REASONS FOR JUDGMENT
Favreau J.
[1]
This is an appeal subject to the rules for an
informal procedure that apply under the Tax Court of Canada Act. It is
an appeal from the assessment issued by the Minister of National Revenue (the Minister) under the Income Tax Act, R.S.C.
1985, c. 1 (5th Supp.), as amended (the Act), dated September 27, 2013, for the 2011 taxation year.
[2]
Based on the assessment dated
September 27, 2011, the Minister denied the $32,000 claimed as a
scientific research and experimental development (SR&ED)
tax credit, and the $11,375 claimed as an investment tax credit (ITC).
[3]
The Appellant
submitted an SR&ED project and claimed the following amounts for the
taxation year ending on October 31, 2011:
|
T661
Scientific Research and Experimental Development (SR&ED) Expenditures
Claim
|
Amounts
claimed by the Appellant
|
|
Project no. 1
– Turbine energy windmill
|
|
|
Total of
current SR&ED expenditures
|
$32,000
|
|
Plus: Proxy
amount
|
$12,501
|
|
Less:
Government or non‑government assistance and contract payments: for current
expenditures: provincial government assistance
|
($12,000)
|
|
Total SR&ED
expenditures that qualify for investment tax credits (ITCs)
|
$32,501
|
|
ITC (35% of
the total qualified SR&ED expenditures)
|
$11,375
|
[4]
The assessment of September 27, 2013,
reflects the Minister’s decision to grant the Appellant $32,000 as business
expenditures, rather than qualified SR&ED
expenditures for the calculation of the ITC, as claimed by the Appellant in its 2011 income tax return. The
Minister determined that the research project undertaken by the Appellant did
not meet the definition of SR&ED within the meaning of subsection 248(1)
of the Act.
[5]
By reassessing the Appellant’s tax payable for
the 2011 taxation year, the Minister made the following assumptions of fact,
listed in subsection 11 of the Reply to the Amended Notice of Appeal:
a)
[translation]
The Appellant works primarily in the sale and development of new
mechanical concepts for manufacturers or prospective license buyers;
b)
The Appellant operated under the name Les
Moteurs Novalia 2000 Inc. until March 15, 2011;
c)
The Appellant is a ‟Canadian‑controlled private
corporation” under the Act;
d)
The Appellant’s fiscal year ended on
October 31 of each year;
e)
For the 2011 taxation year, the Appellant
chose the proxy method set out in clause 37(8)(a)(ii)(B) of the Act to
calculate its SR&ED expenditures and
its ITCs;
f)
Normand Beaudoin
is the president and sole shareholder for the Appellant;
g)
Normand Beaudoin
has a doctoral degree in music;
h)
Normand Beaudoin
filed a patent application entitled ‟Hydraulic wings and wind power
stations” on June 28, 2004 (CA 2472130); however, the patent was not
issued until April 24, 2013;
i)
Normand Beaudoin
filed a patent application for a ‟Turbine energy windmill” on
August 19, 2011 (CA 2750048); however, the patent was not issued until
April 24, 2013;
j)
With respect to
project no. 1, entitled ‟Turbine energy windmill” (project no. 1):
i)
The goal was to
increase turbine windmill power and make all of its components ergonomically
cost‑effective with the following features:
A.
Less cumbersome;
B.Blade width will be equal to that of its extremities, which will
increase wind surface area;
C.Blades will exert a positive force that will be evenly distributed
amongst all components.
ii)
The Appellant
submitted secondary objectives for potential commercial applications (vacuums,
propellers/pumps), without demonstrating any related activities;
iii)
The Appellant
evaluated existing wind power concepts and devised a drive engine with pulleys
and rectangular blades, without taking into account any concepts related to
fluid dynamics, modelling, natural phenomena or laws that could enter into
play.
