REASONS
FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1]
These Reasons pertain to the Appeals by Joel
Theatrical Rigging Contractors (1980) Ltd. (“JTR”)
in respect of Notices of Reassessment issued on March 15, 2011 and January 6,
2012 respectively. These Appeals, which were heard in Toronto, Ontario, on July
4, 2016, relate to two Scientific Research & Experimental Development (“SR&ED”) Expenditures Claims (Form T661) (the “SR&ED Claims”) submitted to the Canada Revenue
Agency (the “CRA”) by JTR for its taxation years
ending on April 30, 2008 and April 30, 2009 respectively.
II. ISSUES
[2]
The CRA disallowed the SR&ED Claims on the
basis that the activities that were the subject of those Claims did not
constitute “scientific research and experimental
development” (“SR&ED”),
as that term is defined in subsection 248(1) of the Income Tax Act. In particular, the CRA took
the position that the activities undertaken by JTR did not satisfy the requirements
outlined by Bowman J (as he then was), which involved the consideration of
five questions, summarized as follows:
1)
Is there a technical risk or uncertainty? In other words, is there a
type of uncertainty that cannot be removed by routine engineering or standard
procedures?
2)
Did the person performing the activities formulate
hypotheses specifically aimed at reducing or eliminating the technological
uncertainty? In other words, was there a process including the following five
stages:
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 a hypothesis or hypotheses
designed to reduce or eliminate the uncertainty; and
e)
the methodical and systematic testing of the
hypotheses?
3)
Did the procedures used accord with established
and objective principles of the scientific method, characterized by trained and
systematic observation, measurement and experiment, and the formulation,
testing and modification of hypotheses?
4)
Did the process result in a technological advance,
i.e., an advancement in the general understanding?
5)
As the work progressed, was a detailed record
kept of the hypotheses, tests and results?
III. FACTS
[3]
JTR undertook two projects, one in its 2008
taxation year and the other in its 2009 taxation year, with a view to solving
two problems that it had encountered in its business of designing,
manufacturing and installing theatrical rigging.
A. 2008 Project
[4]
From June 2007 through April 2008, JTR worked on
a project (the “Fire Curtain Project”) to
develop a system for controlling the rate of descent of, initially, the fire
curtain in a theatre at Ryerson University, and subsequently, the fire curtains
at the Richmond Hill Theatre and the Persephone Theatre in Saskatoon. Until
this time, JTR and other participants in the theatrical rigging business had
used counterweights to control the rate of descent. As counterweights occupied
additional space and created a larger footprint in the theatre, JTR hoped to
find a mechanism that would not require the use of counterweights, but would
utilize only a motor, a hydraulic pump, valves and related equipment, to lower
the fire curtain at an acceptable speed. The applicable fire code regulations
required that a fire curtain must descend in 30 seconds or less. However,
if the rate of descent is too fast, there is a risk of injury to someone who
might be caught below the curtain and there is a risk of causing fear or panic
in the audience.
[5]
JTR found that the backwind system on a standard
motor was not capable of producing a slow, controlled descent. Accordingly, JTR
experimented with a variety of configurations of motors, hydraulic pumps, valves
and related equipment. Ultimately, JTR developed a system that was able to
achieve a controlled descent for 95% of all fire curtains.
[6]
In conducting its experiments, JTR began by
attaching a rigging system to an overhead beam in its shop and then using a
motor to hoist a weight of approximately 800 pounds, which was estimated to be
similar to the weight of the fire curtain in the theatre at Ryerson University.
Once the weight was hoisted, the braking mechanism on the motor was released
and the experimenters watched the rate at which the weight fell, making sure
(if necessary) to reapply the braking mechanism before the weight crashed onto
the floor. It quickly became apparent that the backwind system in the motor was
not sufficient in and of itself to control the rate of descent, so various
other pieces of equipment (such as a hydraulic pump, hoses and valves) were
added to the configuration in various arrangements until the experimenters
found a configuration that controlled the rate of descent for 95% of all fire
curtains.
[7]
In Part 2 (entitled “Project
Information”) of the SR&ED Claim that JTR submitted to the CRA in
respect of the Fire Curtain Project, JTR described the title of that project as
“Hydraulic Backwind System for Theatre Fire Curtains,”
and categorized the field of science or technology as being applied mechanics,
which is categorized in the CRA’s Guide to Form T661 as being part of
mechanical engineering, which in turn is categorized by the CRA as being part of
engineering and technology.
