Citation: 2011 TCC 261
Date: 20110511
Docket: 2008-3875(IT)G
BETWEEN:
JENTEL MANUFACTURING LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D'Arcy J.
[1]
The Appellant has
appealed a notice of reassessment in respect of its fiscal year that ended on
October 31, 2005. The issue before the Court is whether certain expenditures made
by the Appellant during the fiscal year constituted expenditures on scientific
research and experimental development (“SR&ED”).
[2]
The parties filed a
Statement of Agreed Facts (the “SAF”). In addition, I heard from two witnesses:
Mr. Ralph Hahn, the owner and president of the Appellant, and Mr. Phillip
Leong, a research technology advisor for the Canada Revenue Agency (the “CRA”).
[3]
I found both witnesses
to be credible. However, I have placed no weight on Mr. Leong’s testimony as
most of his evidence was, in my view, opinion evidence.
Summary of the Relevant Facts
[4]
The Appellant began
operations in the fall of 1993. The SAF states that the Appellant develops and
manufactures engineered thermoformed plastic products for consumer and
industrial uses. Mr. Hahn described the Appellant as a plastic sheet
thermoformer. He noted that the Appellant performs a significant amount of
custom work for third parties, making such things as enclosures, displays, and
tote bins. It also manufactures its own proprietary product, called Multi‑Bins.
[5]
The work the Appellant
performed during its 2005 fiscal year with respect to the Multi-Bins is the
subject of this appeal. This work is described in paragraphs 8 to 14 of the SAF
as follows:
Substantive Facts
8.
In previous fiscal years, Jentel had developed
Multi-Bins, a small‑parts storage system. Multi-Bins consisted of a
plastic back panel with thermoformed plastic bin fronts screwed into place in
rows. This original version of Multi-Bins could be configured for wall mounting
or as a stand-alone floor unit. It was typically used for holding small parts
and hardware at manufacturing workstations, in maintenance stores and in home
workshops.
9.
In fiscal 2005, Jentel was overhauling the
Multi-Bins concept. The overall aim was to improve the existing product to make
it a smaller and significantly lighter storage system. It would require less
labour to manufacture, be easier to install and require less energy to
transport. The measurable objectives were:
a.
to increase the system’s storage capacity to 20
cubic feet per square metre of footprint, or twice the industry standard;
b.
for each bin front to be able to support a load
of 100 lbs;
c.
to develop a new “snap-fit” design for the bin
fronts, to eliminate the need for fasteners;
d.
to introduce modularity; and
e.
to replace non-recyclable structural plastics,
such as ABS, with recyclable ones, such as polypropylene.
10.
In describing its work to CRA on the SR&ED
claim form, Jentel grouped the work into four areas:
a.
Bin Front and Back Panels
b.
Stands
c.
Sliders
d.
Dividers
11.
Regarding the work performed on the Bin Front
and Back Panels, during fiscal 2005:
a.
Jentel performed a series of tests under a
variety of moulding conditions using at least 8 different plastic materials:
PETG, PVC, acrylic, ABS, styrene, Lexan, HDPE and polyethylene.
b.
For two of those materials (ABS and HDPE),
further testing was carried out using varying thicknesses of material to
determine strength characteristics.
c.
Contemporaneous records of this work were kept.
d.
This work was performed in a systematic manner.
12.
Regarding the work performed on the Stands,
during fiscal 2005:
a.
Jentel performed a series of tests in which it
built test stands using different materials for some of the components: wood,
wood/plastic combination, plastic and aluminum.
b.
The tests were performed to measure the
performance of components made from these materials against defined design and
manufacturing criteria.
c.
Load testing showed that aluminum was the best
suited for the application.
d.
Contemporaneous records of this work were kept.
e.
This work was performed in a systematic manner.
13.
Regarding the work performed on the Sliders,
during fiscal 2005:
a.
Jentel designed and tested many various shapes
and forms of sliders.
b.
None of the sliders worked satisfactorily.
c.
Contemporaneous records of this work were kept.
14.
Regarding the work performed on the Dividers,
during fiscal 2005:
a.
