REASONS
FOR JUDGMENT
Campbell J.
Introduction
[1]
The Appellant is appealing from a Notice of
Reassessment for the 2008 taxation year in which the Minister of National
Revenue (the “Minister”) reduced the Appellant’s
claim for investment tax credits (“ITCs”) in the
amount of $32,425 to nil. The ITCs arose as a result of the Appellant’s claim
for allowable scientific research and experimental development (“SR&ED”) expenditures of $69,354.
[2]
The amount in dispute exceeds the limit of
$25,000 for appeals proceeding under the Informal Procedure. However, the
Appellant has elected to proceed pursuant to the Informal Procedure and to
limit the appeal amount to $25,000 in accordance with section 17 of the Tax
Court of Canada Rules (Informal Procedure).
The Facts
[3]
The Appellant is a Canadian-controlled private
corporation which was incorporated in December, 2003. Its head office is
located in Mississauga, Ontario. It offers financial “factoring”
services to its business clients. “Factoring” is
a term used to describe a process in which a business can sell its accountants
receivable to a third party. The business benefits because it receives
immediate cash for its operating activities. The third party, such as the
Appellant, purchases those invoices for a discount and assumes the obligation
of collecting the money owed on the invoices. The Appellant advances 90 percent
of the invoice amount to the business, with the balance of 10 percent being
withheld as a fee deposit. The Appellant charges 0.1 percent of the invoice
amount per day to the business, from the date of the invoice payment, until the
invoice is paid by the customer. The Appellant would forward any remaining
balance from the fee deposit to the client as a rebate (Exhibit A-2, T661
Part 2: Technical Submission to CRA, page 2).
[4]
Due to the labour-intensive nature of factoring
services and the requirement to track a large number of accounts in respect to
both clients and debtors, the Appellant developed its own Factorsuite software package, which provided
factoring companies and their business clients with an integrated account
management solution. This project was referred to as the Factorsuite
Optimization Project (the “Project”).
… The Factorsuite
application was developed using iFactum which runs on an IBM WebSphere
Java application server. … The application’s language was purposefully selected
and developed in order to allow the Factorsuite application to run on
any combination of hardware platform or operating system. …
(Exhibit A-2, page 3)
The Evidence
[5]
Danilo Caicedo, one of the Appellant’s
shareholders, and Victor Sarmiento provided evidence for the Appellant in
respect to the SR&ED activities conducted in the relevant period. According
to Mr. Caicedo, the purpose of developing the web-based Factorsuite application
was two-fold: (1) to provide more efficient and cheaper services related to
credit facilities and the factoring of receivables in order to better serve its
clients; and (2) to distinguish the Appellant from its competitors (Transcript,
November 26, 2014, page 19). This application was meant to minimize human
intervention so that the operation would be more cost-efficient and more
precise.
[6]
In 2008, the Appellant was already utilizing
existing third‑party software, Factorsoft, and its predecessor, FactorPC.
This software provided basic engine functions that maintained accounts in a
master database working with the Appellant’s own Factorsuite technology.
However, the software lacked many functions that the Appellant required in
order to enhance the technology to produce its intended results. According to
the Appellant’s evidence, introduced through its two witnesses, Factorsuite
required that the Appellant integrate different software, including Factorsoft
and FactorPC, “… in order to integrate with
various platforms” (Transcript, November 26, 2014, page 21). The goal
was to fully integrate the specific calculations, contained in Factorsoft
and FactorPC data, into the Appellant’s Factorsuite application while
maintaining the integrity of those calculations after integration occurred.
[7]
The Appellant was also required to address
potential problems with another product, the faxing software owned by its
client, ActFax. The ActFax software was designed to send a single fax
containing the same information to many individuals at the same time. The
Appellant wanted to send different and unique faxes to different recipients
while maintaining the integrity of the information and the order in which they
were received. This required that the ActFax software also be integrated with
the Appellant’s Factorsuite technologies in order “… to provide unique faxes for each of the recipients.”
