Archambault
T.C.J.:
Réjean
Caron,
Murray
Waxman
and
Martin
Crête
are
disputing
their
notices
of
assessment
made
by
the
Minister
of
National
Revenue
(Minister)
for
the
1987
taxation
year.
As
at
December
31,
1987,
each
of
the
three
appellants
was
a
member
of
Société
en
commandite
Agriboeuf
(Agriboeuf),
which,
in
1987,
began
scientific
research
and
experimental
development
(R&D)
work
relating
to
steer
breeding.
The
Minister
considered
that
a
large
portion
of
the
expenditures
incurred
by
Agriboeuf
were
ordinary
operating
expenses,
not
qualified
R&D
expenditures.
As
the
appellants’
chief
source
of
income
was
neither
farming
nor
a
combination
of
farming
and
some
other
source
of
income,
the
Minister
applied
to
them
the
restrictions
set
out
in
section
31
of
the
Income
Tax
Act^
(Act).
R&D
expenditures
contemplated
in
section
37
of
the
Act
are
not
taken
into
account
in
computing
the
restricted
farm
loss.
The
fact
that
the
Minister
treated
some
of
Agriboeuf’s
expenditures
as
ordinary
expenses
and
not
R&D
expenditures
thus
had
the
consequence
of
restricting
the
amount
of
the
loss
that
each
of
the
appellants
could
deduct
in
1987.
Furthermore,
the
Minister
reduced
the
amount
of
the
investment
tax
credit
that
each
of
the
appellants
could
claim
since
the
amount
of
the
credit
in
the
instant
case
depended
on
the
amount
of
R&D
expenditures
which
were
qualified
for
that
purpose.
The
appellants
do
not
dispute
the
application
of
section
31
of
the
Act,
but
submit
that
all
the
amounts
claimed
as
R&D
expenditures
constituted
such
expenditures
for
the
purposes
of
section
37
of
the
Act.
Facts
Factual
Context
In
his
testimony,
Gatien
Rompré
confirmed
that
he
was
the
promoter
of
Agriboeuf.
In
1974,
following
a
career
in
construction,
he
began
operating
a
135-acre
farm.
From
1974
to
1978,
Mr.
Rompré
carried
on
a
cow-calf
operation
for
Ferme
G.
Rompré
Inc.
(Ferme
Rompré).
Starting
in
1979,
he
decided
to
specialize
in
raising
steers,
adopting
for
that
purpose
a
feedlot
setup.
In
1986-1987,
Mr.
Rompré
noticed
that
Quebec-bred
steers
had
an
average
daily
growth
rate
of
approximately
two
kilograms,
whereas
the
rate
was
2.8
kilos
in
western
Canada.
For
Quebec
producers
to
be
able
to
compete
with
those
from
the
West,
they
had
to
improve
production
methods
and
increase
the
average
daily
growth
rate
to
2.8
kilos.
Mr.
Rompré
is
very
much
involved
in
various
associations
of
cattle
producers
at
both
the
regional
and
provincial
levels.
In
the
past,
he
has
also
taken
part
in
certain
research
projects
carried
out
by
the
Deschambault
experimental
farm
and
has
collaborated
with
Laval
University
researchers.
In
addition,
his
farm
also
takes
in
every
year
students
from
that
University’s
Faculty
of
Agricultural
Science
and
Food
(Faculté
des
sciences
de
l’agriculture
et
de
l’alimentation)
(FSAA).
To
make
his
farm
operation
profitable,
Mr.
Rompré
decided
to
set
up
a
limited
partnership
that
would
carry
out
R&D
projects
with
a
view
to
determining
the
best
diet
for
steers
having
regard
to
hay
and
grain
production
in
Quebec
and
more
particularly
in
the
Sainte-Anne-de-la-Pérade
area.
Another
objective
was
to
determine
the
importance
of
sheltering
steers
during
the
winter.
He
got
the
idea
of
forming
the
partnership
from
a
similar
project
relating
to
pig
breeding.
Mr.
Rompré
wished
to
carry
out
his
research
projects
on
commercial
farms
rather
than
on
an
experimental
farm
where
breeding
conditions
were,
in
his
view,
not
the
same.
The
conditions
in
which
R&D
is
carried
out
on
an
experimental
farm
are
ideal
and
optimum
conditions
for
livestock
breeding.
In
his
view,
the
findings
of
research
in
an
ordinary
operating
environment
are
more
convincing
for
farmers.
Agriboeuf
Agriboeuf
was
formed
as
a
limited
partnership
under
Quebec
law
on
October
5,
1987,
and
made
an
initial
public
offering
by
prospectus
(prospectus)
on
December
18,
1987.
2530-2324
Québec
Inc.
acted
as
general
partner.
Its
only
two
shareholders
were
Gatien
Rompré
and
Luc
Marcotte.
In
their
notices
of
appeal,
the
appellants
state
that
Agriboeuf
operated
a
farming
business
in
1987.
The
Minister
admitted
this
fact
in
his
reply.
However,
the
prospectus,
in
which
there
appears
a
summary
of
the
limited
partnership
agreement,
describes
Agriboeuf’s
business
as
follows:
[TRANSLATION]
The
business
of
the
partnership
is
to
conduct
scientific
research
work.
This
work
will
subsequently
be
used
for
the
purposes
of
commercial
production
of
beef
cattle.
[My
emphasis.]
In
addition,
the
partnership’s
activities
are
described
therein
as
follows:
[TRANSLATION]
Activities
of
the
Partnership
The
partnership
will
engage
in
scientific
research
on
the
diet
of
beef
cattle,
herd
management
and
preventive
medicine.
The
term
of
the
research
projects
will
be
one
and
a
half
years.
For
this
purpose,
the
partnership
intends
to
acquire
approximately
3,750
head
of
cattle
if
the
minimum
offering
is
subscribed
and
8,050
head
if
the
maximum
offering
is
sold.
The
said
research
work
will
subsequently
be
used
in
the
commercial
production
of
beef
cattle.
There
will
be
no
salaries
in
1988
as
all
the
livestock
production
will
be
done
on
a
contract
basis.
General
The
purchases
of
the
beef
cattle
necessary
to
form
the
partnership’s
herd
will
be
made
by
Ferme
G.
Rompré
Inc.
These
beef
cattle
will
be
resold
to
the
partnership
at
market
price.
[My
emphasis.]
Agriboeuf
did
not
have
the
staff
or
the
facilities
to
enable
it
to
maintain
so
large
a
herd.
Instead
it
secured
the
services
of
beef
producers
with
whom
it
negotiated
lump
sum
production
contracts.
These
producers
used
their
own
facilities
and
provided
their
own
equipment
for
rearing
the
animals,
with
the
exception
of
a
small
number
of
pieces
of
equipment
which
Agriboeuf
provided.
Agriboeuf
converted
the
box
of
a
truck
and
installed
therein
a
mixer,
purchased
additional
scales
for
$7,336
and
put
in
some
water
bowls
at
a
cost
of
$1,007.
The
evidence
showed
that
these
pieces
of
equipment
were
not
used
by
Ferme
Rompré
after
it
acquired
Agriboeuf’s
assets
in
1988,
as
will
be
seen
below.
The
total
cost
of
the
animals
used
by
Agriboeuf
in
its
R&D
work
was
$2,713,918,
which,
according
to
the
financial
statements,
included
the
contract
cattle
production
costs.
These
costs
represented
the
customary
payment
for
the
commercial
production
of
steers,
to
which
Agriboeuf
added
an
allowance
of
$86,850
to
compensate
the
producers
for
the
additional
work
required
for
the
R&D.
The
prospectus
states
that
Agriboeuf
obtained
from
Ferme
Rompré
an
undertaking
whereby
it
promised
to
make
available
to
Agriboeuf
revolving
credit
of
$1,000,000
if
the
minimum
subscription
level
was
reached
and
$2,100,000
if
the
maximum
amount
was
subscribed.
The
money
lent
bore
interest
at
12
per
cent
per
annum.
This
revolving
credit
was
used
in
particular
to
purchase
the
livestock.
A
bank
overdraft
of
$591,114
and
a
bank
loan
of
$1,420,000
appear
in
the
balance
sheet
to
December
31,
1987.
In
October
and
November
1987,
Ferme
Rompré
acquired
many
of
the
animals
needed
for
the
R&D
projects.
