Lamarre
Proulx
T.C.J.:
The
appellant
is
appealing
from
reassessments
by
the
Minister
of
National
Revenue
(the
“Minister”)
for
the
taxation
years
ending
on
April
30,
1993
and
1994
and
from
the
assessment
by
the
Minister
for
the
taxation
year
ending
on
April
30,
1995.
The
reason
for
the
Minister’s
assessments
is
that
the
appellant
did
not
show
that
the
amounts
of
$37,323
in
1993,
$42,378
in
1994
and
$11,951
in
1995
constituted
amounts
allocated
to
scientific
research
and
experimental
development
during
those
years
for
the
purposes
of
the
investment
tax
credit
provided
for
under
subsections
127(5)
and
127(9)
of
the
Income
Tax
Act
(the
“Acf”).
Subsection
2900(1)
of
the
Income
Tax
Regulations
(the
“Regulations”)
defines
what
is
meant
by
“scientific
research
and
experimental
development
(“SR&ED”)
”
and
it
does
not
include
development
of
software
in
which
no
technological
advancement
is
involved.
Accordingly,
the
investment
tax
credits
of
$7,465,
$8,476
and
$4,183
respectively
claimed
under
subsection
127(5)
of
the
Act
were
disallowed.
The
Minister
allowed
as
current
expenses
the
SR&ED
expenses
claimed
and
disallowed
under
subsection
37(1)
of
the
Act.
The
amounts
so
allowed
were
slightly
larger,
namely
$40,515,
$49,034
and
$10,443
respectively
for
each
of
the
years
in
issue.
The
notice
of
appeal
reads
as
follows:
[TRANSLATION]
Technological
uncertainty:
Despite
all
our
attempts
to
explain
to
the
various
auditors
that
our
project
involved
technological
uncertainties,
we
are
still
Convinced
that
there
were
and
still
are
considerable
technological
uncertainties
in
this
project.
Technological
advancement:
We
firmly
believe
that
there
is
technological
advancement
because
there
is
nothing
else
on
the
market
that
can
do
the
work
this
software
does.
No
one
has
dared
go
as
far
in
the
development
of
this
kind
of
software.
Adaptation:
This
is
not
an
adaptation
of
a
common
practice
to
a
new
situation,
but
merely
the
use
of
this
programming
platform
to
develop
the
Mikado
software.
We
could
very
easily
have
used
another
platform
to
reach
the
same
conclusion,
but
this
platform
appeared
to
be
the
most
suitable.
We
are
therefore
convinced
that
this
project
is
not
an
adaptation
of
a
current
practice
to
a
new
situation.
In
making
the
assessments,
the
Minister
relied
on
the
facts
set
out
in
paragraphs
3
and
4
of
the
Reply
to
the
Notice
of
Appeal
(the
“Reply”).
I
reproduce
subparagraph
3(i)
and
paragraph
4
below:
[TRANSLATION]
3(1)
the
scientific
project
was
examined
for
the
first
time
by
a
scientific
adviser
for
1993
and
1994
and
a
second
time
by
another
scientific
adviser
for
1995,
and
both
came
to
the
same
conclusion,
namely
that
the
project
did
not
meet
the
technological
uncertainty
criterion;
4.
At
the
objection
stage,
the
project
was
presented
to
a
superior
scientific
adviser
who
came
to
the
same
conclusion
as
the
other
two
scientists
who
had
previously
considered
this
case,
which
was
that
the
appellant’s
project
did
not
meet
the
technological
uncertainty
criteria
for
qualifying
as
R&D
expenditures.
Roger
Lessard,
Director
and
President
of
the
appellant,
and
Pierre
Richard
Lavallée,
the
appellant’s
Director
of
Development,
testified
for
the
appellant.
Roger
Andria,
an
engineer,
testified
for
the
respondent
as
an
expert
witness.
Mr.
Lessard
explained
that
the
appellant
operates
in
the
field
of
sanitary
maintenance
management.
With
a
view
to
providing
a
computer
tool
for
building
managers,
the
appellant
set
about
developing
sanitary
maintenance
software
for
hospitals,
schools
and
industry.
The
software
contains
seven
or
eight
modules,
which
identify
the
various
areas
in
a
building,
together
with
their
materials
and
use,
and
enable
managers
to
establish
a
work
plan.
The
business
derives
its
revenue
from
two
sources:
the
sale
of
the
software
and
preparation
of
work
plans
for
institutions
based
on
that
software.
Mr.
Lavallée
began
working
for
the
appellant
in
1991.
The
appellant
initially
required
the
services
of
a
specialized
computer
firm.
Subsequently
there
were
a
few
people
who
worked
with
Mr.
