Synchrosat Limited v. Her Majesty the Queen, [1996] 3 CTC 2159

Archambault J.T.C.C.: — These are appeals by Synchrosat Limited (Synchrosat) from income tax assessments by the Minister of National Revenue (Minister) for the 1991 and 1992 taxation years.

The Minister disallowed a portion of the refundable investment tax credit (ITC) claimed by Synchrosat with respect to scientific research and experimental development (S.R. & E.D.) expenditures that Synchrosat incurred in connection with its project of developing a momentum turbine. This is a gravitation energy system (GES) being developed as an alternative energy source.

The amounts in issue are an ITC of $9,984 for $28,526 of expenditures incurred in 1991; and an ITC of $5,086 for $14,532 of expenditures incurred in 1992.

Most of these expenditures relate to the salary paid by Synchrosat to Dr. Asim K. Sen, a professional engineer holding a Ph.D. in Science, who is also the president and shareholder of Synchrosat.

There are no other scientists in the employment of Synchrosat. The Minister considered that all these expenditures related to activities that did not qualify as S.R. & E.D. as defined under the Income Tax Act and section 2900 of the Income Tax Regulation thereunder. This is the only issue before this Court. For instance, no issue was raised respecting the amount of qualified expenditures incurred by Synchrosat, or if they related to a business of this taxpayer.

Facts acts

Synchrosat started its work on the GES Project in 1985. The objectives of the project are described in the documentation attached to Form T661 filed for 1991:

a) Purpose of the Project:

To meet the ever-increasing demand of energy by both the industries and consumers alike, our conventional sources of electrical energy such as hydroelectric, nuclear and, of late, solar cells are no longer considered adequate and the need for research to find alternative sources of electrical energy has become of paramount importance to all nations of the world today. The purpose of this project is to explore and harness any alternative energy sources for the generation of electricity. The project falls into the category of applied research. The current efforts are directed mainly towards the development of a new scheme to generate electricity using gravitational energy. A search of prior arts reveals that two independent schemes have already been patented in this field (Canadian Patent No. 1025048, issued January 24, 1978 and No. 1082769, issued July 29, 1980). But, the novelty of the proposed scheme lies primarily in the use of a massive underground wheel and also in the placing of a number of such units along a circular path. These features and the proposed design will ensure that electricity can be generated on a more stable and continuous basis and also with more efficiency relative to the other schemes.

A more succinct description is also found in Form T-661 filed for 1992; it also provides a description of the plan to carry out the project:

B. The overall objective of the project is to develop a system for extracting “lost gravitational energy” from under the wheels of a moving vehicle and transferring it to a set of massive underground wheels to produce electricity. The project was planned to be undertaken in three distinct phases -

Phase 1 : Patent development.

Phase 2 : Performing a detailed analysis.

Phase 3 : Development and study of an experimental model.

C. As to the progress towards the overall objectives, Phase 1 has been completed, Phases 2 is nearing completion and will possibly be completed by March 31, 1993. See item E for the details on documentation. The work on Phases 3 will soon begin and will possibly be completed by December 31, 1994.

The activities carried out in 1991 and 1992 are also described in these two Forms:

Project 1: Research on Alternative Energy Sources

d) CURRENT PROGRESS (as of December 31, 1991)

The Z-transform methodology used to analyze the gravitational energy system developed in this project was examined in some greater depth to clarify some. points. Two examples were worked out and a new theorem was developed for discrete systems analysis. The work accomplished during the period: September, 1990 - May, 1991 is now documented in the report (Paper No. CER-004) as listed in section e).

During the year, the work reported earlier in Paper No. CER-001 was formally published in Energy Conversion and Management Journal. This formal publication has served to generate a lot of interest in the work among the peers in field all across the globe. Numerous inquiries, technical or otherwise, were received. All were responded to with precision and promptness.

Also, during the year, the work reported earlier in Paper No. CER-003 was accepted for publication in Energy Conversion and Management - An International Journal. The proofs were received and the corrected proofs were returned to the publisher on October 21, 1991.

The work reported earlier in Papers No. CER-002 and CER-004 was also revised in the year in response to the reviewers’ suggestions.

D. Activities carried out in 1992:

The work accomplished during the period: September, 1990 -May, 1991 and reported in Paper No. CER-004 which was later revised and re-titled as “A Simplifying Assumption for Discrete-Time Systems” was submitted for publication in the Journal of Guidance Control and Dynamics. One reviewer recommended its publication, while a second reviewer recommended rejection. A point-by-point rebuttal of the reviewer’s comments was then prepared and submitted to the Editor for consideration. Additional reviews were obtained and, based on such reviews, the Editor finally decided that more work should be done on the project prior to its publication (See attachments for details). This work is significant in that it not only provided a sound basis for the analytical tool used to develop the theory of momentum turbine using the Z-transform methodology, but it also represented some useful, new knowledge in the field of discrete system analysis.

During the year, a comprehensive report was also prepared on the gravitational energy system, showing a large-scale working model of the momentum turbine. Some significant new results were also obtained for open-loop operation of the system which eliminated the uncertainties as to the appropriate choice of the succeeding pulse heights to keep the wheel speed within reasonable bounds. This work is now documented as Report No. CER-001.

Also, during the year, the work reported earlier in Papers No. CER-002 and No. CER-003 were formally published in Energy Conversion and Management Journal. A brief announcement was also published in the special supplement of the Ottawa Citizen of April 5, 1992 for a wider dissemination of the research results among the local scientific and engineering community. Many enquiries showing interest in the energy project were received. All these enquiries were responded to promptly.

