Hamlyn
T.C.J.:
The
Appellant,
Com
Dev
Ltd.
(“Com
Dev”)
is
a
Canadian
controlled
private
corporation
and
is
involved
in
the
manufacturing
of
components
for
spacecraft.
The
design
and
manufacture
of
the
components
involved
extensive
research
and
development
activities.
The
parties
agree
that
the
Appellant
incurred
expenditures
that
qualify
as
scientific
research
and
experimental
development
(“SRED”)
within
the
meaning
of
section
37
of
the
Income
Tax
Act
(the
“Act”).
The
parties
also
agree
that
these
expenditures
are
“qualified
expenditures”
within
the
meaning
of
subsection
127(9)
of
the
Act.!
Com
Dev
claimed
investment
tax
credits
(“ITCs”)
on
the
qualified
expenditures.
These
appeals
are
under
the
General
Procedure
and
concern
the
Appellant’s
1989,
1990,
1991
and
1992
taxation
years.
The
Minister
of
National
Revenue
(the
“Minister”)
reassessed
Com
Dev
for
the
taxation
years
in
question
by
concurrent
Notices
of
Reassessment
dated
December
16,
1994.
In
reassessing
Com
Dev,
the
Minister
denied
the
ITCs
that
were
claimed
by
the
Appellant.
Facts
At
the
beginning
of
trial,
the
parties
filed
a
Partial
Agreed
Statement
of
Facts.
The
relevant
agreed
upon
facts
are
as
follows:
3.
At
all
relevant
times,
the
Appellant
was
a
corporation
duly
incorporated
under
the
laws
of
Canada
and
was
a
Canadian-controlled
private
corporation
within
the
meaning
of
the
Income
Tax
Act
(Canada)
(the
“Act”).
4.
The
Appellant
carries
on
active
business
as
a
designer
and
manufacturer
of
satellite
components.
5.
Spar
Aerospace
Limited
(“Spar”)
was
awarded
a
contract
by
the
Canadian
government
to
design
and
manufacture
a
satellite
(“Radarsat”)
which
was
scheduled
to
be
launched
in
1994.
The
contract
between
the
two
parties
was
signed
on
January
26,
1990.
6.
Spar
issued
a
Request
for
Proposal
to
various
subcontractors
in
respect
of
the
design
and
manufacture
of
the
calibration
system,
receiver
system,
the
low
power
transmitter
and
the
phase
shifters
for
the
spacecraft
(collectively
the
“Components”).
7.
In
1989,
the
Appellant
was
selected
as
the
subcontractor
for
the
design
and
manufacture
of
the
components
subject
to
the
conditions
indicated
in
a
letter
of
intent
and
the
contract
with
Spar
dated
July
6,
1990
the
“Spar-Com
Dev
Contract”.
8.
The
Spar-Com
Dev
Contract
was
amended
6
times
in
writing.
There
were
no
other
written
amendments
to
that
contract.
9.
The
Appellant
delivered
the
last
components
required
under
the
contract
in
September
1994.
I
See
paragraphs
14
and
15
of
the
Partial
Agreed
Statement
of
Facts.
10.
In
total,
the
Appellant
had
received
a
total
amount
of
$28,350,000
(collectively
the
Spar
Payments)
arising
from
the
Spar-Com
Dev
Contract.
Evidence
at
Trial
The
Appellant
called
four
witnesses.
Those
witnesses
gave
their
evidence
in
a
straightforward
credible
manner
and
through
their
evidence
identified
and
commented
upon
the
documents
filed
as
exhibits.
The
first
witness
was
Ms.
Anita
Carol
Davis,
a
Vice
President
of
Com
Dev,
who,
for
the
period
in
question,
was
the
contract
administrator
for
the
Appellant
responsible
for
the
contract
that
developed
between
Spar
Aerospace
Limited
(“Spar”)
and
Com
Dev.
She
outlined
the
events
leading
to
the
involvement
of
Com
Dev
with
Spar.
Spar
entered
into
a
contract
with
Her
Majesty
The
Queen
(“Her
Majesty”)
in
January
of
1990
to
build
a
Radarsat
Satellite
to
allow
an
enhanced
monitoring
of
changes
in
the
environment
by
way
of
radar
images
of
the
earth’s
surface.
Towards
this
end,
after
preliminary
proposals,
Spar
asked
Com
Dev
to
manufacture
and
deliver
four
components
for
the
satellite.