B. 2009 Project
[8]
The objective of the second project (the “Manual Override Project”) undertaken by JTR was to
design and develop a manual curtain-rigging system that could be used in the
event of a power failure or machine malfunction. Typically, the machine that
operates the stage curtain allows the curtain to open and close horizontally.
Normally, the curtain opens until it hits a limit switch, and then subsequently
can be reversed and closed. The limit switch is located within the curtain
motor and programmatically understands the movement of the curtain. In the
past, when there was a manual override (in the event of a power failure or
machine malfunction), after the problem was corrected and the automated
operation of the curtain was recommenced, the limit switch would not know where
its starting point was and would not be able to properly guide the movement of
the curtain. Recalibration was a labour-intensive process that impeded the
theatrical performance and often required a service call.
[9]
From May 2008 through September 2008, JTR
conducted various experiments and made various innovations and modifications to
the curtain rigging system, which ultimately resulted in the development of an
easy-to-attach hand-crank system that could disengage the curtain cable drum
and allow it to spin freely on the shaft without damaging or interfering with
the limit switch. According to JTR and its advisor, the development of this
hand-operated back-up for the curtain rigging system was unprecedented in the
industry.
[10]
As various employees of JTR experimented in
respect of the Manual Override Project, they began by removing the chain from
the sprocket that controlled the cable drum and removing the limit switch. When
they discovered that it was too difficult to reattach the sprocket to the
assembly, they then removed the entire assembly from the limit switch, again
without success. Next, they removed the cable drum from the limit switch, but
were again met with failure. Finally, they removed the retaining bolts and
replaced them with a hand-crank system that could disengage the cable drum and
allow it to spin freely on the shaft, which satisfied their objectives.
[11]
In Part 2 (entitled “Project
Information”) of the SR&ED Claim submitted by JTR to the CRA in
respect of the Manual Override Project, JTR entitled the project “Developing a Manual Curtain Rig Operation,” and
categorized the field of science or technology as being applied mechanics,
which, as indicated above, is viewed by the CRA as being a type of mechanical
engineering.
IV. ANALYSIS
A. Introductory Comments
[12]
Only two witnesses testified at the hearing of
these Appeals. They were Van Marineau, who is the president and owner of
JTR, and Todd Louie, who is an accountant and the Director of Taxation at
Sheldon & Milstein Tax Consultants Ltd. (“Sheldon”), which is the advisor that
prepared the two SR&ED Claims on behalf of JTR. Neither Mr. Marineau
nor Mr. Louie is a scientist or an engineer. In fact, no scientist or engineer testified
at the hearing. There were no expert witnesses. The Respondent did not call any
witnesses.
[13]
Mr. Marineau is knowledgeable and experienced in
the theatrical rigging business, having worked at JTR for 36 years. He began
work at JTR as an equipment installer and progressed to become the owner and the president of JTR. Mr.
Marineau has a grade 12 education. He does not have any post-secondary
education, particularly in any field of science or engineering. Mr. Marineau
testified that JTR employed various designers who had some engineering
training, but none of them had earned an academic degree in engineering and
none of them had a professional engineer (P. Eng.) designation. None of the JTR
employees with engineering training testified at the hearing of these Appeals.
[14]
As mentioned, Mr. Louie is an accountant, not a
scientist or engineer. Although he has experience in preparing, and overseeing
the preparation of, SR&ED expenditures claims (Form T661) for various
clients, he has no formal training in mechanical engineering and does not have
a university degree in engineering. Mr. Louie did not work on, or observe, any
of the experiments that were conducted by JTR. Mr. Louie stated that Sheldon employed
PhDs and engineers who worked for him. None of the PhDs and engineers employed
by Sheldon testified at the hearing of these Appeals.
B. Requirements of SR&ED
[15]
Counsel for JTR did not argue or suggest that
JTR had performed basic research or applied research. Accordingly, it is my
understanding that, for the purpose of these Appeals, the relevant
portions of the definition of the term “scientific
research and experimental development,” as set out in subsection 248(1)
of the ITA, are as follows:
“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,
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 … (c) that is undertaken in Canada by or on
behalf of the taxpayer….
[16]
In determining whether the Fire Curtain Project
and the Manual Override Project constituted SR&ED, as defined above, I will
consider the five requirements set out in the Northwest Hydraulic case,
and confirmed in the RIS-Christie and C.W. Agencies cases.