(Transcript, November 26, 2014, page 31). Although the Appellant
contacted the European fax manufacturer to assist with the proposed
integration, the Appellant was informed that ActFax was not designed for, nor could
it be adapted to, achieving the Appellant’s goals.
[8]
The nature of the Appellant’s business
activities required that it deliver “real-time
information” to clients so that they could rely on it in structuring
their current affairs. To deliver this information, the Appellant used the “caching” technique which Mr. Caicedo described as:
A. A cache is a temporary memory, a local memory, that a
computer has, where it keeps a certain amount of information available to [be] used
in the way the user wants to.
(Transcript, November 26, 2014, page 53)
[9]
Mr. Caicedo testified that the Appellant wanted
to provide real-time information to customers expediently by reducing the time
required for caching.
[10]
Mr. Caicedo also testified that the third‑party
software provider, Bayside, which owned the Factorsoft and FactorPC
programs, did not want to share information regarding the abilities and
processes involved in its proprietary software and its storage. Because of
Bayside’s unwillingness to share the internal code of their program, if the
Appellant was to succeed in its integration process, it was required to develop
data mining solutions that would enable it “… to
appropriately map the existing Factorsoft engine and interface it with
their own.” (Exhibit A-2, page 4). Mr. Caicedo
explained that, in data mining, the Appellant was essentially accessing data to
manipulate the information to produce reports and develop and integrate their own
processes with others (Transcript, November 26, 2014, page 26). If
relevant data is located on different software and can be properly integrated,
the Appellant’s goal was to utilize it on a common basis so that its own Factorsuite
application could run with various platforms. In respect to data mapping, Mr.
Caicedo stated:
A. In order
to be able to have two technologies interacting, we needed to have a road map.
Was there equivalent data from point A to point B? We can have the road map
established for the two black boxes.
(Transcript,
November 26, 2014, page 26)
[11]
According to Mr. Caicedo’s testimony, one of the
underlying technological challenges was to achieve integration of all these
technologies where it was difficult for the Appellant to actually change the
technology. He explained that certain elements, however, could be introduced to
the existing technology to achieve the desired result. Since the technology did
not exist in the public domain, hypotheses were formulated and testing
completed by employees, as well as an external company hired to do coding. As
an example of the experimentation undertaken by the Appellant, he stated that,
in attempting to reduce caching time, five or six different approaches were
pursued and within each of these, testing was completed.
[12]
The Appellant’s second witness, Victor
Sarmiento, who was qualified as an expert in software development, elaborated on
Mr. Caicedo’s testimony. Mr. Sarmiento’s company, Highweb & Page Group
Inc., completed work on the Appellant’s Project. According to his evidence,
techniques, performed by the Appellant, in respect to establishing a
relationship between two known databases, consisted of more than data mining
and data mapping and instead, according to his testimony, the Appellant was
actually engaged in process mining:
A. […] The problem here and the challenge here was that we
didn’t know database A at all. It was a proprietary software from a company,
and they did not disclose at all any of the details not only of the database,
but also the business logic implemented in the software that processes that
database. In that sense, it is not data mapping; it is not data mining.
(Transcript,
November 26, 2014, page 89)
A. What we did at the time was try to obtain knowledge from
this system, simulating transactions through these unknown systems, and
analyzing the results in order to get some conclusions of what this system was
doing and how it was structured. Based on that, we were basically generating
multiple transactions and analyzing not only the results, but all the history
of these transactions that are stored. From that perspective, at the time – we
are talking about 2007 – there was no name for this. It wasn’t until recently,
in 2009, when the Institute of Electrical and Electronics Engineers created a
task force for the development of this type of technique, and it was called
process mining, which is a different aspect. The Institute of Electrical and
Electronics Engineers published a manifesto in order to promote the
development, the evolution and adoption of process mining. This document was
published in 2011. We are referring to a discipline that we were performing to
some extent back in 2007, when the Institute of Electrical and Electronics
Engineers were working in establishing a task force two years later, in 2009,
and to then publish this manifesto in 2011.