The
contract
between
Spar
and
Com
Dev
was
on
a
firm
fixed
price
basis
that
provided
for
risk
management,
a
performance
guarantee
and
payment
on
a
milestone
result
oriented
basis.
The
witness
distinguished
this
contract
from
one
that
was
structured
on
a
cost
plus
basis,
where
risk
was
borne
by
the
contractor
not
the
subcontractor,
payments
were
not
based
on
results
and
profits
were
protected
within
a
cost
plus
structure.
She
further
explained
a
cost
plus
contract
was
usually
the
vehicle
applied
in
a
research
and
development
retainer
as
opposed
to
the
contract
before
the
Court
being
that
of
manufacturing
and
supplying
a
product.
From
Com
Dev’s
point
of
view
what
they
were
asked
to
do
was
to
research
and
develop
their
heritage
technology
to
complete
a
commercial
product
contract.
Spar
bought
a
product
with
sufficient
accompanying
information
supplied
by
Com
Dev
to
use
the
product
and
to
provide
a
historical
outline
to
track
the
product
from
design
to
flight
model,
that
is,
the
information
that
was
transferred
was
to
ensure
the
functionality
and
reliability
of
the
components.
The
second
witness,
Mr.
Bill
Chisholm,
was
the
hardware
programmer
for
Radarsat
employed
by
Spar.
This
individual
was
directly
involved
with
the
development
of
the
contract
with
Com
Dev
on
behalf
of
Spar.
His
evidence
indicated
that
Spar
believed
that
Com
Dev
had
sufficient
heritage
technology,
intellectual
property
and
knowledge
acquired
prior
to
the
contract
to
allow
Spar
to
conclude
the
Appellant
had
the
capability
to
perform
the
contract
in
its
entirety.
He
confirmed
the
relationship
between
Spar
and
Com
Dev
was
at
arm’s
length
and
at
times
was
not
always
cordial
as
the
cost
controls
imposed
by
the
Government
of
Canada
on
Spar
affected
the
relationship
that
Spar
had
with
Com
Dev.
Both
witnesses
described
and
discussed
their
respective
focus
and
conduct
in
relation
to
the
two
contracts:
the
first
between
Her
Majesty
and
Spar
and
the
second
between
Spar
and
Com
Dev.
There
was
no
direct
contractual
relationship
between
Her
Majesty
and
Com
Dev.
The
ultimate
or
originating
funding
of
the
project
as
between
Her
Majesty
and
Spar
was
from
the
Government
of
Canada.
As
between
Spar
and
Com
Dev
payments
on
the
contract
came
from
Spar.
The
project
was
phased
by
Spar
to
Com
Dev
to
meet
Her
Majesty’s
requirements
with
Spar,
that
is,
to
protect
the
integrity
of
the
project
against
risk
failure.
The
Government
of
Canada
in
its
contractual
arrangement
with
Spar
insisted
that
the
following
inclusion
be
in
contracts
between
subcontractors
and
Spar:
12.3
All
Technical
Information
and
Inventions
conceived
or
developed
or
first
actually
reduced
to
practice
in
performing
the
Work
under
this
Contract
shall
be
the
property
of
Her
Majesty,
and
the
Contractor
shall
have
no
rights
in
and
to
the
same
except
as
may
be
provided
by
Her
Majesty.
The
Contractor
shall
not,
without
the
express
written
permission
of
Her
Majesty,
divulge
or
use
such
Technical
Information
and
Inventions,
other
than
in
performing
the
Work
under
this
Contract,
and
shall
not
sell
other
than
to
SPAR
under
this
Contract,
any
articles
or
things
embodying
such
Technical
Information
and
Inventions.^
Spar
included
the
foregoing
clause
in
its
contract
with
Com
Dev,
but
also
included
the
following
diminution
modification
clause:
12.7
The
information
detailed
in
the
Contractor’s
letter
dated
April
19,
1990
is
considered
proprietary
to
the
Contractor
or
its
Subcontractors
as
the
case
may
be.^
The
letter
referred
to
in
clause
12.7
and
filed
as
an
exhibit
in
this
proceeding
reads
as
follows:
April
19,
1990
File:
5050
Ref.:
JB-1578
SPAR
Aerospace
Satellite
and
Communications
System
Division
21025
Trans
Canada
Highway
Ste.
