[OFFICIAL ENGLISH TRANSLATION]
Date: 20020130
Docket: 1999-3482(IT)G
BETWEEN:
PIERRE MAILLOUX,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal in respect of
the 1993 and 1994 taxation years. It concerns expenditures that
were disallowed as scientific research and experimental
development expenditures. The appellant filed a discontinuance in
respect of the appeal for the 1995 taxation year.
[2] In making the assessments, the
Minister of National Revenue (the "Minister") made the
following assumptions of fact stated in the Reply to the Amended
Notice of Appeal (the "Reply"):
[TRANSLATION]
1. The
respondent takes note that the only points disputed by the
appellant are those set out in paragraph (d) of the amended
notice of appeal and that the appellant does not dispute the
other changes made by the Minister in respect of the
reassessments dated October 13, 2000, for the 1993 and 1994
taxation years.
2. He denies
all the allegations of fact and findings of law contained in the
amended notice of appeal which are not consistent with what is
set out below.
3. In filing
his income tax returns for the 1993 and 1994 taxation years, the
appellant established that amounts of $405,836 and $258,402
respectively represented qualified scientific research and
experimental development expenditures of Ferme Piluma Enr. and he
claimed farming losses of $291,154 and $131,572 respectively as
well as investment tax credits of $81,167 and $51,680
respectively.
. . .
5. By a nil
notice of assessment dated April 25, 1997, for the 1993 and
1994 taxation years, the Minister of National Revenue disallowed
the scientific research and experimental development expenditures
and the investment tax credits claimed by the appellant for his
1993 and 1994 taxation years.
. . .
7. In response
to an application made under subsections 220(2.1) and 220(3)
of the Income Tax Act, which the appellant filed with the
Minister of National Revenue for the 1993 and 1994 taxation
years, the Minister of National Revenue issued notices of
reassessment dated October 13, 2000, by which he revised the
appellant's scientific research and experimental development
expenditures and investment tax credits as follows for the 1993
and 1994 taxation years.
1993
1994
SR & ED expenditures
qualified for ITC
purposes
$81,978
$138,729
Investment tax
credit
$16,068
$27,191
8.
. . .
(a) during the
taxation years at issue, the appellant held 98 percent of
the shares in Ferme Piluma Enr. (hereinafter "Ferme
Piluma");
(b) Ferme Piluma is
a farming business most of the income of which during the years
at issue came from the sale of dairy products, livestock (calves
and cattle) and harvested hay;
(c) during the years
at issue, Ferme Piluma engaged in scientific research work having
to do with agricultural efficiency in feed crop cultivation and
production, dairy herd management, hybridization trials and
attempts at new types of production, for example, veal, milk and
cheese;
(d) that work was
deemed by the Minister of National Revenue to qualify as
scientific research and experimental development projects;
(e) for his 1993 and
1994 taxation years, the appellant considered all the
expenditures incurred by Ferme Piluma as scientific research and
experimental development expenditures;
(f) those
expenditures represented sums of $405,836 and $258,402 for 1993
and 1994;
(g) the Minister of
National Revenue revised the expenditures incurred by Ferme
Piluma that gave rise to investment tax credits, to $81,978 and
$138,729 for the 1993 and 1994 taxation years respectively, as
described in Appendix A to this reply to the amended notice
of appeal, which Appendix forms an integral part hereof;
(h) the majority of
the expenditures referred to in subparagraph (f) above were
disallowed by the Minister of National Revenue on the ground that
they were not deductible expenditures under
paragraph 37(1)(a) of the Income Tax Act
(hereinafter the "Act") or qualified
expenditures for the purposes of the investment tax credit;
(i) the
appellant did not prove that the expenditures which he disputes
in his notice of appeal were expenditures all or substantially
all of which were attributable, or were attributable as provided
for in subsection 2900(2) of the Income Tax
Regulations, to the prosecution of scientific research and
experimental development;
(j) the
expenditures disallowed under the "salaries" item are
partly expenditures for which there is no supporting
documentation and partly capital expenditures made for the
construction of a cheese house that are excluded from scientific
research and experimental development expenditures under
paragraph 37(7)(f) for 1993 and 37(8)(d) for
1994 and that consequently do not qualify for the purposes of the
investment tax credit;
(k) the cheese house
is a building which is not a special-purpose building
contemplated by section 2903 of the Income Tax
Regulations.
(l) the
expenditures disallowed under the items "transportation of
goods and trucking" and "improvement of lot, land,
prototype" are capital expenditures made for the
construction of the cheese house that are excluded from
scientific research and experimental development expenditures
under paragraph 37(7)(f) in 1993 and 37(8)(d)
in 1994 and that consequently do not qualify for the purposes of
computing the investment tax credit;
(m) the expenditures
disallowed under the items "interest" and "milk
marketing, deduction" are prescribed expenditures under
section 2902 of the Income Tax Regulations and do not
qualify for the purpose of computing the investment tax
credit.
AND SUBJECT TO THE ARGUMENTS SET OUT ABOVE, THE DEPUTY
ATTORNEY GENERAL OF CANADA ADDS THE FOLLOWING:
9. The
appellant provided no proof of the nature of the expenditures
shown under the "interest" item or of the purposes for
which the loans with respect to which the interest was claimed
were used during the 1993 and 1994 taxation years.
10. The expenditures
disallowed under the "interest" item are thus excluded
from scientific research and experimental development
expenditures under paragraphs 37(7)(f) and
37(8)(d) of the Act since the appellant did not
show that the loans in respect of which the interest was paid
were used to cover qualified scientific research and experimental
development expenditures;
11. The expenditures under
the "milk marketing, deduction" item are related to
activities which do not constitute scientific research and
experimental development within the meaning of
paragraphs 2900(1)(d), (e) and (h) of
the Income Tax Regulations and are thus not directly
attributable to scientific research and experimental development
and, consequently, are excluded from that type of
expenditure.
[3] To put the case in context, it
would be appropriate to reproduce the wording used by the
respondent and the appellant in identifying the issues.
[4] In paragraphs 10 and 11 of
the Reply, the respondent stated the issues as follows:
[TRANSLATION]
10. To determine whether
the Minister of National Revenue was correct in disallowing the
amount of $405,836 in 1993 and $258,402 in 1994 as scientific
research and experimental development expenditures.
11. Consequently, to
determine whether the Minister of National Revenue was correct in
disallowing the investment tax credits claimed by the appellant
for his 1993 and 1994 taxation years.
[5] As the appellant filed a
discontinuance for 1995, there is no reason to cite the first
issue stated by him since it related solely to the year concerned
by the discontinuance.
[6] The appellant stated the issues as
follows in his amended notice of appeal:
[TRANSLATION]
1. Revenue
Canada's refusal to grant FERME PILUMA the status of a
business wholly dedicated to research for the 1993 and 1994
taxation years.
2. Revenue
Canada's refusal, for the 1994 taxation year, to allow:
an amount of $31,209 under the item Salaries,
an amount of $20,231 under the item Interest, and
an amount of $16,085 under the item Milk marketing,
deduction.