iv)
The technology
base or level for project no. 1 can be compared to that of wind turbines,
which are a cross between a windmill and a turbine;
v)
The Appellant
indicates that it would like to increase wind turbine power in an ergonomically
cost‑effective manner, but does not list or describe the parameters in
question;
vi)
The Appellant did
not define, from the outset, the performance indicators or measures to be carried
out to meet its primary objective. These measures are a standard part of a
systematic investigation process;
vii)
The Appellant
evaluated existing wind turbine concepts;
viii)
The Appellant
developed a mechanism (pulleys and rectangular blades, belts) to interest
future investors, but failed to create models or take validation measures,
natural phenomena or laws into account that could enter into play (fluid
dynamics, among other things).
ix)
The Appellant
presented real‑time calculations prepared by a third party
comparing a rectangular turbine to a circular turbine; however, these were not
corroborated, were based on static conditions and did not include actual
dynamic parameters;
x)
The calculations
submitted by the Appellant (prepared by a third party with no corroboration)
present a theoretical efficiency of 240% with no scientific basis or
corroboration over time;
xi)
The Appellant
constructed a mechanism (bicycle base / blades / parallel belts / fittings with
criss‑cross supports) based on current engineering practices;
xii)
The Appellant’s
mechanism creates mechanical friction that reduces the efficiency rating of
240%;
xiii)
The Appellant
tested the mechanism (vertical and horizontal positions) and experienced issues
with it that reduced the efficiency rating of 240%;
xiv)
The Appellant did
not purchase any materials for project no. 1, even though it indicated
that it had tested the mechanism;
xv)
The Appellant
tests its mechanisms using a trial and error system;
xvi)
The Appellant’s
work involved a pre‑feasibility study for a potential project
and did not explore beyond current practices;
xvii)
Project no. 1
was submitted as experimental development, even though the Appellant had
previously called it a [translation] ‟basic concept”;
xviii) The Appellant did not demonstrate that
project no. 1 constitutes a [translation]
‟basic concept”;
xix)
There was no
hypothesis related to a wind turbine mechanism for project no. 1;
xx)
Project no. 1
did not validate a hypothesis related to a wind turbine mechanism based on a
systematic investigation process (experimentation or analysis leading to the
formulation of a logical conclusion);
xxi)
The Appellant did
not incorporate into project no. 1 any characteristics or features that
were innovative or difficult to access in standard practice;
xxii)
The Appellant did
not prepare or clearly identify any data that could have advanced the
understanding of scientific relations or technology by overcoming scientific or
technological uncertainty, nor did the results it obtained.
[6]
Based on the Appellant’s unaudited financial
statements for the fiscal year ending on October 31, 2011, the $32,000
claimed as SR&ED expenditures represents salary paid to Normand Beaudoin.
No amounts were claimed as SR&ED expenditures for the cost of materials
used to build prototype devices for demonstration purposes. Based on the
information provided by Mr. Beaudoin, the salary in question was for time
dedicated to preparatory research for the invention, manufacturing prototypes,
evaluating the possible variants to produce patentable intellectual property
with as many applications as possible, and preparing the patent application.
[7]
Mr. Beaudoin is reproaching the Canada
Revenue Agency (the ‟CRA”) and the CRA’s scientific advisor, Micheline Bétournay,
for having botched the analysis of his claim for three reasons: no reviewers
came to his workshop to observe the work performed, the reviewer did not watch
either of the two videos showing the development of the prototypes and, as a
result, no observations were made on the various blade bracket assemblies
developed. Furthermore, the CRA reviewer who sent a draft assessment to
Mr. Beaudoin at his residence on January 15, 2013, and to whom
Mr. Beaudoin showed his wind turbine prototype, which had been stored for
winter, told the CRA’s lead reviewer that the wind turbine had been ‟dismantled,” which Mr. Beaudoin formally
denies.
[8]
Philippe Dufresne, reviewer at the CRA,
testified at the hearing and confirmed that he had gone to Mr. Beaudoin’s
residence and seen the device crushed under the weight of the snow. He could
not confirm whether the wind turbine had been stored under a temporary shelter.
He did not visit Mr. Beaudoin’s workshop at the time because there was too
much snow.