(1) Technological Uncertainty
[17]
To constitute SR&ED, a particular project
must address a problem or a type of uncertainty (typically described in the
jurisprudence as “technical risk or uncertainty” or “technological
uncertainty”) that cannot be resolved by routine engineering or standard
procedures. While there may not be a definitive definition of the term “routine engineering,” the term typically “describes techniques, procedures and data that are generally
accessible to competent professionals in the field.” The difficulty that I have is
that no scientists or engineers testified, with the result that I was given no authoritative
evidence as to the techniques, procedures and data in respect of theatrical
rigging that were generally accessible to mechanical engineers in 2008 and
2009.
(a) Fire Curtain Project
[18]
In describing the uncertainty confronted by JTR,
Mr. Marineau explained that, when JTR began to work on the Fire Curtain
Project, he and those who worked with him had no idea how to control the rate
of descent of the fire curtain, using only a motorized system, without
counterweights. He was not aware of any applicable technology that had been
developed elsewhere. He did some research online and reviewed various patents, but he was not able to find
anything that would assist JTR in the challenge that it faced.
[19]
Mr. Louie testified that, when Sheldon was
preparing the SR&ED Claims, some of its personnel reviewed various patents
to determine what technology would have been available to JTR when it undertook
the Fire Curtain Project. During his direct examination, Mr. Louie produced
four patents,
which were published on December 7, 1999, May 10, 2005, November 23, 2005 and
September 27, 2007 respectively. Mr. Louie stated that those four patents
demonstrated “the embodiment of knowledge that existed
prior to … 2008.”
Mr. Louie also stated that the patents represented “the extent of the technology available on theatre rigging
systems or fire curtains” and “the routine
engineering that was available at the time.” However, as noted above, Mr.
Louie is an accountant, not a scientist or an engineer. He was not qualified as
an expert witness. During cross-examination, he could not describe the search
terms that were used by his staff in looking for the four patents that he
produced. Accordingly, I am not convinced that the four patents entered as
Exhibit A-6 represented the totality of available technology that was known in
2007.
[20]
In summary, I acknowledge that, when Mr.
Marineau and his colleagues at JTR began to work on the Fire Curtain Project in
June 2007, they did not know how to control the descent of the fire curtain,
without the use of counterweights. However, I have not been persuaded that
there was no technology that may have been available for their use and that may
have been found if they had consulted with a professional engineer.
[21]
In determining whether investment tax credits were
available to JTR in respect of SR&ED, the Minister of National Revenue (the
“Minister”) relied on various assumptions of
fact, including the following, as set out in paragraph 16 of the Reply to the
Notice of Appeal:
o. The
claimed SR&ED activities for the 2008 Project [i.e., the Fire Curtain
Project] were limited to the design, purchasing, adjustments, arrangements,
pump selection, and valve changes in relation to the three aforementioned
contracts [i.e., the contracts relating to the fire curtains at Ryerson
University, the Richmond Hill Theatre and the Persephone Theatre in Saskatoon];
p. The
appellant’s [i.e., JTR’s] claimed SR&ED activities for the 2008 Project
constituted routine work for the appellant;
q. Systematic
investigation or research was not performed as part of the 2008 Project….
I am not
convinced that JTR has discharged its burden of disproving the above
assumptions.
[22]
In addition, my impression is that the work done
by JTR in respect of the Fire Curtain Project may well have been routine
engineering. I was not provided with any evidence, on which I could rely with
confidence, that the experimentation performed by JTR in respect of the Fire
Curtain Project was not routine engineering.
(b) Manual Override Project
[23]
Mr. Marineau explained that, in high-end
curtain-control systems, there was technology that would enable a limit switch
to maintain its proper orientation when power was restored after the manual
operation of the curtain during a power failure. However, that technology had
an approximate cost of $25,000, whereas JTR was hoping to develop a solution
that would have a cost of approximately $5,000. He stated that, before JTR
began to work on the Manual Override Project, no one had found an economical
solution.
[24]
Mr. Marineau did not explain the type of
technology used in the expensive high-end curtain-control systems, nor did he
comment on whether that technology could have been adapted to a more economical
system, and, if so, the problems or uncertainties that would have been
encountered in making such an adaptation. In my view, the technological
uncertainty in respect of the Manual Override Project has not been clearly
articulated. For instance, in Box 242 in Section B of Part 2 of the 2009
SR&ED Claim, the technological uncertainty was described as follows:
Manual operation
of the curtain machine was unprecedented, and as such, there was no available
knowledge that could aid us in determining a viable solution. There was no
information or methodology for us to follow to achieve our intended advancement
of a manual override system. The existing technology consisted of an automated
curtain machine, without any back-up method in the event of power or machine
failure…. We had to devise a method of manually pulling a rope that was wound
around the curtain cable drum to operate the curtain without interfering with
and disorienting the limit switch, as this is critical for resuming normal
automated functioning of the curtain machine.