(Transcript, November 26, 2014, page 90)
[13]
In Mr. Sarmiento’s view, the Appellant was not
mapping or mining data, in respect to this particular project but, instead, was
trying to discover the process flow in the otherwise unknown software system.
According to his evidence, data mining is standard practice when the original
databases and data sources are known so that information can be extracted in
order to be converted. If the source is unknown, the technological challenge
will be to retrieve information from that system, which he testified, goes
beyond data conversion. Specifically, the Appellant could not “… map and mine data from Factorsoft, without knowing
the structure of the database …” (Transcript, November 26, 2014, page
89). The Appellant had no access to the proprietary software belonging to
Bayside or of the business logic implemented in that software that processed
the data. In this respect, the Appellant’s activities went beyond data mapping
and data mining. Process mining involved the discovery of a process field
inside an existing information system where there is no possibility otherwise of
extracting the information. In doing so, the Appellant was attempting to, not
only understand the structure of the database itself, but also pursue its goal
of interacting with the entire system (Transcript, November 26, 2014, page
117).
[14]
On cross-examination, Mr. Sarmiento agreed that
the Appellant was looking at log files, generated by the Factorsoft
program, in order to determine what the processes were doing. He made an
analogy between log files and microscopes in that both were scientific tools where
someone does more than put his “… eye to a microscope”
in order to address uncertainties (Transcript, November 26, 2014, page 106).
When asked by Respondent counsel whether analyzing a log file was simply part
of the computer programming discipline and a part of a programmer’s due
diligence, Mr. Sarmiento stated that it would depend on the origin of the log
file and if it was a Factorsoft log file,
A. No, they are not intended to tell me. They are intended to tell Factorsoft’s
support team what is going on. For me, it is a challenge.
(Transcript, November 26, 2014, page 124)
[15]
In respect to the problems encountered
with ActFax, Mr. Sarmiento explained that he designed algorithms and created a
system that would solve the technological uncertainty respecting the faxing
issues by finding “… a balance between performance,
reliability, accuracy in generating these fax transmissions.” (Transcript,
November 26, 2014, page 125). The challenge in this area, according to
Mr. Sarmiento, was to maintain data accuracy and real‑time availability
in an environment of high-level performance. The design of algorithms and their
implementation were the first steps in creating the program.
[16]
The Respondent’s
witness, Leon Pellissero, explained the steps he undertook in the review process
and how he arrived at the conclusion that the Appellant was not eligible for a
SR&ED claim. His evidence was not successfully challenged on
cross-examination.
[17]
The Minister
concluded that the Appellant did not conduct any SR&ED activities related
to its Factorsuite project, as those activities did not involve a
scientific and/or technological advancement. The issue is whether the Minister
properly assessed the Appellant, that is, did the Appellant incur any allowable
SR&ED expenditures in the 2008 taxation year and is the Appellant entitled
to any ITCs in respect to those activities?
Jurisprudence and
Analysis
[18]
SR&ED is defined in subsection 248(1) of
the Income Tax Act (the “Act”) as
follows:
“scientific research and
experimental development” - “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;
[19]
The foundational case remains Justice
Bowman’s decision in Northwest Hydraulic Consultants
Ltd. v The Queen, 98 DTC 1839, which was
confirmed by the Federal Court of Appeal in R I S‑Christie Ltd. v
Canada, 99 DTC 5087,
and C.W. Agencies Inc. v Canada, 2001 FCA 393, 2002 DTC 6740. Justice
Bowman, at paragraph 16, sets out a number of criteria that a taxpayer must
prove if a project’s activities are to be considered 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? …
[…]
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.
[…]
[20]
Justice Bowman, again at paragraph 16 of his
reasons in Northwest Hydraulic, explained the terms “technological risk or uncertainty” as follows:
[…]
1. Is there a technical risk or uncertainty?
(a) Implicit in the term “technical risk or
uncertainty” in this context is the requirement that it be a type of
uncertainty that cannot be removed by routine engineering or standard
procedures. I am not talking about the fact that whenever a problem is
identified there may be some doubt concerning the way in which it will be
solved. If the resolution of the problem is reasonably predictable using
standard procedure or routine engineering there is no technological uncertainty
as used in this context.