3. Revenue
Canada's refusal, for the 1993 taxation year, to allow:
an amount of $117,724 under the item Salaries,
an amount of $7,180 under the item Transportation of goods,
an amount of $21,186 under the item Interest,
an amount of $9,832 under the item Marketing, and
an amount of $96,863 under the item Prototype.
[7] The appellant, a psychiatrist by
profession, stated that he had invested nearly $1.5 million in
Ferme Piluma Enr. ("Ferme Piluma"), which, he said, was
exclusively dedicated to research and to the development of new
consumer products, in particular, beef and various cheeses made
from the milk produced by Ferme Piluma. The appellant controlled
the farm, but it was managed by his brother.
[8] Dr. Mailloux described his
agri-food research with enthusiasm and determination, explaining
that his objective was eventually to be able to produce, at a
reasonable price, meat and cheeses containing fats that were
exceptional and indeed even beneficial for consumers' health
by replacing traditional fats, which are often harmful to
health.
[9] According to the appellant, it was
possible to produce meat and cheeses containing fats that were
nutritious, wholesome and excellent for the health, whereas
existing products often contain fats with harmful effects on
consumers' health.
[10] He provided extensive explanations and
information on his theories and on how to go about achieving his
objectives. He mainly emphasized his judicious choices in animal
cross-breeding and the quality of the feed for his herd.
[11] With respect to cheeses, he explained
at length the pitfalls encountered and his progression
along the road which led to his being able to market two highly
sought-after cheeses, St-Basile and Chevalier Mailloux. He
also described, with considerable well-earned pride, the medals
and awards won at the national level for the exceptional quality
of these two cheeses. He added that they constituted a reward
that had greatly exceeded all expectations and hopes.
[12] To achieve a result that is so much the
envy of producers, Dr. Mailloux explained, he had benefited
from the collaboration of a French expert. He also mentioned that
he had wasted or lost phenomenal quantities of cheese before
finally developing such a remarkable and sought-after
product.
[13] Throughout his testimony,
Dr. Mailloux always spoke with conviction and enthusiasm of
the various experiments conducted on the farm, which he
controlled through his substantial share in its capital
stock.
[14] However, while well acquainted with the
objectives, with the various projects, with the progress of these
projects and with the various constraints, the appellant was
hesitant and even somewhat vague when it came to the details and
the components of the expenditures under the various accounting
items, even though this was a highly relevant and even
fundamental matter in the instant appeal.
[15] On a number of occasions, I observed
that the appellant had quite summary and superficial knowledge of
the business's accounting transactions; in other words, as
informed and enthusiastic as he was about his research
objectives, he was to that same extent poorly informed about
aspects which were nevertheless essential to proving the validity
of his appeal.
[16] In the appellant's view, Ferme
Piluma was a tax shelter, the consequence of which, according to
him, was and ought to be that all the expenditures relating to
operations should be accepted by the respondent as research and
development expenditures. According to the appellant's
testimony, the result of the private experimental farm status
should have been that all outlays had to be allowed and
considered relevant for research and development purposes. This
is quite clear from pages 23 and 24 of the transcript, where
the appellant says:
[TRANSLATION]
A. Well, we are
going to come to the point. So Ferme Piluma is a farming
business. That is incorrect. That is not the case at all. It is a
private experimental farm. I took the money I made as a doctor
and financed that project. And that entitles me to tax credits
for research and to . . . It's a tax shelter.
Section 37. Oh, yes, it's a tax shelter.
[17] The appellant devoted most of his
testimony to demonstrating the quality, scope and specificity of
Ferme Piluma's operations; he underestimated the importance
of submitting adequate evidence relevant to his appeal.
[18] The appellant's strategy was all
the more surprising since, from the start of the hearing, the
respondent admitted what appeared to be the appellant's main
objective: obtaining acknowledgement by the respondent that Ferme
Piluma was a private organization dedicated to research and
development.
[19] This is quite clear from the following
passage at page 26:
[TRANSLATION]
JANIE PAYETTE:
The audit was not at all the same in 91 and 92 in the sense that,
before we agreed, recognized that all the activities were
dedicated to research and development, the audit had accepted
only a certain percentage, whereas, here, we have accepted
100 percent of all his expenditures claimed, except the
excluded expenditures. So I do not see how that letter can be
relevant here.
[20] Despite the respondent's clear
admission of Ferme Piluma's purpose, the appellant spent most
of his energy proving that the objectives pursued were related to
research and development. At pages 27, 31 and 32 one finds
the following:
[TRANSLATION]
A. You're
getting ahead of me. The reason I filed that document was
precisely to show that the status as an experimental farm
entirely devoted to scientific research was granted by the
Department for 91 and 92. And now, for reasons of which I am
unaware, they are refusing to grant it for 93 and 94, yet there
has been no change. The projects are exactly the same.
. . . But the goal, the goal is to produce milk
with the most fat possible, not the least, to make a tasty
cheese.
Q. Yes, but I also
understand from what I just saw on the screen that the milk
produced has a second purpose if we're talking about veal
calves.
A. Uh-huh.
Q. And I also
understood . . .
A. That is
correct.
Q.
. . . that the veal calves are sold to the
restaurant industry.
A. Yes.
Q. We're getting
away from cheese a bit here.
A. Yes. There was,
there is indeed a twofold purpose for the milk. It's not so
much the milk as genetics. That is, there is another purpose.
There are projects having to do with that, and that is on the
list of projects. The idea was to develop a dairy animal for two
purposes, to produce milk for very high-quality cheese and to
produce veal calves of quality as good as if they were raised
exclusively for meat. There's quite . . .
there's quite a story behind that. Those are my ideas. My
brother, the one you saw, my brother Luc carried out the project.
And I was the designer and financial backer. That's how it
was done. So, Madam, it was indicated in the video in question.
Could you show me the wording? That's very important.
"TVA Report, January 12, 95." So starting
in 95, there were a lot more commercial activities. But, on an
experimental basis, we had begun to sell some calves to a few
large restaurants. But that was much more to test that market
than to live off it as such. So what came of it, Your Honour? To
show you the result, it is quite rare to talk about results in
research. This will enable you to appreciate-to answer your
question-and not simply believe that I'm telling you a story.
I would simply like to file a copy of an article published in
Le Soleil on October 3, 1998, which states that one
of Piluma's two cheeses, "Le Chevalier
Mailloux" . . . So the first one you saw was
the St-Basile. And we developed a second one, which won the
prize for best cheese, all categories, in the country, in Halifax
in 1998. So to prevent anyone from questioning my word, I am
filing that with you.
[21] Dr. Mailloux appeared to believe,
and argued, that it was sufficient to prove the purpose behind
Ferme Piluma in order to be entitled, automatically and without
question, to claim all the expenditures entered in the farm's
accounting records. Dr. Mailloux said, at page 34:
[TRANSLATION]
. . . You know, when I told you at the outset that I
have come begging for tax credits, it was because I believe we
deserve the tax credits.
And at pages 35, 36 and 37:
[TRANSLATION]
A.