It seems to me
that the work of finding a way to manually pull the rope wound around the
curtain cable drum, without damaging or disorienting the limit switch, was
routine engineering. JTR did not discharge the burden of proving otherwise.
(2) Formulation and Testing of Hypotheses
[25]
The Canadian Oxford Dictionary defines “hypothesis” as follows:
1. a proposition
made as a basis for reasoning, without the assumption of its truth. 2. a
supposition made as a starting point for further investigation from known
facts.
[26]
In Maritime-Ontario Freight Lines,
Sarchuk J provided a judicial definition of “hypothesis”
as follows:
A hypothesis is a
tentative assumption or explanation to an unknown problem and, as a rule, this
requirement is met by the existence of a logical plan devised to observe and
resolve the hypothetical problem.
Another judicial
definition of “hypothesis” was given by Bonner J
in C.W. Agencies, after having set out a description of the appellant’s
hypothesis:
I note here that
it is not clear to me that this “hypothesis” is
one which is capable of being proved or disproved by means of scientific
research. It seems to me that it is simply too vague. The word hypothesis in
this context is normally considered to mean a provisional concept which is not
inconsistent with known facts and serves as a starting point for further
investigation by which it may be proved or disproved objectively.
In other words, a
hypothesis is a statement to be tested by an experiment
or a trial.
(a) Fire Curtain Project
[27]
In working on the Fire Curtain Project, JTR
conducted eight experiments. Shortly after all the experimentation on this
project was completed, Sheldon prepared a one-page Experiment Summary Sheet in
respect of each experiment.
Each Experiment Summary Sheet described the problem that had been confronted,
the date and nature of the experiment, the personnel who worked on the
experiment, the variables and details that were addressed, the results of the
experiment and the next steps that were proposed. In many of the “next steps” entries, there was a stated hypothesis,
presumably for the next experiment, and not for the experiment that had just
been completed. For instance, at the end of the Experiment Summary Sheet for
Experiment 1, in the “next steps” entry, the
hypothesis was shown as “to experiment with braking
mechanisms within housing unit.” Thus, assuming that this was the
hypothesis for Experiment 2, Exhibit A-1 did not set out a hypothesis for
Experiment 1. For the eight experiments in the Fire Curtain Project, the “next steps” entries at the end of each Experiment
Summary Sheet are set out below:
|
Experiment
Number
|
“Next Steps” Entry
|
|
1.
|
Hypothesis is to experiment with braking
mechanisms within housing unit.
|
|
2.
|
Hypothesis is to experiment with
hydraulic pumps and valves.
|
|
3.
|
Hypothesis is to experiment with braking
mechanisms within housing unit.
|
|
4.
|
Experiment with various valves and free
flowing in one direction and controllable in the other direction to try and
balance the system.
|
|
5.
|
Experiment with different motor.
|
|
6.
|
Experiment with different hydraulics.
|
|
7.
|
Hypothesis that better hydraulics pumps
and valves could alleviate using weights.
|
|
8.
|
Project considered complete.
|
While the “next steps” entries on the
Experiment Summary Sheets for Experiments 1, 2, 3 and 7 (which presumably
stated what was to follow in Experiments 2, 3, 4 and 8 respectively), purported
to set out hypotheses, the particular statements were not formulated as
propositions or suppositions to be tested. There were no purported hypotheses
for Experiments 1, 5, 6 or 7.
[28]
In Part 2
of the SR&ED Claim that JTR submitted in respect of the Fire Curtain
Project, the following statement was made in Box 246 (describing the scientific
or technological advancements that were achieved):
In late fiscal
2007 and early fiscal 2008 we worked to develop a theatrical rigging system for
Ryerson University with a fire curtain that was hydraulically controlled so
that it would fall down safely. We realized that in order to meet Ryerson s [sic]
requirements we needed a motor that could back-wind fast enough to create an
adequate amount of oil pressure so that the equipment could be controlled
sufficiently. We hypothesized that a hydraulic pump working out of rotor end of
the motor instead of the gearing end would suffice. By placing the pump in this
location, it would be able to obtain the speed required to create the desired
oil pressure.
Thus, it appears
that the hypothesis was to the effect that by connecting the hydraulic pump to
the rotor end of the motor, rather than to the gearing end, sufficient oil
pressure could be created in the pump to control the rate of descent. The statement
quoted above may have been a hypothesis of the type contemplated by the second
requirement set out in Northwest Hydraulic. However, as noted above, the
attachment of a hydraulic pump to the rotor end (rather than the gearing end)
of a motor appears to be routine engineering.
