Citation: 2017 TCC 205
Date: 20171006
Docket: 2015-2735(IT)G
BETWEEN:
LEHIGH
HANSON MATERIALS LIMITED,
Applicant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Lyons J.
[1]
Lehigh Hanson Materials Limited
(“Lehigh”) brought a motion for the determination of a question, before the
hearing of the appeal, pursuant to subsections 58(1) and (2) of the Tax
Court of Canada Rules (General Procedure) (the “Rules”).
Rule 58 motions envisage a two-stage process.
[2]
Lehigh seeks an order for a determination hearing at stage one
for the question to be determined at stage two.
At stage one, the motions judge must decide whether the question is appropriate
for a determination and has a broad discretion under Rule 58 in deciding
whether or not to grant such an order. The motions judge may set down a question for determination if
the statutory conditions in subsections 58(1) and (2) of the Rules are
satisfied. These provide:
58(1) On application by a
party, the Court may grant an order that a question of law, fact or mixed law
and fact raised in a pleading or a question as to the admissibility of any
evidence be determined before the hearing.
(2) On the application, the Court may grant an
order if it appears that the determination of the question before the hearing
may dispose of all or part of the proceeding or result in a substantially
shorter hearing or a substantial saving of costs.
[3]
Thus, the following conditions must be met:
1. The question proposed must be a
question of law, fact or mixed law and fact or be a question as to the
admissibility of any evidence;
2. The question must be raised in a pleading; and
3. It appears that the determination of
the question before the hearing may dispose of all or part of the proceeding,
result in a substantially shorter hearing or result in a substantial saving of
costs.
[4]
The first condition embodies “all the possibilities of what form
a question could take.”
The “main focus” is to be placed on the second and third conditions.
[5]
The onus is on Lehigh to establish the conditions are met.[8]
I. Appeal Background
[6]
Lehigh is a private Canadian corporation and a wholly-owned
subsidiary of a United Kingdom company.
[7]
In each of the taxation years ending December 31, 2009, December
31, 2010 and December 31, 2011 (“relevant years”), Lehigh conducted operations
in Canada. Its principal businesses were cement, ready-mixed concrete,
aggregates and pipe and cement products. Lehigh’s registered office is located
in Calgary, Alberta, and it has an office in Vancouver, British Columbia.
[8]
Cement production operations were conducted by
Lehigh’s Cement division with two cement plants located in Canada. One plant is
located in Delta, British Columbia (“Delta plant”).
[9]
Lehigh used alternative fuels in the cement kiln
operation at its Delta plant in its Delta Alternative Fuels Project (the
“Project”).
The alternative fuels included construction and demolition waste and mixed
plastic and paper. Lehigh experienced issues and
obstacles working on the Project and sought to understand and overcome those concerns.
During the relevant years, it claimed input tax credits (“Credits”)
arising from expenditures used in the Project that it alleges constitutes Scientific
Research and Experimental Development (“SR&ED”).
[10]
The Minister of National Revenue reassessed
and denied the federal SR&ED Credits, totaling
$782,576, claimed by Lehigh in the relevant years on the basis it is common
practice for cement kilns to use alternative fuels, thus there were no
technological uncertainties nor technological advancements.
Any issues that arose while using alternative fuels could be resolved by
applying known practices, techniques and methodologies.
Parties’
positions - appeal
[11]
Lehigh’s position is that its Project
constitutes SR&ED because it was a systematic investigation of the
technical uncertainties related to the use of alternative fuels and the
“experimental development work undertaken […] was for the purpose of achieving
technological advancements to improve its existing processes to manufacture
cement at its Delta plant.”
All expenditures it incurred were undertaken on experimental development and
applied research related to Lehigh’s business in Canada. Therefore, its activities qualify
as “experimental development” pursuant to paragraph (c) of the definition of
SR&ED in subsection 248(1) of the Income Tax Act (the “Act”).
[12]
The respondent’s position is that none of Lehigh’s
activities meet the definition of SR&ED within the meaning of subsection
248(1), as it failed to meet the criteria in the test (“five-factor test”) enunciated
in the decision of Northwest Hydraulic, the leading authority for
determining whether an activity constitutes SR&ED. Lehigh’s activities constituted routine engineering and standard
practice. Using alternative fuels in its cement kilns was a common practice and
any challenges arising therefrom could have been resolved by Lehigh by applying
known practices, techniques and methodologies.