. . . So I . . . he worked at that,
on site, and I was the designer and financial backer of this
thing. And that is why I am before you to claim credits. And that
is why I am very comfortable in claiming them. So, in all, I have
put $1,500,000 into it, and the auditors can certify that for
you: $1,484,000. And that enabled me, not paying taxes-since I
paid no taxes, I took the money I earned as a doctor and I
invested it in that. So for me, it was a tax shelter. And it is a
tax shelter. And I claim the status, the same status, Your
Honour, which makes ours a farm operation wholly dedicated to
scientific research. I would like the Court to please grant me
the same status for 93 and 94. Not for 95 because, starting in
95, there was a major commercial operation and, at the end of 95,
as my brother preferred to take the business in a commercial
direction rather than to continue in research, I withdrew from
it. We have settled matters, and it has been over since December
99.
. . .
So I would like 93 and 94, since there was no change in the
projects and they resulted in success, I would like to be granted
the same status as a farm wholly dedicated to scientific research
for 93 and 94. So if . . . look, it's at your
discretion, if . . . I have an article here which
appeared, that appeared in January 96 in Affaires
agricoles. It is very recent. It says that in fact, before we
produced the champion, Chevalier Mailloux, we had predicted it.
And we worked toward that. So it was not a matter of
chance . . . .
. . . and I have brought photocopies, if you want to
look at them. So you will see confirmation of my role at the
time. And when I state that it was an experimental farm, well,
that's what it was. And it cost an arm and a leg, but, in
view of the fact that it was a tax shelter, the cost became
reasonable.
[22] Dr. Mailloux argued most
energetically that all the farm's economic activities,
including the sale of animals, hay and cheeses, were dedicated to
research and development; he refused to admit that the operation
had produced income from the sale of certain products. On this
point, moreover, he provided a very subtle explanation, which
appears in the following passage, at pages 44 and 45:
[TRANSLATION]
JANIE PAYETTE:
Q. So you had two
orientations: the first as a dairy producer and the second as a
processor.
Dr. MAILLOUX:
A. No. I don't
agree with that. It was an experimental farm. What we did was we
disposed of research property and products. When we sold
livestock, it was mainly, either it was certain calves to test
the market, to try to have people discover, to see whether
restaurants were a valid route to take. And in the other case,
when we sold livestock, we didn't do so as a breeding
operation; we simply disposed of research property. Cows are
research property for us. And the milk became a product of
research. The only animals that we sold that had nothing to do
with research were newborn calves. So, yes, it did happen that,
in some cases, we sold animals that were, that were not involved
in any experiments; those were newborn calves. But that
didn't happen often. So each animal had a purpose.
[23] Assuming that proof that Ferme Piluma
was an experimental farm entirely and solely dedicated to
scientific research would have as a consequence the sheltering of
all expenditures and all income from the tax treatment given
conventional businesses, the appellant expressed his concern as
follows, at pages 65 and 66:
[TRANSLATION]
But I want my tax credits for 93 and 94. And I want my status
as an experimental farm wholly dedicated to scientific research.
That status was granted to me for 91 and 92, and I want it, if
only for my honour. It won't give me much in figures, but I
want it. Because that's what, that's what the status was.
And the Department has denied me that status for 93 and 94
without giving any reason. Nothing. They said: "No, you
won't get it for 93 and 94." Like that.
. . .
Oh yes. There are a number of other things that will be added.
We're only at that point. So concerning 8(b), Ferme Piluma is
a farming business. I'm sorry; I don't agree with that.
It is a private experimental farm wholly dedicated to research.
That is why I denied 8(b).
[24] After admitting and acknowledging Ferme
Piluma's predominant purpose, the respondent analyzed the
company's accounting. She had allowed a number of
expenditures and denied others on the ground that they did not
qualify under the Income Tax Act (the
"Act") or that they were not justified or
supported by relevant vouchers. The disallowances had nothing to
do with Ferme Piluma's status and purpose. What was done
essentially was to evaluate the expenditures in light of the
provisions of the Act.
[25] The following exchange between the
parties clearly illustrates the parameters of the case, at
pages 67, 69 and 70:
[TRANSLATION]
THE COURT:
Q. We were at
subparagraph (h).
A. Correct.
"the majority of the expenditures referred to in
subparagraph (f) above were disallowed by the Department of
National Revenue on the ground . . ." Well,
here, Your Honour, it is incorrect to say the majority of the
expenditures because, for 94, it was the minority of expenditures
for 94 that were disallowed. It was not the majority. But, in our
preliminary meeting, Ms. Payette understood that in another
way. You see, for 94, if you take the $258,000, that represents .
. . 41 percent of the expenditures for 94 were
disallowed. So that's not the majority. That's because
the word "majority" here, depending on how you
understand this subparagraph, colours things. It is true that the
Department disallowed more than 50 percent of the
expenditures I claimed as qualified expenditures for 93, but the
Department allowed 59 percent of the expenditures I claimed
as qualified expenditures for 94. So $138,000 out of $258,000 is
59 percent. So for that item, if the word
"majority" were changed, I would admit
subparagraph (h). Otherwise, that subparagraph is incorrect
and is not consistent with the . . . own
figures . . .
. . .
A. Perfect.
Q. I am asking you a
question on this particular point.
A. Yes.
Q. There is a
percentage of expenditures that was actually allowed.
A. Yes.
JANIE PAYETTE: One hundred percent. If you look. I'm
sorry.
THE COURT: Yes.
JANIE PAYETTE: Because I'm specifying the
percentage.
A. Those that were
recognized as qualified, it was 100 percent.
THE COURT:
Q. They allowed all
of them, all the expenditures at that point?
A. Yes. Of those
expenditures as qualifying for the tax credit. Right?
JANIE PAYETTE: One hundred percent of the expenditures.
The items that were allowed were all or substantially all
attributable to research conducted relating to those items. Yes,
we allowed them.
[26] Rather than presenting detailed and
substantial evidence supported by specific explanations and
appropriate documentary evidence, the appellant instead chose to
make statements and observations with no relevant or direct
effect on the validity of his claims. What is more, he admitted a
number of errors and confessed his inability to provide
explanations that were nevertheless essential to an analysis of
his case. Furthermore, he called no one as a witness to correct
the many deficiencies arising from his lack of control or from
his ignorance of important facts.
[27] I think it useful to cite certain quite
revealing passages on this point, at pages 75, 76 and
77:
[TRANSLATION]
. . . the amended notice of appeal. Salaries
$31,000: disallowed. Claimed: $82,000. An amount of $50,000 was
allowed. I would like the full amount to be allowed. Your Honour,
the reason is this: you have been told that the direct salaries
and wages, the wages portion paid to subcontractors was
creditable. So I will go no further on that point.
. . .
Q. $20,000 instead
of zero?
A. Yes. So I would
like the full amount of interest to be recognized as creditable,
as allowable.
. . .
THE COURT:
Q. Now, do the
documents establish the purpose of the loans?
A. No. No, Your
Honour. They went into a pool of money and there was no
distinction made.
Further, pages 80 and 81:
[TRANSLATION]
. . . Look, the auditors will be able to explain to you
what was behind that. I don't have the books with me.