During
that
period,
it
prepared
them
for
the
research
projects
that
Agriboeuf
would
commence
in
December
1987.
This
preparation
included,
among
other
things,
identifying
the
animals
and
fitting
up
facilities
on
the
premises
of
the
various
producers.
The
animals
purchased
for
the
R&D
projects
were
of
different
breeds
normally
used
by
Quebec
producers.
R
&D
Projects
Having
raised
$2,950,000,
from
which
it
deducted
investment
expenses
and
the
$286,910
remuneration
of
the
best
efforts
underwriter,
Agriboeuf
was
able
to
undertake
seven
scientific
research
projects
with
the
aid
of
a
number
of
researchers
from
Laval
University
and
from
the
zootechnical
research
service
of
the
Quebec
Department
of
Agriculture,
Fisheries
and
Food
(Ministère
de
l’Agriculture,
des
Pêcheries
et
de
1’Alimentation
du
Québec)
(MAPAQ)
in
Deschambault.
Dr.
Dominique
D.
Rony
of
the
MAPAQ’s
zootechnical
research
service
directed
one
of
these
projects.
In
that
project,
he
attempted
to
determine
the
performance
of
steers
subjected
to
various
diets
with
or
without
“Ralgro”.
Raymond
Bergeron,
the
Minister’s
scientific
adviser,
gave
the
following
description
in
his
report
dated
June
10,
1991:
[TRANSLATION]
4.1
DIETARY
TRIALS
CONDUCTED
BY
DR.
D.D.
RONY
These
trials
were
conducted
on
the
farm
of
Gatien
Rompré,
who
is
both
a
producer
and
a
senior
officer
of
the
partnership,
in
Ste-Anne-de-la-Pérade.
They
were
carried
out
on
10
groups
of
feedlot
steers,
each
group
comprising
55
head
for
a
total
of
550
head.
The
study
began
in
December
1987
and
extended
over
168
days,
or
slightly
less
than
six
months.
The
research
objective
was
to
determine
the
effect
on
growth
of
the
addition
of
three
dietary
supplements:
fish
meal,
canola
meal
and
meat
meal.
These
trials
were
conducted
with
or
without
Ralgro,
a
growth
promoter
used
in
this
industry.
For
rations
1
(fish
meal)
and
2
(canola
meal),
there
were
four
repetitions
(i.e.
four
groups)
of
55
head
per
repetition
or
group.
For
ration
3,
there
were
only
two
repetitions.
The
sampling
unit
for
statistical
purposes
in
this
project
was
the
group
(that
is,
55
head).
4.1.1
S&T
CONTENT
The
planning
and
implementation
of
this
project
meet
Revenue
Canada
Taxation’s
S&T
content
requirements.
Although
conducting
such
trials
in
a
produc-
tion
context
may
entail
certain
constraints
with
respect
to
the
control
of
environmental
conditions
and
experimental
requirements,
there
is
every
indication
that
the
scientific
supervision
which
was
carried
out
made
it
possible
to
minimize
those
constraints.
Data
gathering
included:
(a)
weighing
each
animal
at
the
start
and
at
the
end
of
the
feeding
period
and
every
56
days
in
between;
(b)
weighing
feed
and
recording
feed
weights
each
day
before
feeding;
(c)
weighing
and
recording
each
day
the
quantities
of
feed
refused
by
each
group;
(d)
continuing
and
special
checking
of
each
animal’s
health;
(e)
taking
blood
samples
every
56
days
from
five
animals,
including
one
control
animal,
from
each
group
for
metabolic
profile
analyses;
(f)
taking
food
samples
from
each
ration
every
two
weeks
for
chemical
and
biochemical
analysis.
4.1.2
S&T
QUESTIONS
This
project
involved
a
number
of
questions.
For
example,
given
the
higher
cost
of
using
fish
meal
as
a
supplement,
is
its
use
in
large
quantities
throughout
the
growth
period
justifiable
from
the
standpoint
of
both
zootechnical
performance
and
cost?
And
what
would
be
the
relative
value
(yield
and
costs)
of
other
supplements
such
as
canola
meal
and
meat
meal?
4.1.3
S
&
T
ADVANCEMENT
In
general,
this
project
contributed
to
increased
knowledge
of
the
effects
of
various
dietary
supplements,
whether
combined
with
Ralgro
or
not,
on
the
growth
of
beef
cattle.
More
particularly,
this
project
made
it
possible
to
establish
the
zoo-
technical
basis
of
a
diet
including
fish
meal,
canola
meal
or
meat
meal
in
steer
production.
In
practical
terms,
it
favoured
better
use
of
fish
meal
in
steer
production.
The
projects
directed
by
Dr.
J.R.
Seoane
of
the
department
of
zootechnics
of
the
FSAA
at
Laval
University
are
described
as
follows
in
the
same
report:
[TRANSLATION]
4.2
DIETARY
TRIALS
CONDUCTED
BY
DR.J.R.
SEOANE
OF
THE
DEPARTMENT
OF
ZOOTECHNICS,
LAVAL
UNIVERSITY
Dr.
Seoane
developed
and
directed
three
research
projects
on
the
effects
of
various
diets
on
steer
growth
performance.
These
trials
were
conducted
respectively
in
three
buildings:
(a)
on
the
farm
of
Léo
Couture
in
Ste-Geneviève
near
Sainte-Anne-de-la-
Pérade;
(b)
on
the
farm
of
H.
Couture
in
Ste-Geneviève
near
Sainte-Anne-de-la-
Pérade;
(c)
on
the
farm
of
Mr.
Snyder
in
Grand-Mère.
In
each
case,
the
trials
focused
on
the
prefinishing
stage
and
lasted
some
90
days
from
December
1987
to
March
1988.
4.2.1
TRIAL
INVOLVING
TWO
RATIONS,
ONE
CONSISTING
OF
CORN
SILAGE
AND
CORN,
THE
OTHER
OF
CORN
SILAGE
AND
BARLEY
These
finishing
trials
initially
involved
two
groups
of
steers.
According
to
the
interview,
one
comprised
185
head
and
the
other
188,
for
a
total
of
373.
However,
as
some
of
the
data
were
lost
along
the
way,
findings
are
available
for
only
180
head....
The
main
problem
in
this
project
was
to
determine
what
dietary
conditions
might
achieve
optimum
efficiency.
This
project
helped
advance
knowledge
of
the
comparative
ability
of
barley-and
corn-based
diets
to
meet
zootechnical
requirements
for
steer
production....
4.2.2
RATE
OF
INTAKE
AND
DIGESTIBILITY
FOR
STEERS
FED
HAY
SUPPLEMENTED
WITH
CORN
OR
BARLEY
AND
FISH
MEAL
OR
SOYBEAN
MEAL
This
was
a
study
on
energy
and
protein
sources
for
steers
and
was
conducted
on
the
breeding
farm
of
H.
Couture
in
Ste-Geneviève,
Quebec.
According
to
the
interview
conducted
on
May
31,
1991,
200*
steers
divided
into
four
groups
of
50
were
fed
different
diets
for
a
period
of
90
days....
The
make-up
of
the
diets
was
as
follows:
—
hay/com/soybean;
hay/corn/fish
meal;
—
hay/barley/soybean;
hay/barley/fish
meal.
The
question
was
whether,
having
regard
to
rate
of
intake
and
digestibility,
the
nutritional
value
of
a
hay
diet
was
greater
with
barley
or
with
corn
and
to
what
extent
the
addition
of
fish
meal
or
soybean
influenced
that
nutritional
value.
The
research
helped
advance
knowledge
in
the
area
of
animal
dietetics
and
zootechnics.
4.2.3
COMPARATIVE
VALUE
OF
AN
ALFALFA
SILAGE-BASED
DIET
The
purpose
of
this
project
was
to
determine
the
maximum
use
that
could
be
made
of
alfalfa
in
the
food
ration
of
steers
during
the
backgrounding
period.
According
to
the
information
obtained
in
the
interview,
this
project
was
conducted
from
mid-December
1987
to
June
1988
on
240
steers
divided
into
four
groups
of
60
head
each.
