Date: 19990406
Docket: 97-1184-IT-G
BETWEEN:
LES DÉVELOPPEMENTS DE SYSTÈMES
SPÉCIALISÉS M.T.P.C. INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for judgment
Lamarre Proulx, J.T.C.C.
[1] This appeal concerns the 1995 taxation year. The issue is
whether expenditures made that year were for scientific research
and experimental development (“SR & ED”) within the
meaning of subsection 2900(1) of the Income Tax
Regulations (“the Regulations”).
[2] The position of the Minister of National Revenue
(“the Minister”) is that the expenditures in question
were not for SR & ED and that the appellant is therefore not
entitled to an investment tax credit under subsection 127(5) of
the Income Tax Act (“the Act”) or a refundable
investment tax credit under section 127.1 of the Act.
[3] The facts on which the Minister relied in reassessing the
appellant are set out as follows in paragraph 7 of the Reply to
the Notice of Appeal (“the Reply”):
[TRANSLATION]
(a) For the 1995 taxation year, the appellant claimed $113,112
in expenditures for two scientific research and experimental
development projects;
(b) In its tax return for the 1995 taxation year, the
appellant claimed an investment tax credit of $41,722;
(c) The expenditures referred to in subparagraph (a) and the
credit referred to in subparagraph (b) were claimed in respect of
two projects, the Vision project and the Laitgiciel project;
(d) Ninety percent of the expenditures claimed were for the
Vision project and 10 percent were for the Laitgiciel
project;
(e) The Vision project is an integrated system for managing
new and used car sales; the project is divided into four modules:
repair service, sales service, parts service and accounting;
(f) The Vision project qualifies in part—in a proportion
of 20 percent—as a scientific research and
experimental development project;
(g) For the Vision project, the appellant can claim a
deduction under section 37 of the Income Tax Act for 20
percent of the expenditures it claimed with respect to that
project; it can also claim an investment tax credit of $8,185
under section 127.1 of the Income Tax Act;
(h) The Laitgiciel project is software that enables milkmen to
manage their dairy product delivery routes and their inventory of
perishable goods and to bill their customers;
(i) The Laitgiciel project is not scientific research and
experimental development;
(j) For the Laitgiciel project, the appellant cannot claim a
deduction under section 37 of the Income Tax Act or an
investment tax credit under section 127.1 of the Income Tax
Act;
(k) Expenditures of $81,914 incurred by the appellant in
respect of the two projects are deductible business expenses,
while expenditures of $10,845 are capital expenditures;
(l) A breakdown of what was allowed and what was disallowed
can be found in the four appended tables, which are an integral
part of the Reply to the Notice of Appeal.
[4] Prior to the hearing of the appeal, Pierre Charron, the
appellant’s president, was given authorization to represent
the appellant. He was the only lay witness who testified. Each
party had one expert witness. The appellant’s expert report
was filed the week before the hearing, well after the deadline
set out in section 145 of the Tax Court of Canada Rules
(General Procedure). Counsel for the respondent told the
Court that while Revenue Canada was not greatly prejudiced by the
late filing of the report in this case, Mr. Charron had been told
at the status hearing that the document had to be filed 30 days
before the hearing date. She therefore asked that, if the appeal
was successful, this factor be considered when awarding costs.
The Court allowed the report to be filed late, and it was filed
as Exhibit A-1.
[5] The appellant’s agent admitted subparagraphs 7(a) to
(d) of the Reply. As regards subparagraph 7(e), he explained that
the Vision project has just one module, namely the repair
service. The other services referred to may be added if
development of the software continues. As regards subparagraphs
7(f) and (g), the appellant argued that 100 percent of the Vision
project should qualify because this part was essential to the
other components of the project. Subparagraph 7(h) was
admitted, while subparagraph 7(i) was denied.
[6] The individuals involved in the research activities were
the appellant’s agent, Pierre Charron, and Pierre
Bisaillon, who was Mr. Charron's partner in 1995.