There was no technological uncertainty nor was technological advancement sought
or achieved.
Request to
Admit and Response
[13]
Subsequent to the close of pleadings, the
respondent served on Lehigh’s counsel a Request to Admit the truth of certain
facts. In the Response to the Request to Admit (“Response”), Lehigh admitted the
facts contained in paragraphs 1 and 3, refused to admit the facts in paragraph
2 and denied the facts in paragraphs 4 and 5 as follows:
1.
and 3. Admitted that cement industry participants, in and outside of Canada,
have undertaken work and achieved advancements with respect to the use of
alternative fuels in cement kilns and those advancements are the same as or
similar to those sought by Lehigh in the Project.
2.
Refused to admit that it is a common practice for cement kilns to use
waste fuels, often referred to as Secondary Fuel, Refuse Derived Fuel or
Process Engineered Fuel, because the statement is:
(i) imprecise with respect to the meaning of
the terms “common practice”, “waste fuels”, “Secondary Fuel”, “Refuse Derived
Fuel” and “Processed Fuel”;
(ii) does not specify any geographic
location to which the statement relates; and
(iii) does not specify a time period to which
the statement relates.
4.
Denied that the technological advancements sought in its Project were based on
known practices, techniques and methodologies accessible to competent professionals
in the field;
5.
Denied that the Project did not advance the general understanding of cement industry
participants and other knowledgeable persons in the field with respect to the
use of alternative fuels in cement kilns.
[14]
No examinations for discoveries have been held.
Rule 58 Motion
[15]
In its Notice of Motion (“motion”), Lehigh seeks a determination
of the following proposed question:
Does
“experimental development” as defined in paragraph (c) of the definition of
“scientific research and experimental development” (“SR&ED”) in subsection
248(1) of the Income Tax Act (Canada) (the “Act”) constitute SR&ED
[even] if other industry participants (located in or outside of Canada) have
achieved the particular or a similar “technological advancement” in their particular
circumstances [the “Question”]?[18]
[16]
In the Question, Lehigh asks the Court to
determine “the correct legal test” for “experimental development” described in
paragraph (c) of the definition of SR&ED in subsection 248(1) of the Act. The definition, it submits,
appears to be silent about whether “experimental development” exists if other
cement industry participants (“industry participants”) have achieved the same
or similar technological advances in their particular circumstances. Neither
term “experimental development” nor “technological advancement” are defined in
the Act. The debate centers on whether experimental development
should be analyzed based on the activities carried on by Lehigh alone or the
activities of others in the same industry.
Lehigh asserts the former.
[17]
The definition of SR&ED permits a taxpayer
to claim SR&ED Credits for experimental development work for the purpose of
achieving technological advancement. The relevant part of subsection 248(1)
reads:
“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
…
(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, …
[18]
Lehigh characterizes the order sought as a guide,
or an aid, to the trial judge and the parties to assist to determine the
ultimate issue at the hearing as to whether or not Lehigh’s own activities
constituted SR&ED based on a common understanding of the legal test. Its
position is that the Question meets all the conditions in subsections 58(1) and
(2) of the Rules. The motion seeking determination of the Question
contains two grounds. First, the Question is raised in the pleadings. Second, a
determination of the Question will dispose of all of the proceedings or result
in a substantial shortening of the hearing of the appeal and/or a substantial
costs savings.
[19]
The respondent counters that sufficient guidance
has been provided in established jurisprudence as to the meaning of SR&ED
in the Act and the test to determine whether there is a technological uncertainty
or technological advance. Determination of the Question would not add anything
to the test.
The respondent’s position is that the Question is
flawed as it cannot be answered conclusively, in either direction, without
additional facts which have not been admitted by Lehigh and the wording is
flawed. It would be inappropriate and prejudicial to the respondent to permit
the Question to proceed to a determination. Substantial savings in time or
costs will not materialize.
[20]
In support of its motion, Lehigh filed the
affidavit of Brian Ross; he describes some factual background and highlights excerpts in various documents in the respondent’s
document production.
