Sarchuk,
T.C.J.:—Sass
Manufacturing
Limited
appeals
from
reassessments
of
income
tax
for
its
1981,
1982
and
1983
taxation
years.
These
appeals
raise
two
separate
and
distinct
issues.
The
first
arises
out
of
the
fact
that
the
appellant
in
its
returns
for
those
years,
claimed
an
inventory
allowance
deduction
pursuant
to
the
provisions
of
paragraph
20(1)(gg)
of
the
Income
Tax
Act
("Act")
on
all
raw
material
and
work
in
process
inventories.
The
respondent
disallowed
that
portion
of
the
inventory
allowance
deduction
claimed
which
related
to
the
work
in
process
inventories
of
certain
of
the
appellant's
"supply
and
install”
contracts.
In
so
doing
the
respondent
takes
the
position
that
the
appellant's
claim
for
inventory
allowance
has
been
properly
disallowed
on
the
basis
that
the
work
in
process
was
not
held
by
the
appellant
for
sale
or
for
the
purpose
of
being
processed,
fabricated,
manufactured,
incorporated
into,
attached
to
or
otherwise
converted
into
or
used
in
the
packaging
of
property
for
sale
in
the
ordinary
course
of
the
appellant's
business
within
the
meaning
of
the
relevant
provisions
of
the
Act.
The
appellant
contends
that
the
portion
of
the
work
in
process
material
that
had
not
been
installed
at
the
job
site
as
at
the
inventory
date
represents
inventory
held
for
sale
within
the
meaning
of
paragraph
20(1)(gg)
of
the
Act.
The
parties
agree
that
the
summary
of
the
amounts
involved
and
claimed
by
the
appellant,
set
out
by
taxation
year
in
paragraph
5
of
the
appellant's
notice
of
appeal,
accurately
reflects
the
amounts
in
issue
under
this
head.
The
appellant
is
primarily
a
steel
fabricator.
It
purchases
steel
in
sheet
and
bar
form
in
“stock
sizes”
which
it
cuts,
forms
and
welds
into
the
products
ordered
by
its
customers.
The
appellant's
business
is
diversified
with
the
biggest
single
product
being
structural
steel
for
the
construction
industry.
Another
major
area
of
its
business
is
the
custom
fabrication
of
housing,
machinery
and
equipment
for
a
number
of
different
industries.
It
produces
containers
described
as
non-pressurized
storage
tanks
and
bins
for
food
processors,
degreasing
equipment
for
the
auto
parts
industry
and
other
specialized
products
which
call
for
steel
to
be
fabricated
according
to
the
customer's
specifications.
Although
the
appellant
does
not
consider
installation
to
be
a
main
part
of
its
business
in
these
specialized
projects,
because
of
its
particular
expertise,
it
quite
frequently
accepts
contracts
for
both
fabrication
and
installation.
Mr.
Robert
Sass
is
a
shareholder
in
the
appellant.
He
is
also
the
corporate
secretary
and
during
the
relevant
period
of
time
was
employed
by
it
as
the
comptroller.
One
of
his
responsibilities
was
the
review
of
each
job
quotation,
purchase
order
or
contract
and
as
a
result
he
is
familiar
with
the
appellant’s
tendering
process.
Robert
Sass
described
his
understanding
of
the
"supply
and
install"
contracts
in
the
following
terms:
A
supply
contract
is
one
where
we
supply
goods
and
have
no
more
responsibility
at
all
in
terms
of
the
contract
other
than
the
quality
of
the
goods.
In
a
supply
and
install
contract
we
undertake
to
do
more
with
the
goods
after
the
fabrication
is
completed.
This
usually
involves
site
work
that
would
require
some
expertise
that
our
customer
felt
that
we
could
perform
and
that
they
would
more
or
less
delegate
to
us.
Robert
Sass
estimated
that
the
installation
portion
of
such
a
contract
would
typically
account
for
15
per
cent
of
its
value
and
that
only
rarely
would
it
exceed
20
per
cent
of
the
total.
As
a
general
rule
these
contracts
did
not
distinguish
between
the
cost
of
fabrication
and
the
cost
of
installation
and
in
many
instances
consisted
of
nothing
more
than
the
"quote"
to
the
customer
which
would
have
the
appellant’s
standard
terms
and
conditions
imprinted
on
its
reverse
side.
A
copy
of
these
terms
and
conditions
of
sale
was
filed
as
Exhibit
A-1.