(b) What is “routine engineering”? It is this question, (as well as that relating to technological
advancement) that appears to have divided the experts more than any other.
Briefly it describes techniques, procedures and data that are generally
accessible to competent professionals in the field.
[…]
[21]
The onus is on the Appellant in this appeal to
show that, on a balance of probabilities, those expenditures it incurred were
for SR&ED activities in respect to the 2008 taxation year. For the
following reasons, I am not satisfied that the Appellant has met that onus
because, based on the evidence adduced, the Appellant has not demonstrated that
its activities were anything more than routine engineering or standard
procedures.
[22]
Although I accepted Mr. Sarmiento as an expert
witness and did not accept the Respondent’s witness, Mr. Pellissero, as an
expert, I prefer the evidence of Mr. Pellissero, as it was presented with
greater clarity and, in the end, was more convincing.
[23]
There were three technological objectives of the
Appellant’s Factorsuite Project. First, the Appellant sought to
interface Factorsuite with the third party software, FactorPC and
Factorsoft, which was owned by Bayside, in order to ensure the functionality
and integrity of calculations between these software applications. Second, the
Appellant sought to maintain this functionality and integrity with regard to
its auto-faxing feature, so that personalized client reports could be
transmitted efficiently and in real time. Third, the Appellant sought to achieve
“interoperability and scalability” between
existing but disparate factor software applications and the Appellant’s own Factorsuite
technology so that data, which included balances, statements of account and
historical transaction data, could be presented to clients instantaneously,
precisely and with security (Exhibit A-2, pages 3 to 4).
[24]
The Appellant’s argument, according to Mr.
Caicedo, is that it has engaged in systematic experimentation through data
mining and data mapping techniques, and according to Mr. Sarmiento’s testimony,
more appropriately through process mining, in order to optimize the migration
of data, while ensuring flawless interoperability and scalability for differing
factor software packages. It also sought to optimize synchronization of the
facsimile aspect to ensure optimal performance in real time between differing
factor software. Its position is that it engaged in hypothetical transactions
in a scientifically designed test environment.
[25]
Mr. Pellissero set out three technological
uncertainties related to the Appellant’s activities:
The first one was how do we get information from – I should just
mention, the FactorPC which is the predecessor, they wanted to move the
information to Factorsoft.
So the first technological uncertainty was in order for Factorsuite,
their internal product, to work with things and produce results, it has to get
information from [Factorsoft].
So that was the first technological uncertainty.
How do we move the data from Factorsoft to Factorsuite?
Their second claimed technological uncertainty was how do we move
the information from Factorsuite, their own product, to ActFax, the
third party product to fax out, because they were having problems with that.
And the third technological uncertainty was to speed up the queries
and/or queries that generate reports because they were experiencing slowness in
this generating reports.
And that, again, typically would be coming from their Factorsuite
products.
(Transcript, April
21, 2015, pages 67 to 68)
[26]
These uncertainties reflect those listed by the
Appellant at Exhibit A-2:
1. Although
extensive efforts were made to research the matter, the design team was unable
to determine how to accurately map and mine data from within Factorsoft without
knowing the structure of the database. …
2. It was
unclear to ITC how to ensure seamless and secure interoperability between
proprietary Factorsuite and pre-existing ActFax development. …
3. ITC
was unsure of how to streamline data presentation in dynamic views to offer
real-time performance without compromising security or precision. It became
evident that the only method of gaining this information was through
experimentation. …
(Exhibit A-2, pages
5 and 6)
[27]
Mr. Pellissero’s description of the techniques
used, including data mining, data mapping, process mining and caching, are very
similar to those descriptions provided by the Appellant’s two witnesses. Mr.
