel
that
would
be
able
to
conduct
the
project
with
appropriate
skill,
competence
and
expertise.
The
project
was
divided
into
six
phases,
although
only
the
first
two
phases
were
developed.
The
phase
numbering
system
started
with
zero
and
went
to
five.
The
first
three
phases
were
to
be
directed
towards
the
examination
of
learning
styles
and
to
determine
the
effect
of
style
in
relation
to
learning.
The
next
phase
was
to
develop
software
to
stimulate
learning,
i.e.
the
development
of
a
prototype,
followed
by
the
development
of
computer
course
author
tools.
That
would
have
included
both
software
and,
I
have
also
concluded
from
a
review
of
the
evidence,
hardware.
The
last
phases
were
to
develop
the
courseware
using
new
authors
tools.
Specifically,
phase
zero
was
to
gather
and
examine
available
computer
technologies,
and
phase
one
was
to
evaluate
lecture
styles
in
relation
to
learning
efficiencies
by
the
use
of
what
was
called
"cells"
(36
in
number).
The
evidence
of
the
Appellants
was
direct
and
forthright.
Their
intention
to
carry
out
the
plan
—
that
is,
scientific
research
—
was
there,
and
for
three
months
they
tried;
but
the
investors,
some
of
whom,
in
part,
were
also
doing
the
plan,
(the
project),
could
not
agree
as
to
future
financing.
The
plan
then
folded
after
phase
zero
and
after
limited
activity
in
phase
one.
The
Appellants
maintained
through
their
witnesses
that
their
activity
should
be
viewed
as
a
whole
with
the
object
of
the
exercise
in
mind,
and
it
was
their
interpretation
that
it
was
more
than
humanities
research
or
education
research
and
more
than
mere
data
collection
when
the
matter
stopped.
The
evidence
of
the
expert
called
by
the
Minister,
a
qualified
expert
in
the
field
of
data
processing,
computer
programming,
creating
programs,
testing
and
evaluation
of
programs,
was
to
the
effect
that
the
project,
including
the
plan,
the
people
involved
in
the
project,
if
at
least
carried
to
the
prototype
phase,
was
in
his
estimation
research
that
was
scientific
research
in
the
computer
science
field.
The
evidence
of
the
expert,
however,
was
that
the
project
never
got
to
the
prototype
stage
and
that
all
that
was
done
was
routine
data
gathering
of
rapidly
changing
technology
at
the
zero
phase
and
phase
one
level.
Moreover,
the
literature
review
and
the
classroom
work
at
phase
one
was
activity
in
relation
to
education
and
learning.
In
terms
of
legislation
and
jurisprudence,
the
relevant
provisions
in
determining
whether
expenditures
by
a
taxpayer
for
the
purpose
of
scientific
research
are
in
subparagraphs
37(1)(a)
and
37(1)(b)
of
the
Income
Tax
Act.
The
first
subparagraph
speaks
of
expenditures
of
a
current
nature
made
in
Canada
by
a
taxpayer
on
scientific
research
and
related
to
the
business
of
the
taxpayer
and
undertaken
by
or
on
behalf
of
the
taxpayer.
Subparagraph
37(7)(b)
provides
that
“scientific
research”
has
the
meaning
given
to
that
expression
by
the
Regulations.
The
regulation
that
the
section
speaks
of
is
Regulation
2900
of
the
Income
Tax
Regulations.
That
regulation
is
set
forth
—
and
I
won't
read
it
at
this
time,
but
it
is
part
of
my
judgment.
In
summary
the
regulation
gives
a
definition
of
what
is
scientific
research,
including
the
activities
that
shall
be
included
in
the
terms
of
scientific
research
and
the
excluded
activities
that
are
outside
in
this
section's
interpretation
of
what
is
“scientific
research".
In
order
for
the
appellant
to
be
able
to
claim
that
the
expenditures
were
for
scientific
research,
it
must
demonstrate
that
they
fall
within
the
ambit
of
this
Regulation
2900.