Mr. Charron initially obtained a CEGEP diploma in
administration and subsequently obtained a bachelor’s
degree in information systems from the
École des hautes études commerciales
in 1985. He worked as a sales representative for a number of
businesses and then started the appellant’s business in
October 1989. Mr. Bisaillon has a CEGEP diploma in the pure
sciences and has also completed three years of computer
engineering at the École Polytechnique.
[7] The Vision project is software that assists in managing
the services sector of a car dealership. The goal of the
Laitgiciel project was to create a system to enable milkmen to
bill their customers directly while on their milk routes, to
collect from those customers and to manage an inventory of
perishable goods (page 9 of the addendum at Tab 5 of Exhibit
I-1, Form T661).
[8] In 1995, the company’s main source of income was
sales of software, equipment and a technician’s technical
services. Those sales brought in about $100,000.
[9] The appellant’s agent filed as Exhibit A-2 a report
written by Mr. S. Matwin, who taught computer science,
that was prepared at the request of Revenue Canada’s
Appeals Division. The appellant's agent referred to the
second last paragraph on page 6, which reads as follows:
[TRANSLATION]
. . .
However, we have to acknowledge that the data transmission
component of the VISION project represents an advance. That
component is responsible for just one of the several VISION
system functions, which means that only part of the VISION
project meets the eligibility criteria set out in Circular 86-4.
We are not recommending any change to the proportion of the work
(20%) considered to be scientific research and experimental
development under subsection 2900(1) of the Income Tax
Regulations.
[10] It should be noted, however, that the scientific advisor
found the following on the same page of the report:
[TRANSLATION]
The work—preliminary analysis, functional analysis,
programming—is all part of routine computer systems
development activities. There is no starting hypothesis or
documentation describing studies or tests.
. . .
As regards the LAITGICIEL project, nothing in the description
of the software’s functions (billing, inventory management,
service management) represents an advance in software technology.
The company’s argument that LAITGICIEL is the only software
in its category is a characteristic of LAITGICIEL in terms of its
potential market, but not in technological terms. The file does
not contain any testimony as to the technological risks
encountered while working on this project. There is nothing to
suggest that any methodology other than the routine approach to
delivery and inventory systems was used. The LAITGICIEL project
is therefore not eligible.
[11] Mr. Charron explained that initially the main problem was
the chosen environment. The appellant wanted the software to
operate in a DOS environment with a network system which did not
require a major investment. The Laitgiciel and Vision projects
began in April 1994 and ended in March 1995. At that time, there
was a complete version on a DOS platform. For the 1996 fiscal
year, the appellant claimed the Vision project as scientific
research and development because of the project’s transfer
to the Windows platform, but that project was not completed.
[12] Vahé Kassardjian testified as an expert for the
appellant. He is the president and director of research and
development of a business that develops cross-platform
software for new media. He described his occupation as being a
computer specialist. In 1988, he obtained a B.Sc. in mathematics
and computer science from the Université de
Montréal, and in 1992 he obtained an M.Sc. in computer
science from the same university. He also has many businesses and
publications to his credit.
[13] Mr. Kassardjian said that all of the appellant’s
files were meticulously organized and perfectly coherent. I refer
to his report filed as Exhibit A-1, in which he describes two of
the appellant’s activities that he feels deserve to be
characterized as SR & ED in addition to those allowed by the
Minister. He states the following at page 5:
[TRANSLATION]
Dynamic dialog generation (point 4)
The issue of static vs. dynamic user interface management is a
major research subject in respect of which there are no
deterministic solutions to date. A great deal of research is
being done in both universities and industry (often more in the
latter than the former) on the various aspects of this subject.
The challenges range from cognitive ergonomics to interface
encoding compression.
In its Vision project, Les développements de
systèmes spécialisés M.T.P.C. Inc.
encountered problems that are part of advanced research subjects
but that were specific to its project and had to be resolved in a
unique way specific to the chosen development environment. In my
view, the dynamic dialog generation solution in Vision and
Laitgiciel constitutes a scientific advance. The reason for that
research being undertaken constitutes a technological
uncertainty.
Memory configuration (point 7)
Point 7 in the appellant’s letter of October 30 refers
to an experimental process designed to achieve an optimal memory
configuration while maintaining a reasonable execution speed.
