Date: 19990205
Docket: 98-2596-IT-I
BETWEEN:
LES ÉDITIONS PROGITECH INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal, brought under the informal procedure,
respecting an investment tax credit for scientific research and
experimental development ("SR & ED").
[2] Jacques Nault is the appellant's president and is
acting as agent for the appellant in this case. Software
development costs were incurred, most of which consisted of the
salary paid to Mr. Nault, who is the appellant's sole
shareholder and only employee. Mr. Nault represents himself
as a software designer and the appellant's object is the
production of accounting software. Mr. Nault is both a
programmer and a chartered accountant by training.
[3] The claim for SR & ED expenditures (form T661) for
1997 was filed as Exhibit A-9. It is dated
January 14, 1998 and itemizes eight projects, each of which,
except for the last, was spread over a one-month period. As for
the last project, it is stated to have begun in July 1997 but no
end date is mentioned.
[4] In response to this claim, a scientific adviser and an
auditor of the Minister of National Revenue (the
"Minister") went to the appellant's premises on
March 18, 1998. The scientific adviser, Charilaos Fakiris,
produced an initial report, included in Exhibit A-5,
in which he concluded that the projects were not eligible for the
tax credit for the 1997 fiscal year. The appellant objected and a
second report, included in Exhibit A-5, was thereupon
written by an outside scientific adviser. According to that
report, all the documents submitted by the appellant were
subjected to a thorough review. The report contains a good
description of the appellant's projects:
[TRANSLATION]
Based on the description given on form T661, the computer
science work involved in the projects consisted essentially in
the following in 1997:
projects 1, 2 and 3: amend source code to change menus,
reports and error messages and test proper operation following
changes;
project 4: change presentation of menus and conduct tests to
exploit computer's graphics capabilities and integrate mouse
into software; these tests led to the conclusion that it was
necessary to wait for the Windows 95 versions in order to
integrate these functions into the software;
project 5: prepare first draft of the "action bar
menu" software package;
project 6: sorting algorithm was designed, checked, programmed
and tested;
project 7: saving algorithm was designed, checked, programmed
and tested;
project 8: the following improvements were made:
a form feed (paper feed) code was deleted to correct a
printing problem on laser printers and other printing problems
were also corrected;
view format options were introduced for cash receipts, cash
disbursements, general journal and bank reconciliation.
[5] The report concludes that these projects did not
constitute scientific research or experimental development. I
cite the following passages from the chapter in the report
entitled "Evaluation", at page 4:
[TRANSLATION]
The taxpayer developed its accounting software over a number
of years. The work claimed in 1997 is the continuation of this
development activity. Most of the 1997 projects lasted about
one month and consisted in carrying out clearly defined
tasks and often in making improvements to existing software.
SR & ED must be a systematic investigation undertaken for
the advancement of science or technology. The technology involved
in this claim is information technology (computer science).
The taxpayer uses C language in its software development
work. C language was developed in 1972 and has been the
subject of standards developed by the ANSI (American National
Standards Institute, Committee X3J11) and the ISO
(International Organization for Standardization) since 1989. This
language is very widely taught and used.
. . .
. . . the description concerns routine aspects of
programming. There is no indication that the taxpayer has
undertaken a systematic investigation to eliminate technological
uncertainty and to achieve technological advancement. The
description of the functional improvements made to the software
packages offers no evidence of experimental development, given
the absence of a goal of technological progress in computer
science.
. . .
Even considering the small size of the business and all the
possible implications of that as regards its knowledge base, it
cannot be said that the three SR & ED criteria have been met.
Based on the information presented, the taxpayer has not gone
beyond common software development techniques and has not aimed
at achieving technological advancement in computer science.
[6] A third report, written by Mr. Fakiris, was produced
as an expert report and filed as Exhibit I-1.
