Date: 20111215
Docket: A-222-11
Citation: 2011 FCA 355
CORAM: EVANS
J.A.
LAYDEN-STEVENSON
J.A.
MAINVILLE
J.A.
BETWEEN:
JENTEL MANUFACTURING LTD.
Appellant
and
HER MAJESTY
THE QUEEN
Respondent
REASONS FOR JUDGMENT
LAYDEN-STEVENSON J.A.
[1] The only issue in this appeal is
whether the appellant, Jentel Manufacturing Ltd. (Jentel), is entitled to
scientific research and experimental development tax credits (SRED credits)
under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the
Act) in relation to its 2005 fiscal year. The Minister of National Revenue (the
Minister) denied Jentel’s claim for SRED credits on the basis that the work it
performed did not meet the definition of “scientific research and experimental
development” (SRED) in subsection 248(1) of the Act. Justice D’Arcy of the Tax
Court of Canada (the
judge) dismissed Jentel’s appeal. The judge’s reasons are reported as 2011 TCC
261. Jentel now appeals to this Court.
[2] Jentel develops and manufactures
engineered thermoformed plastic products for consumer and industrial uses. In
earlier years, it developed Multi-Bins, a small-parts storage system typically
used in industrial and shop-floor settings. During its 2005 fiscal year, Jentel
set out to overhaul its Multi-Bins concept. Jentel’s objective was to improve
its existing product by making a redesigned version that would be smaller and
significantly lighter.
[3] The judge concluded that the
work performed by Jentel, as described in the Agreed Statement of Facts and the
evidence of its owner and President, Mr. Ralph Hahn, did not constitute SRED,
as defined in paragraph 248(1) of the Act. Paragraph (c) of that
definition reads:
|
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…
(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,
|
activités de recherche
scientifique et de développement expérimental »
Investigation ou recherche systématique d’ordre scientifique ou
technologique, effectuée par voie
d’expérimentation ou d’analyse, c’est-à-dire :
c) le développement expérimental, à savoir
les travaux entrepris dans l’intérêt du progès technologique envue de la
création de nouveaux matériaux, dispositifs, produits ou procédés ou de
l’amélioration, même légère, de ceux qui existent.
|
[4] Specifically, the judge
concluded that Jentel’s work was centered on the use of existing manufacturing
processes and existing materials in an attempt to improve its existing product.
Its work involved routine engineering and standard procedures (judge’s reasons
at para. 10). Mr. Hahn’s evidence simply described “the use of existing
manufacturing processes in an attempt to build a better product, while
controlling manufacturing costs” (judge’s reasons at para. 22). There was no
evidence that any of the work involved technological risk or uncertainty
(judge’s reasons at para. 16). In the judge’s view, Jentel did not establish a prima
facie case that it was attempting technological advancement (judge’s
reasons at para. 27).
[5] Despite the capable submissions
of Mr. Fenton, in my view, the appeal must be dismissed. The judge’s finding
constitutes a question of mixed fact and law. The standard of review for the
legal component of a question of mixed fact and law is correctness. The
application of the legal test to the facts is reviewable only for palpable and
overriding error: Housen v. Nikolaisen, 2002 SCC 33. I am not persuaded
that the judge erred in law or that any of his factual findings disclose
palpable or overriding error.
[6] The jurisprudence establishes
the criteria for determining whether work performed constitutes SRED. In C.W.
Agencies Inc. v. Canada, 2011 FCA 293, this Court adopted the criteria set
out in Northwest Hydraulic Consultants Limited v. The Queen, 98 D.T.C.
1839 (T.C.C.) (Northwest Hydraulic). The judge specifically referred to
these criteria (judge’s reasons at para. 9) and additionally cited specific
passages from Northwest Hydraulic (judge’s reasons at para.11). The
judge concluded that Jentel had not met the first criterion, that is, was there
a technological risk or uncertainty which could not be removed by routine
engineering or standard procedures. Since the finding in this respect was
dispositive, it was not necessary for him to go further.
[7] Jentel does not suggest that the
judge failed to identify the appropriate legal test. Rather, it claims that the
judge improperly applied the test to the evidence. In its written submission
Jentel argued that the judge ought to have given greater weight to Mr. Hahn’s
testimony since it was uncontradicted. This argument cannot succeed because the
judge considered Mr. Hahn’s evidence at length (judge’s reasons at paras. 18
through 23). Indeed, it was on the basis of Mr. Hahn’s evidence that the judge
determined that Jentel’s work simply described the use of existing
manufacturing processes in an attempt to build a better product, while
controlling manufacturing costs (judge’s reasons at para. 22).
[8] Jentel submits that the judge’s
statement that there existed “no evidence” of technological risk or uncertainty
constitutes a palpable and overriding error in view of his “finding” in
paragraph 19 that “one of the difficulties with this process is that when plastic
resin is extruded, the properties of the resin used in the sheet are changed.
The actual specifications of the extruded sheet are not known.” Contrary to
Jentel’s submission, the judge did not make such a “finding.” The noted
statement appears in the judge’s summary of Mr. Hahn’s evidence and
demonstrates that the judge was cognizant of the issue. In any event, the judge
concludes that, with respect to the use of different types of plastic resin or
materials, he failed to see how this constitutes SRED (judge’s reasons at para.
24).
[9] Jentel also contends that the
judge erred in finding that attempted improvements to existing processes cannot
constitute SRED. In my view, this misconstrues the judge’s reasons. The judge
did not limit SRED to entirely new products, to the exclusion of improvements.
In fact, the judge turned his mind to Jentel’s objectives (judge’s reasons at
paras. 12-14) before concluding that the measurable objectives were not sought
to be attained through true technological advance, but through routine
engineering. The work performed by Jentel in its development of the product
was, in the judge’s view, in line with standard product development.
[10] As for Jentel’s allegation that
the judge erred in concluding that there was no evidence of “an attempt to
achieve a technological advancement”, and its reliance on Mr. Hahn’s testimony
that there was no process in existence that could create moulded plastic items
with the shapes, features and capabilities sought, Jentel acknowledges that a major
part of the manufacturing technology puzzle was pre-existing (Jentel’s
memorandum of fact and law at para. 85). This recognition that thermoforming
and injection moulding techniques and procedures were pre-existing (and
therefore accessible to other professionals in the field), coupled with the
fact that Jentel had previously used both methods and did not suddenly begin to
use them in the 2005 fiscal year, supports the reasonableness of the judge’s
conclusion that Jentel was using an available, standard manufacturing process.
[11] While the work completed by
Jentel undoubtedly required considerable effort, there is ample evidence to
support the judge’s conclusion that its procedures did not constitute
experimental development, including the fact that the use of a “heat sink” was
merely plug-assist forming technology that had “been out there for quite some
time” (judge’s reasons at para. 23).
[12] In my view, Jentel’s arguments
constitute an invitation to reassess the evidence and substitute this Court’s
opinion for that of the trial judge. That is not this Court’s function.
[13] I see no basis for concluding
that the judge failed to have regard to all of the evidence in determining
whether the work claimed as SRED met the requirements of the Act, as set forth
in the jurisprudence. The judge applied the correct legal test and his
conclusions were based upon a thorough consideration of the evidence. No
palpable or overriding error has been demonstrated. The Court’s intervention is
not warranted.
[14] I would dismiss the appeal with
costs.
"Carolyn
Layden-Stevenson"
“I
agree
John M. Evans J.A.”
“I
agree
Robert M.
Mainville J.A.”
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