Rip,
T.C.C.J.:—Canalerta
Technologies
Inc.
("
Canalerta")
has
appealed
assessments
issued
in
accordance
with
Part
VII
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
denying
its
request
for
refunds
of
tax
("Part
VII
refund")
as
set
out
in
the
corporation's
Part
VII
Tax
Returns
for
1986
and
1987.
The
Minister
of
National
Revenue
('Minister"),
the
respondent,
determined
the
appellant's
Part
VII
refunds,
as
defined
by
subsection
192(2),
and
its
refundable
Part
VII
tax
on
hand,
as
defined
by
subsection
192(3),
to
be
nil
since
expenditures
incurred
by
the
appellant
in
1986
and
1987
were
not
“qualified
expenditures"
within
the
meaning
of
subsections
127(9)
and
37(1)
of
the
Act.
In
the
respondent's
view,
the
appellant,
at
the
relevant
times,
did
not
carry
on
“scientific
research
and
experimental
development"
within
the
meaning
of
subsection
2900(1)
of
the
Regulations
to
the
Act
(”
Regulations").
The
appellant
claimed
it
carried
out
research
and
experimental
development
in
two
areas.
The
first
area
was
with
respect
to
application
of
electromagnetic
radiation
to
pre-impregnated
matrix
materials
to
effect
rapid
and
uniform
curing
of
polyester
and
other
resin
plastics.
Fibreglass
matting,
for
example,
would
be
pre-impregnated
with
an
epoxy
resin
in
a
manner
that
such
matting
could
be
moulded
readily
and
easily
into
thicker
structural
components
and
then
cured
uniformly
and
quickly
on
a
production
basis
by
the
application
of
electro-magnetic
radiation
directly
to
the
pre-impregnated
fibreglass
matting.
This
technology
would
avoid
difficulties
encountered
in
moulding
and
curing
on
a
uniform
basis,
without
damage,
bulky
fibreglass
composite
resin
parts.
I
refer
to
this
area
as
electro-magnetic
radiation".
The
second
area
of
research
claimed
by
the
appellant
was
in
the
technology
of
electro-muscular
stimulation
and
transcutaneous
nerve
stimulation
towards
the
advancement
of
new
therapeutic
applications.
I
refer
to
this
area
of
activity
as
"muscle
and
nerve
therapy”.
Preliminary
matters
At
the
commencement
of
the
trial
in
these
appeals,
counsel
for
the
Minister
acknowledged
that
in
relation
to
the
first
area,
electro-magnetic
radiation,
Canalerta
did
conduct
scientific
research
and
experimental
development
within
the
meaning
of
section
2900
of
the
Regulations.
However,
the
parties
could
not
agree
as
to
the
allocation
of
the
expenditures
attributable
to
each
project.
Counsel
for
the
appellant,
Richard
B.
Jones,
then
applied
to
the
Court
to
allow
the
appeals
on
the
basis
that
the
concession
by
the
Minister
put
him
in
an
untenable
position:
the
pleadings
do
not
refer
to
any
allocation
of
expenditures
and
he
was
not
prepared
to
lead
evidence
as
to
such
allocation.
In
Mr.
Jones'
view,
the
appeals
are
“all
or
nothing”
appeals
and
since
the
Minister
conceded
on
the
electro-magnetic
radiation
issue
the
appellant's
appeals
must
succeed
on
the
muscle
and
nerve
therapy
issue
as
well.
I
rejected
appellant's
application.
Litigation
is
not
a"gotcha"
contest
where
a
concession
by
a
party
of
one
issue
affects
his
or
her
ability
to
defend
his
or
her
position
on
another
issue
unless,
of
course,
the
two
issues
are
related,
which
is
not
the
situation
at
bar.
To
have
allowed
such
an
application
would
destroy
any
willingness
by
a
party
to
an
appeal
to
consider
any
settlement
of
litigation
and
would
promote
unnecessary
litigation.
It
is
clear
from
the
pleadings
and
the
evidence
that
in
assessing,
the
Minister
considered
only
whether
or
not
Canalerta
carried
on
"scientific
research
and
experimental
development"
within
the
meaning
of
section
2900
of
the
Regulations.
No
consideration
was
given
to
allocating
expenses
between
the
electro-magnetic
radiation
and
the
muscle
and
nerve
therapy
activities
the
appellant
claims
it
carried
on;
that
was
not
an
issue
until
trial.
If
I
find
the
muscle
and
nerve
therapy
activity
constituted
scientific
research
and
experimental
development
the
matter
will
be
concluded.
The
assessments
were
wrongly
made
and
the
appellant
will
have
the
right
to
a
refund
of
Part
VII
tax.
However,
at
trial
I
informed
counsel
that
if
I
find
the
muscle
and
nerve
therapy
activity
was
not
scientific
research,
the
proper
course
would
be
to
allow
the
appeals
and
refer
the
assessments
back
to
the
Minister
to
consider
the
allocation
of
the
expenses
between
the
two
activities,
which
he
had
never
done,
and
to
reconsider
the
calculation
of
the
Part
VII
refund
on
the
basis
that
the
electro-magnetic
radiation
was
scientific
research.
(See
Kit-Win
Holdings
(1973)
Ltd.
v.
The
Queen,
[1981]
C.T.C.
43,
81
D.T.C.
5030
at
page
46
(D.T.C.
5031-32),
per
Cattanach,
J.
where
pleadings
were
accordingly
amended
with
an
analogous
result.)
I
informed
counsel
that
if
the
appellant
did
not
agree
with
the
respondent's
allocation
of
expenses
I
would
hear
evidence
on
this
matter
at
a
later
date.
However,
the
parties
should
bear
in
mind
that
David
Walter
Horst
("Horst"),
the
appellant's
only
witness,
testified
in
cross-examination
that
he
could
neither
remember
nor
estimate
the
expenses
for
each
of
the
two
areas
and
all
he
could
do
was
to
"guesstimate"
an
allocation.