Anne
de
Bellevue,
Quebec
H9X
3R2
Attention:
Mr.
Terry
Littlewood
Subcontracts
Manager
Subject:
Letter
to
be
referenced
in
Contract
S-700014
Article
12.7
Dear
Mr.
Littlewood:
The
following
Statement
of
Proprietary
Information
is
to
be
referenced
as
per
the
above
subject.
Statement
of
Proprietary
Information
In
accordance
with
the
conditions
of
the
RADARSAT
Contract
between
SPAR
Aerospace
and
COM
DEV,
S-700014,
Article
12
—
Intellectual
Properties
—
this
will
certify
that
all
equipments,
associated
Technical
Information
and
Technical
Documentation
to
be
generated
in
performance
of
the
Work
and
considered
deliverable
under
the
contract
will
utilize
computer
software,
processes,
methods,
techniques
and
know-how
in
existence
or
residence
with
COM
DEV
prior
to
effective
date
of
the
Contract.
Consequently,
the
intellectual
property
for
any
deliverable
computer
software,
processes,
methods,
techniques
and
know-how
in
existence
or
residence
within
COM
DEV
prior
to
effective
date
of
the
Contract
is
proprietary
to
COM
DEV
and
can
solely
be
used
for
the
purposes
of
the
RADARSAT
programme.
Yours
truly
[signature]
JOHN
BERRY
Contract
Administrator^
The
witness
from
Spar
indicated
Spar’s
full
approval
of
this
modification
inclusion
in
the
contract
between
Spar
and
Com
Dev
and
indeed
the
witness
was
the
one
who
recommended
its
inclusion.
This
witness
stated
from
his
point
of
view
what
Com
Dev
did
in
the
production
of
the
components
was
to
take
the
known
technologies
of
Com
Dev
that
were
part
of
its
internal
heritage
and
rearrange
them
into
the
contractual
product
components
for
Spar.
He
stated
at
no
time
through
the
rear-
rangement
process
did
Com
Dev
deliver
research
and
development
results
to
Spar
nor
were
any
research
or
development
results
expected.
The
next
witness
was
Dr.
Bertram
Blevis,
qualified
as
an
expert
in
the
space
industry
including
expertise
in
aerospace
and
telecommunications.
His
evidence
was
confined
to
what
were
normal
contractual
practices
in
the
space
industry
and
how
these
practices
related
to
the
activities
of
Com
Dev.
Further,
his
evidence
was
tendered
to
assist
in
the
understanding
of
the
Appellant’s
voluminous
documentation.
He
stated
the
component
products
provided
by
the
Appellant
under
the
contract
were
unique
and
had
to
be
developed
from
the
Appellant’s
technology
to
meet
specifications
not
previously
achieved,
to
interface
with
other
equipment
whose
own
specifications
were
changing
and
to
serve
applications
not
previously
addressed
and
to
be
space
qualified.
The
witness
distinguished
within
the
industry
two
types
of
contracts,
one
for
the
sale
of
goods
and
the
other
for
research
and
development.
The
expert
witness
reviewed
in
detail
several
distinguishing
contractual
factors
including
firm
fixed
pricing,
payment
schedules,
performance
guarantees
and
technology
protection.
Dr.
Blevis
found
in
this
case
the
components
delivered
and
the
accompanying
supporting
documentation
supplied
were
consistent
in
the
space
industry
with
a
contract
for
the
sale
of
a
product.
He
further
commented
that
the
information
supplied
(the
supporting
documents)
to
Spar
by
Com
Dev
were
not
consistent
with
the
reporting
of
results
normally
expected
in
a
research
and
development
contract.
The
last
witness
was
the
Chief
Financial
Officer
of
Com
Dev,
Mr.
David
Belbeck,
who
advised
the
Court
that
Com
Dev
suffered
a
$4,283,000
loss
on
the
contract.
He
also
identified
documentation
that
demonstrated
after
the
expiration
of
the
contract
that
Spar
proposed
to
buy
the
technology
from
Com
Dev
to
allow
Spar
to
build
Radarsat
II,
that
is,
to
perform
the
precise
function
that
Com
Dev
performed
for
Spar
in
Radarsat
I.
The
witness
also
confirmed
the
Appellant’s
attempt
to
seek
other
means
to
reduce
its
losses
by
claiming
compensation
from
the
Government
of
Canada
but
was
unable
to
do
so
because
there
was
no
contractual
relationship
between
Com
Dev
and
the
Government
of
Canada.