(b) Manual Override Project
[29]
Five experiments were conducted by JTR while
working on the Manual Override Project. After the five experiments were
completed, Sheldon prepared an Experiment Summary Sheet in respect of each
experiment.
The “next steps” entries on the five Experiment
Summary Sheets were as follows:
|
Experiment
Number
|
“Next Steps” Entry
|
|
1.
|
Hypothesis – removing the entire sprocket
assembly from the limit switch.
|
|
2.
|
Hypothesis – removing the entire sprocket
assembly from the limit switch.
|
|
3.
|
Hypothesis – removing the entire sprocket
assembly from the limit switch.
|
|
4.
|
Hypothesis – Add-on system to complement
the existing housing.
|
|
5.
|
Testing and project completed.
|
[30]
The hypotheses set out on the Experiment Summary
Sheets for Experiments 1, 2 and 3 (which presumably were the hypotheses for Experiments
2, 3 and 4) were all the same, which seems rather peculiar. One would have
thought that, after a particular experiment was shown to be unsuccessful, the
hypothesis would have been modified. A further difficulty that I have is that,
as in the case of the Fire Curtain Project, the various hypotheses are set out
in the “next steps” entries, meaning that there
was no stated hypothesis for Experiment 1 in the Manual Override Project. As
well, the purported hypotheses set out in the above table are not structured as
propositions or suppositions to be tested.
[31]
In Part 2 of the SR&ED Claim submitted by JTR in respect
of the Manual Override Project, the following descriptions of hypotheses were
entered in Box 244 (which describes the work performed to overcome the
scientific or technological uncertainties):
Our initial
hypothesis was to minimize modifications as much as possible when enabling
manual function of the curtain machine. Our first attempt involved removing the
chain from the sprocket which controls the cable drum, as the limit switch is
contained within the cable drum…. [The document then describes an unsuccessful
outcome.] Next, we predicted that removing the entire sprocket from the limit
switch would be more effective…. [The document then describes another
unsuccessful outcome.] For the third series of experiments, we removed the
entire cable drum creating a closed loop cording system…. [The document then
describes yet another unsuccessful outcome.] Now, after three failed
experiments, we decided to approach the problem from a different angle –
instead of removing parts of the assembly and struggling to return them without
disrupting functionality, we now predicted adding some mechanical hardware to
enable the advancement. We experimented with adding two holding bolts to engage
the cable drum onto the shaft. We hypothesized that when the bolts were removed
this would disengage the cable drum and allow the cable drum to spin freely on
the shaft without interfering with both the sprocket and limit switch. A hand
crank was implemented in the place of the two bolts and used to rotate the
drum. Subsequent experimentation corroborated our hypothesis.
On the same claim
form, in Box 246 (which describes the scientific or technological advancements
that were achieved), JTR stated the following:
Our initial
hypothesis was to remove the chain from the sprocket which controls the cable
drum, believing that this would prevent interference or damage to the limit
switch while minimizing modifications necessary for the curtain machine.
[32]
While I have concerns about the hypotheses set
out in the Experiment Summary Sheets for the Manual Override Project, I am of
the view that the hypotheses set out in Part 2 of the 2009 SR&ED Claim
(i.e., Exhibit A-5) were adequately formulated as propositions or suppositions
to be tested. However, returning to a point made previously, the particular
steps contemplated by those hypotheses (i.e., removing the chain from the
sprocket, removing the entire sprocket from the limit switch, removing the
entire cable drum, and adding mechanical hardware (i.e., the two holding bolts
that were replaceable by a hand crank)) appear to have been routine
engineering, and not SR&ED.
(3) Scientific Method
[33]
There is some overlap between the second and
third requirements described in Northwest Hydraulic. The second
requirement has five stages, the fourth and fifth of which are:
•
the formulation of a hypothesis or hypotheses
designed to reduce or eliminate the technical uncertainty; and
•
the methodical and systematic testing of the
hypotheses.
The third
requirement indicates that the procedures used should accord with established
and objective principles of the scientific method, which is characterized by:
•
trained and systematic observation,
•
measurement and experiment, and
•
the formulation, testing and modification of
hypotheses (it is this third characteristic of the third requirement that overlaps
with the fourth and fifth stages of the second requirement).
As the third
characteristic of the scientific method deals with hypotheses, and as I have
already discussed above the hypotheses formulated by JTR, I will not say
anything further about that characteristic here.