Lavallée
on
software
development.
That
team
had
only
one
programmer
at
a
time.
The
appellant’s
witnesses
relied
on
Information
Circular
86-4R3,
entitled
Scientific
Research
and
Experimental
Development.
Referring
more
particularly
to
paragraph
6
of
the
circular:
Criteria
for
Identifying
Eligible
Activities
in
Computer
Science
and
Associated
Technologies,
they
argued
that
the
computer
field
includes
a
software
component
and
a
hardware
component
and
that
their
activities
related
to
software
development.
They
cited
the
following
passage
from
paragraph
6.4:
...A
technological
uncertainty,
on
the
other
hand,
arises
when
the
solution
is
not
readily
apparent
to
someone
familiar
with
the
basic
stock
of
commonly
used
knowledge
and
techniques
within
the
business
context
of
the
firm.
Only
activities
aimed
at
resolving
technological
uncertainties
are
eligible.
Neither
Mr.
Lessard
nor
Mr.
Lavallée
has
any
academic
training
in
computer
science.
They
have
acquired
practical
experience.
In
the
years
at
issue,
the
appellant
employed
a
young
computer
scientist,
Sylvain
Godin,
who
had
earned
a
bachelor’s
degree
in
computer
science
at
the
University
of
Quebec
at
Trois-Rivières
in
1995.
When
he
began
working
for
the
business,
he
held
a
Diplôme
d’études
collégiales
(DEC),
which
he
had
received
in
May
1993.
He
had
at
most
one
year’s
work
experience.
Exhibits
I-3
and
1-4
show
that
the
young
programmer
was
hired
at
the
earliest
on
the
date
appearing
on
the
grant
application,
namely
June
1,
1994.
An
application
for
a
government
grant
to
cover
Mr.
Godin’s
salary
was
filed
as
Exhibit
I-2
and
reads
as
follows:
[TRANSLATION]
WORKER:
Godin,
Sylvain
[number
omitted]
To
promote
the
young
worker's
entry
into
the
job
market.
Young
computer
science
graduate
who
has
held
a
DEC
since
May
1993
and
has
very
little
experience
in
his
profession.
Recent
graduate,
therefore
the
business
will
receive
no
payment
for
training.
However,
the
worker
will
receive
training
in
the
business’s
specific
needs.
Upon
termination
of
the
agreement
in
November
1994,
the
worker
will
have
mastered
the
various
programs
currently
used
in
the
business
and
will
be
able
to
transform
them
as
necessary.
He
will
also
be
able
to
provide
technical
customer
service.
Roger
Andria
is
an
engineer
and
scientific
adviser
at
Revenue
Canada.
His
report
was
filed
as
Exhibit
I-8
and
his
assessment
of
the
research
submitted
was
as
follows:
[TRANSLATION]
ASSESSMENT
According
to
the
aforementioned
documentation
provided
by
the
client
and
based
on
telephone
conversations
with
Mr.
Lessard,
the
project
for
which
the
claim
has
been
made
does
not
meet
the
technological
uncertainty
criterion
as
described
in
Revenue
Canada
Information
Circular
IC
86-4R3.
The
uncertainties
as
described
by
the
taxpayer
are
more
at
the
conceptual
level
and
linked
to
the
codification
of
work
standards,
not
to
the
implementation
of
the
computer
program.
The
problem
relating
to
the
Clipper
87
version
required
a
great
deal
of
work,
but
no
EDP
approach
involving
any
technological
uncertainty
was
taken.
The
client
solved
the
problem
by
creating
libraries
for
screens
with
the
Clipper
5.2
version.
For
a
project
to
be
eligible,
there
must
be
technological
uncertainty
as
described
in
paragraph
2.10.2
of
Circular
86-4R3
or
in
paragraph
6.10(d)
of
that
circular
dealing
with
applications
software.
The
uncertainty
must
be
at
the
software
development
level
or
related
to
the
improvement
of
computer
hardware.
In
his
testimony,
Mr.
Andria
established
the
distinction
between
a
business
project
and
a
technological
project,
and
I
cite
him
at
page
103
of
the
transcript:
[TRANSLATION]
...a
major
distinction
must
be
drawn
between
a
business
project
and
a
technological
project.
A
business
project
is
a
project
with
a
business
management
or
commercial
purpose;
within
that
business
project
there
may
be
zero,
one
or
a
number
of
technological
projects,
and
what
is
meant
by
technological
project
is
a
set
of
activities
that
meet
these
three
criteria:
technological
uncertainty,
technological
advancement
and
technical
content.