Evidence
The
issue
before
me
is
to
determine
whether
any
muscle
and
nerve
therapy
activity
carried
on
by
the
appellant
constituted
scientific
research
and
experimental
development
within
the
meaning
of
section
2900
of
the
Regulations
to
the
Act.
Horst
is
a
building
contractor
in
Waterloo,
Ontario.
In
the
course
of
discussing
a
potential
construction
project
in
1985
he
was
introduced
to
one
Dr.
Mario
d'Alerta
("d'Alerta"),
a
“technical
person”
employed
by
or
associated
with
the
potential
client.
The
project
was
not
proceeded
with
but
d'Alerta
discussed
with
Horst
the
work
he
was
to
have
undertaken
and
his
background.
Horst
was
impressed
with
d'Alerta's
background.
In
his
resumé
d'Alerta
claimed
to
be
a
medical
doctor,
receiving
a
degree
from
the
University
of
Havana,
Cuba,
who
had
practised
in
Miami,
Florida.
He
informed
Horst
that
he
was
also
an
American
citizen
and
had
worked
as
a
consultant
to
the
U.S.
National
Aeronautics
and
Space
Agency
("NASA").
His
resumé
also
states
that
he
is
a
professional
engineer
and
had
received
Ph.D.
degrees
in
cybernetics
from
University
of
Havana,
in
Motion
Pictures
from
University
of
Notre
Dame,
Paris,
France
and
in
Education
from
the
National
University
of
José
Marti,
Havana.
D'Alerta
claimed
he
had
developed
novel
theories
in
the
two
areas
of
electro-magnetic
radiation
and
rehabilitation
and
proposed
Horst
and
his
associates,
who
included
a
professional
engineer,
finance
the
research
of
his
theories.
Horst
and
his
associates
agreed
to
finance
the
research
and
at
the
end
of
August,
1985
caused
the
appellant,
635816
Ontario
Inc.,
to
be
incorporated
to
be
used
as
the
vehicle
by
which
d'Alerta
would
carry
on
his
research.
By
Articles
of
Amendment
dated
September
12,
1985,
the
name
of
the
corporation
was
changed
to
Canalerta
Technologies
Inc.
The
shareholders
of
the
appellant
were
the
source
of
the
appellant's
funds
to
carry
on
the
activities.
On
September
10,
1985
the
appellant
entered
into
an
employment
contract
with
d'Alerta,
conditional
upon
him
receiving
a
work
permit.
D’Alerta
agreed
to
devote
his
full
time
and
attention
"to
the
business
of
the
company
being
in
charge
of
all
research
and
development
activities”.
He
also
had
a
right
to
acquire
up
to
40
per
cent
of
the
issued
shares
of
the
appellant,
the
same
amount
as
Horst.
D'Alerta
received
a
permit
to
work
in
Canada
and
the
appellant
leased
facilities
in
Waterloo,
Ontario
to
enable
it
to
carry
on
its
activities.
A
secretary
and
technical
assistants
were
also
hired.
D'Alerta
transferred
equipment
and
technology
to
Canalerta
in
exchange
for
shares.
D'Alerta
used
the
equipment
and
acquired
the
technology
while
working
in
the
United
States.
The
equipment
included
a
transcutaneous
nerve
stimulator,
a
bio-electric
muscle
stimulator,
a
transcutaneous
nerve
stimulator
(different
model)
and
a
pulse
meter.
The
technology
consisted
of
"certain
inventions
relating
to
the
moulding
of
reinforced
plastics
utilizing
radio
frequency
radiation”
and
"certain
electrical
bio-medical
diagnostic
and
treatment
technology".
Horst
stated
that
d'Alerta
told
him
the
equipment
consisted
of
unique
pieces
built
especially
for
him,
but
in
fact
it
consisted
of
modifications
of
available
equipment.
Horst
was
the
first
president
of
Canalerta
and
later
on
was
its
secretarytreasurer.
Horst
said
he
would
visit
Canalerta's
facilities
"two
or
three
times
a
week,
sometimes
daily,
at
least
once
per
week
.
.
.”.
He
insisted
he
maintained
a“
"day
to
day
awareness
of
what
was
going
on.”
It
was
Horst's
understanding
that
d'Alerta
worked
in
Waterloo
on
the
two
projects.
He
said
he
“observed
d'Alerta
getting
information
from
various
places".
D’Alerta
did
“lots
of
reading”.
On
a
regular
basis
d’Alerta,
Horst
and
the
other
investors
would
have
discussions
"to
see
what
he
(d'Alerta)
was
establishing".
D'Alerta
contracted
the
Ferro
Corporation
in
Massachusetts
to
obtain
preimpregnated
materials.
Ferro
Corporation,
according
to
Horst,
is
a
leading
manufacturer
of
such
product
and
provided
product
to
d'Alerta.
D'Alerta
worked
on
the
electro-magnetic
radiation
project
in
the
appellant's
laboratory
which
consisted
of
a
room
with
a
counter
top,
shelving
units
and
the
equipment.
During
1985
and
1986,
d'Alerta
would
frequently
verbally
explain
his
work
to
the
investors.
In
1986,
Horst
testified,
the
investors
requested
d'Alerta
to
put
forward
a
written
outline
of
his
work
and
how
he
intended
to
proceed.
D’Alerta
complied
with
the
request
and
his
written
explanations
were
produced
into
evidence.
This
material
consisted
of
five
protected"
summaries
and
reports.
The
first
summary
consisted
of
66
pages
and
included
the
following:
(i)
Preimpreg
technical
data,
"Mobaloy
ERS",
produced
by
Ferro
Corporation;
(ii)
Ciba-Geigy
Journal,
April,
1986—"New
high
temperature
tool
hardener
from
Ren";
(iii)
Re-print
from
Plastics
Technology,
December,
1965
“Controlled
flow
impreg
solves
Helicopter
Canopy
Problem";
(iv)
Re-print
from
1965
issue
of
modern
plastics
"Preimpreg
licks
tough
wiring
problem”;
(v)
Article
by
Grant
Brown,
technical
director
and
Charles
Andrew
Murray,
technical
consultant,
Cordo
Division
of
Ferro
Corporation
“
New
Technique
for
Checking
cur
of
B-stage
material"
(vi)
Re-print
from
modern
Plastics,
October,
1965"Doing
the
tough
jobs
in
space";
(vii)
Re-print
from
Plastics,
Design
and
Processing,
May,
1965
D.A.P.
impreg
Mouldings
Make
Intricate
Designs
Practical
for
Short
Run
Parts
at
Cessina
Aircraft";
(viii)
Summary
of
test
results,
Dr.
d'Alerta,
September
8,
1986;
(ix)
Report
No.