Robert
Sass
had
examined
as
many
of
the
contracts
in
issue
as
he
could
find
and
found
no
variation
with
respect
to
the
inclusion
of
the
standard
terms.
He
conceded
that
in
many
instances
because
the
contract
was
for
a
unique
item
it
was
individually
written
but
maintained
that,
without
any
amendment
or
change
requested
by
the
customer,
it
would
be
subject
to
the
standard
terms
and
conditions.
Robert
Sass
referred
to
a
three-page
document
prepared
for
the
appellant
and
captioned
"Work
in
process
on
December
31st,
1980;
December
31st,
1981
and
December
31st,
1982
inventory"
(Exhibit
A-5).
This
document
listed
the
contracts
in
respect
of
which
an
inventory
allowance
was
denied
by
the
respondent.
Although
he
only
made
a
brief
reference
to
the
individual
contracts
listed
therein
it
appeared
that
they
fell
into
two
general
categories.
Typical
of
the
first
are
contracts
with
Pioneer
Hi-Bred
Seed
Company
(Pioneer).
In
one
such
contract,
subreferenced
“Flora”,
the
appellant
fabricated
a
piece
of
equipment
described
as
“bulk
storage"
for
Pioneer.
The
equipment
consists
of
a
system
of
large
tanks
or
bins
designed
to
hold
various
sizes
and
grades
of
seed
corn
that
has
been
sorted
by
a
mechanical
process
and
permits
the
producer
to
easily
bag
and
fill
the
required
product
for
shipment.
In
this
contract
the
component
parts
were
fabricated
at
the
appellant's
plant
and
then
were
shipped
to
the
site,
in
this
case
in
Indiana,
where
the
unit
was
assembled
and
installed.
No
other
contractor
was
involved.
The
second
category
of
contracts
involve
the
appellant
as
a
subcontractor.
Robert
Sass
described
the
contracts
with
Elric
Contractors
(I.H.C.
Pumphouse;
St.
Andrews
Residence);
Kelly-Lynn
Const.
(Bank
of
Montreal);
Van
Reenan
&
Breaksma
(Sarnia
Arena);
Manninger
Bros.
(Sunoco
Car
Wash);
L.B.A.
Masonry;
Mar-Lin
Constr.
and
others
as
instances
where
the
appellant
did
not
supply
and
install
directly
for
a
customer
but
worked
for
a
general
contractor
who
was
engaged
by
the
"end-user".
To
support
its
position
that
the
contracts
in
issue
were
for
the
sale
of
goods
evidence
was
elicited
from
Robert
Sass
with
respect
to
the
appellant's
delivery
and
billing
practices.
He
referred
to
paragraph
2
of
the
appellant's
standard
terms
and
conditions
which
provides
that:
Title
to
all
goods
shall
remain
in
the
company
until
the
goods
are
fully
paid
for
unless
waived
by
specific
releases.
and
stated
that
normally
the
customer
was
billed
at
the
time
of
delivery
while
any
work
done
on
the
site
was
billed
subsequently.
With
respect
to
the
contracts
in
issue
it
was
his
recollection
that
the
customers
had
not
been
billed
in
the
majority
of
cases
because
the
material
had
not
been
shipped.
Mr.
Denys,
the
appellant's
accountant,
testified
that
initially
the
appellant
may
have
claimed
an
inventory
allowance
which
in
some
cases
included
goods
that
had
already
been
shipped
to
the
appellant's
customer,
but
the
revised
claim,
shown
in
column
three
of
Exhibit
A-2,
represents
only
that
inventory
actually
held
on
the
client’s
premises.
Reference
was
also
made
to
the
appellant's
property
insurance
which,
according
to
Robert
Sass,
covers
the
fabricated
material
while
it
is
in
the
appellant's
plant.
He
asserted
that
it
was
only
when
it
leaves
the
plant
that
it
is
considered
by
the
appellant
and
its
insurance
company
to
be
at
the
risk
of
the
customer.
The
appellant
maintains
that
those
portions
of
the
work
in
process
that
had
not
been
installed
at
the
job
site
as
of
the
inventory
date
represent
inventory
held
for
sale
within
the
terms
of
paragraph
20(1)(gg)
of
the
Act,
and
since
the
inventory
remained
in
the
appellant's
possession
and
no
delivery
or
payment
had
been
made,
the
requirement
in
the
inventory
allowance
rules
that
the
property
be
held
for
sale
is
also
satisfied.
Mr.