During the course of his testimony, Dr. Sen also provided the following explanation as to why he carried out in 1991 more work on the Z- transform methodology. He stated:

...after I completed my work on the closed-loop control scheme for momentum turbine as described in Exhibit B, I came across the text by G. Franklin and J. Powell on Digital Control of Dynamic Systems. When I read the pages 90 and 91 of this text of sampled data systems, it created some definite uncertainty in my mind as to the applicability of the Z- transform methodology which I was using earlier in developing the theory of momentum turbine (Exhibit B and C). Therefore, I decided to resolve this uncertainty in my mind by adopting a more fundamental approach using the Laplace transform methodology to obtain the result.

The Minister acknowledged that Synchrosat carried out a systematic analysis in carrying out the GES Project from 1985 to 1990 and that it qualified for the ITC for S.R. & E.D. for that period. However, they concluded that the activities carried on in 1991 and 1992 did not constitute S.R. & E.D. A good general explication of the Minister’s position is found in the S.R. & E.D. report of the Minister of the scientific adviser, an employee of the Minister, attached as Exhibit G to this adviser’s expert report:

We examined the papers and patent, and the cumulative results to the end of 1990 show that the work to date has eliminated the uncertainty (from a theoretical point of view) of the theory. The uncertainty which remains is in going from theory to practice. That is, the work to the end of 1990 has brought the project to stage 2 of the R&D process (as outlined in IC 86-4R2, Sect. 7.1). Unless the work goes beyond this stage, to test the theory with a working prototype, there is no more uncertainty to resolve. The work during 1991 did not advance towards the objective of demonstrating whether the alternative energy system would work or not, but was mathematical analysis that could have indirect value, was not in direct support of the project objective. Therefore, we conclude that unless or until work proceeds towards an actual demonstration of the concept, to prove or disprove the idea, this project should be considered to have been completed in 1990.

His reason for disqualifying the activities in 1992 are contained in his expert report. From November 1991 to December 23, 1992, the taxpayer primarily did work described in Exhibit E. The Appellant stated in the “Abstract” of his paper that:

It presents a complete review of the work done by this author during the past years on a new scheme for generating electricity using gravitational energy. The appellant also produced Exhibit J, a revision of paper Exhibit D.

Exhibit E was therefore largely a summary of the work done on the project in previous years. Reviewing past work does not constitute an advancement and is therefore is not S.R. & E.D.

There was a small amount of additional theoretical analysis presented on pages 6-8 of this report, on open-loop operation of the turbine, along with the wheel speed characteristics of Figure 5. However, this additional analysis not work toward the development of an experimental model or determining the validity of the “lost gravitational energy” theory.

The large-scale working model of the momentum turbine given in Figure 2 of this report is only an artist’s sketch and does not contain any additional scientific or technical information that would help resolve the primary objective of this project. Nor does the sketch have information that would be on a blueprint or an engineering drawing that would serve to construct a working model. There was no documentation given on any conceptual development beyond this sketch.

To quote further on, he concludes:

Therefore, because no work was done in 1992 to construct an experimental model to prove or disprove the theory of “lost gravitation energy” the work is not considered to be SR & ED as per the Regulations.

Synchrosat disputes this opinion of the scientific adviser. Dr. Sen stated his position in his testimony as follows:

1) What I did during the taxation year 1991 advanced the concept of momentum turbine by eliminating the scientific uncertainty created in my mind as to the applicability of the Z-transform methodology to develop the theory of momentum turbine.

2) What I accomplished during the taxation year 1992 advanced the concept of momentum turbine even further by developing a mechanization scheme to control the wheel speed of the momentum turbine in the open-loop situation. A large-scale working model of the momentum turbine was also conceived of and proposed during this taxation year for implementation in the future. The entire work done during the year 1992 was accepted for presentation at the Third World Congress on Computational Mechanics held during August 1 - 5, 1994 in Chiba, Japan.

In 1993, Dr. Sen’s energies were invested in fighting the reassessment for 1991 and the assessment for 1992. Not much time was put in pursing the experimentation of his theories by building a model or a prototype. The fact that the ITCs were not available in 1991 and 1992 did not help him in financing this phase of his GES Project. However, in 1994 he decided to invest more of his own money to build a model. He was invited to make a presentation of his findings at the 30th Inter-Society Energy Conversion Engineering Conference in Orlando, Florida, in August 1995.

Analysis

Basically, the position of the Minister is that work done in 1991 and 1992 was not required to pursue Synchrosat’s GES Project because the theoretical work had all been completed. The only thing left was to test the theory with a working prototype. In his view, the work done during the two relevant years, including the mathematical analysis on the Z-transform methodology, could not have been done directly in support of the applied research of the GES Project.

I believed Dr. Sen when he stated that he thought that his research project needed more analytical work before passing to the next phase, which was to test his theory with a working prototype. I accept his testimony that his work in 1991 and 1992 was done in the course of the GES Project.

Synchrosat was not involved in any other business or activities other than its GES Project. I do not think that Synchrosat had reached yet the experimental developmental phase of its technology. The Minister accepted that this project had been done in a systematic way until 1990.

I believe that Dr. Sen continued in the same fashion in carrying out his additional analytical work in 1991 and 1992. The activities were part of a S.R. & E.D. project which had not been completed; it was still going on in 1994 when Dr. Sen built a small prototype to test his theories.

Before terminating, I would like to add that I was concerned by the longevity of the GES Project. It started in 1985 and the experimental work on a prototype did not take place until 1994. Furthermore, only about 550 man-hours were devoted each year in 1991 and 1992 on the GES Project, this represents about three months’ of work. These facts raise in my mind the issue if the project was being carried on in a business-like manner. However, this was not the issue raised before me in these appeals. Had it been, it is possible more explanations would have resolved this concern.

For these reasons the appeals for the 1991 and 1992 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the expenditures of $28,526 and $14,532 are expenditures on S.R. & E.D.

Appeals allowed.