The
Appellant’s
Position
Com
Dev
states
that
the
Spar-Com
Dev
contract
was
for
the
delivery
of
a
product,
namely
the
components.
Com
Dev
did
not
perform
SRED
for
Spar
nor
did
they
deliver
any
SRED
information
to
Spar.
The
Component
Information
that
was
delivered
to
Spar
would
not
be
sufficient
for
Spar
or
anyone
retained
by
Spar
to
duplicate
the
components.
The
delivery
of
the
Component
Information
is
typically
required
by
a
purchaser
of
components
in
the
aerospace
industry
and
is
not
the
delivery
of
SRED.
The
Appellant
further
states
that
any
clauses
in
the
contract
that
appear
to
vest
a
proprietary
interest
in
research
or
development
to
Her
Majesty
were
modified
and
diminished
by
other
clauses.
The
contract
payments
made
to
Com
Dev
by
Spar
were
not
contract
payments
made
by
a
Canadian
government
and
were
not
amounts
paid
to
Com
Dev
for
SRED.
The
Appellant
concludes
the
amounts
paid
by
Spar
under
the
subcontract
with
Com
Dev
did
not
constitute
contract
payments
within
the
meaning
of
subsection
127(9)
of
the
Act
and
the
Appellant
is
entitled
to
an
ITC
claim
for
the
years
in
question
in
the
full
amount
of
the
qualified
expenditures
without
deduction.
The
Respondent’s
Position
The
Respondent
pleads
that
with
respect
to
the
Spar-Com
Dev
contract,
the
contract
speaks
for
itself.
The
Respondent
also
asserts
that
under
the
Spar-Com
Dev
contract,
the
Appellant
became
a
subcontractor
of
Spar
for
the
research,
design,
development,
analysis,
testing,
verification
and
delivery
of
subsystems
that
were
to
be
integrated
to
Radarsat
and
that
pursuant
to
the
Spar-Com
Dev
contract,
the
Appellant
was
required
to
perform
SRED
in
order
to
design,
development,
analyse,
test,
verify
and
deliver
subsystems
to
Spar.
The
intention
was
to
transfer
to
the
Government
of
Canada
the
intellectual
property
arising
from
the
entire
performance
of
the
Spar-Com
Dev
contract.
In
accordance
with
the
agreement,
the
Appellant
received
payments
from
Spar
in
the
aggregate
amount
of
$28,350,000
in
respect
of
the
expenditures
incurred
for
the
research,
design,
development,
analysis,
testing,
verification
and
delivery
of
the
subsystems
to
Spar.
The
Respondent
further
submits
that
the
Appellant’s
qualified
expenditures
incurred
pursuant
to
the
Spar-Com
Dev
contract
were
properly
reduced
by
the
aggregate
amount
received
from
Spar
as
the
overall
project
was
funded
by
the
Gov-
ernment
of
Canada.
The
reduction
of
the
qualified
expenditures
had
the
effect
of
reducing
the
ITCs
claimed
by
the
Appellant.
The
Respondent
also
asserts
the
project
was
fully
funded
by
the
Government
of
Canada
and
this
funding
was
directly
related
to
Com
Dev
through
Spar.
Issue
The
issue
is
whether
the
amounts
received
by
the
Appellant
from
Spar
under
the
Spar-Com
Dev
contract
represent
contract
payments
within
the
meaning
of
paragraph
(b)
of
the
definition
of
“contract
payment”
in
subsection
127(9)
of
the
Act.
Analysis
Section
37
of
the
Act
is
designed
to
encourage
scientific
research
in
Canada
(Consoltex
Inc.
v.
R.
(1997),
97
D.T.C.
724
(T.C.C.)).
The
tax
incentive
of
performing
SRED
in
Canada
is
twofold.
First,
SRED
expenditures
are
given
preferential
treatment
under
section
37.
Expenditures
that
qualify
under
section
37
are
fully
deductible
in
the
year
they
are
incurred
or
can
be
pooled
and
deducted
in
later
years.
Secondly,
an
ITC
is
available
under
subsection
127(5)
of
the
Act.
Subsection
127(5)
of
the
Act
allows
a
taxpayer
to
claim
a
deduction
for
an
amount
that
is
based
on
the
taxpayer’s
ITC
for
the
year.