[34]
With respect to the first characteristic of the
scientific method (i.e., trained and systematic observation), Mr. Marineau and
his colleagues at JTR appear to have engaged in systematic observation;
however, as the research teams did not include any professional engineers or
researchers who held a university degree in engineering, and as none of the
researchers with limited engineering training were called as witnesses, I question
whether trained observation occurred.
[35]
I will discuss the second characteristic of the
scientific method (i.e., measurement and experiment) separately for the two
projects.
(a) Fire Curtain Project
[36]
In simple terms, the method used for the experiments
relating to the Fire Curtain Project was to use a motor (attached to
various configurations of pumps, valves and other equipment) to raise a
weight, then let it drop and watch it fall, to see whether the speed was
controlled or uncontrolled. In setting up these experiments, Mr. Marineau
and his colleagues “guesstimated” that the weight of the fire
curtain in the theatre at Ryerson University was probably 800 to 1,000 pounds.
Therefore, in the back of JTR’s shop they mounted some rigging on one of the
overhead beams, used a motor to hoist a weight of approximately 800 pounds as high as it would go, and
then released the brake on the motor and watched the weight fall. If the weight
fell too fast (which it usually did in the early experiments), they quickly
applied the brake so as to prevent the weight from smashing on the floor. When
asked during cross-examination about the rate at which the weight fell, Mr.
Marineau stated that he did not know and that they had no way of measuring that
rate. He further stated that they took no measurements as to how fast the
weight fell.
They simply observed the fall with the naked eye.
[37]
It seems to me that, if the scientific method
had been used (i.e., if there had been systematic observation, measurement and
experiment), Mr. Marineau and his colleagues would have determined the precise
weight used in the experiments and would have precisely measured the duration
of the descent in each experiment so that they could determine whether, as they
moved from one experiment to the next, the duration of the descent was
increasing or decreasing. During re-examination, Mr. Marineau reiterated that
their objective was to have the fire curtain descend within 30 seconds. He
stated that the 30-second limit was the only measurement about which they were
concerned. However, there was no indication that they used a stopwatch or even
the second hand on a wristwatch to determine how close the duration of a
particular descent came to the 30-second objective. There was no evidence that
the duration of the descent was tracked for each experiment and then compared
to the duration of the descent in another experiment.
[38]
As Mr. Marineau and his colleagues moved from
one experiment to the next, they began with a hydraulic pump attached to the
rotor end of a motor, then added a braking mechanism, then deployed an
additional braking mechanism, then experimented with various hydraulic pumps,
valves and hoses. Once it appeared that they had found a way to control the duration
of the descent, they then experimented with various curtain sizes and weights,
as well as various grades of Zetex (which was the fabric used in the fire
curtains). They next experimented with a new motor assembly and gears, and
finally with new hydraulic systems of valves and hoses and a more powerful
motor and gears. During direct examination, Mr. Marineau acknowledged that
motors, gear boxes, pumps, valves and the other equipment used were all
standard products. The challenge that he and his colleagues had was to put
those items together in such a manner as to control the duration of the descent.
While I acknowledge that they faced a challenge, it seems to me that it was a
challenge that was resolved by routine engineering or standard procedures, or
if not, it constituted a process of trial and error.
[39]
The Canadian Oxford Dictionary defines
the term “trial and error” as follows:
a method of finding
the most effective way of completing a task, resolving a situation, etc., by
experimenting with various unsuccessful approaches until a suitable one is
found.
[40]
I am not aware of any jurisprudence that has
established that trial and error does not come within the scientific method and
does not qualify as SR&ED; however, there are several cases which, while
not saying so explicitly, suggest that trial and error may well fall outside
the scientific method. For instance, in R&D Pro-Innovation, a
research and technology adviser for the CRA indicated that the activities
undertaken by the appellant in that case were performed unsystematically and by
trial and error. Masse J disagreed and found that the appellant’s experimental
program was methodical and systematic; however, he dismissed the appeal on
other grounds.
In ACSIS EHR, representatives of the appellant (whose appeal was
successful) testified that its researchers, in conducting their experiments,
applied a systematic approach, rather than a haphazard approach or trial and
error.
In Novalia Power General Research, the CRA was of the view that the
appellant (whose appeal was unsuccessful) had used a trial and error system,
rather than systematic investigation.
[41]
When asked, during direct examination, to explain
JTR’s hypothesis, possible solution and the various variables in respect of the
Fire Curtain Project, Mr. Marineau stated:
Well, what we
basically ended up doing was trying to get a pump. We knew we couldn’t just
backwind it. We’d free drop it kind of thing and have some kind of control so
we could scale on how we would be able to move forward and see what the results
were the first time we put something together and dropped it freely….