1
material
testing
of
a
fibre
glass
and
epoxy
composite",
February
1987,
prepared
by
Geotechnical
Resources
Ltd.
on
behalf
of
Canalerta
Technologies
Inc.;
These
documents
relate
to
the
electro-magnetic
radiation
activity
of
the
appellant
which
was
accepted
by
the
respondent
as
"scientific
research
and
experimental
development".
There
is
therefore
no
need
to
consider
this
material.
The
four
other
reports
which
concerned
efforts
improving
therapy
for
muscle
and
nerve
damage
are:
(i)
a
36
page
ITCM
report
entitled
"Electro-chemical
modulation
of
cell
and
tissue
function"
by
Dr.
Mario
d'Alerta;
(ii)
an
11
page
report
on
ITMC
entitled
“Scientific
Explanation
and
basic
principles
supporting
the
ITMS
System”
by
Dr.
Mario
d’Alerta;
(iii)
a
19
page
report
of
the
ITMC
setting
forth
background
neurological
concerns
and
overview
of
ITMC
system;
and
(iv)
a
132
page
report
by
Canalerta
Technologies
Inc.
setting
forth
the
model
of
the
biomedical
micro
processor.
The
first
of
these
four
reports,
which
is
attributed
to
d'Alerta,
states,
at
the
end
of
the
report
it
was
“taken
from
Chapter
12
of
Mechanics
of
Growth
Control,
Robert
O.
Becker,
ed.,
Charles
C.
Thomas,
Springfield,
Illinois,
1981”.
Horst
could
not
state
with
any
degree
of
certainty
that
this
was
an
original
work
of
d'Alerta
and
it
appears
to
me
to
be
a
photostatic
copy
of
the
publication
to
which
it
is
attributed.
On
the
evidence
before
me
I
cannot
accept
this
report
as
a
work
emanating
from
d'Alerta.
The
second
of
the
four
reports,
Horst
admits,
does
not
deal
with
electrochemistry
but
with
something
called
International
Telemetric
Medical
Centre
(”
ITMC")
system.
The
ITMC
system
was
d'Alerta's
representation
to
the
investors
of
how
his
theory
could
be
applied
to
the
market
place;
the
term
ITMC
was
coined
by
d'Alerta.
This
report
contains
his
explanations
of
the
cellular
composition
of
the
human
body,
the
structure
of
the
atom
and
the
position
of
atomic
particles,
electrolytes,
polarity
of
the
human
body
and
stimulation
of
the
nervous
system,
nerve
stimulation,
nerve
impulse,
stimulation
of
enervated
muscle,
effects
of
the
electrical
muscular
contractor,
electrical
stimulation
and
his
theory.
The
report
appears
to
explain
various
functions
but
here
too
there
is
no
evidence
of
any
work
undertaken
by
d'Alerta.
The
third
report
contains
a
"considerable"
number
of
extracted
copies
from
other
publications,
Horst
acknowledged.
It
also
includes
a
sketch
or
layout
of
d'Alerta's
pain
treatment
centre,
a
market
analysis
and
1984
medical
form.
The
last
report,
entitled
Biomedical
Microprocessor,
Horst
said,
was
produced
by
d'Alerta
while
an
employee
of
Canalerta.
The
report
contains
sketches
of
what
would
appear
on
a
computer
to
assist
a
medical
practitioner
in
applying
d'Alerta's
work.
According
to
Horst,
this
report
describes
a
medical
diagnosis
and
treatment
system
to
be
operated
by
a
physician
and
contains
specifications
for
the
creation
of
an
interactive
software
program.
The
proposed
computer
system
would
be
effective
only
if
the
muscle
and
nerve
therapy
theory
project
of
d'Alerta
did
in
fact
have
application,
Horst
acknowledged.
In
cross-examination,
Horst
stated
that
this
report
was
an
attempt
by
d'Alerta
to
develop
his
muscle
and
nerve
therapy
theory”.
.
.
to
bring
(it)
.
.
.
into
a
lab
setting".
This
program
was
never
tested
by
d'Alerta.
In
my
view
this
report
describes
how
a
program
may
work
but
there
is
no
evidence
that
any
effort
was
put
forth
to
determine
whether
the
basic
theory
underlying
this
program
was
practical.
D’Alerta
claimed
to
have
done
much
of
the
work
on
muscle
and
nerve
therapy
while
with
NASA,
before
coming
to
Canada,
and
at
clinics
in
Miami.
He
arranged
to
visit
with
Horst
the
Kennedy
Space
Centre
in
Florida
as
well
as
clinics
in
the
Miami
area
where
he
had
previously
worked.
Horst
testified
that
d'Alerta
introduced
him
to
medical
staff
of
the
clinics
and,
at
NASA,
where
he
had
security
clearance,
his
questions
were
answered
without
any
reservation.
At
NASA,
d'Alerta
discussed
his
therapeutic
work
with
several
people
and
introduced
Horst
to
various
officials.
Horst
said
he
came
away
from
NASA
with
the
feeling
d’Alerta
was
“legitimate”;
however
he
could
not
obtain
confirmation
d’Alerta
had
graduated
in
medicine
from
the
University
of
Havana
or
that
he
had
worked
at
the
University
of
California
at
Los
Angeles
("UCLA")
as
he
claimed.
Horst
said
that
with
respect
to
UCLA,
the
report
he
received
was
that
such
information
was
"classified";
d'Alerta
had
previously
informed
Horst
his
work
at
UCLA
was
classified.
At
this
stage,
Horst
concluded,
"we
had
confidence
in
him
.
