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Citation:2003TCC380
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Date: 20030529
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Docket: 2002-4673(IT)I
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BETWEEN:
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SYNCHROSAT LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] This is an appeal under the
informal procedure from an assessment made by the Minister of
National Revenue ("Minister") under the Income Tax
Act ("Act") for the appellant's 2001
taxation year. Through that assessment, the amount of $41,398
claimed by the appellant as allowable scientific research
expenditures for that year was reduced to $19,424 and the claimed
refundable investment tax credit in the amount of $13,040 was
reduced to $6,119.
[2] The amount of $21,974 that was
thus disallowed as scientific research and experimental
development ("SR & ED") expenditures, which
disallowance resulted in the disallowance of $6,921 of the
refundable investment tax credit claimed, is the portion of the
salary earned by the appellant's main shareholder,
Dr. Asim K. Sen, in 2001, plus Canada Pension Plan
("CPP") contributions, that was considered not to be
related to eligible SR & ED activities. The facts upon which
the Minister relied to assess the appellant are set out in
paragraph 9 of the Reply to the Notice of Appeal
("Reply") as follows:
(a) the Appellant operated research on
Alternative Energy Sources-Momentum Turbine (the
"Project"), its sole eligible S.R. & E.D. project;
(admitted)
(b) the fiscal year end of the Business was
December 31; (admitted)
(c) Dr. Asim K. Sen (the
"Appellant's shareholder") was the president and
shareholder of 97% of the common shares of the Appellant during
the taxation year 2001; (admitted)
(d) the Appellant's shareholder was the sole
employee and sole scientist working for the Appellant during the
entire 2001 taxation year; (admitted)
(e) the Appellant's shareholder agreed
in writing with CCRA representatives that the Project of the
Appellant can be divided into the following four set [sic]
of activities:
A. Re-installation and modification of the experimental
set-up;
B. Purchase of an IBM personal computer and installation
of the internet facility;
C. Preparation and Posting of the Company Website;
D. Application for New and Preparation of the Response for the
Already-applied patents;
(admitted)
(f) the Appellant's shareholder admitted
in the description of the S.R. & E.D. project that much of his
work done during the taxation year 2001 was related to patent
development work in order to protect proprietary rights;
(admitted)
(g) the Appellant's shareholder admitted
that the activity A, (25% of the activities described in
paragraph e)), were [sic] eligible R.S. & E.D.
activities; (admitted)
(h) the Appellant's shareholder did not
provide a breakdown of his time spent for the entire activities
(A,B,C,D) related to his work for the Appellant; (admitted)
(i) only 25% of the shareholder's
working time spent on the entire activities for the Appellant
during the taxation year 2001 were allowable S.R. & E.D.
expenditures; (admitted)
(j) the salary of the Appellant's
shareholder during the entire 2001 taxation year is an amount of
$28,080, plus CPP contributions in the amount of $1,219 for a
total of $29,299;
(k) CPP contributions in the amount [of] $1,219
for the Appellant's shareholder were paid during the taxation
year 2001; (admitted) and
(l) the calculation of the total
salary of the Appellant's shareholder related to eligible
S.R. & E.D. activity is $29,299 x 25% = $7,324.66.
[3] The appellant disputed two points.
The first was in respect of the CPP contributions paid by it in
2001. The appellant agreed that Dr. Sen earned an accrued
salary of $28,080 in 2001, which was in fact paid in 2002, but
denied that the CPP contributions in the amount of $1,219 paid in
2001 were attributable to that salary. The appellant argued that
the CPP contributions of $1,219 were attributable to salary that
was paid to Dr. Sen in a previous year and that had been accepted
as an SR & ED expenditure. At the hearing, counsel for the
respondent conceded that point and no longer disputed that the
total amount of $1,219 was an allowable SR & ED
expenditure.
[4] The second issue raised by the
appellant was that the accrued salary of $28,080 earned by Dr.
Sen in 2001 was for "540 man-hours" only, which in fact
represented just 25 per cent of the total hours worked
by Dr. Sen in the year on the entire project. In other words, the
appellant argued that the Minister erred in allowing only 25 per
cent of the salary expense of $28,080, that is, $7,020, as the
amount of $28,080 Dr. Sen charged the appellant represented only
three months' salary in the year and Dr. Sen worked full-time
for the appellant during all of 2001. In the appellant's
view, the salary earned by Dr. Sen in 2001 was wholly
attributable to the only activity that qualified as an eligible
SR & ED activity.
[5] When asked why he charged the
appellant for only three months' salary for the year 2001,
Dr. Sen answered that the appellant could not afford to pay more
and that he himself also wanted to save tax.
[6] In the Notice of Appeal, the
appellant submits the following:
18. The Appellant submits that, during the entire
2001 taxation year, the scientist [Dr. Sen] worked as a full-time
employee of Synchrosat Limited working more than 40 hours a week
to undertake all four activities (A), (B), (C) and (D) as
described in paragraph 8 above, but he charged for only 540
man-hours of his time to the company for all his work performed
during the year. This represents only about 25% of his total time
he spent in carrying out all four activities (A), (B), (C) and
(D). All four activities undertaken by the scientist in the year
relate to work on Project 1.