The respondent filed the affidavit of Elizabeth Goh;
she highlights an excerpt from a Canada Revenue Agency (“CRA”) letter that
outlines the respondent’s position in response to Lehigh’s notices of
objections for the relevant years.
I. Question
of law, fact or mixed law and fact
[21]
It is undisputed that the first condition in subsection 58(1) is
satisfied as the Question is framed as a question of law. I agree, as framed, it
is a question of law.
II. Is
the Question raised in the pleadings?
[22]
Turning to the second condition in subsection 58(1), as to
whether the Question is raised in the pleadings.
[23]
In Sentinel Hill, Justice Woods
interpreted the previous iteration of Rule 58, as requiring “that the Proposed
Question must be properly raised as an issue in the pleading” because
Rule 58 contemplates that the pleadings raise the issue that is the
subject of the proposed question. In Suncor, Chief Justice Rossiter noted that “[i]n Sentinel
Hill ... Justice Woods held that a proposed question must be properly
raised as an issue in the pleadings; it is insufficient for the question to be
merely referred to in the pleading. It is not an appropriate use of s. 58(1)(a)
to raise a new issue.” This was endorsed in the context of current Rule 58 in considering
proposed questions from both parties, three of which failed to satisfy the
second condition. The reasons for that included a mere reference to the
question and a few words alone in the pleadings do not amount to properly raising
the proposed question as an issue in the pleadings.
[24]
In Paletta, Justice Owen indicates that
“Rule 58 does not provide a means to address such questions that are not raised
in the pleadings.”
[25]
The second condition in subsection 58(1) serves
to bring into a clear focus in the pleadings the proposed question that is the
subject of a Rule 58 motion. That was not done in the present case. As noted by
Justice Woods, the rationale for properly raising the issue in the pleadings is
“[f]or reasons of fairness, issues in an appeal are generally limited to those
that are raised in the pleadings. The language used in paragraph 58(1)(a)
ensures that this principle is not by-passed by bringing a motion under this
provision. It is not an appropriate use of s. 58(1)(a) to raise a new issue
through this procedure.”
[26]
I observe that the Question, as framed, is not
raised as an issue in either pleading in any of the sections.
[27]
Lehigh argues that this second condition should
not be interpreted narrowly, otherwise the issues section of any pleading
that contemplates a Rule 58 motion would become prolix and absurd requiring
litigants to break down the relevant provision into “multiple, multiple issues”
and contrary to the expectation that pleadings are to be pithy and concise.
Lehigh suggests that the Question is properly raised in the
pleadings based on various points pled in the Reply combined with the main
issue in its pleading.
[28]
Paragraph 113 of its pleading describes the
overall issue as “Did the activities undertaken by the
Appellant in the conduct of its experimental trials with alternative fuels at
its Delta cement plant constitute “SR&ED” as that term is defined in
subsection 248(1) of the Act?”
Whilst paragraph 113 refers generally to some elements of the Question, it cannot
be construed, in my view, as satisfying the condition that the
Question is properly raised in the pleadings. As in Suncor, at best,
there is a remote nexus between paragraph 113 of Lehigh’s pleading and the
Question.
[29]
In the grounds for its motion, Lehigh points to
paragraph 117 of its pleading, in the reasons section, in support of its
position that the Question is raised in the pleadings. It states “All of the
expenditures incurred by the Appellant in the course of the Delta Alternative
Fuels project were necessary for, and directly in support of, the work
undertaken on experimental development and applied research related to the
business of the Appellant, carried on in Canada and directly undertaken by the
Appellant.” That paragraph
merely connects the expenditures to the purported SR&ED activity, it does
not, however, properly raise the issue that is the subject of the Question in
the pleadings.
[30]
Lehigh also points to paragraph 5 of the Reply,
the statement of facts section, which contains 11 subparagraphs that summarizes
the respondent’s admissions, denials and statements in response to paragraphs
13 to 90 (containing facts pled by Lehigh) of the Amended Notice of Appeal. Lehigh
reproduced the subparagraphs below in its motion in support of its position
that the Question is properly raised as an issue in the
pleadings:
a) “the Appellant
sought to use alternative fuels at its cement plant in Delta” (paragraph 5(i));
b) “it
is common practice for cement kilns to use alternative fuels” (paragraph 5(ii));
c) “there were no
technological uncertainties in using the alternative fuels at the Delta plant”
(paragraph 5(iv));
d) “the activities
claimed by the Appellant to be scientific research and experimental development
(“SR&ED”) were routine engineering and standard practice” (paragraph 5(v));
e) “the
process interruptions which arose were resolvable by applying known practices,
techniques, and methodologies” (paragraph 5(vi)); and
f) “the
Appellant did not achieve technological advancement in using the alternative
fuels” (paragraph 5(viii)).