[9]
Micheline Bétournay, Research and
Technology Advisor with the CRA, testified at the hearing, and her SR&ED
Review Report dated December 6, 2012, was submitted into evidence. To
prepare her report, Ms. Bétournay examined the documents submitted by the
Appellant following a request for additional information dated August 1,
2012, which included:
sketches
(including applications for related and unrelated patents for wind turbines);
calculations
relating to a triangular blade that did not show the basis for the
calculations;
a
document that seems to be a patent application dated June 20, 2012,
related to the following: [translation] ‟How to build a machine that converts
fluid energy into mechanical energy, or conversely, mechanical energy into
fluid energy (for use in wind/water current turbines, wet/dry vacuums,
air/water pumps)”;
a video showing a non‑autonomous mechanism made up of
multiple square blades attached to a belt on pulleys, some of which rotated in
the direction of the fluid, and others in the opposite direction.
[10]
The reviewer’s conclusions are as follows:
[translation]
All of the
activities/work described and claimed as part of project no. 1 involve a
series of concepts for numerous potential applications, the scientific and
technological uncertainty of which was not demonstrated. There is not enough
admissible documentation. …
The Appellant did
not perform a systematic investigation in a field of technology by means of
experiment to resolve technological uncertainty. It did not incorporate into
the product any features or capabilities that were unknown or not openly
available in standard practice.
[11]
Ms. Bétournay confirmed that
Mr. Beaudoin had invited her to visit his workshop and see his prototypes.
She declined his invitation because she did not find it necessary to do so to
evaluate the project.
[12]
Following Ms. Bétournay’s report,
Mr. Beaudoin submitted additional information on January 15 and 16,
February 14 and April 16, 2013. He also requested a meeting at the
CRA offices, which was held on January 18, 2013. The meeting was attended
by Normand Beaudoin, Omer Descostes, one of Mr. Beaudoin’s
financial advisors, Philippe Dufresne, financial reviewer at the CRA,
Cédric Durban, Research and Technology Manager at the CRA (and
Ms. Bétournay’s supervisor) and Micheline Bétournay.
[13]
Based on the additional information submitted by
Mr. Beaudoin following the CRA’s first report, the primary objective of
the project was to use new kinetic advancements to:
increase
conventional wind turbine power;
improve
conventional wind turbine design; and
reduce
the unwieldiness of conventional wind turbines.
[14]
The secondary objectives of the project were to
identify:
variations in lateral fluid input during the main
process;
the
main types of fluid movement through the machines;
devices
that could use these techniques in fluid propulsion mode (wind and water
current turbines);
devices
that can use these techniques in fluid propulsion mode
(vacuums/propellers/pumps).
[15]
Based on the information provided by
Mr. Beaudoin, the research project began in 2010 and was to be
completed by the end of 2011. The summary of the work performed in 2011
included an evaluation of existing wind turbine concepts, and the development
of a prototype for demonstration purposes (not intended for use) with
rectangular pulleys and blades (with no material expenditures).
[16]
Based on Mr. Beaudoin’s submissions and the
additional information he provided, Ms. Bétournay prepared an addendum to
her report on April 24, 2013. She retained her opinion that the Appellant
did not resolve any technological uncertainty by performing a systematic
investigation in a field of technology. In her opinion, the Appellant tests its
mechanisms using a trial and error system. She noted no concepts related to
fluid dynamics, and no models, or natural phenomena or laws that could enter
into play. The various percentages indicated by Mr. Beaudoin have no scientific
basis and were not corroborated.
[17]
After receiving the addendum to
Ms. Bétournay’s report, Mr. Beaudoin made submissions to Cédric Durban,
Research and Technology Manager at the Laval Tax Services Office (CRA). He
testified at the hearing and confirmed that he had upheld Ms. Bétournay’s
opinion in a letter dated September 9, 2013, addressed to
Mr. Beaudoin and the Appellant. The conclusions are clearly expressed in
the last three paragraphs of the letter:
[translation]
In summary, the
project and the activities claimed do not meet the requirements of the
SR&ED program for the following reasons: they do not sufficiently account
for the existing wind energy conversion technological knowledge base, they fail
to convincingly demonstrate any potential technological advancements and there
are no indicators or measures that validate the existence of a systematic
investigation.