Although the methods used to establish and evaluate the
various memory configurations are part of standard computer
science practice, the appellant’s team was nevertheless
faced with a problem of technological uncertainty (the
impossibility of knowing from the outset or during the project
whether there is a solution to the problem to be addressed and,
if there is, how much time it will take to implement it) and had
to move toward an experimental process involving successive
evaluations of prototypes.
[14] Charilaos Fakiris, the respondent’s expert witness,
explained that he made an initial visit to the company, which
gave him a demonstration of its software for the Vision and
Laitgiciel projects. Based on that visit, the demonstration and
the documents received, he decided that neither project involved
a technological advance. The taxpayer then contacted Mr. Fakiris
to arrange a second meeting, which was held at Revenue
Canada’s offices. Mr. Fakiris asked Mr. Charron to
send him a written account of the items raised at that meeting.
Those items are set out in the letter of October 30, 1995, found
at Tab 7 of Exhibit R-1, which describes seven points
involving technological problems.
[15] Further to the meeting and the letter, Mr. Fakiris again
concluded that the Laitgiciel project was ineligible. With regard
to the Vision software, he found that there may have been some
problems related to the Paradox database management system. Those
problems had to do with programming. According to Mr. Fakiris,
they were not true technological uncertainties. All the same, he
considered the activities described under points 1 and 2 of the
letter of October 30, 1995 (Tab 7 of Exhibit R-1) to
be eligible. He estimated the proportion of time and work related
to those activities at 20 percent.
[16] Mr. Fakiris’ response to the assertions made by the
appellant’s expert witness, as set out above, is as
follows. His response to the assertion on the point concerning
dynamic interface management can be found at
pages 170-71 of the transcript:
[TRANSLATION]
Yes, there are some problems with dynamic interface
management, but they’ve been around a long time. When I was
a teacher, again at the military college in
Saint-Jean-sur-Richelieu starting in 1984—and I gave
database courses and systems design and development
courses—we had dynamic management systems and they were
like class projects. There really were some problems, I’ve
admitted that there are some problems, but it can’t be said
that there is technological uncertainty, especially for the
’94-’95 fiscal year. There may be some problems
to be fixed, to be solved, to provide a solution for, but there
are no more major problems that would justify saying that yes,
for dynamic interface management today or during the fiscal year
in question, ’94-’95, there was a major problem or
there was technological uncertainty.
Q. But you heard Mr. Kassardjian tell us earlier that he felt
there were uncertainties and that he believed finding a solution
to them advanced computer science.
A. I totally disagree with Mr. Kassardjian. If it’s
really possible to consider dynamic interface management a
technological advance in computer science in 1994-95,
that’s quite something. I heard that, and I consider it
unacceptable to say that dynamic interface management was a
technological advance in computer science in 1994-95.
Once again, Mr. Charron or Mr. Bisaillon may have run into
some problems; I agree with that, I’ve admitted that, I
agree with . . . but it can’t be said that, we can’t
go so far as to say that there was a technological advance in
computer science. I don’t accept that and I don’t
agree with that at all.
[17] The following is Mr. Fakiris’ response to the
second point raised by the appellant’s expert, which
concerns memory configuration. It can be found at
pages 171-72 and 180-82:
[TRANSLATION]
Q. Now, as for point 7, which concerns memory configuration,
once again on that aspect Mr. Kassardjian felt that there were
uncertainties in that area. What is your opinion on that point
specifically?
A. Again, I totally agree with Mr. Kassardjian regarding point
7, page 5, second paragraph, where he speaks of memory management
standard practice, exactly, it’s standard practice in
memory management.
Once again, of course, there are some problems; it depends on
the level. Memory management, it depends on the system involved:
for example, with Vision here, I find that it’s quite a
simple system, so the software is fairly simple. It can’t
be said that there are technological uncertainties when it comes
to memory management. Once again, as I see it, we’re
dealing with standard practice with the Vision software. There
may be some problems, there may still be major problems, but they
have to do with the development of software much more complex
than the Vision software.