[31]
The two terms “technological advancement” and
“SR&ED” referred to in the subparagraphs are included in the Question. However,
no mention is made in the subparagraphs to features such as other industry
participants, in or outside Canada, that have achieved the particular or a
similar technological advancement in their particular circumstances nor are
such features prominent elsewhere in the Reply. Lehigh did not raise these
features in its pleading notwithstanding that these are germane to the
Question.
Its pleading focuses exclusively on its activities and how it meets the definition
of SR&ED in alleging technological uncertainty existed and technological
advancement was sought.
My view is that the two terms referenced in the subparagraphs
do not fulfil the condition in subsection 58(1) that the Question is properly
raised as an issue in the pleadings. I was unable to glean from the pleadings a
clear focus as to the issue that aligns with the Question in the motion.
III. Does it appear that the
determination of the Question may dispose of all or part of the proceeding,
result in a substantially shorter hearing or
substantial costs savings?
[32]
As to the third condition in subsection
58(2), whether it appears that the determination of the proposed question may
dispose of all or part of the proceeding, shorten the hearing or save costs.
[33]
Relying on the decisions in McIntyre and Kwok, in Suncor,
the Court held that the third condition is not satisfied if only one of two
possible answers would lead to the desired results (that the proposed question
may dispose of all or part of the proceeding or substantially shorten the
hearing or save costs) or where it will do so only if it is answered in a
particular way.
[34]
The respondent contends that the only way the Question will
dispose of the appeal is if Lehigh elects to discontinue the appeal if the
Question is answered in the negative. Further, the Question is flawed
structurally and fundamentally. Consequently, no conclusive answer can be given
to the Question – affirmatively or negatively - based on the wording and without
additional material facts necessary to determine the activity’s eligibility for
SR&ED. At best, the only possible answer the Court could give to the
(closed ended) Question would be “it depends”.
[35]
Lehigh submits that should the Court ultimately determine
the Question be answered: (a) in the negative, Lehigh will discontinue
its appeal and it will then dispose of the appeal and result in costs savings;
or (b) be answered in the affirmative, the issues in the hearing will likely be
narrowed and the discovery/trial process will likely be shortened. The
proceeding will then focus solely on whether Lehigh’s activities constituted
SR&ED based on its own products and processes. As such, this will likely
shorten the proceedings and/or trial time plus save costs. I do not agree.
[36]
The Question essentially asks does
experimental development constitute SR&ED if other industry participants,
located in Canada or globally, “have achieved the particular or a similar “technological
advancement” in their particular circumstances.” The
wording is awkward. It expressly refers to other industry participants
and then alludes indirectly to an industry participant (such as Lehigh) by
virtue of the phrase italicized in which it is implied that technological
advancement was similarly achieved by an industry participant (such as Lehigh).
However, the respondent clearly disputes that Lehigh sought
and achieved technological advancement and she posits that the determination of
that issue and the issue of whether technological uncertainty existed, is “the
factual crux” of the case. I will return to this later in these reasons.
[37]
Another difficulty is that the Question cannot
be answered in the affirmative because it presumes all other requirements for
claiming SR&ED have been met. To be eligible for SR&ED, each of the
questions in the five-factor test must be answered in the affirmative. Therefore, no affirmative answer can be given to
the Question unless all five questions in the test can also be answered in the
affirmative. I agree with the respondent and find that the
structure and wording of the Question – does experimental development
constitute SR&ED [even] if – is structurally flawed.
[38]
Apart from those difficulties, a fundamental
concern with the Question is it does not address the five-factor test (for the
reasons noted below) established in jurisprudence interpreting what constitutes
SR&ED. The Question is not determinative of the five factors in that test as
enunciated by Justice Bowman, as he then was, in Northwest
Hydraulic which, again, was designed to determine
eligibility for SR&ED. That decision has been applied
extensively at the trial and appellate levels. As such, the Question cannot be dispositive of any of the elements of the SR&ED definition.