Pellissero concluded that there were no technological uncertainties existing
with the technology and that the processes employed were routine procedures
that any competent computer programmer using industry standard methods would
utilize.
[28]
With the exception of the Appellant’s own Factorsuite,
according to Mr. Pellissero, although the structures of the products were
unknown, the main challenge was to obtain information from one product and then
move it to another. However, he testified that this challenge could be resolved
by the use of well-known techniques.
[29]
The Appellant’s agent, Mr. Louie, submitted that
the uncertainties related to a lack of information respecting those third-party
products rather than to the task of simply moving the information from one
program to another. In cross-examining Mr. Pellissero, he phrased his
question as follows:
Q. […] Is it possible that you have overlooked the fact that during
testimony witness Victor Sarmiento stated clearly that the challenge was not to
move data, but to achieve interoperability and scalability between these two
disparate platforms?
(Transcript, April 21, 2015, page 122)
Q. […] So in your determination of eligibility, is it conceivable
that you have overlooked the fact that the information was unavailable even
from the supplier of the software?
(Transcript, April 21, 2015, page 125)
[30]
I will review each individual uncertainty
separately. In respect to the first claimed uncertainty, the attempt to
understand the structure of data belonging to a third party software vendor in
order to have it work in conjunction with its own Factorsuite
application, Mr. Caicedo testified that the processes of data mining and data
mapping were used to determine the data in the database and its structure. Mr. Sarmiento
described the technique that was utilized as process mining, which included the
examination of event logs in order to determine how a program was functioning.
Although Mr. Sarmiento referred to an article, first published in 2011 on
process mining, the Appellant did not produce the article. The Appellant’s
agent, in his submissions, also indicated that the technique of process mining
may have been available as early as 2008. According to Mr. Pellissero, the
technique existed in 2007 and information on it was available. There can be no
technological uncertainty if the resolution of a problem is reasonably
predictable using already available standard procedures or routine engineering
(Northwest Hydraulic, at paragraph 16). The Appellant failed to
produce sufficient evidence to support its contention that uncertainty existed
in the Factorsoft and Factorsuite interoperability and failed to
adduce evidence to specifically identify the work that would have been
conducted to accomplish such a process. The third party programs were running
without apparent problems and as Mr. Pellissero explained: “… it … tells us that the programming language is coded
syntactically correct, the underlying syntax in the program is good, the
database was generated according to what the database is doing, according to
its limits and constraints.” (Transcript, April 21, 2015, page 77). In
fact, it is unclear from the evidence what the precise state of the available
knowledge was at this time. Based on the facts, I would conclude that the
techniques used, to determine what information or data was contained in the unknown
programs and how it could eventually interact with the Appellant’s own Factorsuite
program, were the available standard procedures routinely used by a competent
programmer.
[31]
With respect to the second uncertainty alleged
by the Appellant, the fax sending component of the program, it would appear
from the evidence that programs, designed to generate client reports that were
sent efficiently and in correct order, are routine and standard procedural work
that competent computer programmers perform. The Appellant’s solution involved
the examination of the data that the faxes would contain and then a procedure
was written and a holding area created where the faxes could be sent in the
correct order. The evidence does not support that this procedure involved a
technological uncertainty.
[32]
With respect to the third uncertainty, the
requirement to find a system that would produce client reports in real time,
the Appellant failed to convince me that the procedures to process reports,
cache them and refresh them so that those reports that were used more
frequently could be accessed more readily, were anything more than routine
procedure for a competent programmer.