The
ITC
for
the
year
is
defined
under
subsection
127(9)
of
the
Act.
The
definition
of
an
ITC
under
subsection
127(9)
of
the
Act
includes,
among
others,
a
percentage
of
a
taxpayer’s
“qualified
expenditures”
made
in
the
year.
The
term
“qualified
expenditure”
is
also
defined
under
subsection
127(9)
of
the
Act.
The
Respondent
admits
that
the
amounts
in
question
are
“qualified
expenditures”
of
the
Appellant
within
the
meaning
of
subsection
127(9)
and
would
qualify
for
the
ITC
under
subsection
127(9)
if
that
definition
was
read
without
reference
to
subsection
127(11.1)(c)
of
the
Act.
With
respect
to
the
definition
of
ITC
in
subsection
127(9)
of
the
Act,
paragraph
127(11.1
)(c)
reads
as
follows:
(11.1)
For
the
purposes
of
the
definition
“investment
tax
credit”
in
subsection
(9),
(c)
the
amount
of
a
qualified
expenditure
made
by
a
taxpayer
shall
be
deemed
to
be
the
amount
of
the
qualified
expenditure,
determined
without
reference
to
subsections
13(7.1)
and
(7.4),
less
the
amount
of
any
government
assistance,
non-government
assistance
or
contract
payment
in
respect
of
the
expenditure
that,
at
the
time
of
the
filing
of
the
return
of
income
for
the
taxation
year
in
which
the
expenditure
was
made,
the
taxpayer
has
received,
is
entitled
to
receive
or
can
reasonably
be
expected
to
receive.
(emphasis
added)
“Contract
payment”
is
defined
in
subsection
127(9)
of
the
Act.
For
amounts
that
became
payable
on
or
before
December
20,
1991,
the
definition
of
“contract
payment”
reads
as
follows:
“contract
payment”
means
(a)
an
amount
payable
by
a
person
resident
in
Canada
for
scientific
research
and
experimental
development
related
to
the
business
of
that
person,
(b)
an
amount,
other
than
a
prescribed
amount,
payable
by
a
Canadian
government,
municipality
or
other
Canadian
public
authority
or
by
a
person
exempt
from
tax
under
Part
I
by
virtue
of
section
149
for
scientific
research
and
experimental
development
to
be
performed
for
it
or
on
its
behalf,
or
(c)
an
amount
payable
by
a
person
not
resident
in
Canada
if
he
is
entitled
to
a
deduction
under
clause
37(
1
)(a)(ii)(D)
in
respect
of
the
amount.
In
the
Partial
Agreed
Statement
of
Facts,
the
parties
agreed
that
paragraph
(c)
of
the
definition
of
contract
payment
in
subsection
127(9)
did
not
apply.
At
the
submission
stage
of
the
trial,
the
Respondent
stated
that
he
would
not
make
an
argument
under
paragraph
(a)
of
the
definition
of
contract
payment
in
subsection
127(9).
As
a
consequence,
the
Appellant’s
and
the
Respondent’s
submissions
were
based
upon
paragraph
(b)
of
the
definition
of
contract
payment.
The
difference
between
the
wording
of
paragraph
(b)
for
amounts
payable
after
December
20,
1991
and
the
wording
of
paragraph
(b)
for
amounts
that
became
payable
on
or
before
December
20,
1991,
is
minimal
and
does
not
affect
the
determination
to
be
made
in
this
case.
To
qualify
as
a
contract
payment
under
paragraph
(/?)
in
subsection
127(9),
an
amount
must:
1)
be
payable
by
a
Canadian
government,
municipality
or
other
Canadian
public
authority
or
by
a
person
exempt
from
tax
under
Part
I
by
virtue
of
section
149;
and
2)
be
payable
for
SRED
be
performed
for
it
or
on
its
behalf.
Was
there
a
Contract
Payment
Payable
by
a
Canadian
Government,
Municipality
or
other
Canadian
Public
Authority
The
Respondent
submits
that
the
$28,350,000
was
paid
by
the
Government
of
Canada.
The
Respondent
claims
that
Spar
was
merely
a
general
contractor
and
that
all
payments
flowed
through
Spar
and
the
Respondent
also
places
emphasis
on
the
fact
that
Her
Majesty
is
mentioned
in
numerous
provisions
of
the
Spar-Com
Dev
contract.