Moreover, even if
the project qualified as an SR&ED project, it has been demonstrated that
some of the work claimed is, by all indications, standard practice.
Upon reviewing
your submissions, we find no elements that could enable us to change the
conclusions of the RTA’s review. The conclusions of our review therefore remain
unchanged: the project presented does not meet the definition of SR&ED in
subsection 248(1) of the Income Tax Act.
[18]
To prepare for the appeal hearing, the Department
of Justice mandated Hocina Haine of the CRA, in his capacity as an expert,
to examine the Appellant’s work and determine whether its activities were
designed to make technological advancements in wind power generation.
Mr. Haine signed his report on March 11, 2015. It concludes as
follows:
[translation]
Mr. Beaudoin
has stated and explained that his goal in carrying out the project was to
improve wind turbine performance, such that his concept could significantly
increase their power. He based it on ideas that, to my knowledge, have no basis
in the discipline that normally deals with the mechanical component of this
technology (fluid mechanics and, specifically, aerodynamics). He did not
perform any research to identify performance indicators on which he would base
his work and that could have helped to determine whether his project’s
objectives were achievable. Technological advancement cannot be measured on this
basis.
Mr. Beaudoin
built a device and tried to operate it by focusing his efforts solely on its
technical feasibility. That is not the research objective indicated in the
application (Form T661 SR&ED Expenditures Claim). According to the
application, the intended advancement was for the device to considerably
improve wind turbine power. None of the activities (experiments or analyses)
demonstrated whether or not this objective was achieved. When it is a question
of aerodynamics, which is the case with wind turbines, standard experimentation
can only be performed in a wind tunnel (more controlled environment). If
Mr. Beaudoin could only demonstrate the validity of his idea through
visual effects, we would expect to see two devices (one conventional and one
based on the new concept) tested under the same conditions to be able to
observe the difference. In the end, we do not know what the device was used for
other than to move air, as all other wind turbines do, only in a more
complicated manner. Moreover, no mathematical models of the natural phenomena
at play were created.
In conclusion, I
am of the opinion that the goal of the work performed was not to resolve any
scientific or technological uncertainty. Rather, it illustrated an idea that
was based on an erroneous understanding of the phenomena that characterize wind
turbine movement. Mr. Beaudoin’s explanations did not help me to
understand how the device he built could lead to any kind of advancement in
wind turbine power or increase in the knowledge of the technology in question.
Mr. Beaudoin may have had a few good ideas for the design and construction
of the device itself (presented in the video); however, that is not enough to
demonstrate the scientific or technological advancement he claims in his application.
[19]
Mr. Beaudoin did not contest Mr. Haine’s
status as an expert, but naturally disagreed with the conclusions of the
report. In his opinion, the quality of the report cannot be relied upon because
Mr. Haine refused to consider previous machines or wind turbines
constructed later and, thereby, the general scientific advancement, by focusing
solely on the specific technology, the scientific basis of which he called into
question. Mr. Beaudoin’s theory on the scientific advancement is as
follows:
[translation]
It is not the
drive wheels or the belts that provide the scientific basis for the
advancement; rather, it is the fact that the drive wheels increase rotation
speed and that the belts play a key role similar to the effect of the
connecting rod in a piston engine or a counter‑rotational cylinder in a
turbine engine, which free the blades from strict axis rotation, and
synchronizes them with the fluid flow.
[20]
According to Mr. Beaudoin, the advantage to
synchronizing the blades with the fluid flow is that it reduces the machines’
loss of efficiency because their rotational motion is unitary and too slow,
making the connecting rod less effective. The belts’ recovery of the connecting
rod’s power helps the blades to mimic the fluid flow, thereby increasing their
mechanical efficiency. Mr. Beaudoin’s work involved the development of new
technological procedures to increase rotational motion.