. . .
Yes. $117,000. So the difference between the two is the salaries
paid by the subcontractor to the employees who worked in the
cheese house. So, as we were told to differentiate, that those
salaries would be allowable by Revenu Québec, it was
for that purpose that it was put with the salaries of the Piluma
employees. $7,180 under the item Transportation of goods and
trucking. There, you have 03. Look, I
can't . . . The auditors will tell you what
that consists of. I don't remember.
Then at pages 91 and 92:
[TRANSLATION]
JANIE PAYETTE:
Q. Right. So you
admitted that this disallowed amount consists of expenditures for
which there is no supporting documentation and capital
expenditures made for research, for construction, I'm sorry,
of the cheese house. My question is this: when you spoke a moment
ago about salaries to subcontractors, were they the people who
built the cheese house? What do you mean by subcontractors?
A. Yes. That's
correct. The individuals . . .
Q. Who built the
cheese house.
A. Yes. Yes, yes,
yes.
Q. So
the . . .
A. The wages
portion.
Q. To
subcontractors.
A. Yes. To all those
who . . . Yes.
Q. Who took part in
the construction of the cheese house.
A. Uh-huh,
uh-huh.
Q. Thank you.
A. Yes. That's
exactly right. On the invoice of a contractor, there is a
materials portion and a wages portion. They have been separated,
Your Honour.
Q. Perfect.
A. And accounted
for. By my brother. I didn't have anything to do with that,
but that's what he was supposed to do.
. . .
Also at pages 95 to 102:
[TRANSLATION]
JANIE PAYETTE:
Q. Well.
A. Probably. No
problem.
Q. Perfect. Now,
that document . . .
A. It looks like
it.
Q. . . . I
explained to you, I am explaining to you that this is the
interest you claimed in the financial statements, which amounted
to $20,186 in 93 and $20,231 in 94.
A. Uh-huh.
Q. Was separated by
Jacques Prince between 1, 2, 3, well . . .
Around 13 loans. You provided us with Exhibit A-4 a
moment ago. Can I assume that that document concerns a $25,000
loan from the National Bank paid out on March 1, 1994, on
which you took interest, claimed interest of $1,928? Do you have
that . . .
A. I don't know.
I didn't calculate that, Ms. Payette.
Q. You don't
know. You can't tell me.
A. Look, I
discovered this on Sunday, and my analysis doesn't amount to
all that much. I have no idea.
. . .
A. O.K. I have no
idea. I have no idea. I haven't looked at it. I have no
idea. So you have the contract in front of you, and it says what
it says. I have nothing to add in that regard. I have conducted
no analysis, so there is nothing I can add on that.
JANIE PAYETTE:
Q. With regard to
those loans, do you know where the loan money came from, what the
amount was and what it was used for?
A. The money, yes.
That I do know. The money went to pay all the expenditures for
research, the work.
Q. All the
expenditures for the research.
A. That's
correct.
Q. So if we take the
third loan here, for example, Caisse populaire St-Basile,
car loan of $15,000. That was for research?
A. No. That
wasn't. I don't know.
Q. You don't
know.
A. I would have to
ask. I have no idea what that's doing there. That wasn't
used for research although he put it in there.
Q. Well no, but
. . .
A. I haven't
examined that.
Q. . . .
when you say "he", who is "he"?
A. Luc.
Q. Luc, your
brother?
A. Yes.
Q. Who prepared
that?
A. Look . . .
Q. I'm
sorry.
A. I don't know.
I have no idea who prepared it.
Q.
Luc Mailloux. Was it Mr. Mailloux who, Mr.
Luc Mailloux, who prepared Ferme Piluma's statements of
expenses?
A. Yes. That is
correct.
Q. So it was
Luc Mailloux who claimed the $20,000 and the $20,186 in
interest in 93 and 94?
A. Well, if he did
it, if it's true, it's not right. I don't know
whether he claimed it, but he wasn't the one who made that
list.
Q. Good. O.K.
I'm sorry, we're going to Tab . . .
Tab 3. You have Tab 3 with the red sticker, which is
the statement of revenue and expenses. If we look at line 3,
interest, there's an amount of $20,231 claimed.
A. Uh-huh.
Q. Do you see, do
you agree that that $20,000 was entered by Mr. Mailloux, was
entered in the statements of . . .
A. Yes.
Q. . . .
revenue and expenses? Yes. Good.
A. It was done by
him. That is correct. It was he who prepared the statement of
revenue and expenses.
Q. Good.
A. And as to whether
it's true that he put, that he included the $15,000 car loan
in that, it would only be a portion because a portion of car
expenses went for the business, for the farm.
Q. All right. And
can we . . .
A. So it's a
portion. For that loan, I agree with you. Normally, there should
have been some rigour; he should have agreed with the auditor to
enter a portion with respect to the car, the allowable
portion.
Q. All right.
A. The other loans
were taken out directly for the business, unless I am
mistaken.
Q. Unless you're
mistaken.
A. So you have
the cheese house, a loan of $104,000 in October 93, etc.
Q. Yes. Are we to
think that that is a loan that was, that was paid for the
construction of the cheese house, a mortgage loan?
A. Correct.
Q. It was for the
construction?
A. Yes, yes. Yes,
yes.
Q. Loan of $104,000.
And then the loan of . . .
A. Look, let's
be careful here.
Q. Yes. You
don't know . . .
A. Because there is
equipment.
Q. That's right.
You don't know . . .
A. Because the
loan . . . Wait a minute. In October 93, it was
the construction. Wait a minute. Was it for the construction or
for the purchase of equipment? I don't know. I don't know
the details.
. . .
Q. Perfect. And
then, we see, for example, that the loan of $103,000 in 92 was
paid into account no. 58521, which would be Ferme
Piluma's account, if I understand correctly. And we see it in
a number of places.
A. No idea about the
accounts.
Q. You don't
know.
A. The account
numbers.
Q. You don't
know.
. . .
A. . . .
what happened is that my wife sent invoices from
Trois-Rivières.
[28] I observed on a number of occasions
that the appellant was unable to explain, justify or even
understand certain information concerning his own case. He could
have corrected this significant deficiency by calling qualified
persons as witnesses. He chose to do nothing of the kind. I
respect that choice, which was quite peculiar in the
circumstances, particularly since the appellant alone bears the
consequences.
[29] On a few occasions, he admitted certain
errors and irregularities, in particular regarding the salary
that his brother paid to his mother to babysit the children and
regarding interest on a car loan; the same was true with regard
to the amounts from the sale or disposition of hay and even with
regard to the crop insurance proceeds, which were no doubt paid
following a poor harvest. These admissions were quite revealing
of the appellant's incompetence to testify on certain
fundamental aspects of his appeal.
[30] The appellant's approach was very
academic and theoretical. A good example of that approach was
provided when the question of income arose: the appellant
vigorously argued that the income was not income, but the
proceeds of disposition of products of research.