.
.
much
of
his
past
had
been
confirmed”.
Horst
recalled
d'Alerta
performing
at
least
two
applications
of
muscle
and
nerve
therapy.
One
of
Horst's
fellow
investors,
Richard
Kline
("Kline"),
was
“intrigued”
with
d'Alerta's
ideas
due
to
his
son's
muscular
problems.
D'Alerta
treated
Kline's
son
and
according
to
Horst
the
son
believes
the
treatment
was
beneficial.
At
another
time,
a
friend
of
Kline’s
son
who
was
in
a
motorcycle
accident
and
confined
to
a
wheelchair
sought
help
and
was
treated
by
d’Alerta.
The
friend,
again
according
to
Horst,
enjoyed
benefit
from
the
treatment.
However
Horst
and
his
co-investors
were
of
the
view
it
was
premature
for
d'Alerta
to
treat
humans
and
requested
he
stop
such
treatments.
In
cross-examination
Horst
stated
d'Alerta
wrote
up
his
ideas
for
a
computer
program,
documenting
his
theory,
in
the
132
page
report.
However,
except
for
working
with
Kline’s
son
and
his
friend,
d'Alerta
did
no
laboratory
research
with
respect
to
the
project
of
electrical
stimulation
to
rehabilitate
muscles
on
humans.
D'Alerta
simply
wrote
reports.
"That
is
the
work”,
Horst
declared.
Horst
stated
that
the
shareholders
of
Canalerta
wished
to
expose
d'Alerta
to
areas
where
he
could
perform
his
work,
in
particular
a
medical
environment.
Arrangements
were
made
for
him
to
meet
medical
staff
at
Wellesley
Hospital
in
Toronto.
He
met
doctors
at
the
hospital
but,
said
Horst,
he
would
stress
the
results
of
his
work
or
his
theories
with
them.
D'Alerta
insisted
that
any
work
on
muscle
and
nerve
therapy
be
done
by
himself
without
any
assistance.
Horst
revealed
antagonism
was
thus
built
up
and
he
and
his
fellow
investors
found
themselves
in
a
difficult
situation.
Sometime
in
1986,
Kline
brought
to
d'Alerta's
and
Horst's
attention
an
article
from
the
April,
1986
issue
of
"Discover"
magazine.
The
article
discussed
the
claim
of
Dr.
Bjôrn
Nordenstrôm
("
Nordenstrôm"),
a
Swedish
radiologist,
to
have
found
in
the
human
body
electrical
activity
that
is
the
foundation
of
the
healing
process.
Kline
had
d’Alerta
attend
a
conference
in
Stockholm
where
he
arranged
for
d’Alerta
to
meet
Nordenstrom,
and
in
fact
they
did
meet
and
discuss
their
theories,
said
Horst.
By
May,
1987,
Horst
and
his
fellow
investors
caused
the
appellant
to
cease
operations.
The
electro-magnetic
radiation
work
was
abandoned
because
the
appellant
concluded
that
effective
patent
protection
could
not
be
obtained.
Discussions
with
staff
at
Wellesley
Hospital
and
with
other
medical
practitioners
resulted
in
the
investors
realizing
d'Alerta's
attitude
and
lack
of
cooperation
with
others
would
cause
the
muscle
and
nerve
therapy
work
to
come
to
no
good
conclusion.
"D'Alerta
was
unwilling
to
co-operate”,
said
Horst,
"and
.
.
.
led
us
to
cease
.
.
.
[carrying
on]
.
.
.
the
project".
In
Horst's
view
the
"proprietary
and
secret
domain
in
d'Alerta's
mind
couldn't
be
changed
.
.
.
[he]
.
.
.
couldn't
agree
to
co-operate
.
.
.
[and]
.
.
we
agreed
to
part
company".
D'Alerta
left
Canada.
Submissions
This
appeal
turns
on
whether
or
not
the
activities
conducted
by
the
appellant
during
1986
and
early
1987
with
respect
to
muscle
and
nerve
therapy
constituted
“scientific
research
and
experimental
development”
within
the
meaning
of
section
2900
of
the
Regulations
to
the
Act.
If
such
activities
fall
within
that
meaning,
the
appellant
will
be
successful
in
its
appeal.
Subsection
2900(1)
reads,
in
part,
as
follows:
(1)
For
the
purposes
of
this
Part
and
paragraphs
37(7)(b)
and
37.1(5)(e)
of
the
Act,
“scientific
research
and
experimental
development"
means
systematic
investigation
or
search
carried
out
in
a
field
of
science
or
technology
by
means
of
experiment
or
analysis,
that
is
to
say,
(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)
development,
namely,
use
of
the
results
of
basic
or
applied
research
for
the
purpose
of
creating
new,
or
improving
existing,
materials,
devices,
products
or
processes,
and,
where
such
activities
are
undertaken
directly
in
support
of
activities
described
in
paragraph
(a),
(b)
or
(c),
includes
activities
with
respect
to
engineering
or
design,
operations
research,
mathematical
analysis
or
computer
programming
and
psychological
research.
.
.
.
Appellant’s
argument
Counsel
analyzed
subsection
2900(1)
to
determine
what
is
meant
by
"scientific
research
and
experimental
development”.
He
concluded
that
the
semantics
of
the
definition
suggest
that
if
a
taxpayer
qualifies
under
any
of
the
alternative
definitions
of
basic
research,
applied
research
or
development
he
is
Carrying
on
“scientific
research
and
experimental
development".
He
stated
that
his
client
was
carrying
on
applied
research.
Canalerta's
counsel
cited
Steinman
v.
M.N.R.
(1952),
7
Tax
A.B.C.
255,
52
D.T.C.
415
at
page
262
(D.T.C.
419)
and
Partington
v.
Attorney
General
(1869),
L.R.
4
H.L.
100
at
page
122
per
Lord
Cairns
in
support
of
the
principle
that,
in
dealing
with
the
construction
of
taxation
statutes,
if
the
taxpayer
is
caught
within
the
strict
words
of
the
statute
then
he
will
be
taxed
regardless
of
the
court's
view
of
equity.