We just further
took additional steps on components to try and get it within a range of doing
the same thing as well. Just more experimental. Parts changing and
freefalling….
We experimented
more with pumps and valves and pull[ey] sizes and that type of stuff to get, to
see control (inaudible) going through this, doing something, but it’s a matter
of how to get it right what we have to do.
The above description of the activities
undertaken by JTR appears to me to have been trial and error, rather than the scientific
method.
(b) Manual Override Project
[42]
As indicated above, the experiments undertaken
in respect of the Manual Override Project seem to have involved various
reconfigurations of the mechanisms controlling the curtain cable. In
particular, the persons conducting the experiments went through a series of alterations
and adjustments, including:
a)
removing the chain from the sprocket controlling
the cable drum and removing the limit switch,
b) removing the entire sprocket assembly from the limit switch,
c)
removing the cable drum from the limit switch,
and
d) removing the retaining bolts and replacing them with a hand-crank
system.
These reconfiguring steps, in my view, did
not involve measurement, and seemed more in keeping with trial and error than
with the scientific method.
(4) Technological
Advancement
[43]
To satisfy this requirement, purported research
or development must result in a technological advance or an advancement in the
general understanding, meaning that which is known or available to persons
knowledgeable in the field.
The difficulty that I encountered is that no scientists or engineers testified
at the hearing, with the result that I do not have any reliable evidence as to
the general understanding in 2007 through 2009 of persons knowledgeable in the
field of mechanical engineering.
(a) Fire Curtain Project
[44]
In Box 246 of Part 2 of its SR&ED Claim in
respect of the Fire Curtain Project, JTR described the technological
advancement as follows:
In late fiscal
2007 and early fiscal 2008 we worked to develop a theatrical rigging system for
Ryerson University with a fire curtain that was hydraulically controlled so
that it would fall down safely. We realized that in order to meet Ryerson s [sic]
requirements we needed a motor that could back-wind fast enough to create an
adequate amount of oil pressure so that the equipment could be controlled
sufficiently. We hypothesized that a hydraulic pump working out of the rotor
end of the motor instead of the gearing end would suffice. By placing the pump
in this location, it would be able to obtain the speed required to create the
desired oil pressure. The Fire Code placed another restraint on this project,
requiring that the curtain be dropped in 30 seconds or less.
Our primary
objective was to develop universal technology for hydraulically controlled backwinding
systems for fire curtains. In fiscal 2008 we isolated two other fire curtain
projects that would enable us to work towards this goal: The Richmond Hill
Theatre and the Persephone Theatre of Saskatoon, SK. Specifically, we wanted to
develop a single system that would be capable of handling curtains of any size
and that could therefore be assembled at our shop in Mississauga and then
shipped to the theatre for installation, anywhere in North America.
In each of these
applications a new lightweight material called Zetex was used – typical fire
curtains in the past used heavy asbestos curtains. This meant that the curtain
would not be very heavy, since its size was being governed by the frame.
Meeting these requirements proved to be a difficult task, since the weight of
the curtain was proportional to the inertial forces that could be applied by
the motor the heavier the curtain, the faster it could fall.
The above
comments do not appear to me to describe a technological advancement.
(b) Manual Override Project
[45]
In Box 246 of Part 2 of the SR&ED Claim
submitted to the CRA by JTR in respect of the Manual Override Project, JTR
described the technological advancement as follows:
Our company, Joel
Theatrical Rigging (JTR), sought to advance technology in the area of applied
mechanics … in particular theatre rigging equipment, through the development of
a manual curtain rigging system to be used in the event of power failure or
machine malfunction…. The development of a hand-operated back-up for the
curtain system was unprecedented in the industry in light of the aforementioned
problems, thus experimentation would be necessary for us to devise a solution….
It was important that the solution be user-friendly, in that it could be
activated and controlled by users with minimal training.
While the above
statement is perhaps more descriptive of a possible technological advancement
than is the corresponding statement in respect of the Fire Curtain Project, it
still seems to be more of a statement of objectives than a summary of a
technological advancement. Thus, I am not certain that the description of the
purported technological advancement in the Manual Override Project is
sufficient for me to make a determination that there was an advancement in the
understanding of persons knowledgeable in the field of mechanical engineering.