Four
diets
were
tested
and
they
were
made
up
as
follows
(apart
from
their
other
components):
—
69%
high
moisture
corn
I
26%
alfalfa
silage
|
—
58%
|
I
40%
|
|
—
44%
|
/
54%
we.
|
—
31%
high
moisture
corn
I
68%
alfalfa
silage.
The
question
was
which
of
these
rations
was
most
favourable
from
the
standpoints
of
zootechnical
performance
and
cost.
According
to
the
findings,
a
diet
consisting
of
58
per
cent
corn/40
per
cent
alfalfa
seemed
to
be
the
most
desirable,
and
this
contributed
to
an
advancement
of
knowledge
in
this
area.
Furthermore,
this
research
project
served
as
an
incentive
to
greater
use
of
alfalfa
in
steer
production.
This
project
is
considered
as
qualifying
under
section
2900(1)
of
the
Income
Tax
Regulations.
Lastly,
in
Mr.
Bergeron’s
report
there
is
a
description
of
the
projects
conducted
by
Professor
A.
Marquis
of
the
Department
of
Agricultural
Engineering
(Département
de
génie
rural)
of
the
FSAA
at
Laval
University.
Professor
Marquis
carried
out
three
research
projects
on
the
effects
of
equipment,
infrastructure
and,
more
generally,
herd
management
on
animal
production
performance.
Mr.
Bergeron
provided
the
following
description:
[TRANSLATION]
4.3
RESEARCH
CONDUCTED
BY
PROFESSOR
A.
MARQUIS
OF
THE
DEPARTMENT
OF
AGRICULTURAL
ENGINEERING,
FSAA,
LAVAL
UNIVERSITY
This
research
was
conducted
in
the
farm
buildings
of
producer
G.
Rompré
in
Sainte-Anne-de-la-Pérade,
Quebec.
4.3.1.
EFFECT
OF
DENSITY
IN
QUEBEC
WINTER
CONDITIONS
ON
STEER-FINISHING
PERFORMANCE
The
purpose
of
this
project
was
to
assess
the
effect
of
three
different
densities
on
the
performance
of
penned
steers.
For
this
purpose,
three
groups
of
steers
comprising
respectively
93,
114
and
130
head
were
raised
in
pens
in
different
density
conditions,
i.e.
2.2
m
/head,
1.7
m
/head
and
1.5
m
/head
respectively.
Based
on
the
information
obtained
during
our
visit,
this
project
was
conducted
from
December
1987
to
March
1988.
According
to
a
research
report
dated
March
31,
1989,
the
experiment
as
such
(measurement
taking)
lasted
67
days,
i.e.
from
December
13,
1987,
to
February
19,
1988.
These
trials
were
conducted
in
Sainte-Anne-de-la-Pérade.
The
optimum
breeding
density
(from
the
standpoint
of
the
effect
on
finishing
performance)
in
wintering
conditions
in
Quebec
is
the
main
question
in
this
project.
The
findings
helped
advance
knowledge
of
herd
management
conditions,
particularly
as
regards
the
optimum
number
of
animals
per
unit
area.
This
research
was
the
subject
of
a
publication
project....
4.3.2
EFFECT
OF
THREE
DIFFERENT
TYPES
OF
BUILDINGS
ON
STEER
FINISHING
PERFORMANCE
These
trials
were
conducted
in
Sainte-Anne-de-la-Pérade.
For
their
finishing
phase,
three
groups
of
steers
were
placed
in
three
types
of
unheated
buildings
in
accordance
with
the
following
experimental
arrangement:
—
386
head
in
a
conventional
building
with
open
walls
and
at
a
density
of
2.61
m
/head;
—
286
head
in
a
full-walled
building
with
slatted
floors
and
at
a
density
of
1.75
m
/head;
—
310
head
in
a
full-walled
building
with
non-slatted
floors
and
at
a
density
of
2.51
m
/head.
The
purpose
of
the
project
was
to
verify
the
effect
of
these
shelter
conditions
and
more
particularly
of
the
ambient
temperature
on
certain
zootechnical
parameters
such
as
rate
of
weight
gain
and
feed
efficiency.
Based
on
the
information
obtained
during
our
visit,
this
project
was
conducted
from
December
1987
to
March
1988.
According
to
a
research
report
dated
March
31,
1989,
the
experiment
as
such
lasted
64
days,
i.e.
from
December
23,1997,
to
February
25,
1988.
Data
gathering
included:
—
weighing
daily
rations;
—
weighing
the
animals
every
32
days;
—
indoor
and
outdoor
temperature
measurements;
—
mortality;
—
incidence
of
disease.
The
main
question
in
this
project
was
how
shelter
conditions
would
affect
these
zootechnical
parameters.
The
findings
helped
advance
knowledge
of
beef
cattle
herd
management.
This
project
was
the
subject
of
a
report
(March
31,
1989)
presented
jointly
to
the
Agriboeuf
limited
partnership
by
Professor
A.
Marquis
and
S.
Godbout....
4.3.3
STEER
PRODUCTION
TRIALS
WITH
OR
WITHOUT
PROTECTION
These
trials
began
in
December
1987
and
lasted
260
days.
They
took
place
in
Ste-Geneviève
near
Sainte-Anne-de-la-Pérade
and
consisted
in
studying
the
comparative
effect
of
raising
steers
either
in
conventional
open
buildings
(87
head)
or
in
the
field
without
shelter
(93
head).
The
idea
was
to
determine
whether
there
might
be
any
benefit
from
a
zootechnical
standpoint
to
constructing
a
building
for
production
purposes.
That
was
the
question
in
this
project.
The
trials
made
it
possible
to
determine
that
the
performance
of
steers
raised
without
shelter
was
not
as
good
in
winter
as
that
of
steers
raised
in
the
barn;
however,
during
the
rest
of
their
finishing
phase,
the
steers
raised
without
shelter
managed
to
make
up
the
ground
that
was
lost
during
their
growth
period,
suggesting
that
production
in
buildings
is
not
necessarily
wholly
justified.
These
trials
thus
contributed
to
an
improvement
in
cattle-raising
methods.
This
project
is
therefore
considered
as
qualifying
under
subsection
2900(1)
of
the
Income
Tax
Regulations.
The
three
researchers
produced
research
reports
after
their
scientific
research
projects
were
completed.
Some
of
the
findings
of
that
research
were
published
in
scientific
reviews.
Steer
production
in
the
context
of
R&D
projects
requires
more
manpower
than
ordinary
commercial
operations.
According
to
Mr.
Rompré,
the
daily
operation
of
a
commercial
feedlot
requires
approximately
half
a
man-
day,
whereas
stock-rearing
in
the
context
of
an
R&D
project
requires
three
or
four
man
days
per
day.
This
is
due
to
the
fact
that
the
steers
must
be
weighed
much
more
often
and
the
quantity
of
food
provided
to
them
must
be
measured
more
accurately.
In
other
respects,
Agriboeuf’s
steer
production
was
different
from
production
in
a
commercial
context.
In
particular,
Agriboeuf
could
not
replace
certain
feed
with
other
types
based
on
fluctuations
in
purchase
prices.
The
research
protocol
as
set
out
by
the
researchers
had
to
be
followed.
According
to
that
protocol,
the
producers
also
had
to
discard
all
feed
not
consumed
by
the
steers
at
the
end
of
each
day.
In
a
normal
commercial
operation,
that
feed
would
have
been
given
to
the
animals
the
next
day.
Rapid
Succession
of
Securities
Transactions
(“Quick
Flips”)
The
prospectus
informed
investors
that
Ferme
Rompré
intended
to
acquire
control
of
Agriboeuf
in
order
to
continue
R&D
on
its
own
account
and
to
apply
the
findings
to
the
commercial
production
of
beef
cattle.
Furthermore,
there
is
to
be
found
on
page
1
of
the
prospectus
a
description
of
the
limited
partners’
right
to
sell
all
or
part
of
their
shares
to
Ferme
Rompré
around
March
15,
1988.
The
purchase
price
had
to
be
equal
to
the
fair
market
value
of
the
shares
at
December
31,
1987,
to
a
maximum
of
$150
per
share.
If
more
than
75
per
cent
of
the
limited
partners
present
at
a
special
meeting
called
for
that
purpose
exercised
this
option,
Ferme
Rompré
was
required
to
purchase
all
the
shares
of
the
limited
partners.