McNair
submitted
that
material
was
the
essence
of
the
contracts
in
issue
while
the
value
of
the
labour
(that
is
erection
and
installation)
was
marginal,
being
no
more
than
15
or
20
per
cent
of
the
total
contract
price
on
average.
That
being
the
case
the
contracts
were
clearly
for
the
sale
of
goods.
He
referred
to
Preload
Company
of
Canada
Ltd.
v.
City
of
Regina
et
al.
(1958),
13
D.L.R.
(2d)
305
and
in
particular
the
comments
of
Chief
Justice
Culliton
at
pages
313-14:
Whether
a
contract
is
one
for
the
sale
of
goods,
or
is
one
for
work
and
wages
depends
upon
the
essential
character
of
the
agreement.
If
the
City
was
to
pay
substantially
for
materials
rather
than
skill,
then
the
contract
was
one
for
the
sale
of
goods.
Notwithstanding
that
a
high
degree
of
skill
goes
into
the
making
of
the
pipe,
if
such
skill
is
primarily
for
the
purpose
of
producing
pipes
for
delivery
to
the
City
at
a
price,
then
the
contract
is
one
for
the
sale
of
goods:
J.
Marcel
(Furriers)
Ltd.
v.
Tapper,
[1953]
1
All
E.R.
15;
Cheshire
&
Fifoot,
Law
of
Contract,
3rd
ed.,
pp.
162-63;
Benjamin
on
Sale,
7th
ed.,
pp.
166
et
seq.;
Robinson
v.
Graves,
[1935]
1
K.B.
579;
Lee
v.
Griffin
(1856),
1
1H.
&
N.
73,
156
E.R.
1123.
Mr.
McNair
submitted
that
the
evidence
of
Robert
Sass
and
Denys
established
that
the
bulk
of
each
of
the
contracts
in
issue
"is
something
other
than
the
erection
part
of
the
contract".
Their
evidence,
he
argued,
therefore
supports
the
proposition
"that
the
fabrication,
labour
and
materials
and
so
forth
are
by
far
the
major
portion
of
each
of
those
contracts
and
the
erection
is
a
much
less
significant
part",
which
leads
to
the
conclusion
that
the
contract
is
one
for
the
sale
of
goods.
Mr.
McNair
further
submitted
that
the
substance,
or
what
he
described
as
the
principal
component
of
the
contract,
must
be
looked
at
and
a
decision
made
as
to
its
nature
in
accordance
with
"the
way
a
reasonable
man
would
describe
the
contract”.
He
made
reference
to
section
2
of
the
Sale
of
Goods
Act,
R.S.O.
1970,
c.
421
which
provides:
2.
(1)
A
contract
of
sale
of
goods
is
a
contract
whereby
the
seller
transfers
or
agrees
to
transfer
the
property
in
the
goods
to
the
buyer
for
a
money
consideration,
called
the
price
.
.
.
and
submitted
that
property
in
goods
passes
when
the
parties
intend
it
to
pass,
in
this
case:
Mr.
Sass
indicated
that
as
far
as
the
company
was
concerned
their
opinion
was
that
the
risk
was
theirs
while
the
material
was
in
their
plant,
and
ceased
to
be
theirs
when
it
was
out
of
sight,
and
the
insurance
coverage
covers
the
material
while
only
in
his
plant.
The
risk
is
an
important
element,
particularly
the
responsibility
to
insure
is
an
important
element
of
the
concept
of
property,
a
concept
which
is
somewhat
different
from
title.
In
those
contracts
where
the
appellant
acted
as
a
subcontractor
and
tendered
to
supply
and
install
a
particular
component,
for
example
a
loading
dock
or
steel
stairs,
Mr.
McNair
argued
that
the
appellant's
customers
were
the
general
contractors,
and
not
the
owners
of
land
or
structure
to
which
the
fabricated
component
was
to
be
attached.
Although
these
contracts
involved
work
to
be
done
on
the
land
of
the
"end-user"
Mr.
McNair
contended
that
upon
delivery
of
the
component
to
the
job
site
and
billing
the
general
contractor,
property
passed
to
the
latter
by
way
of
sale
and
not
to
the
“end-user”
by
accession,
once
again
leading
to
the
conclusion
that
the
contracts
were
for
the
sale
of
goods.
Counsel
for
the
respondent
argued
that
where
it
appeared
from
a
consideration
of
the
entire
arrangement
that
the
contract
was
one
for
the
supply
of
work,
labour
and
materials
the
fact
that
on
its
face
it
was
a
written
contract
for
the
sale
of
goods
was
not
necessarily
determinative
of
the
issue:
Fairbanks
Co.
v.