Mr. Fakiris, who testified as an expert for the respondent,
has a bachelor of science degree (mathematics and statistics)
obtained at the Faculty of Science at the University of Athens in
1974. In 1983, he earned a master's degree in computer
science (office automation and data bases) from the Computer
Science Department at Concordia University in Montréal.
From 1985 to 1989, he did doctoral studies in computer science
(expert systems and artificial intelligence) at the Department of
Computer Science at the Université de Montréal in
Montréal, and, from 1990 to 1991, did advanced studies in
computer science (expert systems and artificial intelligence) at
the Ottawa-Carleton Institute for Computer Science in Ottawa. He
was a lecturer at the Computer Science Department of Concordia
University from 1980 to 1982. From January 1981 to May 1985, he
was also a lecturer at the Computer Science Department at Vanier
College in St-Laurent, and, from May 1982 to July 1994, he
worked as a programmer/analyst at MDDC Systèmes in
Pointe-Claire. He was an assistant professor at the
Department of Computer Science at the Collège Militaire
Royal de Saint-Jean, from August 1984 to July 1985. From
January 1996 until the present, he has been a lecturer at the
Computer Science Department at O'Sullivan College in
Montréal. He has also been a computer science adviser with
Revenue Canada since August 1995.
[7] Mr. Fakiris reviewed and analyzed the projects as
described by the appellant in its claim (Exhibit A-9).
He made the same comment concerning each of the first three
projects. It appears in Exhibit I-1 and reads as
follows:
[TRANSLATION]
. . . The taxpayer modified the source code to
change (translate) the menus, reports and error messages, then
tested the software to see whether it was operating properly.
This work may be considered as constituting standard practice for
persons with acceptable skills in computer science.
. . .
The comment on the fourth project is as follows:
[TRANSLATION]
. . . The taxpayer changed the presentation of the
menus and conducted tests to exploit the computer's graphics
capabilities and to integrate the mouse into the software. The
tests led to the conclusion that it was necessary to wait for the
Windows 95 versions in order to integrate these functions
into the software. The integration of the mouse does not in any
way constitute technological progress in computer science. On the
contrary, the description concerns routine aspects of
programming. . . .
The expert made the following comment about the fifth
project :
[TRANSLATION]
. . . The technical work done during the period from
April to May 1997 consisted in making a first draft of the
"action bar menu" software package. This work may be
considered as constituting standard practice in the field of
computer science. . . .
The comment on project 6 is as follows:
[TRANSLATION]
. . . The technical work done during the month of
May 1997 consisted in designing, checking, programming and
testing a sorting algorithm for sorting ledger transactions.
The comment on project 7 is virtually identical. The
expert concluded that no scientific research had been done,
particularly since the evidence concerning projects 6 and 7
showed that the algorithms were not designed by the appellant,
but were existing algorithms that he had checked and tested. The
expert's comments on project 8 are as follows:
[TRANSLATION]
The development during the period from July to December 1997
consisted of improvements made to the existing
"Chequebook 2.6" software. . . .
[8] The general conclusion is that the work performed was
standard practice in the field of computer science.
[9] Subsection 2900(1) of the Income Tax
Regulations (the "Regulations") reads as
follows:
For the purposes of this Part and sections 37 and 37.1 of
the Act, "scientific research and experimental
development" means systematic investigation or search
carried out in a field of science or technology by means of
experiment or analysis, that is to say,
(a) basic research, namely, work undertaken for the
advancement of scientific knowledge without a specific practical
application in view,
(b) applied research, namely, work undertaken for the
advancement of scientific knowledge with a specific practical
application in view,
(c) experimental development, namely, work undertaken
for the purposes of achieving technological advancement for the
purposes of creating new, or improving existing, materials,
devices, products or processes, including incremental
improvements thereto, or
(d) work with respect to engineering, design,
operations research, mathematical analysis, computer programming,
data collection, testing and psychological research where that
work is commensurate with the needs, and directly in support, of
the work described in paragraph (a), (b) or
(c),
but does not include work with respect to
(e) market research or sales promotion,
(f) quality control or routine testing of materials,
devices, products or processes,
(g) research in the social sciences or the
humanities,
(h) prospecting, exploring or drilling for, or
producing, minerals, petroleum or natural gas,
(i) the commercial production of a new or improved
material, device or product or the commercial use of a new or
improved process,
(j) style changes, or
(k) routine data collection.