The
prospectus
provided
that,
if
all
the
shares
were
redeemed
in
this
manner,
Agriboeuf
would
be
automatically
dissolved
30
days
after
the
option
was
exercised,
and
that
Ferme
Rompré
would
acquire
ownership
of
Agriboeuf’s
assets.
Around
March
18,
1988,
Ferme
Rompré
acquired
all
of
Agriboeuf’s
shares.
It
would
also
appear
that
Agriboeuf’s
financial
statements
were
prepared
only
to
December
31,
1987.
Agriboeuf’s
income
statement
to
December
31,
1987,
shows
no
“sale
of
products
from
research”
and
indicates
research
expenditures
of
$310,213,
general
partner’s
fees
of
$2,000,
professional
fees
of
$10,000,
administrative
expenses
of
$750
and
fixed
assets
depreciation
of
$472,
for
a
total
of
$323,435.
The
Court
was
given
no
reason
as
to
why
Agriboeuf
considered
90
per
cent
of
the
share
issue
expenses
as
an
R&D
expenditure
and
10
per
cent
as
a
farm
operating
expense.
After
acquiring
Agriboeuf’s
assets
and
once
the
R&D
program
was
finished,
Ferme
Rompré
sold
the
steers
to
slaughterhouses
in
the
area.
Mr.
Rompré
stated
that
Ferme
Rompré
incurred
a
loss
upon
completion
of
the
entire
operation.
However,
Ferme
Rompré
used
Agriboeuf’s
R&D
findings
in
the
operation
of
its
business,
which,
according
to
Mr.
Rompré,
enabled
it
to
increase
the
profitability
of
that
business.
Today,
Ferme
Rompré
owns
1,250
acres
of
agricultural
land
and
leases
some
450
more,
for
a
total
of
1,700.
These
lands
are
used
to
grow
the
grain
crops
required
for
feeding
Ferme
Rompré’s
steer
herd.
Ferme
Rompré
has
a
permit
to
raise
as
many
as
2,000
head.
Mr.
Rompré
stated
that
Ferme
Rompré
was
earning
profits
from
its
farming
operations.
Minister’s
Audit
and
Assessment
In
the
course
of
his
audit
and
upon
reviewing
Agriboeuf’s
1987
financial
statements,
the
Minister’s
auditor
noted
that
the
main
R&D
expenditure
claimed
was
the
animal
inventory
cost
representing
approximately
89
per
cent
of
such
expenditures.
He
requested
the
opinion
of
Mr.
Bergeron,
a
scientific
adviser,
as
to
whether
Agriboeuf’s
seven
research
projects
were
qualified
projects.
Mr.
Bergeron
considered
them
as
qualifying
as
R&D
projects
for
the
purposes
of
subsection
2900(1)
of
the
Income
Tax
Regulations
(Regulations),
either
as
applied
research
or
as
experimental
development.
The
auditor
also
asked
him
for
clarification
of
the
following
points:
[TRANSLATION]
-Sampling:
Was
it
reasonable
given
the
research
conducted?
Who
determined
the
nature
of
the
sampling
(researchers
or
others)?
How
was
it
determined?
-Inventory:
Did
the
experiments
affect
the
normal
production
cycle?
(meat
quality,
marketing
of
animals,
etc.)
-Scope
of
research:
Date
research
began
Date
research
ended
Mr.
Bergeron
provided
him
with
the
following
comments:
[TRANSLATION]
1.
CONTEXT
OF
IMPLEMENTATION
OF
RESEARCH
PROJECTS
These
research
projects
were
implemented
in
a
production
context.
The
trials
were
conducted,
on
farms
specializing
in
steer
raising,
on
groups
of
steers
whose
numbers
were
in
keeping
with
the
capacity
of
those
farms
to
accommodate
them,
and
care
was
taken
not
to
disrupt
the
normal
production
process
nor
to
affect
the
animals
unduly,
so
as
to
avoid
compromising
their
zootechnical
quality
and
commercial
value.
In
particular,
this
was
done
to
ensure
that
the
findings
would
as
far
as
possible
be
applicable
to
ordinary
commercial
production.
By
analogy,
these
experimental
trials
could
be
compared
to
trial
production
runs
in
a
factory,
though
without
taking
the
comparison
too
far
because
trial
production
runs
in
a
factory
do
not
necessarily
have
the
same
commercial
value
as
regular
production
runs,
whereas
the
trials
in
this
instance
do
not
appear
in
general
to
have
resulted
in
a
reduction
in
the
steers’
commercial
value.
2.
NUMBER
OF
ANIMALS
SUBJECTED
TO
TRIALS
We
have
two
sources
of
information
on
this
point:
the
interviews
we
had
with
each
of
the
researchers
and
the
documentation
they
provided
to
us.
According
to
Dr.
Rony,
550
head
were
subjected
to
his
trials
at
the
farm
of
G.
Rompré
in
Sainte-Anne-de-la-Pérade.
This
is
consistent
with
the
data
in
the
research
report
he
produced.
The
projects
conducted
by
Dr.
Seoane
involved
respectively
180
(Léo
Couture’s
farm),
200
(Henri
Couture’s
farm)
and
240
head
(Snyder
farm),
for
a
total
of
620
head.
The
projects
conducted
by
Professor
Marquis
involved
respectively
337,
982
and
180
head,
for
a
total
of
1,499
head.
Thus,
a
total
of
2,669
steers,
more
or
less,
underwent
trials
sponsored
by
the
Agriboeuf
limited
partnership
in
1988,
which
trials
likely
got
under
way
in
December
1987.
It
is
clear
that,
in
purely
statistical
terms,
if
these
projects
had
been
conducted
in
the
context
of
and
in
the
conditions
peculiar
to
an
experimental
farm
(university
type
research),
it
would
have
been
sufficient
to
use
a
much
smaller
sample
to
obtain
findings
of
scientific
value.
For
example,
in
the
case
of
Dr.
Rony’s
project,
it
would
have
been
sufficient
to
perform
the
trials
on
eight
to
10
head
per
group
(80
to
100
head
in
all)
rather
than
on
55
head
per
group
(550
in
all),
which
is
one-fifth
of
the
number
of
animals
that
were
actually
used
for
these
trials.
There
are
justifications
for
the
use
of
a
number
of
animals
consistent
with
the
farms'
production
capacity,
the
main
one
being
so
that
it
may
be
determined
whether
a
treatment
remains
applicable,
valid
and
profitable
in
a
normal
production
management
context.
The
second,
which
is
closely
akin
to
the
first,
is
the
mistrust
that
producers
may
have
of
overly
academic
research
that
does
not
adequately
take
into
account
the
realities
and
requirements
of
common
practice.
Furthermore,
conducting
these
kinds
of
trials
in
a
production
context
generally
also
imposes
constraints
related
mainly
to
the
difficulty
of
properly
controlling
the
various
experimental
variables.
In
addition,
according
to
our
information,
there
are
restrictions
as
to
the
potential
impact
of
the
research
on
herd
quality
and
production
value.
3.
IMPORTANCE
FOR
RESEARCHERS
By
and
large,
for
a
researcher,
designing
and
conducting
a
research
project
in
production
conditions
is
not
necessarily
an
ideal
situation.
However,
it
nevertheless
affords
him
an
opportunity,
perhaps
a
rare
one,
to
have
the
resources
and
equipment
to
conduct
research,
involve
his
students
and
young
researchers
in
his
research
projects
and
produce
the
publications
that
are
essential
to
maintaining
his
credibility
as
a
researcher.
The
researcher
also
hopes
that,
in
this
way,
his
work
can
help
improve
animal
breeding
industries.
4.
CONSTRAINTS
PLACED
ON
PRODUCTION
BY
THE
CONDUCT
OF
EXPERIMENTAL
TRIALS
Introducing
experimental
requirements
into
a
process
that
is
normally
dedicated
to
production
necessarily
imposes
certain
constraints.
At
the
same
time,
these
constraints
constitute
that
(activities,
expenses,
etc.)
which
is
properly
attributable
to
research
requirements.