[39]
Whether other industry participants have
achieved a particular or similar advancement is a relevant fact that would be
considered in determining the first and fourth questions (technological
uncertainty and technological advancement, respectively) in the five-factor
test. However, that alone is not determinative of those questions. In drawing
from Justice Bowman’s analysis of the first question, the respondent sums up
the principles for this factor as “The fact other industry participants have
achieved a particular or similar advancement might well be indicative that
there is no technological uncertainty. However, the ultimate determination of
the legal test depends on whether the identified uncertainty can be resolved by
“routine engineering or standard practices”, being the “techniques, procedures
and data that are generally accessible to competent professionals in the
field.” A substantial body of jurisprudence confirms the importance of
determining whether the sought advancement was based on routine engineering or
standard procedures in interpreting the meaning of SR&ED. This aspect is a common factual thread running throughout the Reply
in the present case, however, it is not apparent as to how this factors into
the Question.
[40]
In his analysis of the
fourth question, Justice Bowman discusses an example involving a technological
advance in Canada and notes that that does not cease to be one merely because
of a theoretical possibility that a researcher outside of Canada may have made
the same advance but that researcher’s work is not generally known. I agree with
the respondent that this highlights the flaw in Lehigh’s Question that “A technological
advance made by a taxpayer does not cease to be one merely because other
industry participants may have achieved the particular or similar advancement unless
that other participant’s work in achieving that advancement is known or
available to persons knowledgeable.” Given that, I find that the Question has no reasonable prospect of
success.
[41]
In Paletta, the
Court affirmed that the prospect of success factor remains relevant as one of
several factors at stage one of a Rule 58 analysis in the exercise of the
Court’s discretion. In Sentinel Hill, the Federal Court of Appeal upheld
Justice Woods’ dismissal of a Rule 58 motion because the proposed question had
no reasonable chance of success and therefore would not dispose of the
proceeding, shorten the hearing, or save costs and should not be set down for
hearing.[38]
[42]
Ultimately, the resolution of the first and
fourth questions of the five-factor test depends on relevant facts. Lehigh
has admitted in its Response that industry participants, in
Canada and globally, have undertaken work and achieved advancements with
respect to the use of alternative fuels in cement kilns and those advancements
are the same as or similar to those sought by Lehigh in its Project. This maybe
explains why Lehigh suggests that no facts are in dispute for the purpose of
the Question. Other critical material facts, however, have been denied. Namely,
Lehigh has denied the technological advancements sought in its Project were
based on known practices, techniques and methodologies accessible to competent
professionals in the field. It has also denied that the Project did not advance
the general understanding of cement industry participants and other knowledgeable
persons in the field with respect to the use of alternative fuels in cement
kilns. All of which remain in issue and form “the factual crux” of the case.
[43]
The existence of factual disputes does not preclude the granting
of a Rule 58 motion, however, this remains a relevant consideration to a Court’s
consideration as to whether a determination of a proposed question may
substantially shorten the hearing or save costs.
[44]
In McIntyre, HSBC and Suncor, the Court held in each instance that there
should never be a dispute as to a material fact underpinning a question
of law. In addition to the above disputed material facts, the respondent
denies the facts in paragraphs 20 to 28 of Lehigh’s pleading which were pled by
Lehigh in support of its position that technological advancement was sought and
achieved and technological uncertainty existed. The respondent has also denied a
substantial number of other facts pled by Lehigh. Lehigh
disagrees with various assumptions of fact made by the Minister including those
that relate to routine engineering and standard practice. There are disputed
material facts underpinning the Question of law which require viva-voce
evidence, including expert evidence and documentary evidence.
[45]
The Court is also being asked to answer the Question without additional
material facts that are necessary to formulate a dispositive Question and no
examinations for discovery have been conducted. It would be inappropriate, in
my view, to determine the Question in the abstract in a factual vacuum isolated
from the overall determination of whether Lehigh’s activities satisfied the
definition of SR&ED as Lehigh seeks to do. Facts relating to experiments
are critical to a SR&ED analysis. Without such facts, I find it is unlikely
that an affirmative or negative answer could be given to the Question.