Jentel performed a series of tests in attempts
to determine a method for moulding a groove in the front panel of the
Multi-Bins to receive and hold the divider.
b.
In the course of these tests, Jentel tried 3
different moulds, each made of different casting materials, and many iterations
of groove design in an attempt to create a groove in the part that could be
manufactured on a consistent basis.
c.
Each of Jentel’s attempts failed.
d.
Contemporaneous records of this work were kept.
[6]
During his testimony,
Mr. Hahn described the work performed by the Appellant on the Multi-Bins,
focusing on the bin fronts, the back panels and the dividers.
The Law
[7]
The only issue before
the Court is whether the work performed by the Appellant constituted SR&ED,
as that term is defined in subsection 248(1) of the Income Tax Act (the
“Act”).
[8]
The relevant wording,
for the purposes of this appeal, is contained in the Act at paragraph (c)
of the above-mentioned definition, which reads 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.
[9]
Five criteria have been
used by the Courts to assist in determining whether a particular activity
constitutes SR&ED. These criteria were summarized by the Federal Court of
Appeal in C.W. Agencies Inc. v. The Queen, 2001 FCA 393, 2002 DTC 6740,
at paragraph 17, as follows:
1.
Was there a technological risk or uncertainty which could not be removed
by routine engineering or standard procedures?
2.
Did the person claiming to be doing SRED formulate hypotheses
specifically aimed at reducing or eliminating that technological uncertainty?
3.
Did the procedure adopted accord with the total discipline of the
scientific method including the formulation testing and modification of
hypotheses?
4.
Did the process result in a technological advancement?
5.
Was a detailed record of the hypotheses tested, and results kept as the
work progressed?
Application of the Law to the Facts
[10]
After reviewing all of
the facts, I have concluded that the work performed by the Appellant in 2005
did not constitute SR&ED. In my view, the work involved the Appellant using
existing manufacturing processes and existing materials in an attempt to
improve its existing product. This involved routine engineering and standard
procedures.
[11]
In discussing whether a
technological risk or uncertainty existed, Justice Bowman (as he then was)
noted the following in the Northwest Hydraulic decision at paragraph 16:
a.
Implicit in the term “technological risk or uncertainty” in this context
is the requirement that it be a type of uncertainty that cannot be removed by
routine engineering or standard procedures. I am not talking about the fact
that whenever a problem is identified there may be some doubt concerning the
way in which it will be solved. If the resolution of the problem is reasonably
predictable using standard procedure or routine engineering there is no
technological uncertainty as used in this context.
b.
What is “routine engineering”? It is this question, (as
well as that relating to technological advancement) that appears to have
divided the experts more than any other. Briefly it describes techniques,
procedures and data that are generally accessible to competent professionals in
the field.
[12]
The SAF notes that the
purpose of the work was to “improve the existing product to make it a smaller
and significantly lighter storage system. It would require less labour to
manufacture, be easier to install and require less energy to transport.”
[13]
The SAF lists the
following measurable objectives of the work:
a. to increase the system’s storage capacity
to 20 cubic feet per square metre of footprint, or twice the industry standard;
b. for each bin front to be able to support a load of 100
lbs;
c. to develop a new “snap-fit” design for the
bin fronts, to eliminate the need for fasteners;
d. to introduce modularity; and
e. to replace non-recyclable structural
plastics, such as ABS, with recyclable ones, such as polypropylene.
[14]
The SAF notes that the Appellant
tried to attain these objectives by changing the type and thickness of the
plastic used in the manufacture of the product (8 different types were
used), by changing the moulds and the casting materials used for the moulds and
by using different types of materials for the stand (wood, a wood/plastic
combination, plastic, and aluminum).
[15]
During his testimony,
Mr. Hahn described the work performed by the Appellant in respect of the Multi-Bins.
He focused on the Appellant’s use of two manufacturing processes (thermoforming
and injection moulding), the use by the Appellant of what was referred to as a
plug assist (or freezing) during the thermoforming process, and the use by the
Appellant of different types of plastics and materials.
[16]
There was no evidence
before me that any of this work involved technological risk or uncertainty.
[17]
Thermoforming and
injection moulding are well‑known manufacturing processes.