[10] The agent for the appellant suggested that this
subsection gives priority to product development, not
technological advancement. I cannot agree. The very wording of
the Regulations establishes that experimental development
is work undertaken for the purposes of achieving technological
advancement for the purposes of creating new, or improving
existing, materials, devices, products or processes, including
incremental improvements thereto. Technological advancement is an
essential element of the notion of experimental development.
[11] The appellant also referred to paragraph 2.11 of
Information Circular 86-4R3, which reads as follows,
at page 6:
2.11. Application of criteria
The three criteria of IC 86-4R3 must be applied
within the context of the taxpayer's business
environment.
Scientific research and experimental development varies in
content as well as in the complexity of the technology in a given
field. The technical uncertainties encountered by one taxpayer
may well be looked upon as facts easily obtained by another. The
judgment as to eligibility should be made within the context and
environment of a single company and its field of business.
Specifically, the activities undertaken to resolve technical
uncertainties are eligible if the taxpayer cannot obtain the
solutions through commonly available sources of knowledge and
experience in the business context of the firm.
[12] In the expert report referred to in paragraph [6] of
these Reasons, the small size of the business was taken into
consideration but it was concluded that the taxpayer had not gone
beyond common software development techniques.
[13] The agent for the appellant also argued that the work
performed by the appellant constituted experimental development
because it was the product of the imagination and inspiration of
its designer who, through experimentation, attempted to bring his
idea to fruition by drawing on all his knowledge for this project
in the technology field. Mr. Nault, the agent for the appellant,
maintained that only a person with this combination of technical
knowledge, that is to say, a programmer with training as a
chartered accountant, could create the software Mr. Nault is
attempting to create.
[14] Counsel for the respondent submitted that
Mr. Fakiris's testimony should prevail. He has the
academic knowledge and many years of experience teaching
programming, as well as practical programming experience. It is
my opinion that, given his knowledge and experience,
Mr. Fakiris is able to determine whether the development of
a piece of software is just a matter of common practice or
whether it is of real technological interest. In any case,
Mr. Nault admitted a number of times that several of his
projects were a matter of common practice. In addition, the
evidence revealed that, although matters were more complex in
certain instances, Mr. Nault did not have the necessary
expertise to establish the assumptions required in order to
resolve the uncertainties. Mr. Fakiris believes that today
everything Mr. Nault did could be done by a person with a
Cegep-level education in computer science. Counsel for the
respondent also argued that it was not enough to show that the
activities brought about a product or a result different from
what existed on the market; it had to be proven that there had
been technological advancement.
[15] Mr. Nault laid great stress on the fact that his
project should be looked at as a whole, and not in its various
elements as the specialists did. However, as counsel for the
respondent suggested, although the product may be different, that
does not necessarily mean that there has been technological
advancement. According to the experts, everything developed by
Mr. Nault was a matter of common practice; it was not
technological advancement. The product may have been improved,
but no technological uncertainty was resolved. The knowledge was
already accessible.
[16] It is my view that with regard to his development
activities the appellant has demonstrated neither the existence
of technological uncertainties nor the making of valid
assumptions for resolving them. Rather I find that the evidence
revealed the normal activity of a programmer who wishes to
develop a new piece of software based on an existing computer
language. Where there were technological uncertainties or where
there were barriers in the appellant's way, Mr. Nault
could only observe them and wait for someone else to provide the
necessary tools to resolve the difficulty. The development of the
software might have constituted development of a new product, but
it was based on existing techniques. There was thus no scientific
research or experimental development.
[17] The appeal is dismissed.
Signed at Ottawa, Canada, this 5th day of February 1999.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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