Sheppard,
[1952]
1
D.L.R.
417.
He
submitted
that
a
simplistic
reference
to
the
standard
terms
and
conditions,
even
if
they
formed
part
of
each
"quote"
or
contract
as
alleged,
does
not
necessarily
provide
the
answer
whether
the
appellant
was
contracting
to
supply
work,
labour
and
materials
or
was
manufacturing
goods
for
sale.
To
succeed
in
its
appeal
the
appellant
must
establish,
with
respect
to
each
contract,
the
existence
in
its
inventory
of
tangible
property
and,
secondly,
that
this
property
was
held
by
it
for
sale,
or
for
the
purposes
of
being
fabricated,
manufactured,
incorporated
into,
attached
to,
or
otherwise
converted
into
or
used
in
the
packaging
of
property
for
sale
in
the
ordinary
course
of
the
business.
Mr.
McNair
referred
to
the
text,
Sale
of
Goods
in
Canada,
by
G.H.L.
Fridman,
Q.C.
for
the
proposition
that
the
substance
of
a
contract
must
be
regarded
and
a
decision
made
in
accordance
with
the
way
a
reasonable
man
would
describe
the
transaction.
The
difficulty
the
Court
faces
is
that
there
is
no
single
transaction
to
be
assessed
but
rather
a
number
of
contracts
which
on
the
face
of
it
are
different.
The
Court
was
invited
by
the
appellant
to
draw
certain
necessary
inferences,
not
from
contract
documents
themselves
but
from
extremely
generalized
statements
as
to
the
nature
of
these
contracts.
That
invitation
must
be
rejected.
The
situation
is
not
similar
to
that
which
existed
in
Crown
Tire
Service
Ltd.
v.
The
Queen,
[1983]
C.T.C.
412;
83
D.T.C.
5426.
In
that
case
the
appellant
was
engaged
in
a
tire
retreading
business.
The
contracts
it
entered
into
and
the
services
it
provided
to
each
customer
were
for
all
practical
purposes
identical
in
nature.
In
such
a
case
a
general
approach
may
be
acceptable.
On
the
other
hand,
the
contracts
in
issue
have
not
been
shown
to
be
capable
of
such
an
approach.
I
have
considered
the
decisions
cited
by
both
counsel.
One
principle
which
emerges
from
the
various
judgments
is
that
the
contract
in
issue
should
be
carefully
reviewed
to
determine
whether
it
is
in
substance
a
contract
for
the
provision
of
labour
and
materials
or
a
contract
for
the
sale
of
goods.
For
whatever
reason
the
appellant
chose
to
deal
with
all
of
its
contracts
as
though
the
essential
character
of
each
was
identical.
Perhaps
this
approach
is
the
reason
why
Robert
Sass'
evidence
lacked
clarity
and
precision
and
why
the
individual
contracts
were
not
tendered
as
exhibits.
In
result,
however,
there
is
little
evidence
as
to
the
specific
terms
of
any
of
the
contracts
in
issue
from
which
a
determination
might
be
made
whether
a
contract
was
for
the
sale
of
goods
or
was
for
work
and
material.
One
example
of
the
manner
in
which
the
contracts
were
presented
will
suffice.
With
reference
to
a
contract
described
as
“Kelly-Lynn
Const.
—
Bank
of
Montreal"
Sass
said:
This
is
a
mixture,
there
are
some
supply
and
install
items
here,
steel
stairs
and
supply
only
on
the
other
items.
The
contract
other
than
the
standard
terms
and
conditions
(which
may
or
may
not
have
formed
part
of
it)
is
not
before
me.
On
the
other
hand,
what
is
clear
from
the
evidence
of
Robert
Sass
is
that
in
each
instance
the
contract
required
the
appellant
to
fabricate
a
product
and
to
provide
the
necessary
supervision
and
work
with
respect
to
the
installation
or
erection
of
the
product
on
the
job
site.
What
is
also
apparent
is
that
the
appellant’s
customers
required
the
appellant
to
perform
these
services
because
of
its
particular
expertise,
skill
and
knowledge.
In
fact
Robert
Sass'
evidence
as
to
the
nature
of
the
services
provided
by
the
appellant
leads
me
to
categorize
the
appellant
as
a
custom
manufacturer
and
installer.