[31] His claims on this score extended to
all products, in particular meat, milk, hay and cheese. In other
words, according to the appellant, there were never any sales or
income; there were essentially just proceeds of disposition
relating to or associated with research. It is quite surprising
that, in 1995, those same products suddenly became commercial
products, without any transition period or any substantial change
in operations.
[32] I think it useful to reproduce the
following passages from pages 109, 110, 112, 114 and
115:
[TRANSLATION]
THE COURT:
Q. They came to pick
it up at the farm themselves?
A. Yes.
Q. Perfect.
A. So with respect
to the sale of milk, it was and is my claim that the research
business had to dispose of research property in order to generate
official figures. So it was indeed a disposition of research
property, not a sale of milk, a commercial transaction.
Q. All right.
A. Your Honour
. . .
Q. I'm going to
continue my . . .
A. . . .
we're not dealing with semantics here. I had longstanding
contracts with tax experts in Sherbrooke.
Q. I'm sorry, is
that argument, Mr. Mailloux?
A. Well, no, because
you asked me a very specific question: "Was it a sale?"
I say no.
. . .
THE COURT:
Q. Look here. I
understand that the questions that are put to you have effects
with which you do not necessarily agree.
A. Uh-huh.
Q. But this is not
the appropriate time or moment to testify. What I mean is, in
light of the audit, was this income? In a specific column, there
is an amount that appears as sale of milk.
A. No, it is not a
sale. And no, it is not income.
JANIE PAYETTE:
Q. O.K. So can
you . . .
A. It is a
disposition of a research product or of property. In the case of
the milk, it is a disposition of research property.
Q. Mr.
Mailloux . . .
A. It is not
income.
THE COURT:
Q. Look.
A. And it is not a
sale.
Q. There was a cash
inflow.
A. Yes.
Q. It's a cash
inflow?
. . .
A. Your Honour,
it's very simple. I was answering the question: "Was
there income?" No. But if you are asking me, as you
suggested, "Was there a cash inflow?" Yes. So
that's all it is. The question must be precise in order to be
answered precisely. And I'm not quibbling over words here.
The terms used are important.
. . .
PIERRE MAILLOUX:
. . . That's as you wish. Your Honour, I give
you notice right away that I have no intention of objecting to
the vast majority of the auditors' remarks. They audited;
they had access to the books; I did not have access to them. So
it's going to be, I can tell you in advance, announce that,
apart from a few very specific minor questions, my
cross-examination of the auditors will be extremely brief. If I
have any questions at all.
. . . you could let Mr. Mailloux know what you
intend to establish through your witnesses. And perhaps he will
simply admit that, if he testified, he would say such and such a
thing. That will have the effect of considerably shortening your
evidence.
PIERRE MAILLOUX: I accept all . . .
JANIE PAYETTE:
Your Honour.
PIERRE MAILLOUX: Your Honour, I accept all the figures of
the auditors.
[33] The appellant's discomfort over
certain aspects of his case was confirmed by the testimony of
Jacques Prince, at pages 124 and 125:
[TRANSLATION]
. . .
JANIE PAYETTE:
Q. As well. So it
was the audit by the Quebec Department of Revenue?
A. That is correct,
yes.
Q. Perfect. Can you
explain the purpose of your audit?
A. At the outset, we
had . . . the department had asked . . . it was an in-house
auditor; he had requested supporting documents from
Mr. Mailloux, that he provide us with his supporting
documents justifying certain expenditure items which he had
claimed in his tax return. Mr. Mailloux was unable to
provide those documents since his brother had them on site and
Mr. Mailloux did not have access to them. So we disallowed the
expenditures in question claimed by Mr. Mailloux, Pierre
Mailloux,
Q. The expenditures,
what expenditures?
A. The expenditures
under the expenditure items for which we had requested supporting
documents from him. Since he did not produce the documents, the
auditor who conducted the in-house audit disallowed the
expenditures claimed by Mr. Mailloux.
. . .
At pages 126 and 127:
[TRANSLATION]
. . .
THE COURT:
Q. There is
something I do not understand. You asked the witness, you said,
if I understand your testimony correctly, I requested supporting
documents and we never received them.
A. That's right.
We requested them in writing. I didn't request them; it was
another in-house auditor.
Q. O.K.
A. He did not
receive, he did not get the documents from Mr. Mailloux.
Q. O.K.
A. Because
Mr. Mailloux did not have access to them.
. . .
At pages 130 and 131:
[TRANSLATION]
A.
. . . Then there were expenditures that could be
capitalized, that is, either the purchase of equipment or the
construction of a building. In addition there were no supporting
documents for $63,439 and $28,653, so there was no document to
justify the amounts claimed. And then, lastly, there was
depreciation that was disallowed for each of the years. That
gives us our total of disallowed expenditures of $258,000 and
$79,000.
Q. Well, at
page 3 of your report, in paragraph 3, you write in the
no supporting documents section:
With the accounting system in place at Ferme
Piluma, it was difficult to reconcile the various expenditure
items.
Can you explain what you mean by that?
A. O.K. To begin
with, with regard to the accounting system, normally, when we
conduct an audit, for example, when a maintenance-repair
expenditure item is claimed, an amount of $10,000 normally-in the
column, we would have $10,000. Then, we can check the
invoices. But I could not reconcile the amounts claimed
with what I had in the books because there were . . . there were
amounts that had been entered in the wages column, and the other
part for the same supplier could have been put in another column.
I had trouble reconciling the items. So I went with the whole of
the invoices that were there for the expenditure items that had
to be justified by means of invoices.
Q. So you could not
reconcile the statement of revenue and expenses with what was in
the books?
A. That is correct,
because Luc Mailloux also grouped things together. When he
prepared his statement of revenue and expenses at the end of the
fiscal year, he grouped certain items together. So I didn't
know what he had grouped together. He did not provide me with the
details on that. So I couldn't balance each expenditure item
separately. That's why I went with his expenditures as a
whole.
Q. O.K. When you say
that you went with his expenditures as a whole, what do you mean
by that? You looked at each invoice, you . . .
At pages 137 and 138:
[TRANSLATION]
. . .
A. D17, it was. O.K.
If we take, yes. Just the second one; we see: "Yvette
Villeneuve $180". I got no explanation of that. I
don't know what Ms. Villeneuve could have done for the
farms. I don't know; I had no details on that.
Q. So this, here on
this page, D17, we have a total of $76,387 at the bottom. What do
those amounts represent?
A. They were all
amounts that were, for example, entered as salaries.
Q. In the
$146,000?
A. Right.
Q. In the wages
claimed?
A. That's right,
yes.
THE COURT:
Q. That would be,
the $76,000, that would be a component of the $117,000?
A. That's
correct, yes. Yes, the $76,000 is included in the $117,000.
JANIE PAYETTE:
Q. All right. And in
that $76,000, there are documents that are not, there are
expenditures that are not justified.
A. Right.
Q. That's what
you're saying?
A. That's
correct. For example, as I was telling you, among other things,
Yvette Villeneuve, I don't know what that is. I
didn't, I didn't see anything, no
documents . . .
At pages 143 to 147:
[TRANSLATION]
. . .
Q. These are items
that you found where, pages D17 and D18?