Similarly,
where
the
taxpayer
seeks
a
deduction,
he
must
come
within
the
words
of
the
statute.
Thus,
if
his
client
is
to
succeed,
counsel
stated,
he
must
show
that
his
client's
activities
clearly
fall
within
the
strict
words
of
the
definition
contained
in
subsection
2900(1).
Appellant's
counsel
conceded
that
his
client
does
not
claim
"d'Alerta
ever
did,
during
the
course
of
his
employment
with
it,
experimental
work
in
the
application
of
his
claimed
therapeutic
utilization
of
electrical
stimulations
to
the
human
body”.
Counsel
stated,
"the
fact
that
d’Alerta
did
no
experimental
work,
no
tangible
physical
work
with
recording
of
data
and
results”
is
not
an
issue.
What
activities
did
Canalerta
carry
on
in
1986
and
1987
which
one
may
reasonably
conclude
constitute
scientific
research
and
experimental
development,
in
particular
applied
research,
within
the
meaning
of
subsection
2900(1)?
Its
counsel
described
d'Alerta's
activities
as
follows:
.
.
.
Dr.
d'Alerta
apparently
sought
to
assemble
data,
to
assemble
prior
art,
to
study
the
literature,
to
study
this
field,
to
think,
contemplate
and
meditate
upon
the
work
that
he
had
done
in
Miami
on
what
he
believed
were
healing,
curative
processes
attributable
to
electromuscular
treatments,
that
he
applied
to
patients.
As
counsel
for
Canalerta
explained,
it
was
a
known
art
in
1986
and
1987
to
apply,
by
means
of
conductive
pads
fixed
to
different
portions
of
the
human
body,
a
pulsed
electrical
impulse.
However,
he
contended
that
at
that
time
it
was
not
known
that
such
technology
had
important
therapeutic
benefits,
a
fact
upon
which
“Dr.
d'Alerta,
by
happenstance,
good
luck,
mere
misfortune,
kismet,
whatever,
in
fact,
had
stumbled
upon.
.
.
.”
Counsel
for
the
appellant
emphasized
that
d'Alerta
carried
on
his
work
by
means
of
analysis.
He
suggested
"the
thoughtful
assembly
of
prior
known
facts,
the
consideration
of
the
logical
relationships
between
those
prior
known
facts,
the
analysis
of
those
prior
known
facts
.
.
.
the
detection
of
errors
within
those
prior
known
facts,
and
the
assembly
of
that
into
a
reasoned
presentation
can
well
be
of
the
very
essence
of
scientific
research
and
experimental
development.
It
is
certainly
work
.
.
.
it
is
.
.
.
with
a
specific
practical
application
in
view
.
.
.
it
.
.
.
is
analysis
.
.
.”.
Finally
he
declared
"experiment
is
the
gathering
of
data
or
the
testing
of
hypotheses,
but
the
analysis
of
data
and
the
formulation
of
hypotheses
are
equally
vital,
integral
parts
of
the
process
of
scientific
research
and
experimental
development”.
Respondent's
argument
In
his
submission
that
Canalerta's
activities
did
not
constitute
scientific
research
and
experimental
development,
counsel
for
the
respondent
cited
several
reported
cases
where
this
Court
considered
whether
a
particular
activity
fell
within
the
subsection
2900(1)
definition
of
that
term.
In
Sass
Manufacturing
Ltd.
v.
M.N.R.,
[1988]
1
C.T.C.
2524,
88
D.T.C.
1363
(T.C.C.),
Sarchuk,
J.,
at
page
2535
(D.T.C.
1371),
stated
the
test
to
determine
whether
an
activity
constitutes
scientific
research
or
experimental
development
within
the
meaning
of
subsection
2900(1)
as
follows:
In
my
view,
Regulation
2900
requires
an
appellant
to
adduce
cogent
evidence
of
such
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.
There
is
no
evidence
of
such
an
approach
in
the
case
at
bar,
either
in
the
context
of
applied
research
or
development.
The
appeal
on
this
issue
cannot
succeed.
Counsel
suggested
Sass
was
dismissed
because
the
learned
trial
judge
found
that
the
activities
undertaken
by
that
appellant
fell
short
of
meeting
the
criteria
set
out
in
subsection
2900(1)
since
there
was
no
cogent
evidence
of
a
systematic
investigation
or
of
controlled
experiments,
of
highly
accurate
measurements,
of
testing
of
theories
against
empirical
evidence.
Counsel
argued
that
it
is
not
the
intention
of
the
appellant
that
governs.
The
words
of
paragraph
37.1(6)(a)
of
the
Act
require
that
an
expenditure
must
be
of
a
Current
nature
on
scientific
research
and
experimental
development
directly
undertaken
by
or
on
behalf
of
the
taxpayer.
To
support
this
contention,
counsel
referred
to
Revelations
Research
Corp.
v.
M.N.R.,
[1992]
1
C.T.C.
2136,
92
D.T.C.
1036
(T.C.C.)
in
which
Christie,
A.C.J.
dismissed
the
appeal
of
a
taxpayer
who
had
some
ideas
that
he
believed
might
be
fruitful,
yet
did
not
have
a
plan
of
how
he
was
going
to
go
about
putting
them
into
action
and
did
not
undertake
the
kind
of
systematic
investigation,
search,
analysis
or
controlled
experiments
as
required
in
Sass.
At
page
2144
(D.T.C.
1043)
of
his
reasons
for
judgment,
Christie,
A.C.J.
concluded:
.
.
.
it
has
not
been
established
that
there
was
any
systematic
investigation
or
research
carried
out
of
the
nature
described
in
Sass
Manufacturing
Ltd.
Finally
counsel
compared
the
facts
in
Satellite
Earth
Station
v.
M.N.R.,
[1991]
1
C.T.C.
2416,
91
D.T.C.
337
(T.C.C.)
with
those
in
the
case
at
bar.
In
Satellite,
the
witness
described
the
activities
of
the
appellant
in
the
following
manner
at
page
2419
(D.T.C.