The
Appellant
takes
the
position
that
Her
Majesty
and
Spar
entered
into
a
particular
contract
while
Spar
engaged
Com
Dev
by
way
of
a
separate
contract.
The
Appellant
further
claims
that
Her
Majesty
was
not
a
party
to
the
Spar-Com
Dev
contract
and
that
Spar
paid
Com
Dev
all
of
the
amounts
owing
to
the
Appellant
under
the
Spar-Com
Dev
contract.
The
Appellant
states
that
the
definition
of
contract
payment
as
set
out
in
paragraph
(b)
in
subsection
127(9)
of
the
Act
should
be
given
its
plain
and
ordinary
meaning
and
should
not
be
expanded
to
deal
with
indirect
arrangements.
While
the
Radarsat
project
was
ultimately
funded
by
the
Government
of
Canada
the
Appellant
did
not
have
any
direct
contractual
relationship
with
the
Government
of
Canada.
The
Appellant’s
contractual
arrangements
were
with
Spar.
The
evidence
establishes
that
Spar
bought
components
that
were
designed,
manufactured
and
delivered
by
the
Appellant.
The
contract
was
a
firm
fixed
price
contract,
with
milestone
payments
linked
to
production
results.
At
all
times
risk
was
in
the
hands
of
the
Appellant.
Although
Her
Majesty
was
mentioned
in
the
contract,
this
does
not
change
the
commercial
reality
of
the
relationship
between
the
parties.
Her
Majesty
had
the
right
to
monitor
the
progress
of
the
components
but
the
evidence
has
shown
that
this
arrangement
is
common
in
the
aerospace
industry
when
the
ultimate
success
of
the
overall
project
is
dependant
in
part
on
products
produced
by
subcontractors.
The
right
of
Her
Majesty
to
monitor
the
progress
of
the
components
does
not
change
the
fact
that
there
was
no
direct
contractual
relationship
between
Com
Dev
and
Her
Majesty.
Moreover,
there
was
no
evidence
that
Spar,
in
engaging
Com
Dev
under
the
Spar-Com
Dev
Contract,
acted
merely
as
Her
Majesty’s
agent.
Spar
had
a
contract
with
Her
Majesty
to
act
as
the
general
contractor
for
the
Radarsat
project.
It
was
Spar,
not
Her
Majesty,
who
paid
all
of
the
amounts
owing
to
Com
Dev
under
the
Spar-Com
Dev
contract.
When
Com
Dev
realized
it
was
going
to
incur
a
loss
on
the
Spar
contract,
Com
Dev
attempted
to
claim
compensation
from
the
Government
of
Canada
in
order
to
minimize
its
losses.
Com
Dev
however,
was
unable
to
do
so
because
there
was
no
contractual
relationship
between
Com
Dev
and
the
Government
of
Canada.
Any
request
for
financial
compensation
would
have
to
be
presented
to
Spar
who
had
the
option
of
submitting
the
request
to
the
Government
of
Canada.
Spar
chose
not
to
submit
the
request
for
financial
compensation.
It
is
the
Court’s
conclusion
that
the
payments
received
by
Com
Dev
from
Spar
arose
from
the
rights
and
obligations
established
under
the
Spar-Com
Dev
contract
and
were
not
contract
payments
from
Her
Majesty.
The
Respondent
also
makes
the
argument
that
with
respect
to
paragraph
127(11.1)(c)
of
the
Act,
the
words
“in
respect
of”
are
to
be
read
in
their
widest
possible
scope.
As
a
matter
of
legislative
interpretation,
the
plain
and
ordinary
meaning
of
words
should
be
applied
to
the
definition
of
a
“contract
payment’’.
The
words
“in
respect
of”
are
used
to
link
the
terms
government
assistance,
nongovernment
assistance
and
contract
payments
to
the
qualified
expenditures.
The
expansive
language
of
paragraph
127(11.1)(c)
was
not
used
in
paragraph
(b)
in
the
definition
of
contract
payment
in
subsection
127(9)
and
that
such
expansive
language
cannot
be
read
into
the
provision.
Was
there
a
Contract
Payment
Payable
for
Sred
on
Behalf
of
a
Canadian
Government
Although
the
Court
has
found
that
the
payments
received
by
Com
Dev
were
not
payable
by
a
Canadian
government,
the
Court
shall
also
consider
whether
the
payments
received
by
Com
Dev
were
payable
for
SRED.