Some
of
these
constraints
or
requirements
may
be
enumerated
here:
—
the
hiring
of
researchers
and
technicians
to
plan
and
carry
out
the
research
project
and
to
analyze
and
interpret
findings;
—
the
hiring
of
additional
support
staff
(farm
hands,
labourers,
etc.)
to
perform
work
related
to
the
research,
or
granting
overtime
to
existing
personnel
so
that
they
might
perform
such
work;
—
the
time
required
of
the
company’s
directors
and
managers
to
plan,
Supervise
and
carry
out
the
work;
—
the
improvements
that
may
have
been
made
in
the
facilities
(breeding
farms)
for
the
purposes
of
the
research
that
was
to
be
performed;
if
these
improvements
are
subsequently
dismantled,
it
may
be
said
that
they
were
made
solely
for
research
purposes;
—
the
instruments
or
equipment
that
were
purchased
specifically
for
the
purposes
of
the
research
and
that
were
used
solely
for
the
research
during
their
entire
useful
life;
—
the
activities
that
are
not
necessary
for
production,
but
that
are
necessary
in
carrying
out
the
research
project,
for
example:
.
weighing
feed
each
day;
.
weighing
animals
more
frequently;
.
specific
tests
(e.g.,
digestibility)
on
a
certain
number
of
animals;
.
blood
samples
and
analyses
if
made
necessary
by
research
requirements;
—
losses
of
animals
that
could
be
associated
with
research
activities
(e.g.,
from
stress
caused
by
excessive
handling)
or
loss
of
value
attributable
to
research
activities;
—
increased
frequency
of
supervision
and
treatment,
by
a
veterinarian
for
example,
necessitated
by
the
research
project
context;
—
the
addition
to
diets
of
foods
or
growth
promoters
required
by
the
research.
4.
IMPONDERABLES
The
addition
of
an
experimental
context
to
a
production
process
may
have
various
effects
that
are
impossible
to
assess.
First,
there
is
the
stress
caused
to
the
producer
and
to
the
livestock
by
the
introduction
of
experimental
requirements.
This
stress
is
not
really
quantifiable.
It
may
perhaps
be
partly
responsible
for
any
livestock
losses
incurred.
Adjusting
to
the
changes
introduced
in
the
production
system
is
another
question
mark.
Even
if
the
changes
in
the
Agriboeuf
limited
partnership’s
projects
do
not
appear
significant,
there
were
nevertheless
a
few,
such
as
more
frequent
weighing
of
feed
and
more
frequent
observation
of
the
livestock.
The
business
had
to
adjust
to
a
slightly
less
stereotyped
form
of
production;
it
was
not
necessarily
easy
to
have
the
producers
accept
certain
requirements
on
which
the
researchers
might
insist.
SUMMARY
Although
these
various
projects
were
carried
out
in
a
production
context,
they
seem
to
me,
in
zootechnical
and
steer-breeding
terms,
to
constitute
a
highly
valid
contribution
to
ST
&
ED.
[My
emphasis]
In
his
testimony,
Professor
Seoane
also
acknowledged
the
usefulness
of
carrying
out
R&D
projects
with
such
a
large
number
of
animals
in
the
context
of
a
commercial
farm
operation.
He
gave
the
example
of
a
professor
at
Cornell
University
who
was
conducting
similar
experiments.
Professor
Seoane
confirmed
that
he
had
requested
changes
consisting
in
the
installation
of
certain
gates
and
the
construction
of
certain
pens
to
make
it
possible
to
separate
the
various
groups
and
ensure
a
better
rotation
of
animals.
In
its
expenses
incurred
in
the
fiscal
year
ending
on
December
31,
1987,
Agriboeuf
included
R&D
expenditures
totalling
$3,208,482.
The
Minister
allowed
only
$149,446.
This
amount
essentially
represented
additional
expenditures
directly
attributable
to
R&D,
that
is
to
say
salary
expenses
for
the
researchers
and
project
managers.
It
did
not
include
expenses
relating
to
the
purchase
and
raising
of
the
animals
since,
according
to
the
Minister,
those
were
expenses
relating
to
“normal”
operations.
The
following
table
provides
a
summary
of
the
expenses
incurred
by
Agriboeuf
and
their
tax
treatment
by
the
Minister:
Agriboeuf
Limited
Partnership
Qualified
Research
Expenditures
and
I.T.C
-
December
31,
1987
-
|
AGRIBOEUF
|
|
MINIS
|
|
TER
OF
|
|
NA-
|
|
TIONAL
|
|
REVE
|
|
NUE
|
|
Expenditures
of
a
capital
nature
|
|
|
Truck,
box,
mixer
|
$
|
20,000
|
$
|
0
|
|
Water
bowls
|
|
1,007
|
|
0
|
|
Scales
|
|
7,336
|
|
0
|
|
TOTAL
|
$
|
28,343
|
$
|
0
|
|
Expenditures
of
a
current
nature
Salaries
|
|
|
and
wages
|
|
|
Salaries
and
wages
|
|
|
—
researchers
|
|
4,930
|
|
4,930
|
|
—
project
manager
|
|
8,000
|
|
8,000
|
|
—
contractor
|
|
47,531
|
|
47,531
|
|
Materials
used
|
|
|
—
purchases
of
|
|
2,713,918
|
|
0
|
|
3,000
head
of
cattle
|
|
|
—
production
costs
|
|
84,018
|
|
0
|
|
—
compensation
for
|
|
86,850
|
|
86,850
|
|
producers
|
|
|
(disruption
caused
|
|
|
by
R&D)
|
|
|
Direct
expenses
|
|
|
—
notebooks,
sta-
|
|
2,135
|
|
2,135
|
|
tionery,
etc.
|
|
|
—
interest
expenses
|
|
2,881
|
|
0
|
|
share
issue
expenses
|
|
258,219
|
|
0
|
|
TOTAL
|
$
3,208,482
|
$
149,446
|
|
Total
expenditures
of
capital
and
current
|
|
3,236,825
|
|
149,446
|
|
nature
|
|
Less:
|
I.T.C.
claimed
and/or
granted
(20%
or
|
419,000
|
29,889
|
|
maximum
$100/share)
|
|
|
Total
Qualified
Expenditures
|
$
2,817,825
|
$
199,557
|
As
appears
from
the
following
table,
the
Minister
considered
all
the
claimed
current
R&D
expenditures
that
he
disallowed
to
be
ordinary
operating
expenses:
Agriboeuf
Limited
Partnership
Reconciliation
of
Farming
Loss
-
December
31,
1987
-
|
Agriboeuf
|
|
Minister
of
|
|
National
|
|
Revenue
|
|
Farming
loss
claimed
|
|
|
Share
issue
expenses
(10%
X
|
$
28,691
|
$
|
28,691
|
|
$286,910)
|
|
|
General
partner’s
fees
|
2,000
|
|
2,000
|
|
Professional
fees
|
10,000
|
|
10,000
|
|
Administrative
expenses
|
750
|
|
750
|
|
$
41,441
|
$
|
41,441
|
|
Plus:
|
|
|
Current
research
expenditures
disal
|
|
|
lowed
|
|
|
—
Purchases
of
cattle
|
-
|
|
2,713,918
|
|
—
Contract
livestock
production
|
-
|
|
84,018
|
|
expenses
|
|
|
—
Interest
expenses
|
-
|
|
2,881
|
|
—
Share
issue
expenses
(90
X
|
-
|
|
258,219
|
|
$286,910)
|
|
|
Farming
loss
|
$
41,441
|
|
43,100,477
|
In
his
T20
report
(Exhibit
1-13),
the
auditor
Mr.
Gélinas
explained
in
the
following
terms
why
he
refused
to
consider
some
of
Agriboeuf’s
expenses
as
being
qualified
research
expenditures:
[TRANSLATION]
According
to
subparagraph
37(7)(c)(ii),
only
expenditures
all
or
substantially
all
of
which
were
attributable
to
scientific
research
qualify
as
R&D
expenditures.
Paragraphs
10
and
21
of
IT-151R3
state
that
the
“all
or
substantially
all”
test
is
normally
met
if
the
assets
acquired
as
a
result
of
the
research
are
to
be
used
for
at
least
90
per
cent
of
the
time
throughout
their
expected
useful
life
for
R&D
in
Canada.
/t
is
our
opinion
that
the
cattle
purchases,
contract
livestock
production
expenses,
interest
expenses,
share
issue
expenses
and
capital
expenditures
can-
not
be
considered
to
be
all
or
substantially
all
attributable
to
the
prosecution
of
R&D.