And
in
what
was
presented
to
me,
the
documentation
was
much
more
focused
on
the
business’s
product,
that
is
to
say
on
the
functions
the
project
must
have,
than
on
what
it
provides
from
a
technological
standpoint
in
the
way
of
advances
and
technological
uncertainty
in
that
particular
case,
in
the
document,
that...
In
his
cross-examination,
the
following
sentence
from
paragraph
6.8
of
the
Circular
was
cited
to
him:
Work
on
improving
or
advancing
the
user
interface
in
computer
systems,
including
developing
technological
objectives
for
the
user
interface,
can
be
an
integral
part
of
eligible
experimental
development
activities.
With
respect
to
this
sentence,
the
witness
explained
that
these
statements
must
be
read
in
context
and
he
referred
to
the
following
sentence:
...
They
are
eligible
when
carried
out
directly
in
support
of
the
needs
of
an
activity
that
itself
is
established
as
eligible....
The
reports
of
the
other
two
experts
mentioned
in
the
Reply
reveal
that
difficult
work
had
been
done,
but
that
it
did
not
go
beyond
common
professional
practice
in
computer
science.
Analysis
Subsection
2900(1)
of
the
Regulations
reads
as
follows:
For
the
purposes
of
this
Part
and
sections
37
and
37.1
of
the
Act,
“scientific
research
and
experimental
development”
means
systematic
investigation
or
search
carried
out
in
a
field
of
science
or
technology
by
means
of
experiment
or
analysis,
that
is
to
say,
(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,
(c)
experimental
development,
namely,
work
undertaken
for
the
purposes
of
achieving
technological
advancement
for
the
purposes
of
creating
new,
or
improving
existing,
materials,
devices,
products
or
processes,
including
incremental
improvements
thereto,
or
(d)
work
with
respect
to
engineering,
design,
operations
research,
mathematical
analysis,
computer
programming,
data
collection,
testing
and
psychological
research
where
that
work
is
commensurate
with
the
needs,
and
directly
in
support,
of
the
work
described
in
paragraph
(a),
(b)
or
(c),
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.
Counsel
for
the
respondent
referred
to
the
decision
by
this
Court
in
Sass
Manufacturing
Ltd.
v.
Minister
of
National
Revenue
(1988),
88
D.T.C.
1363
(T.C.C.),
and
more
particularly
to
the
following
passage
at
page
1371:
The
evidence
falls
far
short
of
establishing
the
existence
of
any
systematic
investigation
or
search
carried
out
in
a
field
of
technology
by
means
of
experiment
or
analysis.
In
my
view
Regulation
2900
requires
an
appellant
to
adduce
cogent
evidence
of
such
investigation
or
search.
Systematic
investigation
connotes
the
existence
of
controlled
experiments
and
of
highly
accurate
measurements
and
involves
the
testing
of
one’s
theories
against
empirical
evidence.
Scientific
research
must
mean
the
enterprise
of
explaining
and
predicting
and
the
gaining
knowledge
of
whatever
the
subject
matter
of
the
hypothesis
is.
This
surely
would
include
repeatable
experiments
in
which
the
steps,
the
various
changes
made
and
the
results
are
carefully
noted.
There
is
no
evidence
of
such
an
approach
in
the
case
at
bar,
either
in
the
context
of
applied
research
or
development.
The
appeal
on
this
issue
cannot
succeed.
Thus
it
must
be
shown,
as
contemplated
in
section
2900
of
the
Regulations,
that
a
systematic
investigation
or
search
was
carried
out
in
a
field
of
science
or
technology
by
means
of
experiment
or
analysis.
The
various
experts
agreed
that
the
people
involved
here
possess
considerable
skill
in
the
area
of
computers.
However,
in
this
specialized
field,
successfully
overcoming
difficulties
does
not
mean
one
has
made
a
technological
discovery.
I
found
that
Mr.
Andria
expressed
well
the
importance
of
distinguishing
between
a
business
project
and
a
scientific
research
and
experimental
development
project.
The
project
in
the
instant
case
was
a
business
project.
I
must
also
say
that
the
absence
of
expert
testimony
for
the
appellant
cannot
but
raise
doubts
as
to
the
technological
advances
achieved
through
the
development
of
the
software
at
issue.
The
persons
involved
in
developing
the
software
were
not
computer
science
graduates,
with
the
exception
of
the
young
graduate,
and
in
his
case,
he
had
not
yet
earned
his
first
university
degree
and
had
very
little
work
experience.
The
appellant
has
not
shown
on
the
balance
of
evidence
that
the
development
of
its
software
constituted
scientific
research
and
experimental
development
within
the
meaning
of
subsection
2900(1)
of
the
Regulations.
The
appeals
are
accordingly
dismissed.
Appeal
dismissed.
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