Before
the
appellant
is
eligible
to
claim
the
inventory
allowance
pursuant
to
paragraph
20(1)(gg)
of
the
Act
it
must
clearly
establish
that
the
property
described
in
its
inventory
was
held
for
sale
in
the
ordinary
course
of
its
business.
If
the
appellant
fails
to
establish
the
existence
of
this
element
it
is
no
longer
entitled
to
a
reserve
under
that
paragraph.
It
is
sometimes
difficult
to
determine
whether
a
particular
contract
is
properly
described
as
a
contract
for
sale
of
goods
or
a
contract
for
the
performance
of
work
or
service.
For
that
reason
the
Court
is
entitled
to
hear
clear
and
cogent
evidence
as
to
the
nature
of
each
individual
contract.
In
the
absence
of
such
evidence
it
is
not
possible
to
reasonably
conclude
whether
a
particular
contract
was
essentially
related
to
the
fabrication
of
a
product,
such
as
a
bulk
storage
unit
for
delivery
to
the
purchaser
or
whether
the
appellant’s
expertise
and
skill,
both
in
designing
and
fabricating
the
product
and
in
installing
or
erecting
it
were
the
essential
elements
sought
by
the
customer.
That
being
the
case
I
must
find
that
the
appellant
has
failed
to
demonstrate
that
the
respondent's
assumptions
were
wrong
and
that
the
assessments
ought
to
be
vacated.
The
second
issue
relates
to
the
appellant's
claim
that
certain
expenditures
made
by
it
in
taxation
years
1982
and
1983
were
qualified
scientific
research
expenditures,
with
the
result
that
it
is
entitled
to
claim
a
deduction
for
scientific
research
pursuant
to
the
provisions
of
section
37.1
of
the
Act
and
is
eligible
for
an
additional
investment
tax
credit
pursuant
to
the
provisions
of
subsection
127(5)
of
the
Act.
The
appellant
alleges
that
in
1982
it
manufactured
and
tested
a
machine,
the
Auto-Piper,
designed
to
install
storm
and
sewer
drain
pipe
and
in
so
doing
incurred
net
expenditures
of
$67,772.
In
1983
it
designed,
built
and
tested
a
prototype
“in-drain”
pump
and
the
equipment
necessary
to
test
it,
thereby
incurring
expenses
of
$3,821.
Neither
of
these
amounts
was
claimed
or
reported
as
qualifying
scientific
research
expenses
in
the
income
tax
returns
filed
by
the
appellant
for
those
taxation
years.
At
the
outset
the
Court
was
advised
that
the
appellant
was
abandoning
its
appeal
with
respect
to
the
costs
incurred
in
the
development
of
the
in-drain
pump.
It
follows
therefore
that
the
expenses
incurred
by
the
appellant
with
respect
to
this
project
were
not
expenses
incurred
for
the
purpose
of
scientific
research
and
experimental
development
and
were
properly
disallowed
by
the
respondent.
The
appellant’s
involvement
in
the
Auto-Piper
began
in
1981
when
it
was
approached
by
one
George
Bruinsma
(Bruinsma),
a
professional
engineer,
and
the
President
of
Auto
Piper
Sewer
Systems
Inc.
Bruinsma
contracted
with
the
appellant
to
manufacture
a
prototype
machine
which
he
had
conceived
as
a
means
of
resolving
a
problem
in
the
laying
of
asbestos
concrete
sewer
pipe.
The
machine
was
designed
to
travel
over
a
pre-dug
trench;
deposit
a
gravel
bed
on
the
bottom
thereof;
place
asbestos
concrete
sewer
pipe
in
the
trench;
line
up
and
butt
connect
the
pipes;
correct
pipe
butting
and
centring
in
the
trench
by
means
of
a
closed
circuit
T.V.
system
operated
by
the
operator
of
the
machine
and
finally
to
deposit
and
tamp
gravel
around
and
over
the
pipe
as
required.
One
novel
design
feature
was
a
laser
guided
system
to
control
the
pipe
level.
The
concept
was
initially
discussed
by
Bruinsma
with
Mr.
Henk
Van
Giessen,
the
appellant’s
general
manager
and
with
its
president,
Mr.
Metro
Sass.
Neither
Metro
Sass
nor
Van
Giessen
are
professional
engineers
but
both
have
substantial
business
experience
in
the
course
of
which
they
acquired
a
fair
amount
of
engineering
and
mechanical
expertise.
They
were
satisfied
that
Bruinsma's
concept
was
feasible.