340):
Our
research
effort
wasn't
what
you
would
characterize
as
being
high
technology
by
any
means.
We
were
working
initially
out
of
a
converted
pig
barn
and
other
buildings
on
a
farm,
a
chicken
coop.
Much
of
our
work
was
actually
done
by
taking
bits
of
paper
and
drawing
out,
sketching
out
various
components.
We
did
not
use
a
methodology
that
might
be
followed
by
the
Spar
Aerospaces
or
by
the
big
firms.
Often
it
was
a
case
of
going
to
the
blackboard
or
taking
the
chalk
and
writing
on
the
shop
floor,
sketching
out
different
ideas
and
hypotheses.
You
actually
had
to
try
them.
Bonner,
T.C.C.J.,
gave
his
reasons
for
dismissing
the
appeal
at
page
2420
(D.T.C.
340):
I
cannot
find
in
the
evidence
of
the
activities
described
in
the
passages
quoted
or
in
any
of
the
other
testimony
or
in
Exhibits
A-10
and
A-11
any
indication
of
”
.
.
.systematic
investigation
or
search
carried
out
in
a
field
of
science
or
technology
by
means
of
experiment
or
analysis
.
.
."
within
the
meaning
of
section
2900
of
the
Income
Tax
Regulations.
Respondent's
counsel
concluded
that
"casual
doodling
with
ideas",
even
trying
out
those
ideas,
where
it
is
not
done
in
a
systematic
scientific
fashion,
does
not
constitute
scientific
research
or
experimental
development.
He
added
that
the
appellant's
activities
which
consisted
of
contemplating,
meditating,
and
thinking
do
not
constitute
scientific
research
because
analysis,
if
it
consists
exclusively
of
mental
work,
must
involve
the
disciplined
analysis
that
advances
knowledge
or
at
least
attempts
in
a
disciplined
fashion
to
resolve
an
area
of
scientific
uncertainty.
Counsel
concluded
as
follows:
This
man
[d’Alerta]
did
not
postulate
any
specific
hypotheses.
He
didn't
analyze
any
data.
He
didn't
advance
knowledge
in
any
way.
.
.
He
obviously
thought
he
was
attempting
something
in
his
own
air,
I
suppose,
but
he
was
doodling.
He
was
a
dreamer.
He
was
not
practising
scientific
research
and
experimental
development
within
the
criteria
that
the
courts
have
laid
down.
Analysis
The
appellant
insists
that
“thinking,
contemplating
and
meditating”
are
acceptable
activities
which
constitute
“scientific
research
and
experimental
development"
within
the
meaning
of
subsection
2900(1)
of
the
Regulations.
Its
counsel
stated:
The
Regulation
does
not
say
no
daydreaming
allowed.
The
section
does
not
say
you
can't
take
something
that
you
dreamt
about
last
night
and
wonder
whether
or
not
you've
got
some
inspiration
that
will
lead
you
into
profitable
scientific
enquiry.
The
section
doesn't
say
you
have
to
succeed.
I
agree
with
appellant's
counsel.
Daydreaming
may
be
a
vital
component
of
scientific
research.
However
the
daydreaming
must
be
coupled
with
a"system-
atic
investigation
or
research
.
.
.
by
means
of
experiment
or
analysis.
.
.
.”
Work
must
be
undertaken.
Mr.
Jones
pointed
out
that
if
a
taxpayer
is
claiming
a
deduction,
he
must
fall
squarely
within
the
words
of
the
statute.
Subsection
2900(1)
does
not
exclude
daydreaming
from
the
concept
of
scientific
research
and
experimental
development
but
that
provision
insists
that
other
factors
be
present.
This
is
apparent
from
the
words
of
the
Act
and
the
conclusions
of
this
Court
in
Sass,
Satellite,
and
Revelations
as
well
as
J
and
J
Cameron
Venture
Corp.
v.
M.N.R.,
unreported
judgment
dated
October
2,
1989
(Court
File
No.
87-1774).
Several
steps
should
normally
be
present
in
an
endeavour
that
might
represent
scientific
research
and
experimental
development
for
the
purposes
of
subsection
2900(1):
Sass,
op
cit.
In
this
regard,
scientific
research
contemplates
activities
which
might
oe
based
on
hypothesis
in
respect
of
which
the
objective
is
the
gaining
of
knowledge.
To
attain
that
objective,
theories
must
be
tested
against
empirical
data.
This
testing
is
accomplished
through
controlled
experimentation,
and
must
be
done
with
extremely
accurate
measurements.
Without
the
presence
of
these
elements,
an
activity
will
not
meet
the
requirements
of
subsection
2900(1).
From
the
arguments
presented
by
the
appellant,
it
is
evident
that
the
activities
of
d'Alerta
with
respect
to
muscular
and
nerve
therapy
did
not
represent
those
targeted
by
section
2900
of
the
Regulations.
Subsection
2900(1)
states
that
"scientific
research
and
experimental
development"
means
research
in
a
particular
field
by
means
of
experiment
or
analysis.
Intuition
is
not
research,
although
it
can
trigger
research.
There
is
no
evidence
that
anything
d'Alerta
did
with
respect
to
any
research
in
nerve
and
muscle
therapy
was
systematic".
The
Shorter
Oxford
Dictionary
on
Historical
Principles
defines
the
word
"systematic"
as:
3.
Arranged
or
conducted
according
to
a
system,
plan,
or
organized
method,
involving
or
observing
a
system,
(of
a
person)
acting
according
to
system,
regular,
methodical.
.
.
.
There
was
no
evidence
produced
by
the
appellant
to
indicate
d'Alerta
carried
on
any
of
his
work
in
nerve
and
muscle
therapy
research
according
to
any
plan
or
organized
method.
He
was
by
nature
secretive
and
reluctant
to
part
with
any
knowledge.
D’Alerta
himself
was
not
called
by
the
appellant
to
testify
as
to
the
work
he
performed
and
the
method
of
analysis
he
employed.
D'Alerta
apparently
kept
no
records
of
his
analyses.