In
the
case
of
the
Agriboeuf
limited
partnership,
the
research
activities
did
not
make
the
meat
unsuitable
for
consumption,
the
value
of
the
cattle
was
not
affected
and
the
cattle
were
sold
as
part
of
a
normal
agricultural
production
business.
Less
than
ninety
per
cent
of
the
capital
expenditures
was
used
for
R&D.
[My
emphasis.]
Relevant
Statutory
Provisions
The
relevant
provisions
of
the
Act
respecting
deductions
of
R&D
expenditures
appear
in
subsection
37(1)
and
subparagraphs
37(7)(b)
and
(c):
37(1)
Where
a
taxpayer
files
with
his
return
of
income
under
this
Part
for
a
taxation
year
a
prescribed
form
containing
prescribed
information,
carried
on
a
business
in
Canada
and
made
expenditures
in
respect
of
scientific
research
and
experimental
development
in
the
year,
there
may
be
deducted
in
computing
his
income
for
the
year
the
amount,
if
any,
by
which
the
aggregate
of
(a)
such
amounts
as
may
be
claimed
by
the
taxpayer
not
exceeding
all
expenditures
of
a
current
nature
made
in
Canada
by
the
taxpayer
in
the
year
or
in
any
previous
taxation
year
ending
after
1973
(i)
on
scientific
research
and
experimental
development
related
to
the
business
and
directly
undertaken
by
or
on
behalf
of
the
taxpayer,
(b)
such
amount
as
may
be
claimed
by
the
taxpayer
not
exceeding
the
lesser
of
(i)
the
expenditures
of
a
capital
nature
made
in
Canada
(by
acquiring
property
other
than
land)
in
the
year
and
any
previous
year
ending
after
1958
on
scientific
research
and
experimental
development
relating
to
the
business
and
directly
undertaken
by
or
on
behalf
of
the
taxpayer,
and
(ii)
the
undepreciated
capital
cost
to
the
taxpayer
of
the
property
so
acquired
as
of
the
end
of
the
taxation
year
(before
making
any
deduction
under
this
paragraph
in
computing
the
income
of
the
taxpayer
for
the
taxation
year),
(c)
...
exceeds
the
aggregate
of
(c.1)
...
(d)
all
amounts
paid
to
him
in
the
year
or
in
any
previous
taxation
year
ending
after
1973
under
an
Appropriation
Act
and
on
terms
and
conditions
described
in
paragraph
(c),
(e)
that
portion
of
the
aggregate
of
all
amounts
deducted
under
subsection
127(5)
in
computing
the
tax
otherwise
payable
by
the
taxpayer
under
this
Part
for
the
year
or
any
previous
taxation
year
that
may
reasonably
be
attributed
to
expenditures
of
a
current
nature
made
in
Canada
in
the
year
or
in
any
previous
taxation
year
that
were
qualified
expenditures
in
respect
of
scientific
research
and
experimental
development
within
the
meaning
of
paragraph
127(10.
l)(c),
(f)
all
amounts
deducted
by
virtue
of
this
subsection
and
paragraph
20(l)(Z)
in
computing
the
taxpayer’s
income
for
any
preceding
taxation
year,
except
amounts
described
in
subsection
(6),
(g)
-
(h)
...
37(7)
In
this
section,
(b)
“scientific
research
and
experimental
development”
has
the
meaning
given
to
that
expression
by
regulation;
(c)
references
to
expenditures
on
or
in
respect
of
scientific
research
and
experimental
development
(i)
(11)
where
the
references
occur
other
than
in
subsection
(2),
include
only
(A)
expenditures
each
of
which
was
an
expenditure
incurred
for
and
all
or
substantially
all
of
which
was
attributable
to
the
prosecution,
or
to
the
provision
of
premises,
facilities
or
equipment
for
the
prosecution,
of
scientific
research
and
experimental
development
in
Canada,
and
(B)
expenditures
of
a
current
nature
that
were
directly
attributable,
as
determined
by
regulation,
to
the
prosecution,
or
to
the
provision
of
premises,
facilities
or
equipment
for
the
prosecution,
of
scientific
research
and
experimental
development
in
Canada;
[My
emphasis.]
Subsection
96(1)
of
the
Act
states
the
rules
for
computing
the
income
of
a
limited
partner
in
a
limited
partnership:
96(1)
Where
a
taxpayer
is
a
member
of
a
partnership,
his
income,
non-capital
loss,
net
capital
loss,
restricted
farm
loss
and
farm
loss,
if
any,
for
a
taxation
year,
or
his
taxable
income
earned
in
Canada
for
a
taxation
year,
as
the
case
may
be,
shall
be
computed
as
if
(a)
the
partnership
were
a
separate
person
resident
in
Canada;
(b)
the
taxation
year
of
the
partnership
were
its
fiscal
period;
(c)
each
partnership
activity
(including
the
ownership
of
property)
were
carried
on
by
the
partnership
as
a
separate
person,
and
a
computation
were
made
of
the
amount
of
(1)
each
taxable
capital
gain
and
allowable
capital
loss
of
the
partnership
from
the
disposition
of
property,
and
(ii)
each
income
and
loss
of
the
partnership
from
each
other
source
or
from
sources
in
a
particular
place,
for
each
taxation
year
of
the
partnership;
(d)
each
income
or
loss
of
the
partnership
for
a
taxation
year
were
computed
as
if
this
Act
were
read
without
reference
to
subsections
66.1(1),
66.2(1)
and
66.4(1)
and
as
if
no
deduction
were
permitted
by
section
29
of
the
Income
Tax
Application
Rules,
1971,
subsection
65(1)
or
section
66,
66.1,
66.2
or
66.4;
(e)
each
gain
of
the
partnership
from
the
disposition
of
land
used
in
a
farming
business
of
the
partnership
were
computed
as
if
this
Act
were
read
without
reference
to
paragraph
53(1)(Z);
(f)
the
amount
of
the
income
of
the
partnership
for
a
taxation
year
from
any
source
or
from
sources
in
a
particular
place
were
the
income
of
the
taxpayer
from
that
source
or
from
sources
in
that
particular
place,
as
the
case
may
be,
for
the
taxation
year
of
the
taxpayer
in
which
the
partnership’s
taxation
year
ends,
to
the
extent
of
the
taxpayer’s
share
thereof;
and
(g)
the
amount
of
the
loss
of
the
partnership
for
a
taxation
year
from
any
source
or
from
sources
in
a
particular
place
were
the
loss
of
the
taxpayer
from
that
source
or
from
sources
in
that
particular
place,
as
the
case
may
be,
for
the
taxation
year
of
the
taxpayer
in
which
the
partnership’s
taxation
year
ends,
to
the
extent
of
the
taxpayer’s
share
thereof.
[My
emphasis.
]
Subsection
127(9)
of
the
Act
defines
qualified
expenditures
for
the
purposes
of
the
investment
tax
credit:
127(9)
In
this
section
and
section
127.1,
“qualified
expenditure”
means
an
expenditure
in
respect
of
scientific
research
and
experimental
development
made
by
a
taxpayer
after
March
31,
1977
that
qualifies
as
an
expenditure
described
in
paragraph
37(1)(a)
or
subparagraph
37(1)(b)(i),
but
does
not
include
(a)
a
prescribed
expenditure,
[My
emphasis.
I
Sections
2900
and
2902
of
the
Regulations
define
R&D
expenditures
for
the
purposes
of
section
37
and
subsection
127(9)
of
the
Act:
2900(1)
For
the
purposes
of
this
Part
and
paragraphs
37(7)(ô)
and
37.1(5)(e)
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,
or
(c)
development,
namely,
use
of
the
results
of
basic
or
applied
research
for
the
purpose
of
creating
new,
or
improving
existing,
materials,
devices,
products
or
processes,
and,
where
such
activities
are
undertaken
directly
in
support
of
activities
described
in
paragraph
(a),
(b)
or
(c),
includes
activities
with
respect
to
engineering
or
design,
operations
research,
mathematical
analysis
or
computer
programming
and
psychological
research,
but
does
not
include
activities
with
respect
to
(d)
market
research
or
sales
promotion;
(e)
quality
control
or
routine
testing
of
materials,
devices
or
products;
(f)
research
in
the
social
sciences
or
the
humanities;
(g)
prospecting,
exploring
or
drilling
for
or
producing
minerals,
petroleum
or
natural
gas;
(h)
the
commercial
production
of
a
new
or
improved
material,
device
or
product
or
the
commercial
use
of
a
new
or
improved
process;
(i)
style
changes;
or
(j)
routine
data
collection.