A. They may be in .
. . either . . . they may be in various expenditure items.
Q. Right. So
everything we see on pages D17 or D18 may be in various
expenditure items which you have allowed?
A. Correct.
Q. Unless they are
not justified?
A. That is correct,
yes.
Q. So, if they were
not justified, they would go in no supporting documents.
A. No supporting
documents, right. Because we take, on D17, the first, for example
"Coopérative des inséminateurs du
Québec". At that point, if there was an invoice,
if that invoice was there, well, at that point I added it to the
other expenditures and I allowed it. I didn't allow it under
wages though, but under other expenditures. But I didn't go
and take a portion of labour; I put it in overall terms, so that
it would be easier to account for and to analyse a little.
THE COURT:
Q. In fact, what you
disallowed was essentially those items for which there were no
supporting documents?
A. That is correct,
yes.
Q. If there was a
supporting document, you didn't necessarily respect the
heading under which it was presented to you, but you attributed
it to the heading that corresponded to it in your assessment, to
the heading it should be attributed to.
A. That's right,
I added up all the expenditure items. For example, if they came
to $200,000, I then added all the invoices that had been
submitted to me. For example, if they added up to $180,000 out of
$200,000, I allowed $180,000, then I subtracted the expenditures
that could be considered personal, and then if we were left with
$150,000, well I allowed $150,000 out of the $200,000. I
don't know if you understand.
Q. Yes. But not
necessarily for the items under which and for which they had been
submitted to you?
A. No, that is
correct.
Q. Yes.
A. Right, because I
went with the whole. Since for us a subcontractor did not
necessarily represent wages.
Q. But it did not
mean the expenditure was not allowable just because of that?
A. No, no. That is
correct. No, no. I allowed it in full. One hundred percent of the
invoice could be allowed, except that it would not be allowed
under wages.
Q. Right.
A. I would allow it
in the other expenditures as a whole.
JANIE PAYETTE
Q. But we arrive at
$258,000 in disallowed expenditures all the same?
A. Yes, yes,
that's right.
Q. In 93.
A. If we calculate
everything including the expenditures that can be capitalized,
and the disallowed depreciation and the personal expenses, yes,
we get $258,000, yes.
Q. O.K. And $79,201
in 94.
A. That is correct.
That's why the amount is greater in 93; it's mainly due
to the building expenditure, which is capitalizable.
Q. Including the
construction cost of $157,000?
A. That's right,
yes.
Q. For the cheese
house.
A. Uh-huh.
Q. All right. Now
with regard to the interest expense, we looked at page D14
of your report a moment ago on which there are, I don't know,
details concerning the interest claimed. So, first, in 94, the
statement, the interest claimed was $20,231. Then for 93, you
write $20,000. There is an error there, I believe? $20,186,
because, in 93, I see $21,186 here on the income statement.
A. Yes. In 93, yes,
I made a mistake, yes, a $1,000 error which ultimately benefits
the taxpayer. Ultimately, we should have disallowed $1,000
more.
Q. What documents
were provided to you so that you could itemize the interest like
that, and calculate totals?
A. O.K. Right, I
started with the amount claimed in the financial statements. Then
I worked with the bank statements that were provided to me by
Luc Mailloux. The interest statements that were received,
that he received at the end of each year, which stated the
principal and the interest paid for each month. And based on
that, I determined, from the supporting documents that were
submitted to me, I was able to determine the amounts that were
paid for each year.
At pages 149 to 151:
[TRANSLATION]
A. That's
correct. What it is is that, of the $20,000-well, ultimately, it
should have been $21,186. There was $12,294 of it in interest
presented to us, in statements that could justify that for us. So
we disallowed $7,892. And in 94 it was the reverse. We allowed
$1,793 more.
Q. Based on the
statements that he provided to you?
A. That is correct.
Based on the supporting documents that were provided to me.
Q. All right. Did
you check to see for what purposes the money borrowed, from those
loans, was used?
A. We didn't
look at that. I looked only at the principal amounts. If we take
94, there are two amounts of $6,000, if it was for the loan in
October 93 and June 92. So we basically knew that it was related
to the construction of the cheese house. And the other loans-they
go back to-it's said that there were some in 80. The loans
were made in 80, so we gave the taxpayer the benefit of the
doubt. We said it was for the business; we didn't investigate
any further on that point.
Q. O.K, but you did
not look at research and development, whether they were loans
that had been used for research and development?
A. No, that's
right. We allowed them as expenditures. We said, we supposed
that . . .
PIERRE MAILLOUX:
Your Honour. Your Honour, to simplify the discussion, in case we
come back to this, I would be prepared to admit that the matter
of the car loan has nothing to do with this. I am ready
to . . .
JANIE PAYETTE: No, I'm going to continue my
examination.
PIERRE MAILLOUX:
No, but considering that it is a point that had escaped my
notice.
THE COURT: Yes. That is an admission we will take note
of.
PIERRE MAILLOUX:
Yes. It's an admission, and it has no relevance. We could
scratch it out because it is an error.
JANIE PAYETTE: All right.
THE COURT: Continue.
JANIE PAYETTE:
Q. So you were
saying that you did not analyze the purposes for which the
borrowed money was used?
A. No, that's
correct. It was assumed that it was for the business.
Q. Perfect.
A. So we
allowed . . . since the business was also operating at
a loss each year, we knew perfectly well that it would eventually
need a line of credit or loans to keep it afloat. So we said-and
there were some assets-so loans would be needed at some point.
So, we allowed the expenditure, we concluded that the various
loans had been used for the purposes of the business.
Q. An amount of
$12,294 in 93?
A. Yes, that is
correct, the last loan. Yes, right, until October, yes, which was
the last. O.K. Yes.
Q. Because there is
a difference of $7,892, which is what? It wasn't justified,
is that it?
A. That's right.
Which did not have . . .
Q. It wasn't
there.
A. That is correct,
which did not have supporting documents to justify it.
Q. Perfect. Did you
meet Mr. Mailloux, Pierre Mailloux?
A. Yes, once, on one
occasion, yes.
Q. When?
A. At the Department
of Revenue . . . .
At page 155:
[TRANSLATION]
. . .
PIERRE MAILLOUX:
All right. I would like to make an admission, Your Honour, if you
have no objection. Yvette Villeneuve is my mother. And, once
again, it was a monumental error to have put the salary he paid
my mother to babysit his children in that statement. So I admit
that there are a few minor errors like that which distress me,
Your Honour. So is it possible . . .
At page 157:
[TRANSLATION]
. . .
PIERRE MAILLOUX:
I admit-I would like the name of my mother,
Yvette Villeneuve, and the amounts beside it, which are
salary that he paid my mother to take care of his children, that
it be removed from this sheet. Is it possible to request that? It
is an error on his part, on Luc Mailloux's part, to put
the salary he paid my mother there.
. . .
At page 159:
[TRANSLATION]
PIERRE MAILLOUX:
I am attacking my own figures, no. I'm taking the
auditor's figures. I am telling you that this item is an
error and should not have been there.