Page 180:
But I can tell you that because—but based on what I
know—that dynamic interface management and memory
management for software like Vision, which is really not at all
complex—once again I feel that it was really standard
practice.
Q. The things that were done, with respect to point 4 and
point 7, were they known in the industry, or do you know what was
being done in the industry as regards those two points?
A. Based on my experience as a teacher at the military college
and with the development of a number of manuals, with student
projects, I feel that yes, dynamic interface management perhaps
wasn’t—again, perhaps, it depends on the level at
which software development occurs. There may be some problems,
but again it depends on the level. Of course, if the development
level is more complex, because, of course,
when . . . we receive research and development
projects with different complexity levels, maybe there will
really be technological uncertainty problems.
But again, I find that the Vision and Laitgiciel softwares are
really at a very simple level. In general, overall, what’s
involved is setting up a relational database and, with a Paradox
database management system—working with SQL, of course, to
query another database and with Paradox to manage that database.
That, in general terms, is exactly what the Vision and Laitgiciel
projects do.
Now during development, and once again this was at the
preliminary level—it was the first fiscal year the taxpayer
had worked on the project—he ran into some problems, but we
can’t say there was technological uncertainty.
The next year, the ’95-’96 fiscal year, the
project was even more advanced and another scientific advisor
who’s a colleague of . . . and once again he didn’t
consider it eligible. It isn’t really a research and
development project. It’s really a lot of work, I agree
with Mr. Charron that there’s a lot of work involved, a lot
of programming. But unfortunately, it didn’t fit within the
context of our Revenue Canada program. It can’t be said
that there’s a technological advance in computer science
or, of course, that there are a number of technological
uncertainties.
It’s good work; as Mr. Charron said, it’s unique,
but when we . . . in the Revenue Canada circular, innovation does
not always equal research and development. It’s a new
product, it’s a lot of work, because in computer science we
sometimes work for hours and hours, sometimes all night, but the
only thing I can say, to finish up on this, is that it
didn’t fit within the context of our research and
development program: there was no technological advance and no
technological uncertainty.
[18] The conclusion reached by both of the Minister’s
scientific advisors is that the appellant’s activities were
in the realm of standard practice and did not involve any
technological advances. I refer to what Mr. Fakiris said at page
167:
[TRANSLATION]
If with—based on my experience, based on the research
and development projects we receive in computer science, I really
consider the Vision and Laitgiciel projects to be standard
practice. It’s basic work, it’s really standard
practice.
Conclusion
[19] It seems to me that it would be more satisfactory for the
taxpayer—and it would certainly be so for the
Court—if the scientific advisor at the appeal level had not
seen the report filed by the scientific advisor at the first
level. However, I cannot find any description of technological
uncertainty in the document describing the research undertaken,
which is attached to Form T661. All that is discussed is the
novelty and usefulness of the product the appellant wanted to
develop. The subsequent letter of October 30, 1995, describes the
problems (listed as seven points) encountered while the new
softwares were being developed. The Minister’s scientific
advisor, with difficulty, accepted points 1 and 2 as eligible.
The appellant’s expert witness felt that the activities
described under points 4 and 7 deserved to be characterized as
SR & ED. The Minister’s scientific advisors strongly
believed that the scientific or technological knowledge needed to
solve the problems encountered should normally have already
existed and that there was no technological advance in this case
because everything was a matter of standard practice. In my view,
the contrary has not been shown on the balance of evidence.
[20] It is my opinion that there has been no proof of any
systematic search, as required by subsection 2900(1) of the
Regulations, in respect of the activities involved in this
appeal. As noted by the Minister’s scientific advisor at
the appeal level, some of whose comments are set out in paragraph
10 of these reasons, in this case there was no formulation of
hypotheses nor was there documentation describing studies or
tests. The appellant’s documents describe a programming
project that encountered problems, but they do not describe a
systematic investigation or search carried out in a field of
science or technology by means of experiment or analysis. The
projects were business projects and not SR & ED projects.
[21] The appeal is dismissed with costs.
Signed at Ottawa, Canada, this 6th day of April 1999.
“Louise Lamarre Proulx”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Email this Content