[33]
Mr. Caicedo also testified that there
were problems because the data in the Factorsoft application was in SQL
while the data in its older version, FactorPC, was in dBase IV and had
to be converted to SQL in order to successfully map the data. Again, this is
common procedure in computer programming and such conversion is frequently
ineligible for SR&ED, as noted in Information Circular IC97-1. While I am
not bound by Canada Revenue Agency policy established in such circulars, it has
been accepted and followed as a guideline for eligibility in other
jurisprudence. For example, Zeuter Development
Corporation v The Queen, 2006 TCC 597, 2007
DTC 41, referenced this circular in considering whether a new product, created
by the taxpayer corporation for its own business, used known techniques that
were ineligible for SR&ED. In Zeuter, the project related to an
on-line learning tool to be used by high school students. At paragraph 23,
Justice Little stated the following:
[23] In
summary, the work done by the Appellant may be an advancement for the company
but not an advancement in the underlying technology. Mr. Slater argued that the
technological advancement is essentially the presentation of information in a
form that can be used by students or other users. However, he has failed to
demonstrate this from the viewpoint of the SR & ED definition in the Act.
The utility of the final product is determinative of the technological
advancement. Rather, the issue is in developing that tool, what sort of
technological challenges had to be overcome, and the Appellant has not provided
any information to demonstrate that it encountered some technological challenge
that could not be overcome by standard engineering.
[34]
In Jentel Manufacturing Ltd v The Queen,
2011 FCA 355, 2012 DTC 5031, the taxpayer developed a small parts storage
system, called Multi-Bins, to be utilized in industrial and shop floor
settings. The work completed in the development of this product was “in line with standard product development” and was
not a true technological advance.
[35]
In Hypercube Inc. v The Queen, 2015 TCC
65, 2015 DTC 1089, Justice Lamarre concluded that the taxpayer’s “crawler” technique was a standard practice. Even
though it had been developed to accomplish novel items, the programming tools
were already available in the field. These cases, and in particular Hypercube,
are similar to the present appeal in that well-known techniques were used to
develop software in order to identify the weaknesses in different websites. It
also addresses Mr. Sarmiento’s testimony respecting his comparison
regarding the use of log files in computer programming and microscopes to
research cancer. The SR&ED regime requires more than just looking into a
microscope for research. For instance, it would require, in Mr. Sarmiento’s
example of looking at cancer cells, the addition of a new substance into cancer
cells under a microscope or the removal of a specific component or the amalgam
of two different techniques to create something new. Such methods fall within
the ambit of technological advancement. However, where a new product is created
through well-known techniques, it will not qualify as SR&ED activities
because it does not involve any scientific or technological risk or
uncertainty. Mr. Louie appears to acknowledge this principle in his
submissions:
In effect, if a scientist is observing the behaviour of an organism,
he’s altering a chromosome or adding proteins.
And through his observation one could argue that he was performing
standard practice, to use a microscope, a test tube, a Bunsen burner, whatever
implements he happens to use.
But what if, through the observation of that organism, a scientist
cures cancer.
Is it still standard practice?
(Transcript, April
22, 2015, page 174)
So while a
project may lead to a major advancement in a field, there may be no scientific
or technological uncertainty, as contemplated by Justice Bowman in Northwest
Hydraulic, where the element of uncertainty is absent because standard
practice was utilized, as in the example of a scientist utilizing a microscope
to cure cancer by doing nothing more than observing the interaction among those
cancer cells under a microscope. In that instance, it would not qualify as
SR&ED within the meaning of paragraph 248(1)(c) where the scientist
withdrew the element of uncertainty by using only the standard and well-known
practice of microscopic observation.
[36]
In the present case, the Appellant has adduced
evidence of a product improvement that benefitted the company but there was
insufficient evidence for me to conclude that a scientific or technological
advancement occurred. Product improvement alone is insufficient to bring a
taxpayer within the SR&ED provisions contained in the Act. The
evidence supports my conclusion that the Appellant employed available
programming tools to resolve its objectives and those tools were known in the
field and capable of being utilized by competent computer programmers. The fact
that the Appellant integrated all of the programs was clearly an advancement
for the company, but it does not qualify as an advancement in the underlying
technology, where the technology underlying each of the programs, FactorPC,
Factorsoft, Factorsuite and ActFax, did not raise any problems at
the time. Despite the in-depth explanation provided by Mr. Louie, the
Appellant’s agent, in regard to the uncertainty in that the third-party programs
were unknown, the evidence failed to demonstrate what new technology was
introduced to resolve it or, as Mr. Louie phrased it, what chromosome was
altered or what protein was added. The evidence supports that well-known,
routine programming tools were used to develop and improve upon the procedure
of reporting to clients efficiently and quickly in a real-time environment.