THE COURT:
But if I were to come to the conclusion that, if there are so
many errors, perhaps there are more of them than those you
yourself have identified.
PIERRE MAILLOUX:
In that case, Mr. Chairman, Your Honour, I would simply ask
you, based on what I learned before lunch, to suspend the hearing
and to ask Richard Purcell to go and check the figures on
site. And then the points will be submitted to me and, before
they are submitted to you again, we will remove what does not
belong there.
. . .
[34] These various passages show quite
clearly to what extent the appellant was unaware of the
day-to-day details of the accounting. That is not a fault in
itself, since his considerable responsibilities no doubt occupied
him to the point where he was not available to get involved in
that aspect, which was clearly secondary in his mind. That being
the case, he should have brought in qualified persons to testify
and answer any questions relating to his appeal.
[35] The appellant was pursuing noble and
laudable objectives; he wanted to put on the market products
(meats and cheeses) of superior quality that were excellent for
consumers' health.
[36] In general, the appellant was more
concerned with the progress and results of the research than with
the inherent expenditures. He was clearly more comfortable and at
ease testifying on that aspect of the case than on the
expenditures, which were not within his province. It is very
difficult to be, all at the same time, psychiatrist, doctor,
lawyer, scientist, veterinarian, agronomist, accountant,
dietician and tax expert.
[37] The appellant had decided to invest in
a private experimental farm in order to create a tax shelter for
himself; according to him, all the expenditures without exception
should have been part of the research project. In his view, the
experimental research farm status should have had the effect of
making all the expenditures allowable by virtue of the fact that
what was involved was a research project set up in the context of
a tax shelter.
[38] The appellant contended and repeated
that all the funds invested had been used for a single and
exclusive purpose: research and development, until 1995, in which
year the farm's orientation changed, for reasons not
explained, to that of a broadly commercial undertaking, which
moreover accounted for and justified the discontinuance for that
taxation year.
[39] It is curious that the operation became
instantly commercial in nature. It appears that what had been
proceeds of disposition suddenly became simply revenue from
commercial activities.
[40] Relying on a judgment by the Honourable
Pierre Archambault concerning the same business, the
appellant contended that all the expenditures claimed must be
allowed. He testified that, for the years at issue,
administration and accounting had been his brother's
responsibility, yet he did not call him as a witness.
[41] What is rather unusual is that the
assessments were issued following an audit initiated at the
request of the appellant himself.
[42] The facts could be succinctly summed up
in the following lines. The appellant, a physician specializing
in psychiatry, set up a tax shelter for himself by establishing a
private experimental farm. He invested therein a large
portion of his personal income and set some objectives: namely to
produce meats and cheeses containing healthy fats. He controlled
the capital invested and drew upon and experimented with his own
ideas and knowledge in the hope of achieving very positive
results.
[43] He does not accept and vehemently
disputes all the respondent's decisions disallowing certain
expenditures on the grounds that, in some cases, no justification
was provided and that, in others, they were not authorized by the
Act.
[44] Matters became complicated when the
appellant decided to discharge his burden of proof on his own in
areas in which he had no knowledge for one thing and-even more
prejudicially-did not have the necessary and appropriate
information for another.
[45] Despite these deficiencies, which were
moreover admitted by the appellant himself a number of times, he
continued to believe that, to succeed, all he had to do was prove
that the activities of the experimental farm were essentially
centred on research and development; virtually all the
appellant's evidence was devoted to achieving that
objective.
[46] Yet, the fact that the operation was
indeed a private research farm was never disputed by the
Minister. In fact, the outset, the respondent admitted that the
experimental farm's purpose was research and development.
However, that recognition did not have the effect of preventing
the audit and the verification of the appropriateness of certain
expenditures.
[47] The appellant has made his appeal a
matter of pride and wishes the Court to confirm his perception
and vision of the orientation he had wanted to give his farm.
Throughout the hearing, he appeared to believe that the direct
effect of the assessment was to deny its research and development
status.
[48] He himself initiated the process
leading to the assessment under appeal. Indeed, Dr. Mailloux
himself requested that the Quebec Department of Revenue proceed
with an audit of the file.
[49] The appellant's tax file has
previously been the subject of an appeal before this Court for a
period prior to the one here in issue.
[50] Dr. Pierre Mailloux would
like this Court, first, to confirm that the farm was a private
experimental farm absolutely, totally and exclusively dedicated
to research and, as a consequence of its obtaining that status,
would like the Court simply to allow his appeal.
[51] To succeed in his appeal, the appellant
had to show on a balance of probabilities that his claims were
valid. As the assessment consisted of a number of components,
some of which included a number of elements, that exercise might
constitute a difficult challenge, particularly since
Dr. Mailloux's knowledge of the business's
administration and accounting was rather limited, as he himself
admitted.
[52] However, he would have had to show, at
least through circumstantial evidence, in the absence of direct
evidence, that his claims were justified and justifiable. Not
only was Dr. Mailloux unable to adduce such circumstantial
evidence, but his testimony confirmed rather the validity of a
number of aspects of the assessment.
[53] Lastly, Dr. Mailloux very
vigorously argued that the building where the cheese was
manufactured was a prototype and that that characterization gave
him access to the benefits provided for by the Act.
[54] Here again, Dr. Mailloux misread
the provisions of the Act.
[55] In the appellant's mind, the
provisions of the Act are secondary; he believes that his
own assessment and characterization of property should be
sufficient for all the expenditures to be allowed.
[56] The actual situation is quite
different. Parliament has enacted provisions which must be
complied with. In the exercise of applying the provisions of the
Act, I must assess the facts on a balance of probabilities
since it is difficult, if not impossible, to obtain evidence
whose quality is beyond all doubt.
[57] In the instant case, the balance of
probabilities amply favours the validity of the assessment, since
the appellant did not see fit to submit evidence challenging the
respondent's evaluations. The only evidence adduced by the
appellant concerned the status and purpose of the farm, which
evidence he supplemented with various comments and observations
suggesting that the statutory provisions should be adjusted to
suit the project, not the reverse.
[58] The Act permits taxpayers
engaged in a business to deduct certain expenditures made for the
purpose of scientific research and experimental development.
Those expenditures may not be otherwise deducted, either because
they do not constitute expenses incurred by a taxpayer for the
purpose of earning income from a business or property under
paragraph 18(1)(a) of the Act, or because they
are capital expenditures the deductibility of which is
specifically prohibited by paragraph 18(1)(b) of the
Act.
[59] Even if the expenditures are made for
the purpose of scientific research and experimental development,
the taxpayer is not by virtue of that fact released from the
obligation of having in his possession supporting documents
demonstrating or certifying the nature and quality of the
expenditures claimed.
[60] That is the case for the activities
which took place after February 1995. The term "scientific
research and experimental development" is defined in
subsection 248(1) of the Act under the heading
"scientific research and experimental development". As
regards activities which took place prior to February 1995, the
term "scientific research and experimental development"
is defined in paragraph 37(2)(b) of the Act,
which provides that that expression has the meaning given to it
by the Income Tax Regulations (the
"Regulations"). Subsection 2900(1) of the
Regulations defines what constitutes scientific research
and experimental development for the purposes of section 37
of the Act.