They
were
also
convinced
that
if
the
design
was
successful
the
machine
would
reduce
the
cost
of
installing
concrete
sewer
pipe
thereby
taking
advantage
of
the
lower
cost
of
concrete
pipe.
That
fact
would
make
the
machine
marketable.
On
December
4,
1981
the
appellant
and
Bruinsma
entered
into
an
agreement
to
fabricate
a
prototype
(Exhibit
R-1).
The
following
clauses
of
this
agreement
are
particularly
relevant
to
the
issue:
A.
all
design
engineering
and
detailed
drawings
for
fabrication
to
be
provided
by
owner
(George
Bruinsma);
B.
regular
meetings
to
take
place
between
owner,
plant
manager,
and
person
in
charge
of
fabrication
for
Sass
Manufacturing
Limited
to
assure
that
all
aspects
of
this
unit
are
discussed
and
all
items
required
are
approved
by
the
owner
before
proceeding
with
fabrication;
C.
all
mechanical
parts
such
as
power
unit,
hydraulics,
winches,
instruments
etc.
are
to
be
supplied
by
owner
and
delivered
to
Sass
Manufacturing
Limited;
D.
Sass
Manufacturing
Limited
agrees
hereby
to
do
all
fabrication
and
management
for
a
rate
of
$23.50
per
man
per
hour
including
the
use
of
all
fabrication
equipment
needed
for
this
project;
H.
it
is
further
agreed
that
any
future
additional
machines
required
are
to
be
fabricated
by
Sass
Manufacturing
Limited
on
agreeable
terms
by
both
parties
involved;
I.
Sass
Manufacturing
Limited
hereby
agrees
not
to
fabricate
this
machine
for
any
other
potential
customers
without
the
consent
of
George
Bruinsma;
J.
for
the
fabrication
of
this
prototype
unit,
Sass
Manufacturing
Limited
agrees
to
provide
the
following
special
financial
terms:
(i)
one
third
of
total
cost
60
days
after
completion
of
this
unit
and
from
date
of
INVOICe;
(ii)
second
payment
shall
be
one
third
of
the
total
cost
six
months
from
date
of
Invoice;
(iii)
final
payment
shall
be
one
third
of
the
total
cost
and
shall
be
paid
as
soon
as
possible
thereafter
but
not
to
exceed
one
year
from
date
of
invoice;
(iv)
no
interest
will
be
charged
for
this
arrangement.
According
to
Robert
Sass,
the
preliminary
sketches
provided
by
Bruinsma,
although
adequate
for
the
purpose
of
outlining
the
concept,
were
inappropriate
and
inadequate
for
the
construction
of
the
machine.
After
some
delay
it
was
“forcibly
suggested"
to
Bruinsma
that
detailed
technical
drawings
had
to
be
prepared
and
provided.
As
a
result,
R.M.
Pow,
Consulting
Engineers
were
engaged
by
the
appellant
and
the
necessary
drawings
were
prepared.
The
project
proceeded
and
at
some
point
of
time
in
1982
the
prototype
was
completed
and
was
tested
on
the
premises
of
the
appellant.
Although
several
problems
were
disclosed
the
initial
results
were
considered
satisfactory.
Some
changes
and
adjustments
were
made
and
a
further
field
test
was
conducted.
This
test
was
attended
by
Bruinsma
and
Van
Giessen.
Robert
Sass'
recollection
is
that
the
site
apparently
contained
varying
strata
of
soil
and
the
prototype
ran
into
several
levels
of
gravel
which
kept
collapsing
into
the
trench.
It
became
apparent
that
the
prototype
as
designed
could
not
handle
difficult
soil
conditions.
During
the
same
period
of
time
the
appellant
realized
that
Bruinsma
was
no
longer
able
to
finance
the
project.
His
account
with
the
appellant
was
in
arrears,
including
a
sizeable
amount
paid
on
his
behalf
to
R.M.
Pow
for
the
drawings.
Although
Robert
Sass'
testimony
is
imprecise
as
to
when
certain
decisions
were
made,
it
appears
that
at
or
about
the
time
of
the
second
field
test
the
appellant
had
decided
to
assume
some
of
the
risk
of
building
the
prototype.
To
that
end
on
May
10,
1983
an
offer
was
made
by
Bruinsma
and
Auto
Piper
Sewer
Systems
Inc.
to
sell
shares
to
the
appellant
in
the
capital
stock
of
a
company
to
be
incorporated
to
complete
the
Auto
Piper
project
(Exhibit
A-6).