This
made
it
difficult
for
Horst
to
give
evidence.
In
my
view
the
appellant’s
work,
if
any,
in
muscular
and
nerve
therapy
did
not
constitute
"scientific
research
and
experimental
development”
within
the
meaning
of
subsection
2900(1)
of
the
Regulations.
The
appeals
will
be
allowed
and
the
assessments
referred
back
to
the
respondent
to
reconsider
the
allocation
of
expenses
between
the
electromagnetic
radiation
research
and
the
muscular
and
nerve
therapy
activity
and
to
calculate
the
Part
VII
refund
on
the
basis
that
only
the
electro-magnetic
radiation
activity
was
scientific
research
or
experimental
development
within
the
meaning
of
subsection
2900(1)
of
the
Regulations.
The
decision
to
award
costs
will
await
such
allocation.
Appeal
allowed
in
part.
Anthony
P.
Gay
v.
Her
Majesty
The
Queen
(informal
procedure)
[Indexed
as:
Gay
(A.P.)
v.
Canada]
Tax
Court
of
Canada
(Watson,
T.C.C.D.J.),
December
11,1992
(Court
File
No.
92-1414).
Income
tax—Federal—Appropriation
of
goods
from
business
for
personal
use.
The
appellant
and
his
brother
were
equal
partners
in
a
general
store.
The
appellant
lived
behind
the
store
and
used
much
of
the
store's
merchandise
for
his
own
pur-
poses.
The
appellant
did
not
keep
separate
books
for
his
personal
expenses
and
those
of
the
store.
In
computing
his
income
for
1986,
the
appellant
declared
gross
revenue
of
$103,276
and
net
business
income
of
$723.
On
reassessment,
the
Minister
recalculated
the
cost
of
goods
sold
and
other
items
and
revised
the
appellant's
net
business
income
to
$14,579.
At
the
hearing
of
the
appeal,
the
Minister’s
counsel
conceded
that
an
error
in
calculation
had
been
made
and
that
the
correct
amount
of
gross
revenue
was
$99,776,
$3,500
less
than
the
amount
included
in
the
reassessment.
HELD:
The
appellant
did
not
succeed
in
establishing
on
a
balance
of
probabilities
that
the
Minister's
reassessment
was
ill-founded
in
fact
and
in
law.
Except
for
aforementioned
concession
by
Minister,
appeal
dismissed.
The
appellant
appeared
on
his
own
behalf.
B.
Shields
for
the
respondent.
Watson,
T.C.C.D.J.
(informal
procedure):—This
appeal
was
heard
under
the
Informal
Procedure
in
Winnipeg,
Manitoba,
on
November
4,
1992.
Mr.
Gay
appeals
against
the
taxes
assessed
by
the
Minister
of
National
Revenue
in
respect
of
his
1986
taxation
year.
In
computing
his
income
for
the
1986
taxation
year,
the
appellant
included
net
income
in
the
amount
of
$722.84.
In
reassessing
the
appellant
for
this
same
year,
the
Minister
included
revised
net
income
in
the
amount
of
$14,579
in
computing
his
income
and
made
the
following
adjustments:
4.
In
computing
the
appellant's
business
income
for
the
1986
taxation
year,
the
Minister
made
the
following
adjustments:
|
Declared
|
Adjustment
|
Revised
|
|
Gross
Revenue
|
$103,276
|
—
|
$103,276
|
|
Gasoline
Sales
|
|
—
|
$
2,695
|
2,695
|
|
$103,276
|
$
2,695
|
$105,971
|
|
Cost
of
Sales
|
$
90,067
|
$
8,042
|
$
82,025
|
|
Gross
Profit
|
$
13,209
|
$10,737
|
$
23,946
|
|
Expenses
|
$
12,486
|
$
1,559
|
$
10,927
|
|
$
|
723
|
$12,296
|
$
13,019
|
|
Personal
Consumption
of
Goods
|
|
—
|
1,560
|
1,560
|
|
Net
Business
Income
|
$
|
723
|
$13,856
|
$
14,579
|
In
reassessing
the
appellant,
the
Minister
made
the
following
assumptions
of
fact:
(a)
At
all
relevant
times
the
appellant
was
a
50
per
cent
partner
in
a
general
merchandise
store
(the"Store");
(b)
At
all
relevant
times
the
appellant
was
engaged
in
the
sale
of
gasoline;
(c)
In
calculating
his
share
of
the
net
income
from
the
Store
for
the
1986
taxation
year,
the
appellant
deducted
an
amount
of
$90,067
in
respect
of
the
cost
of
goods
sold;
(d)
In
calculating
his
share
of
the
net
income
from
the
Store
for
the
1986
taxation
year,
the
appellant
deducted
expenses
in
the
amount
of
$12,486;
(e)
In
calculating
his
share
of
the
net
income
from
the
Store
for
the
1986
taxation
year,
the
appellant
did
not
take
into
account
any
amount
in
respect
of
his
personal
consumption
of
goods;
(f)
In
computing
his
business
income
for
the
1986
taxation
year,
the
appellant
did
not
include
any
amount
in
respect
of
sales
of
gasoline;
(g)
Cost
of
sales
for
the
1986
taxation
year
in
excess
of
the
amount
of
$82,025
allowed
by
the
Minister
were
not
incurred
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property;
(h)
Expenses
for
the
1986
taxation
year
in
excess
of
the
amount
of
$10,927
allowed
were
not
incurred
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property,
but
were
personal
or
living
expenses
of
the
appellant;
(i)
During
the
1986
taxation
year
the
appellant
consumed
goods
from
the
Store
valued
at
an
amount
of
$1,560;
and
(j)
The
appellant
sold
gasoline
during
the
1986
taxation
year
in
the
amount
of
$2,695.
At
the
hearing,
the
appellant
admitted
paragraphs
(a)
to
(d)
and
(j);
he
denied
all
the
other
paragraphs.
The
Minister’s
counsel
conceded
that
an
error
in
calculation
was
made
by
the
appellant's
accountant
and
that
the
correct
amount
of
gross
revenue
was
$99,776,
$3,500
less
than
the
amount
of
$103,276
included
in
the
reassessment.