The
evidence
indicates
that
the
clause
that
related
to
the
rights
Her
Majesty
received
as
to
“Technical
Information
and
Inventions
conceived
or
developed
or
first
actually
reduced
to
practice
in
performing
the
Work’’
(clause
12.3)
was
modified
by
clause
12.7.
The
effect
of
this
clause
at
a
minimum
severely
restricted
Her
Majesty’s
right
to
a
proprietary
interest
in
technical
information
and
inventions
under
the
contract.
It
is
these
potentially
conflicting
clauses
that
do
not
allow
the
Spar-Com
Dev
contract
to
simply
speak
for
itself.
Therefore,
the
Court
is
not
constrained
by
the
parol
evidence
rule
and
may
look
beyond
the
contract
and
examine
the
collateral
evidence
surrounding
the
contract.
Under
the
contract
between
Spar
and
Com
Dev,
Com
Dev
retained
rights
to
technology
that
Com
Dev
had
at
the
inception
of
the
contract.
The
work
done
in
this
retained
technology
was
as
previously
reviewed
a
rearrangement
of
the
proprietary
interests
of
the
Appellant
to
meet
the
component
demands
of
Spar.
The
actions
of
the
parties
under
the
contract
supports
the
stated
intention
of
the
parties
given
in
evidence,
that
is,
Spar
showed
no
interest
in
the
technology
and
indeed
did
attempt
later
to
buy
the
technology
from
Com
Dev
for
the
Radarsat
II
project.
There
was
no
evidence
that
Her
Majesty
asserted
or
attempted
to
obtain
any
of
the
intellectual
property
that
the
Respondent
now
maintains
is
the
property
of
Her
Majesty.
In
support
of
the
argument
that
the
intellectual
property
in
question
belonged
to
Her
Majesty,
the
Respondent
produced
an
annotation
on
some
technical
documentation
(see
Exhibit
A-l,
tabs
28
to
34),
an
acknowledgement
at
the
end
of
a
paper
presented
by
Com
Dev
to
a
space
conference
(Exhibit
A-1
Supplemental,
tab
9,
page
130),
and
an
internal
correspondence
from
Com
Dev
warning
Com
Dev
employees
about
using
information
that
rightfully
belongs
to
other
companies
in
documents
submitted
to
Spar
(Exhibit
A-1,
tab
37).
It
is
the
Court’s
finding
that
this
evidence
does
not
change
this
Court’s
review
of
the
evidence
in
relation
to
the
contractual
relationship
and
intention
of
the
parties.
Clearly,
the
evidence
indicates
that
there
were
no
patentable
results
from
the
work
performed
by
the
Appellant
in
the
production
of
the
components.
Com
Dev
retained
all
rights
to
the
technology
previously
developed.
Com
Dev
had
the
heritage
and
ability
to
further
rearrange,
research
and
develop
their
existing
technology
to
meet
the
contractual
component
purchase
of
Spar.
All
the
witnesses
confirmed
the
position
that
Spar
did
not
intend
to
buy
nor
did
it
buy
on
behalf
of
the
Government
of
Canada
the
research
and
development
with
respect
to
the
purchased
components.
I
conclude,
in
this
case,
the
contractual
relationship
based
on
a
fixed
firm
price
for
the
purchase
of
the
components
did
not
include
the
purchase
of
SRED.
Conclusion
The
amounts
in
question
are
“qualified
expenditures”
within
the
meaning
of
subsection
127(9).
The
amounts
paid
by
Spar
to
Com
Dev
do
not
constitute
contract
payments
within
the
meaning
of
paragraph
(b)
in
subsection
127(9)
of
the
Act.
The
Appellant
is
entitled
to
claim
a
deduction
for
ITCs
for
the
years
in
question
as
calculated
in
accordance
with
subsection
127(5)
without
reduction
pursuant
to
paragraph
127(11.1)(c)
of
the
Act.
Decision
The
appeals
are
allowed
and
the
assessments
are
referred
back
to
the
Minister
of
National
Revenue
for
reconsideration
and
reassessment
on
the
basis
that
the
Appellant
is
entitled
to
investment
tax
credits
without
a
reduction
pursuant
to
paragraph
127(
11.1
)(c)
of
the
Act.
The
Appellant
is
entitled
to
its
costs.
Appeal
allowed.