The
appellant
encountered
great
difficulties
in
finalizing
this
arrangement
with
Bruinsma
and
in
due
course
it
became
apparent
that
the
proposed
agreement
would
not
be
implemented.
An
attempt
was
made
to
enforce
the
terms
of
this
agreement
but
this
approach
ran
into
a
number
of
difficulties.
Subsequently,
acting
upon
its
solicitor's
advice,
the
appellant
accepted
an
alternative
course,
took
legal
action
and
ultimately
took
possession
of
the
prototype,
all
plans,
drawings
and
other
material.
This
action
was
described
as
"basically
a
seizure
under
lien
and
was
made
pursuant
to
a
court
order
(not
produced).
When
this
order
was
granted
Bruinsma
was
indebted
to
the
appellant
in
an
amount
in
excess
of
$100,000.
Upon
taking
possession
of
the
machine
and
drawings
the
appellant
reviewed
its
position.
It
concluded
that
although
the
prototype
could
be
made
to
work,
in
view
of
the
economic
recession
there
was
no
cause
for
optimism
with
respect
to
the
future
marketing
of
the
machine
and
recovery
of
the
costs
incurred.
As
a
result
the
project
was
abandoned
and
the
prototype
was
salvaged
for
its
component
parts
which
were
sold
or
otherwise
utilized
by
the
appellant.
These
events
took
place
in
1983.
It
was
conceded
by
Robert
Sass
that
the
appellant's
initial
intention
was
to
build
a
prototype
machine
based
on
Bruinsma's
drawings
and
nothing
more.
Bruinsma
was
merely
another
customer.
The
appellant
had
nothing
to
do
with
the
invention
or
development
of
the
project
and
it
was
not
until
Bruinsma
consistently
failed
to
make
payments
on
account
as
required
that
the
appellant
negotiated
the
share
purchase
arrangement
of
May
10,
1983
in
an
effort
to
recoup
some
of
its
costs.
As
to
the
nature
of
the
scientific
research
carried
out
some
evidence
was
elicited
from
Robert
Sass
as
to
the
investigation,
experiments
and
analysis
which
were
conducted.
This
was
a
daunting
task
for
him
and
in
fairness
it
should
be
noted
that
he
was
not
directly
involved
in
the
project.
Furthermore
his
expertise
does
not
lie
in
the
field
of
engineering
or
mechanics,
so
that
he
was
not
able
to
provide
much
more
than
a
layman's
view
of
the
basic
concepts
and
technology
involved.
No
evidence
was
adduced
as
to
the
basis
upon
which
the
design
was
evolved
by
Bruinsma.
Since
Robert
Sass
did
not
participate
in
the
discussions
between
Metro
Sass,
Van
Giessen
and
Bruinsma
during
the
course
of
fabrication
of
the
prototype,
he
could
only
assume
that
Bruinsma
and
Van
Giessen
considered
the
implications
of
the
various
steps
taken
and
tests
conducted
and
took
decisions
on
that
basis.
No
records
of
these
discussions
or
decisions
were
kept
with
the
result
that
when
asked
whether
any
analysis
or
testing
had
been
done
as
to
the
amount
of
support
the
prototype
would
require
to
straddle
a
previously
dug
trench,
Robert
Sass
could
only
respond,
"To
a
great
degree
that
was
done
by
an
engineering
hunch
basis
by
Bruinsma
and
our
General
Manager.”
When
the
project
was
abandoned,
what
limited
records
may
have
existed
were
discarded
with
the
result
that
there
is
absolutely
no
statistical
or
test
result
basis
upon
which
one
might
determine
where
the
project
left
off
other
than
what
might
still
exist
“in
Mr.
Van
Giessen's
head”.
Van
Giessen
did
not
testify.
The
respondent
adduced
evidence
from
Mr.
R.
Garth
Doel,
a
graduate
in
1953
of
Queen's
University
with
a
bachelor
of
science
degree
in
mechanical
engineering.
At
the
present
time
he
is
the
president
of
Forest
Machinery
Co.,
a
small
engineering
and
prototype
manufacturing
company.
Its
expertise
is
in
electro-mechanical
design
and
computer
control
of
machinery.
Although
originally
formed
to
conduct
research
projects
for
the
National
Research
Council,
it
is
now
primarily
involved
in
design
work
for
other
manufacturers.
The
appellant's
representative
took
no
exception
to
Doel's
qualifications
and
the
Court
heard
his
evidence
as
an
expert
in
the
field
of
mechanical
engineering.