(2)
For
the
purposes
of
clauses
37(7)(c)(i)(B)
and
(ii)(B)
of
the
Act,
the
following
expenditures
are
directly
attributable
to
the
prosecution
of
scientific
research
and
experimental
development:
(a)
the
cost
of
materials
consumed
in
such
prosecution;
(b)
where
an
employee
directly
undertakes,
supervises
or
supports
such
prosecution,
the
portion
of
the
salaries
or
wages
and
related
benefits
paid
to
or
for
that
employee
that
can
reasonably
be
considered
to
relate
thereto;
and
(c)
other
expenditures
that
are
directly
related
to
such
prosecution
and
that
would
not
have
been
incurred
if
such
prosecution
had
not
occurred.
(3)
For
the
purposes
of
clause
37(7)(c)(ii)(B)
of
the
Act,
the
following
expenditures
are
directly
attributable
to
the
provision
of
premises,
facilities
or
equipment
for
the
prosecution
of
scientific
research
and
experimental
development:
(a)
the
cost
of
the
maintenance
and
upkeep
of
such
premises,
facilities
or
equipment;
and
(b)
other
expenditures
that
are
directly
related
to
such
provision
and
that
would
not
have
been
incurred
if
such
premises,
facilities
or
equipment
had
not
existed.
2902.
For
the
purposes
of
the
definition
“qualified
expenditure”
in
subsection
127(9)
of
the
Act,
a
prescribed
expenditure
is
(a)
an
expenditure
of
a
current
nature
incurred
by
a
taxpayer
in
respect
of
(i)
the
general
administration
or
management
of
a
business,
including
(A)
administrative
salary
or
wages
and
related
benefits
in
respect
of
a
person
whose
duties
are
not
all
or
substantially
all
directed
to
the
prosecution
of
scientific
research
and
experimental
development,
except
to
the
extent
that
such
expenditure
is
described
in
subsection
2900(2)
or
(3),
(B)
a
legal
or
accounting
fee,
(C)
an
amount
described
in
any
of
paragraphs
20(1)(c)
to
(g)
of
the
Act,
(D)
an
entertainment
expense,
(E)
an
advertising
or
selling
expense,
(F)
a
convention
expense,
(G)
a
due
or
fee
in
respect
of
membership
in
a
scientific
or
technical
society
or
organization,
and
(H)
a
fine
or
penalty,
or
(ii)
the
maintenance
and
upkeep
of
premises,
facilities
or
equipment
to
the
extent
that
such
expenditure
is
not
attributable
to
the
prosecution
of
scientific
research
and
experimental
development,
except
any
such
expenditure
incurred
by
a
taxpayer
who
derives
all
or
substantially
all
of
his
revenue
from
the
prosecution
of
scientific
research
and
experimental
development
or
the
sale
of
rights
in
or
arising
out
of
scientific
research
and
experimental
development
carried
on
by
him;
(b)
an
expenditure
of
a
capital
nature
incurred
by
a
taxpayer
in
respect
of
(i)
the
acquisition
of
property,
except
any
such
expenditure
that
was
incurred
for
and
was
all
or
substantially
all
attributable
to
the
prosecution,
or
to
the
provision
of
premises,
facilities
or
equipment
for
the
prosecution,
of
scientific
research
and
experimental
development,
(ii)
the
acquisition
of
property
that
is
qualified
property
within
the
meaning
assigned
by
subsection
127(9)
of
the
Act,
or
(iii)
the
acquisition
of
property
that
has
been
used
for
any
purpose
whatever
before
it
was
acquired
by
the
taxpayer;
[My
emphasis.]
Analysis
The
only
ground
for
the
Minister’s
refusal
to
allow
as
R&D
expenditures
and
as
qualified
expenditures
for
the
purposes
of
computing
the
investment
tax
credit
the
expenses
incurred
by
Agriboeuf
is
that
he
believed
that
the
acquisition
cost
of
the
steers
and
the
contract
livestock
production
costs,
interest
expenses,
share
issue
expenses
and
the
expenditures
of
a
capital
nature
could
not
be
considered
as
all
or
substantially
all
attributable
to
the
prosecution
of
R&D
The
Minister
assumed
that
Agriboeuf
was
operating
a
farming
business
and
that
the
steers
were
purchased
for
the
purpose
of
reselling
them
at
a
profit
in
the
ordinary
course
of
that
business.
In
my
view,
the
taxpayers
have
succeeded
in
showing
that
this
perception
of
the
Minister’s
was
incorrect.
All
the
expenses
that
the
Minister
disallowed
were
expenditures
all
or
substantially
all
of
which
were
attributable
to
R&D.
This
is
true
of
both
the
expenditures
of
a
current
nature
and
those
of
a
capital
nature.
As
appears
from
the
questions
put
to
his
scientific
adviser
Mr.
Bergeron,
the
Minister
wondered
whether
the
sampling
used
by
Agriboeuf
was
reasonable
in
light
of
Agriboeuf’s
objectives.
The
Minister
concluded
that
the
steers
had
not
been
purchased
for
R&D
purposes.
I
believe,
however,
that
the
evidence
shows
that
all
the
animals
were
acquired
for
such
purposes
and
were
used
in
Agriboeuf’s
seven
R&D
projects.
For
the
purpose
of
its
systematic
investigation
or
search
carried
out
in
a
field
of
science
or
technology,
Agriboeuf
could
choose
whether
its
projects
would
be
based
on
a
limited
sampling
in
an
experimental
farm
setting
or
on
a
broader
sampling
in
a
commercial
farm
setting.
Mr.
Rompré
indicated
that
he
considered
the
findings
of
research
conducted
on
an
experimental
farm
in
ideal
conditions
to
be
less
convincing.
Instead
he
wanted
his
projects
to
be
carried
out
in
an
ordinary
commercial
farming
environment.
Not
only
did
Professor
Seoane
acknowledge
the
usefulness
of
carrying
out
such
projects
in
this
manner,
but
the
Minister’s
scientific
adviser
himself
stated
that
research
so
conducted
seemed
to
him
“in
zootechnical
and
steer-breeding
terms,
to
constitute
a
highly
valid
...
contribution”.
The
Minister
did
not
recognize
the
cost
of
any
of
the
steers
purchased
by
Agriboeuf
as
an
R&D
expenditure.
I
fail
to
see
how
one
can
undertake
an
R&D
program
having
to
do
with
the
effects
of
diet
and
various
herd
management
methods
on
production
performance
without
using
steers
for
that
purpose.
Nor
do
I
believe
that
Agriboeuf
purchased
the
steers
for
the
purpose
of
raising
them
for
resale
at
a
profit.
Rather
the
steers
were
acquired
for
the
purpose
of
carrying
out
the
R&D
projects.
The
approach
adopted
by
Agriboeuf
confirms
this
fact.
Agriboeuf
did
not
raise
its
steers
with
a
view
to
maximizing
its
resale
profits.
If
this
had
been
the
case,
it
would
have
used
a
half
man-day
of
manpower
per
day,
whereas
four
or
five
persons
were
used
for
the
R&D
program.
In
addition,
they
would
have
changed
the
feed
in
accordance
with
market-price
fluctuations
instead
of
staying
with
the
feed
specified
in
the
R&D
protocol.
Lastly,
in
a
commercial
operation,
feed
not
consumed
by
the
livestock
would
not
have
been
thrown
out
at
the
end
of
the
day,
but
rather
kept
for
the
next
day.
I
find
this
approach
adopted
by
Agriboeuf
wholly
consistent
with
the
business
described
in
the
limited
partnership
agreement:
“The
business
of
the
partnership
is
to
conduct
scientific
research
work.
This
work
will
subsequently
be
used
for
the
purposes
of
commercial
production
of
beef
cattle.”
Accordingly,
the
acquisition
cost
of
the
cattle
and
the
contract
livestock
production
expenses
constituted
R&D
expenditures
all
or
substantially
all
of
which
were
attributable
to
R&D.
As
to
the
expenditures
of
a
capital
nature,
the
evidence
demonstrated
that
the
equipment
in
question
was
used
only
for
the
R&D
projects.