(5) Record
of Hypotheses, Tests and Results
[46]
Although Northwest Hydraulic indicated
that one of the criteria of SR&ED is a detailed record of hypotheses, tests
and results, some cases have suggested that this particular criterion may not
be absolutely essential. For instance, in 116736 Canada Inc.,
Archambault J stated:
In my view,
contemporary reports showing detailed records of each experiment attempted by a
researcher could constitute evidence of a systematic investigation. Any taxpayer
attempting to convince the Minister that he is entitled to deduct R&D
expenditures without such evidence puts himself in a very precarious position.
A taxpayer would be in a similar position when appearing before this Court to
contest the Minister’s refusal to allow the deduction of his R&D
expenditures. However, the Act and the Regulations do not require
that such written reports be produced in order for a taxpayer to qualify for
the deduction of such expenditures: it is possible to adduce evidence by way of
oral testimony. Whether the Minister or a judge could conclude that the
activities purported to have been carried out by the taxpayer were actually
carried out then becomes a question of credibility.
[47]
Similarly, in Les Abeilles Service, Jorré
J stated that, although contemporaneous documentation is relevant to the Court’s
resolution of factual controversies, “the existence of
contemporaneous documentation, or contemporaneous documents with specific
content, is not a condition to the recognition of scientific research or
experimental development.”
[48]
In addition, D’Auray J stated the following in 6379249
Canada Inc.:
The appellant did
not file any documents describing its systematic investigation. Although … the ITA
does not require a taxpayer to file such documents, in my view, it would have
been better if the appellant had produced such records or, if too voluminous,
at least a sample of such records….
The respondent
stated that the appellant had not filed in evidence any documents demonstrating
that it had followed a systematic approach in performing its SR&ED’s work.
As I have stated earlier, the filing of the documents proving a systematic
investigation is not a requirement in the ITA. The ITA requires
that the appellant prove that he has followed a systematic investigation in
order to resolve a technological uncertainty with the purposes of achieving a
technological advancement.
[49]
However, although documentary evidence may not
be a statutory requirement, as Campbell J noted in ACSIS EHR, there is a
risk in failing to produce such documentation:
This is not to
say that taxpayers should ignore detailed record keeping. Such documentary
evidence is always to be preferred and each case will vary in respect to how
the evidence will be viewed. Taxpayers who come to court without proper
documentation will always remain in the unenviable position of persuading a
court that systematic investigation did occur.
[50]
The above statement builds on the foundation
enunciated by Archambault J in 116736 Canada (as quoted above) and by
Robertson JA in RIS-Christie (as set out below):
Although both
documentary and viva voce are admissible, the only sure-fire way of
establishing that scientific research was undertaken in a systematic fashion is
to adduce documentary evidence which reveals the logical progression between
each test and preceding or subsequent tests.
The failure of
JTR to adduce any of the notes, sketches, drawings and other documents made
during its experiments hampered its ability to show that it had undertaken
scientific research or experimental development in a systematic fashion.
(a) Fire Curtain Project
[51]
At the hearing, Mr. Marineau explained that,
when the JTR researchers were working on the Fire Curtain Project, they did not
keep any of the notes, sketches, drawings or other documents that may have been
prepared during the experimentation process. He explained that, once they had
determined that a particular design did not work, they discarded the plans for
that design so as to ensure that no one else in the organization would build
the same thing. During cross-examination, he stated that, as the JTR
researchers were changing variables in the course of working on the Fire
Curtain Project, they did not keep a record of the changes in the variables and
the subsequent results. The documents that were available for the hearing,
i.e., the Experiment Summary Sheets that were entered as Exhibit A-1, were
prepared by Sheldon sometime after the experiments had been completed.
(b) Manual Override Project
[52]
At the hearing, Mr. Marineau acknowledged that
JTR did not keep any documents related to the Manual Override Project. The
Experiment Summary Sheets for this project (i.e., Exhibit A-4) were prepared by
Sheldon sometime after the experiments had been completed.
C. Burden of Proof
[53]
JTR has the burden of proving, on a balance of
probabilities, that the activities undertaken in respect of the Fire Curtain
Project and Manual Override Project constituted SR&ED. While I acknowledge that
the activities undertaken by JTR were innovative and creative, JTR has failed to adduce
sufficient evidence to establish that those activities did not constitute
routine engineering, that there was technological uncertainty in respect of the
Fire Curtain Project and the Manual Override Project, that the scientific
method was followed, and that technological advancements were achieved in
respect of each project.
V. CONCLUSION
[54]
For the reasons set out above, JTR’s Appeals are
dismissed with respect to both the Fire Curtain Project and the Manual Override
Project.
[55]
There is no award as to costs.
Signed at Edmonton, Alberta, this 17th
day of January, 2017.
“Don R. Sommerfeldt”
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