19. The Appellant submits that this is not the
first time the scientist had charged the company just about 25%
of the actual cost of his total labour in working on Project 1.
He, being also the owner of the company, has been doing it almost
every year to reduce his total tax liability on his yearly
earnings. In this context, the Appellant would like to quote the
following observations made by the Honourable Judge, Pierre
Archambault, during his judgement on an earlier appeal hearing
heard on January 26, 1996 relating to Project 1:
"... only about 550 man-hours were devoted each year in 1991
and 1992 on the GES project, this represents about three
months' of work. These facts raise in my mind the issue if
the project was being carried on in a business-like manner.
However, this was not the issue raised before me in these
appeals. Had it been, it is possible more explanations would have
resolved this concern."
. . .
21. Therefore, the Appellant submits that the
total salary expense claimed should represent the required 25% of
the scientist's actual wages in accordance with the
Eligibility Report of the Regional Research and Technology
Advisor and should be considered qualified Scientific Research
and Experimental Development expenditures under the Income Tax
Act (Canada) and the Income Tax Regulations.
[7] The evidence disclosed that the
appellant had deducted SR & ED expenditures for several
previous years. When the appellant filed its Claim for Scientific
Research and Experimental Development (SR & ED) in Canada
("Claim") in January 2002 for the 2001 taxation year
(Exhibit F in Exhibit A-1), it claimed total labour expenditures
of $28,080 for the "alternative energy sources"
project. Along with the Claim there was filed a breakdown of
SR & ED expenditures showing a research and development labour
expense for the scientist's work ("540 man-hours")
of $28,080. In an attachment also filed with the Claim, the
appellant described the work performed in 2001. As so described,
that work was a combination of the four activities listed in
paragraph 9(e) of the Reply, which list I reproduce again
here:
A. Re-installation and modification of the experimental
set-up;
B. Purchase of an IBM personal computer and installation
of the internet facility;
C. Preparation and Posting of the Company Website;
D. Application for New and Preparation of the Response for the
Already-applied patents.
[8] Although the breakdown of
SR & ED expenditures attached to the Claim indicates that the
amount of $28,080 was charged for "540 man-hours",
there is no suggestion either there or in the other document,
referred to above, that was attached to the Claim, that the
"540 man-hours" charged for were only for work done on
activity "A", that is, the re-installation and
modification of the experimental set-up. Indeed, when the
appellant filed its Claim in January 2002, it was under the
impression that all the activities gave rise to eligible
expenditures. An audit was subsequently performed by the Canada
Customs and Revenue Agency ("CCRA") and the project was
split into four sets of activities. It was only during the audit
that the appellant conceded that activity "A" alone
qualified as an eligible SR & ED activity. At that stage, both
the CCRA and the appellant agreed on the description of the four
sets of activities and on the fact that Dr. Sen had spent
25 per cent of his time on each activity in the
year.
[9] Therefore, I do not believe that
the amount of $28,080 that Dr. Sen charged the appellant was
attributable only to that one eligible activity. Indeed, I do not
interpret the reference to "540 man-hours" in the
breakdown of SR & ED expenditures filed with the Claim as
meaning that the salary charged was only for the work done on the
re-installation and modification of the experimental set-up. That
is not what that document says. As a matter of fact, Dr. Sen
admitted that the appellant could not afford to pay him a higher
salary. That is the reason for Dr. Sen's not charging for
more than "540 man-hours" and for his accepting from
the company he controlled a reduced salary for all of the work he
did in 2001. The appellant had the burden of showing that Dr. Sen
charged it only for the work done on the eligible activity. Dr.
Sen did not file a breakdown of the time he spent on each
activity in the appellant's project. The evidence before me
is insufficient to refute the allegations of fact stated in the
Reply.
[10] For these reasons, I agree with the
respondent that the total salary of the appellant's principal
shareholder did not relate exclusively to the eligible SR & ED
activity, and that only 25 per cent of the salary earned in
2001 qualified as an SR & ED expenditure. The salary earned in
2001 was $28,080, and only 25 per cent of it, that is,
$7,020, was related to an eligible activity.
[11] The respondent conceded at the hearing
that the CPP contributions in the amount of $1,219 paid in 2001
were attributable to salary earned in previous years that was
related to eligible SR & ED activities.
[12] Consequently, the appeal is allowed on
the basis that the appellant is entitled to allowable SR & ED
expenditures in the amount of $20,338 (which is composed of the
amount of $19,424 already allowed by the Minister plus
75 per cent of $1,219, or $914, which counsel for the
respondent now concedes should be added). The refundable tax
credit is to be recalculated on that basis, in accordance with
subsections 127(5) and 127(9) and section 127.1 of the
Act.
Signed at Ottawa, Canada, this 29th day of May 2003.
J.T.C.C.
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