This
equipment
was
not
subsequently
used
in
Ferme
Rompré’s
operations.
These
expenditures
were
therefore
all
or
substantially
all
attributable
to
R&D.
There
remain
the
interest
expenses
and
share
issue
expenses.
The
evidence
showed
that
all
or
substantially
all
of
the
amounts
raised
either
by
means
of
the
prospectus
or
through
loans
were
used
to
pay
the
acquisition
cost
of
the
steers
and
R&D
equipment.
The
evidence
did
not
show
any
other
use
of
these
funds.
All
of
Agriboeuf’s
activities
to
December
31,
1987,
were
devoted
to
R&D.
It
follows
therefore
that
these
expenses
were
all
or
substantially
all
attributable
to
the
prosecution
of
R&D.
For
these
same
reasons,
the
expenses
disallowed
by
the
Minister
are
qualified
expenditures
for
the
purposes
of
subsection
127(9)
of
the
Act,
that
is
to
say,
for
the
purposes
of
the
investment
tax
credit.
Although
I
believe
that
Agriboeuf’s
approach
was
quite
consistent
with
a
scientific
research
approach,
one
may
wonder,
however,
whether
it
was
also
as
consistent
with
that
of
a
person
operating
a
“commercial
enterprise”.
Would
a
contractor
operating
a
business
for
profit
and
wishing
to
conduct
this
type
of
R&D
have
used
such
broad
sampling?
I
believe
this
question
could
have
been
debated
if
the
case
had
turned
on
whether
Agriboeuf
genu-
inely
operated
a
business
in
1987.
The
existence
of
a
business
is
one
of
the
essential
conditions
for
an
expenditure
to
be
qualified
for
the
purposes
of
section
37
of
the
Act.
Section
37
provides
that,
where
the
expenditure
is
of
a
current
nature,
it
must
be
an
R&D
expenditure
“related
to
the
business
...
of
the
taxpayer”.
Where
it
is
an
expenditure
of
a
capital
nature,
it
must
be
an
R&D
expenditure
“relating
to
the
business
...
of
the
taxpayer”.
In
this
appeal,
the
Minister
not
only
did
not
bring
up
any
problem
with
respect
to
the
application
of
this
condition,
but
he
even
admitted
in
his
reply
that
Agriboeuf
was
operating
a
farming
business.
On
the
evidence
I
heard,
I
have
serious
doubts
as
to
whether
Agriboeuf
truly
operated
a
farming
business
in
1987
and
even
1988.
Even
putting
to
one
side
the
entire
question
of
the
size
of
the
sampling,
it
is
far
from
certain
that
Agriboeuf
was
operating
a
business.
Agriboeuf
sold
no
steers
and
its
income
statement
contained
no
item
concerning
the
sale
of
steers.
The
only
item
that
can
be
found
is
entitled
“products
of
research”
and
no
proceeds
of
sales
are
indicated
thereunder.
We
know
that
Agriboeuf
was
dissolved
before
the
R&D
program
was
even
completed,
and
Mr.
Rompré
indicated
for
his
part
that
Ferme
Rompré
had
incurred
a
loss
as
a
result
of
this
series
of
operations.
It
seems
to
me
that
Agriboeuf
was
started
up
strictly
for
the
purpose
of
financing
the
R&D
program.
I
do
not
believe
that
Agriboeuf
ever
intended
to
operate
a
farming
business.
Agriboeuf
was
only
formed
on
October
5,
1987;
its
public
offering
was
closed
between
December
18
and
31,
1987;
and
it
was
dissolved
shortly
after
March
18,
1988.
It
is
clear
from
the
prospectus
that
Ferme
Rompré
was
going
to
acquire
all
the
shares
of
Agriboeuf
and
that
the
limited
partner
investors
were
going
to
sell
their
shares
in
March
1988
at
the
agreed
price
of
$150
per
share.
It
is
a
well-known
fact
that
limited
partnership
investors
investing
in
this
type
of
limited
partnership
generally
do
so
with
the
firm
intention
of
exercising
the
option
that
is
offered
to
them
to
sell
their
interest
at
a
predetermined
price.
This
is
essentially
the
only
way
they
have
of
selling
their
investment
since
there
is
no
market
for
this
kind
of
investment.
The
chances
that
fewer
than
75
per
cent
of
the
individuals
present
at
the
special
meeting
would
exercise
their
option
are
practically
nil
and,
if
this
percentage
is
reached,
the
promoter
is
required
to
purchase
all
the
shares
of
all
the
limited
partners.
I
do
not
believe
it
was
a
coincidence
that
all
of
Agriboeuf’s
limited
partners
sold
their
shares
to
Ferme
Rompré
on
March
18,
1988.
Ferme
Rompré
clearly
had
an
interest
in
obtaining
the
R&D
findings
in
order
to
improve
the
management
of
its
own
livestock.
I
have
no
doubt
that
the
R&D
program,
if
conducted
by
Ferme
Rompré,
would
have
been
ori-
ented
towards
its
business.
It
seems
to
me
that
Agriboeuf’s
sole
object
was
to
carry
out
R&D
projects
and
to
pass
its
costs
on
to
the
limited
partners
so
that
they
could
deduct
them
in
computing
their
incomes
for
tax
purposes.
The
Act
provides
for
R&D
incentives
and
it
is
possible
for
a
limited
partnership
to
incur
R&D
expenditures
for
which
deductions
may
be
claimed
by
the
limited
partners.
However,
and
this
is
an
important
proviso,
all
the
conditions
of
the
Act
must
be
met
and
those
who
set
up
such
financing
arrangements
must
ensure
that
they
comply
not
only
with
the
spirit
but
also
the
letter
of
the
Acct.
I
do
not
believe
that
the
limited
partners
intended,
through
Agriboeuf,
to
operate
a
farming
business
or
to
share
in
the
proceeds
of
the
sale
of
the
R&D
findings.
In
any
case,
it
is
not
certain
that
there
was
a
market
for
the
results
of
this
kind
of
research.
The
limited
partners
were
not
interested
in
anything
other
than
the
deduction
of
the
R&D
expenditures
for
tax
purposes
and
the
$150-per-share
selling
price
of
their
shares.
if
it
had
been
established
that
Agriboeuf
did
not
operate
a
business,
not
only
would
the
R&D
expenditures
not
have
been
qualified
expenditures
for
the
purposes
of
section
37
and
thus
for
the
purposes
of
the
investment
tax
credit,
but
there
would
also
be
the
possibility
that
the
limited
partnership
had
not
been
validly
constituted.
One
of
the
conditions
essential
to
the
formation
of
a
partnership
is
that
the
partnership
“should
be
for
the
common
profit
of
the
partners”
(art.
1830
Civil
Code
of
Lower
Canada).
In
this
instance,
it
may
be
questioned
whether
the
partnership
really
intended
to
make
a
profit
for
its
partners.
For
an
example
relating
to
a
limited
partnership
established
in
a
common
law
province,
see
the
decision
rendered
by
the
Federal
Court
of
Appeal
in
Continental
Bank
of
Canada
v.
R.,
(1996),
96
D.T.C.
6355
(Fed.
C.A.).
In
conclusion,
it
is
possible
that
Agriboeuf
did
not
operate
a
farming
business
in
1987.
However,
since
the
Minister
admitted
in
his
reply
that
Agriboeuf
had
operated
a
farming
business,
the
appellants
did
not
have
to
adduce
any
evidence
to
convince
me
that
Agriboeuf
did
actually
operate
such
a
business.
It
is
therefore
not
appropriate
in
the
circumstances
to
conclude
that
Agriboeuf
did
not
operate
a
farming
business.
The
appellants
have
thus
succeeded
in
discharging
their
onus
of
establishing
that
the
R&D
expenditures
that
Agriboeuf
incurred
and
that
the
Minister
disallowed
were
all
or
substantially
all
attributable
to
R&D
For
these
reasons,
the
appeals
are
allowed
and
the
income
tax
assessments
are
referred
back
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
that
all
the
expenses
that
the
Minister
disallowed
as
R&D
expenditures
are
qualified
expenditures
for
the
purposes
of
section
37
and
subsection
127(9)
of
the
Act.
The
appellants
are
entitled
to
costs.
Appeal
allowed.
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