Whether
or
not
an
expenditure
is
on
account
of
scientific
research
as
defined
in
Regulation
2900
is
a
question
of
fact
which
must
be
determined
on
a
case-by-case
Basis.
In
commenting
on
the
requirements
of
Regulation
2900,
Judge
Sarchuk
had
to
say,
in
Sass
Manufacturing
Ltd.
v.
M.N.R.,
[1988]
1
C.T.C.
2524,
88
D.T.C.
1363,
at
page
2535
(D.T.C.
1371),
that,
Regulation
2900
requires
an
appellant
to
adduce
cogent
evidence
of.
.
.
systematic
investigation
or
search.
Systematic
investigation
connotes
the
existence
of
controlled
experiments
and
of
highly
accurate
measurements
and
involves
the
testing
of
one's
theories
against
empirical
evidence.
Scientific
research
must
mean
the
enterprise
of
explaining
and
predicting
and
the
gaining
knowledge
of
whatever
the
subject
matter
of
the
hypothesis
is.
This
surely
would
include
repeatable
experiments
in
which
the
steps,
the
various
changes
made
and
the
results
are
carefully
noted.
Some
of
the
factors
considered
relevant
in
deciding
whether
the
project
(development
of
the
prototype
of
a
machine)
in
Sass
Manufacturing
Ltd.,
supra,
fell
within
the
definition
of
scientific
research
and
experimental
development
were:
the
elements
of
scientific
uncertainty
in
the
activity,
technology
advances,
uniqueness
of
research,
experimental
(systematic)
approach,
scientific
experience
of
the
staff,
and
the
nature
of
the
data
collected.
As
both
counsel
indicated,
however,
the
amount
of
case
law
in
this
area
is
somewhat
limited,
but
that
(Sass)
seems
to
be,
from
what
I
can
find,
the
key
case
under
this
section.
Analysis
The
sections
of
the
Act
and
the
Regulations
are
clear
and
unambiguous.
Scientific
research
means
a
systematic
investigation
or
search
carried
out
in
the
field
of
science
or
technology
by
means
of
experiment
or
analysis.
This
includes
basic
research,
applied
research,
and
the
development
of
processes
and
products,
including
activities,
for
the
case
at
bar
and
computer
programming
and
psychological
research.
It
does
not
include
the
activities
with
respect
to
research
in
the
social
sciences
or
humanities
or
routine
data
collection.
In
this
case,
if
the
project
had
been
carried
beyond
the
data
collection
stage
and
the
literature
review
and
on
to
the
prototype
stage,
the
development
of
the
courseware,
whether
it
was
successful
or
not,
I
have
concluded
from
the
evidence,
may
have
met
the
test
of
scientific
research.
However,
where
the
project
stopped,
it
resulted
in
routine
data
collection
at
the
zero
phase
level
and
was
data
collection
or,
at
best,
may
have
had
application
for
research
in
education
at
the
phase
one
level,
and
little
else.
Scientific
research
for
tax
purposes
commences
when
the
Act
and
the
Regulation
state
that
it
does.
Given
that
the
activities
at
the
date
of
cessation
fell
within
the
excluded
activities,
it
is
therefore
concluded
that
no
scientific
research
was
conducted
within
the
definition
of
scientific
research
as
found
in
the
legislation
and
the
Regulations.
Scientific
research,
within
the
legislation,
means
a
systematic
search
in
the
field
of
computer
science
and
technology
by
means
of
experiment
or
analysis.
It
does
not
include
research
in
social
sciences
or
humanities
and
does
not
include
routine
data
collection.
In
this
case,
no
experiments,
no
analysis
had
commenced
to
test
the
hypothesis
against
the
empirical
evidence
and,
as
such,
unfortunately
I
must
conclude
that
the
appeal
fails
and
is
dismissed.
It
is
not
necessary
to
deal
with
the
second
issue
of
expenditures
in
view
of
this
finding.
Appeal
dismissed.
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