Court File No. 1999‑780(IT)I
TAX
COURT OF CANADA
IN RE: the Income Tax Act
BETWEEN:
BALESH W. KONDA
Appellant
-
and -
HER
MAJESTY THE QUEEN
Respondent
* * * * *
ORAL REASONS FOR JUDGMENT BY
THE HONOURABLE JUSTICE PARIS
in the Courts Administration
Service, Courtroom,
200 Kent Street, Ottawa,
Ontario
on Tuesday, September 18, 2007
at 2:00 p.m.
* * * * *
APPEARANCES:
Mr. Balesh W. Konda for
himself
Ms. Marie‑Andrée Legault for
the Respondent
Mr. Simon Petit
Also present:
Ms. Line Lanthier Court
Registrar
A.S.A.P.
Reporting Services Inc. 8 2007
200 Elgin
Street, Suite 1004 130 King Street West, Suite 1800
Ottawa, Ontario
K2P 1L5 Toronto, Ontario M5X 1E3
(613) 564-2727 (416)
861-8720
Ottawa, Ontario
‑‑‑ Upon commencing on Tuesday,
September 18, 2007,
at 2:00 p.m.
REASONS FOR JUDGEMENT BY MR. JUSTICE PARIS,
ORALLY:
This is an appeal from a
reassessment of the Appellant’s 1988 taxation year, by which the Minister of
National Revenue disallowed the Appellant’s claim for investment tax credit
with respect to his investment in A.L.H. Systems.
A.L.H. is a partnership which
undertook to do scientific research and experimental development.
The Minister refused the
investment tax credit on the basis that A.L.H. had not done any scientific
research and experimental development within the meaning of paragraph 37(1)(a)
of the Income Tax Act and Regulation 2900 of the Income Tax
Regulations in the 1988 year.
Therefore, the Appellant as
partner of A.L.H. was found to not have had any “qualifying expenditures” as
defined in subsection 127(9) of the Act, and no investment tax credit
could be claimed.
There are a number of issues set
out in the Reply to the Notice of Appeal, but at the outset of this hearing for
the sake of expedience, I directed the parties to present evidence and argument
on two of the issues, and to postpone presenting evidence and argument on the
remaining issues until the first two issues had been decided, if it were still
necessary to do so.
Therefore, the two issues to be decided
at this point are, firstly, whether the Appellant has shown that A.L.H. did in
fact carry out any scientific research and experimental development in 1988, and
secondly, whether the Appellant was a specified member of A.L.H. as that term
is defined in subsection 248(1) of the Act.
The Appellant conceded in argument
that he was a specified member of A.L.H., because he did not participate
actively in the operations of the partnership on a regular, continuous and
substantial basis.
I, too, am satisfied that the
evidence shows that the Appellant was a specified member of A.L.H.
The Appellant became a partner in
A.L.H. in the Fall of 1988, after attending a presentation in Ottawa.
He understood that the partnership
would carry out research and development leading to the development of software
for use in the financial industry, and with applications in other fields as
well. The project was referred to as “INCOM”.
The partnership activities were to
be carried out in Montreal, but the Appellant said he did not go to Montreal.
He received and read some progress
reports on the research activities, and attended three or four meetings in
Ottawa to discuss the program and to give his opinion on whether the research
work was going in the right direction. He also received some diskettes
containing basic computer exercises to be done by each investor in the
partnership, but says that he himself did not do the exercises.
After a meeting in early 1989, the
Appellant said the project appeared to run into difficulties, and his attempts
to get further information from A.L.H. were unsuccessful.
The activities carried out by the
Appellant cannot be considered to have been continuous, regular or substantial
in relation to the activities of A.L.H. The Appellant was a passive investor, and
relied on others to carry out all of the partnership operations. His input into
the project was limited to his attendance at a few meetings to review the
progress of the partnership’s research work, and to offering his opinion at these
meetings regarding the progress of the research.
As a specified member of A.L.H.,
the Appellant is not permitted any investment tax credit as set out in subsection
127(8) of the Act. This conclusion alone is sufficient to dispose of
the appeal, but I will also deal with the question of whether the Appellant has
shown that A.L.H. carried out scientific research and experimental development
in 1988.
Section 2900, sub (1) of the
Regulations sets out the meaning of “scientific research and experimental development”
. It reads in part as follows:
For the purposes of this part, paragraphs 37(7)(b)
and 37.1(5)(e) of the Act, ”scientific research and experimental
development is a systematic investigation or search carried out in the field of
science and technology by means of experiment or analysis, that is to say, basic
research namely, work undertaken for the advancement of scientific knowledge
with a specific practical application in view or development, namely, use of
the results of basic or applied research for the purpose of creating new, or
improving existing, materials, devices, products or processes.
According to the Respondent’s
scientific expert, Mr. Claude Papion, no evidence was presented by directors of
A.L.H. to show that any research and development work was actually performed by
or on behalf of A.L.H. in 1988.
The documentation that was
submitted consisted of a number of project proposals, each different from one
another, and a series of studies, plans and discussion papers that did not show
any research work done.
Whether or not there was a link
between the various project proposals that Mr. Papion looked at, the
important point is that no research or development work was ever documented to him
by the A.L.H. directors. None of the progress reports that were purportedly received
by the Appelant were given to Mr. Papion, and unfortunately none were put into
evidence at the hearing.
I also note that, according to a
letter sent to Revenue Canada by Mr. Vohoang (on behalf of A.L.H.) in January
1992 (Exhibit R-10), the work done by A.L.H. on INCOM in 1988 consisted of two project
proposals, a system summary and an analysis of some questionnaires filled in by
brokers and partners. This appears at page 3 of the letter.
Again, none of this work has been
shown to qualify as research and experimental development as defined in Regulation
2900. As an aside, it is almost inconceivable that the limited work that Mr.
Vohoang lists as being done by A.L.H. on the INCOM project in 1988 could have
resulted in expenditures of over $3.17 million as claimed.
The Appellant presented no
evidence that any scientific research and experimental development done by
A.L.H. The onus in this case is on him to show that the basis for the
reassessment is incorrect and in the absence of any such evidence, I must
conclude that the assumptions relied on by the Minister in reassessing are
correct.
Therefore, on this basis as well,
the appeal cannot succeed. It is clear to me that the Appellant invested in
A.L.H. in good faith, and did what he believed was required of him in order to
receive the tax benefits that the promoters of the partnership claimed would be
available. It appears to me that the Appellant was misled in this regard,
however, the fact that he was misled can have no bearing on the outcome of this
appeal.
Given the foregoing conclusions it
is not necessary to hear evidence or argument concerning any of the
Respondent’s alternative arguments.
On the basis of all of the
evidence that has been presented, the appeal is dismissed.
--- Whereupon the proceedings concluded
at 2:10 p.m.
I HEREBY CERTIFY THAT I have, to the best
of my skill and ability, accurately
recorded
by Shorthand and transcribed therefrom,
the
foregoing proceeding.
Sue Rochon
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