Applicable legislation provisions and analysis
[21]
The definition of ‟scientific research and
experimental development” can be found in subsection 248(1) of the Act. In
the version applicable to the 2011 taxation year, the definition 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
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, or
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,
and, in applying this definition in respect of a
taxpayer, includes
d)
work undertaken by or on behalf of the
taxpayer with respect to engineering, design, operations research, mathematical
analysis, computer programming, data collection, testing or psychological
research, where the work is commensurate with the needs, and directly in
support, of work described in paragraph (a), (b), or (c) that is
undertaken in Canada by or on behalf of the taxpayer,
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;
[22]
To obtain ITCs, the Appellant must demonstrate
that it has made qualified expenditures within the meaning of subsection 127(9)
of the Act. In this case, the expenditures simply involve salary paid to
Mr. Beaudoin.
[23]
In paragraph 16 of Northwest Hydraulic
Consultants Ltd. v. The Queen, 98 DTC 1839, Bowman J.
described the steps to take to determine whether the research activities
described constitute SR&ED:
. . .
1.
Is there a technical risk or uncertainty?
. . .
2. Did the person claiming to be doing SRED
formulate hypotheses specifically aimed at reducing or eliminating that
technological uncertainty? This involves a five stage process:
(a) the observation of the subject matter of the
problem;
(b) the formulation of a clear objective;
(c) the identification and articulation of the
technological uncertainty;
(d) the formulation of an hypothesis or
hypotheses designed to reduce or eliminate the uncertainty;
(e) the methodical and systematic testing of the
hypotheses.
. . .
3. Did the procedures adopted accord with
established and objective principles of scientific method, characterized by
trained and systematic observation, measurement and experiment, and the
formulation, testing and modification of hypotheses?
. . .
4. Did the process result in a technological
advance, that is to say an advancement in the general understanding?
. . .
5. Although the Income Tax Act and the
Regulations do not say so explicitly, it seems self‑evident that a
detailed record of the hypotheses, tests and results be kept, and that it be
kept as the work progresses.
[24]
Unfortunately for the Appellant and for
Mr. Beaudoin, I do not find that the work performed as part of the ‟Turbine
energy windmill” project can be qualified as SR&ED activities.
[25]
It is important to reiterate here that the
Appellant’s research project has been examined by three CRA scientists, one of
whom is considered an expert, and that Mr. Beaudoin has had many
opportunities to explain his point of view and convince them that his research
activities meet the requirements of the Act. Moreover, the Appellant’s research
project has been examined as an [translation]
‟Experimental development project for the improvement of existing product
applications,” given that the issue of the existence of technological
uncertainties has been addressed from the standpoint of both basic and applied
research for the advancement of scientific knowledge that does not necessarily
require technological uncertainties. According to the CRA’s scientists, the
Appellant’s research project never reached the SR&ED stage because it
simply involves a concept illustrated by drawings and demonstrated using an
extremely rudimentary prototype, at least in the 2011 version of the project.
[26]
If we apply the criteria set out by Bowman J.
in Northwest Hydraulic Consultants Ltd. v. The Queen, cited above,
to determine whether the Appellant’s research activities qualify as SR&ED,
it is clear that none of the five criteria therein are met in this case. There
is a lack of both uncertainty and technological advancement; no clear
hypothesis was formulated or technological investigation performed as part of the
scientific method used; and, lastly, the hypotheses, tests performed and
results obtained were not properly recorded as the project progressed.
[27]
In conclusion, the work performed by the
Appellant does not constitute SR&ED within the meaning of subsection 248(1)
of the Act, and the Minister was right to reject the amounts claimed by the
Appellant as SR&ED expenditures and those claimed as ITCs.
[28]
For all of these reasons, the appeal is
dismissed.
Signed at Ottawa, Canada, this 8th day of
April 2016.
‟Réal Favreau”
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