[18]
Mr. Hahn
described the thermoforming process as follows:
-
Third‑party
extruders pour plastic resin (pellets) into a machine where it is heated and
extruded into a sheet.
-
A plastic sheet
thermoformer, such as the Appellant, then takes the sheet and forms it into
shapes using moulds, vacuums and air pressure.
[19]
Mr. Hahn noted that the
plastic sheet thermoformer specifies the required gauge and size of the plastic
sheet and the type of plastic to be used. He noted that there are 12 different
plastics that could be extruded for the Appellant’s purposes. Mr. Hahn
explained that one of the difficulties with this process is that when plastic
resin is extruded, the properties of the resin used in the sheet are changed.
The actual specifications of the extruded sheet are not known.
[20]
Mr. Hahn described
injection moulding as the process of designing a mould and then retaining a
third‑party injection moulder to inject plastic resin into the mould. A
product is then produced from the shape contained in the mould. He noted that
there are hundreds of different types of plastics that could be injection
moulded for the Appellant’s purposes. It appears that the primary constraint
with respect to injection moulding is the cost of the mould.
[21]
Mr. Hahn noted that the
main difference between thermoforming and injection moulding was flexibility.
Once a mould was designed for injection moulding it could not be changed, it would
always produce the same part. However, a thermoformer can manipulate the
thermoforming process in order to achieve a variation in the part.
[22]
Mr. Hahn described in
some detail how the Appellant used both thermoprocessing and injection moulding
in attempting to design a better Multi-Bin. This involved different moulds,
plastics and casting materials. After considering all of this evidence, it is
my view that Mr. Hahn was simply describing the use of existing manufacturing
processes in an attempt to build a better product, while controlling
manufacturing costs. There was no evidence before me of an attempt to achieve a
technological advancement.
[23]
Mr. Hahn implied that
the use of a “heat sink” by the Appellant while thermoforming constituted
experimental development. However, this also appeared to be routine engineering
or use of standard procedures. As Mr. Hahn stated during his testimony, the
so-called heat sink was merely plug-assist forming technology that had “been
out there for quite some time”.
[24]
Similarly, with respect
to the use of different types of plastic resin or materials, I fail to see how
this constitutes SR&ED.
[25]
Counsel for the
Appellant based his argument on the following premise:
Jentel adduced evidence from Ralph Hahn about his own
observations and experience as to what work he and his staff did, why they did
it, what they knew at the time, what their competitors were doing and what
knowledge was available to them in the public domain. We submit that this
establishes at least a prima facie case that Jentel was attempting
technological advancements, and therefore was performing SR&ED. As a
result, Jentel has “demolished” the Minister’s assumptions and the onus shifts
to the Minister to prove his case. If the Minister adduces no evidence to rebut
the taxpayer’s prima facie case, the taxpayer is entitled to succeed.
Hickman Motors Ltd. v. Canada, [1997] 2
S.C.R. 336 at paras. 92-94
[26]
When assessing the
Appellant, the Minister made the following assumptions:
(l)
the Appellant failed to demonstrate a systematic
investigation through experiment or analysis performed to resolve any
scientific or technical uncertainties that may have arisen through the
development of the [Multi‑Bin] or its component parts; and
(m)
the work performed by the Appellant in its development
of the Product or its component parts is in line with standard product
development and does not represent scientific or technical advancement.
[27]
I do not intend to
discuss the legal merits of counsel for the Appellant’s argument. The argument
fails for the simple reason that the Appellant did not establish a prima
facie case that it was attempting technological advancement.
[28]
As discussed
previously, the evidence before me, particularly the SAF and the testimony of
Mr. Hahn, demonstrates that the work performed by the Appellant with respect to
the Multi-Bins involved the use of routine engineering and standard procedures.
This evidence does not establish a prima facie case that the work was
undertaken for the purpose of achieving technological advancement. As a result,
the Appellant did not “demolish” the Minister’s assumptions.
[29]
For the foregoing
reasons, the appeal is dismissed with costs to the Respondent.
Signed at Ottawa, Canada, this 11th
day of May 2011.
“S. D’Arcy”
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