In
the
1986
taxation
year,
the
appellant
was
a
50
per
cent
owner
of
a
general
store
called
"Gay
General
Store",
his
brother
Frank
Gay
owned
the
other
half
interest
in
the
store.
At
the
same
time,
the
appellant
operated
the
gas
sales
entirely
on
his
own
account
and
Frank
operated
a
post
office
sub-station
located
in
the
store
on
his
own.
The
appellant
lived
in
quarters
located
in
the
back
of
the
store,
consisting
of
a
bedroom,
bathroom
with
shower
and
kitchen
until
sometime
in
September
1986.
Some
meals
were
taken
at
a
nearby
restaurant
and
others
prepared
in
the
store's
kitchen.
The
store
also
owned
a
motor-van
that
the
appellant
sometimes
used
for
his
personal
business.
No
separate
books
of
accounts
or
journal
were
maintained
by
the
appellant
to
keep
separate
his
personal
expenses
and
those
of
the
store
in
relation
to
the
use
of
the
motor-van,
the
heat,
electricity,
water,
taxes
or
insurance.
He
also
consumed
food
from
the
store
and
used
various
supplies
or
equipment
for
his
personal
use
as
did
his
brother
Frank;
a
journal
was
kept
detailing
Frank's
purchases
but
none
was
kept
for
the
appellant's.
Informal
inventories
were
made
on
an
estimate
basis
and
the
amount
of
sales
was
also
done
by
way
of
estimate.
The
only
complete
inventory
made
at
the
store
was
at
the
time
of
its
sale
in
1988.
The
books
of
accounts
were
the
appellant's
responsibility
even
though
he
had
no
formal
training
in
accounting.
The
appellant
was
not
able
to
produce
any
records
or
books
concerning
the
amounts
disallowed
by
the
Minister.
Both
brothers
blame
the
accountant
for
their
woes
in
this
matter.
In
a
statement
provided
to
National
Revenue
in
November
1989
(produced
as
Exhibit
R-1)
the
appellant
stated
that
the
gross
sales
for
1986
were
$205,062,
the
total
purchases
were
$164,399
and
the
expenses
were
$23,417.82
and
that
he
had
all
the
invoices
for
the
above,
but
these
were
not
produced
at
the
hearing
of
the
appeal.
In
a
letter
dated
December
19,
1989
(produced
as
Exhibit
R-2),
the
Minister
allowed
63
per
cent
of
the
motor-van
expenses,
90
per
cent
of
the
utilities,
80
per
cent
of
the
taxes
for
business
use
and
made
an
allowance
of
$30
per
week
for
the
goods
taken
from
the
store
for
the
appellant's
own
use,
for
a
total
of
$1,560.
The
issues
to
be
decided
are
the
following:
1.
Whether
the
cost
of
goods
sold
in
excess
of
the
amount
allowed
by
the
Minister
were
incurred
by
the
appellant
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property;
2.
Whether
the
expenses
in
excess
of
the
amount
allowed
by
the
Minister
were
incurred
by
the
appellant
for
the
purpose
of
gaining
or
producing
income
from
a
business
or
property;
3.
Whether
the
appellant
personally
consumed
goods
from
the
store
in
an
amount
assessed
by
the
Minister;
and
4,
Whether
the
appellant
sold
gasoline
in
the
amount
of
$2,695
as
assessed
by
the
Minister.
1.
Cost
of
goods
sold
Generally,
the
cost
of
goods
sold
is
determined
by
taking
the
opening
inventory,
adding
purchases
and
subtracting
the
closing
inventory.
However,
in
this
case,
the
appellant
and
his
brother
did
not
take
inventory
before,
during
or
after
the
period
in
issue
but
relied
only
on
a
general
estimate.
The
revised
amount
allowed
by
the
Minister
was
based
on
the
vouchers
reviewed
as
supplied
by
the
appellant
and
no
evidence
was
provided
at
the
hearing
to
the
contrary.
2.
Business
expenses
The
appellant
resided
on
store
property
for
a
good
part
of
1986,
but
distinct
accounts
were
not
kept
for
the
store's
share
and
the
appellant's
share
of
the
expenses.
There
is
no
reliable
way
to
determine
the
true
share
of
the
personal
use
of
the
appellant
in
relation
to
the
overall
expenses
of
the
business.
No
records
were
available
at
the
hearing.
The
amounts
allowed
as
reasonable
by
the
Minister
were,
in
my
opinion,
quite
generous
in
the
circumstances,
reducing
the
business
expenses
from
$12,486
to
$10,927
(approximately
$1,560).
3.
Personally
consumed
goods
The
Minister
established
an
amount
of
$30
per
week
for
the
food
and
goods
personally
consumed
by
the
appellant.
Records
were
kept
for
Frank
Gay;
it
is
unfortunate
that
none
were
kept
for
the
appellant.
There
was
no
explanation
for
this
difference
for
the
two
partners.
In
the
absence
of
any
documentary
or
objective
evidence
to
the
contrary
the
amount
of
$30
per
week
appears
to
be
reasonable
in
the
circumstances.
4.
Sale
of
gasoline
The
sale
of
gasoline
by
the
appellant
was
not
included
in
the
1986
income
tax
return
but
was
subsequently
found
by
the
auditors,
discussed
and
admitted
by
the
appellant.
The
appeal
is
dismissed
in
respect
to
the
matters
mentioned
above.
I
am
satisfied
that
the
appellant
has
not
succeeded
in
establishing
on
a
balance
of
probabilities
that
the
Minister’s
reassessment
was
ill-founded
in
fact
and
in
law
for
these
four
issues.
In
so
far
as
the
calculation
of
gross
revenue
is
concerned,
the
appeal
is
allowed
to
reduce
the
gross
revenue
by
$3,500,
from
$103,276
to
$99,276,
and
the
matter
is
referred
back
to
the
Minister
for
reconsideration
and
reassessment
based
on
an
error
in
calculation.
Appeal
dismissed.
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