[61] The respondent admitted that the
appellant was engaged in a business within the meaning of the
Act such that, under the appropriate conditions, he could
deduct certain expenditures such as those made for the purpose of
scientific research and experimental development.
[62] According to subsection 2900(1) of
the Regulations, the investigation or search must be
systematic in order to constitute scientific research and
experimental development for the purposes of section 37 of
the Act.
[63] The evidence showed that this test had
been met. The Minister admitted that, in 1993 and 1994, the
appellant had engaged in scientific research and experimental
development within the meaning of section 37 of the
Act for the purposes of his cheese production
business.
[64] With respect to the appeal, the matters
to be determined for 1993 and 1994 are the categories and amounts
of the expenditures made for the purposes of the appellant's
scientific research and experimental development.
[65] First, expenditures made in order to
acquire or maintain a building do not constitute scientific
research and experimental development expenditures under
paragraph 37(1)(a) of the Act because an
"expenditure of a current nature" within the meaning of
subparagraph 37(1)(a)(i) of the Act does not
include outlays required for the acquisition of land, an interest
in land, or a property on which depreciation may be claimed.
[66] Expenditures for the acquisition or
maintenance of a building may be considered as scientific
research and experimental development expenditures under
subparagraph 37(1)(b)(i) of the Act.
[67] However,
subparagraph 37(7)(f)(i) of the Act for 1993
and subparagraph 37(8)(d)(i) for 1994 specifically provide
that no capital expenditure made for the acquisition of a
building after 1987 may be characterized as a scientific research
and experimental development expenditure, unless it is for a
"special-purpose building" within the meaning of
section 2903 of the Regulations.
[68] At the hearing, the appellant admitted
that the building in issue is not a "special-purpose
building" within the meaning of section 2903 of the
Regulations.
[69] It would be appropriate to reproduce
the exact text of the appellant's admission on this point, at
pages 84 and 85:
[TRANSLATION]
All right, now, the prototype. There is an amount of $96,000. So
you have, at the top, the salary of $117,000, and you have, at
the bottom, where it says: "improvement of lot, land,
prototype", it is clear that, with respect to land,
there was no land purchase. So we'll forget that too. There
are a number of terms used, but the word, the $96,863, refers to
the construction of the prototype. And I agree entirely with the
Department of Revenue that the prototype absolutely does not
correspond to the type of building contemplated by the Income
Tax Act in paragraph 37(7)(f). I agree with them
on that. It is not a special-purpose building within the meaning
of that paragraph of section 37. It is plainly a prototype,
a capital expenditure.
So that's why, Your Honour, I admitted, I admitted 8(k). If
you were surprised at my admission of 8(k), it's just that I
agree entirely that the cheese house is a building that is not a
special-purpose building contemplated by section-it's not
2909, it's 37(7)(f), I believe, if my memory is
correct, 37(7)(i), or something like that. But there is a
subsection which concerns-of section 37-which concerns
special-purpose buildings, and I agree with the Department that
we're not talking about that here.
[70] Consequently, the expenditures related
to "improvement of lot, land, prototype" are not
expenditures made for the purpose of scientific research and
experimental development and cannot be deducted under
subsection 37(1) of the Act.
[71] As regards capital expenditures made
for the acquisition of equipment, they constitute capital
expenditures on scientific research and experimental development
under subparagraph 37(1)(b)(i) of the Act.
[72] Subparagraphs 37(7)(f)(i)
of the Act for 1993 and 37(8)(d)(i) for 1994 show
that Parliament's intent was to exclude deductions that might
benefit permanent fixed assets such as a building, even one used
for scientific research and experimental development purposes.
There were two reasons for this. First, such a building may be
depreciated over a number of years. Second, its purpose may
change or it may be used for purposes other than those initially
intended.
Wages to subcontractors for the construction or maintenance
of the building
[73] The appellant contended that it was
normal, customary and appropriate to pay certain workers in cash;
and apparently if he did not do so he would have been unable to
obtain labour.
[74] Paying cash does not in itself make it
impossible to claim expenditures or outlays. However, when the
expense is claimed, it is difficult, indeed very difficult, to
prove that expense, particularly if the recipient of the payment
does not testify. In the instant case, there is no real proof of
payment of the wages claimed, except for the appellant's
testimony in that regard, which, like his testimony on all the
other aspects of the administrative details, was vague, confused
and certainly conclusive.
[75] In any case, this assessment of his
testimony is entirely secondary since such wage expenditures,
even if they had been established conclusively, were not
allowable as the wages were paid for the construction of the
building and, as such, constitute non-deductible expenditures
under subparagraph 37(7)(f)(i) of the Act for
1993 and subparagraph 37(8)(d)(i) for 1994.
Transportation of goods and trucking
[76] According to the Amended Notice of
Appeal, the Reply to the Notice of Appeal and the testimony, the
expenditures shown under the item "transportation of goods
and trucking" constitute expenditures which were made solely
for the construction of the building. These expenditures made for
the construction of the building thus do not constitute
scientific research and experimental development expenditures
under subparagraph 37(7)(f)(i) for 1993 or
subparagraph 37(8)(d)(i) for 1994. Such expenditures
might have been allowable if the evidence had established that
they had served another purpose provided for and accepted by the
provisions of the Act.
Interest on loans intended for Ferme Piluma Enr.'s
operations
[77] As to the interest on the loans, the
portion of such interest corresponding to the interest paid in
respect of qualified scientific research and experimental
development expenditures was deductible and was allowed.
[78] However, as regards the interest on the
loans taken out for purposes unrelated to scientific research and
experimental development, they are clearly not deductible and
were not allowed. On this question, the appellant submitted no
evidence, and, what is more, with respect to one year, the
respondent allowed an amount greater than that claimed by the
appellant.
Milk marketing
[79] The expenditures relating to "milk
marketing" include the dues paid to the Union des
producteurs agricoles ("UPA"). Those dues were
mandatory for the operation of the appellant's business,
regardless of the purpose of that business. Such dues do not
constitute expenditures made for the purposes of scientific
research and experimental development within the meaning of
subsection 37(1) of the Act. They are mandatory dues
which all milk producers, without exception, must pay. However,
they do constitute expenditures made for the purpose of gaining
or producing a profit or income from a business or property
within the meaning of paragraph 18(1)(h) of the
Act.
[80] As to the other amounts paid for
"milk marketing", I very much doubt that the appellant
never intended marketing the final products resulting from his
scientific research activities, particularly the cheeses he
described with such pride and enthusiasm.
[81] Those expenditures were made for the
purposes of market research and quality control or routine
testing of products within the meaning of
paragraphs 2900(1)(d) and (e) of the
Regulations. Consequently, the deduction of those
expenditures is not allowable under section 2900 of the
Regulations.
[82] For all these reasons, the appeal must
be dismissed, with costs.
Signed at Ottawa, Canada, this 30th day of January 2002.
J. T. C. C.
Translation certified true
on this 15th day of May 2003.
Erich Klein, Revisor
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