[46]
Based on the foregoing, I conclude that it
appears that a determination of the Question may not dispose of all or part of
the proceeding, result in a substantially shorter hearing or result in substantial
costs savings, therefore, the Question fails to satisfy the condition in
subsection 58(2) of the Rules.
IV. Other considerations and the circumstances
[47]
The repetitive and permissive language in Rule 58
confirms that the motions judge is not limited to considering only the statutory
conditions in subsections 58(1) and (2) of the Rules. The motions judge has the discretion to consider other factors,
together with all the circumstances of the case, in order to decide whether the
proposed question is appropriate for a Rule 58 determination.[42]
[48]
In Banque National, former Chief Justice
Bowman considered a motion that was based on a previous iteration of Rule 58.
He expressed concern about determining a question of law without evidence when
defining a legal test and held that a question of law cannot be decided in a
vacuum and must be based on a proper evidentiary foundation with factual
underpinnings.
V. Is the determination of the Question best left to the trial judge?
[49]
The respondent argues that the
determination of the Question, structured as a question of law, is essentially
a question of fact which should be left to the trial judge because the Question
“really comes down to a determination of the facts.” A similar strategy was employed in the decision in and by HSBC
involving a Rule 58 motion. using Rule 58 to limit the scope
of the respondent’s discovery and the evidence that will be presented to the
trial judge, on a factual matter, is inherently unfair.
[50]
Mindful of the 2004 amendments to Rule 58, Justice C. Miller in HSBC nevertheless noted that a Rule 58
motion should never be a substitute for a trial. One concern was the complexity
of the issues necessitating many conclusions on facts in the context of the
motion. The Court held that a trial is more appropriate to afford a fair
hearing with evidentiary protections for both parties. In Suncor,
the Court endorsed the principles in McIntyre and HSBC and noted
that although a Rule 58 motion is very much like a trial, an actual trial has
the benefits of a fair hearing with evidentiary protections.[47] In concluding in HSBC that the 12 questions
of law failed to meet the conditions, the Court states:
13 … The CDIC issue as framed in the Reply is a question of fact: … Interestingly,
the Appellant has framed its question for Determination as a question of law - …
The answer to the legal question can only be determined by answering the
factual question, and that notwithstanding the new wording of Rule 58,
is a finding so fundamental to the overall appeal that only a full-blown trial
with all the benefits of trial rules and procedures is the appropriate place
for such an adjudication.”
…
14 … the Appellant is attempting to resolve the Respondent’s major
contentious issue. This goes to the very heart of what a trial judge, with all
the evidentiary rules and procedures at his or her disposal, is to hear. No, I
find the Appellant’s request for the resolution of the CDIC issue is an attempt
to bifurcate the trial, with the result a Motion’s Judge may be forced to reach
conclusions on facts which should, and must, go to trial for a fair hearing,
and to reach those conclusions without the benefit of the evidentiary
protections afforded to both sides at a trial. …
[51]
In the present case, the pleadings reveal a
complex case. Material facts are disputed by both parties, a substantial number
of facts pled by Lehigh have been denied by the respondent and no discovery has
taken place. Extensive findings of fact will need to be made. Determining
the relevance and weight to be given to the practices of other industry
participants is best left to the trial judge tasked with determining the
overall issue so as to consider the evidence in the context of
the overall SR&ED analysis. In my view, such
circumstances warrant a trial with the benefit of the
evidentiary protections afforded to both sides at a trial to obtain a fair hearing.
[52]
For these reasons, I am of the view that the proposed Question
was not properly raised in the pleadings thus fails to satisfy the condition in
subsection 58(1). Also, the Question cannot be answered conclusively, in either
direction, and has no reasonable prospect of success, therefore, does not
satisfy the conditions in subsection 58(2) in that it appears that the
determination may not dispose of all or part of the proceeding, result in a
substantially shorter hearing or result in substantial costs savings.
[53]
I conclude that it is not appropriate that the Question be set
down for determination under the Rule 58 process.
[54]
The motion is dismissed.
[55]
Costs are awarded to the respondent in any event of the cause.
Signed at Ottawa, Canada, this 6th day of October
2017.
“K. Lyons”
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