[37]
In the present appeal, the technological
advancement cannot be either the interoperability or the scalability of unknown
programs, as a vast number of programs interact everywhere with each other on a
daily basis. The fact that the third party products belonging to Bayside and
ActFax were unknown was an additional challenge encountered by the Appellant,
but it cannot by itself constitute a technological uncertainty.
[38]
In 1726437
Ontario Inc. o/a Airmax Technologies v The Queen, 2012 TCC 376, 2013 DTC 1008, Justice Hogan concluded that a
combination of different techniques may constitute a technological advancement.
However, while I agree that an amalgam of different techniques may constitute a
technological advancement, this will only be so where a new technique is
created that has never been previously used in that particular industry. Otherwise,
the individual utilization of techniques, such as use of mining, mapping,
process mining or caching, could never give rise to an advancement. However,
this is not the case in the present appeal and I remain unconvinced by the
evidence, or I should say lack of it, that process mining was a new technique
at the time that the Appellant employed it and that any of the other techniques
employed were anything more than the standard procedures available at the time.
[39]
The Appellant’s
agent, Mr. Louie, attempted to distinguish “process mining” from “technique”. He
referenced Mr. Sarmiento’s evidence in this respect, in which he stated that
process mining was a discipline involving a methodology used for research as
opposed to a technique, which is presumed to be a known. Whether process mining
is, in fact, a methodology or a technique, the integration of the programs or
the exchange of information between one program and another necessarily
includes some knowledge that was already a known quantity and, therefore, there
were no SR&ED activities because there was a product advancement only,
which is insufficient to qualify as SR&ED activities.
[40]
In addition, the Appellant has not met
the requirement of showing that hypotheses, aimed at reducing or eliminating
the alleged technological uncertainties, were specifically formulated and
tested and that scientific investigation was conducted and procedures adopted
in accordance with the scientific method. According to the Federal Court of
Appeal in C.W. Agencies Inc.
v Canada, 2001 FCA
393, 2002 DTC 6740, at paragraph 17, this requires that “… a detailed record of the hypotheses
tested, and results [achieved was] kept as the work progressed”. There is no evidence that the Appellant
adopted this approach nor was there any reasonable explanation offered for its
failure to do so and, on this basis also, the appeal cannot succeed. Both
Mr. Caicedo and Mr. Sarmiento testified that the Appellant undertook
multiple hypotheses to make the differing programs interoperable. For example,
in respect to the second uncertainty concerning the faxing problems, Mr.
Caicedo explained that the hypothesis was whether the Appellant could create a
plain text file containing all of the information that could be manipulated in
the manner the Appellant required. However, none of the Appellant’s hypotheses,
that were specifically aimed at reducing or eliminating the alleged
uncertainties, were reflective of the scientific research method and very
little supporting documentation to substantiate the testing was introduced into
evidence. I was provided no evidence of specifics respecting the number of
tests performed or the nature of the experiments, the modifications or the
results. In fact, some of the documentation that was provided included
handwritten notes, which were not in English, and no translation was included.
[41]
In conclusion,
the work performed by the Appellant on the Factorsuite Project was not
SR&ED, as defined in subsection 248(1) of the Act, and the Minister
correctly disallowed the Appellant’s SR&ED claim. Consequently, the
expenditures claimed by the Appellant in engaging in this Project are not
qualified expenditures pursuant to subsection 127(9) and ITCs were properly
disallowed in respect to the 2008 taxation year.
[42]
For these
reasons, the appeal is dismissed.
[43]
As this appeal proceeded
under the Informal Procedure, there will no order as to costs.
Signed at Ottawa,
Canada, this 30th day of October 2015.
“Diane Campbell”
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