His
report
was
filed
as
Exhibit
R-3.
To
obtain
as
much
relevant
information
as
possible
for
his
analysis
the
project
was
reviewed
with
Robert
Sass
and
with
Mr.
Sypkes,
an
employee
of
the
appellant.
Doel
sought
infomation
as
to
the
nature
of
the
initial
project;
what
the
appellant
wanted
to
accomplish;
how
it
carried
out
the
project,
what
were
seen
as
uncertainties
and
how
they
tried
to
solve
them.
The
appellant
was
not
able
to
provide
overall
descriptions
or
drawings
for
the
intended
project.
There
was
no
evidence
of
any
hypothesis
for
research
in
the
appellant's
records
and
indeed
no
such
hypothesis
appears
to
have
been
postulated.
There
were
no
test
reports,
written
or
otherwise.
The
appellant
had
some
photographs
of
components
of
the
machine
but
none
of
the
prototype
and
none
relating
to
the
problems
encountered.
There
was
no
record
or
other
material
to
describe
any
changes
that
were
made
and
nothing
to
illustrate
test
observations.
After
reviewing
the
available
information
Doel
formed
the
opinion
that
the
project
did
not
constitute
scientific
research,
and
gave
the
following
reasons
for
this
conclusion:
1.
Components
of
Activity:
(a)
There
is
no
basic
research
in
this
project;
(b)
Engineering
and
experimenting
with
various
components
of
this
machine
could
be
applied
research,
had
it
been
properly
carried
out,
for
the
following
reasons:
—
the
loadings
on
various
components
of
the
machine
under
the
variety
of
conditions
in
which
it
will
perform
are
unknown
and
are
indeterminate
through
analysis;
—
the
functional
performance
of
several
components
of
the
machine
was
not
previously
proven
and
could
not
be
determined
for
certain
through
analysis;
—
the
action
of
the
soil
in
the
trench
during
the
operation
of
the
machine
was
not
known
and
could
not
be
determined
by
analysis
alone;
(c)
The
completion
of
assembly
and
field
testing
could
be
development
had
they
been
properly
carried
out;
(d)
There
was
no
commercial
content
in
this
project
since
it
was
not
completed.
2.
Elements
of
Scientific
Uncertainty
in
the
Activity:
(a)
It
was
uncertain
if
the
walls
of
the
trench
would
support
the
machine
while
the
necessary
operations
were
performed;
(b)
It
was
uncertain
if
the
concrete
pipe
sections
could
be
properly
aligned
and
butted
by
an
operator
viewing
them
by
closed
circuit
T.V.;
(c)
It
was
uncertain
if
the
mechanism
provided
to
align
the
concrete
pipe
would
perform
properly;
(d)
An
uncertainty
arose
in
the
tamping
mechanism
in
that
it
did
not
perform
properly
as
initially
constructed.
However,
a
reasonable
amount
of
engineering
analysis
should
have
foreseen
this
problem;
(e)
An
uncertainty
arose
in
the
winch
mechanism
for
telescoping
the
gravel
insertion
tube.
However,
a
reasonable
amount
of
engineering
analysis
should
have
foreseen
this
problem;
(f)
The
level
of
uncertainty
for
the
above
is
moderate.
3.
Technology
Advances:
The
technological
advancement
being
sought
was
to
produce
a
machine
which
would
reduce
the
labour
content
in
laying
concrete
sewer
pipe
to
the
point
where
its
installed
cost
could
compete
with
plastic
sewer
pipe.
No
technological
advancement
was
achieved.
4.
Uniqueness
of
Research:
The
overall
combination
of
components
made
this
machine
unique.
Although
the
action
of
each
major
component
of
the
machine
should
have
been
predictable,
the
interaction
of
this
number
of
components
is
not
so
readily
predictable.
5.
Experimental
Approach:
The
systematic
application
of
the
scientific
method
was
not
performed.
No
records
were
kept
of
test
observations.
No
records
are
available
of
machine
modifications
or
reasons
for
modifying.
There
is
no
evidence
that
systematic
test
procedures
were
established.
There
is
no
evidence
that
thorough
engineering
analysis
was
carried
out.
It
was
not
possible
to
trace
their
trial
steps
and
progress.
6.
Commercial
Content:
The
prototype
was
built
to
commercial
scale
and
if
successful
would
have
had
commercial
content.
However,
since
it
was
not
successful
to
commercial
content
exists.
7.
Scientific
Experience
of
the
Staff:
No
one
assigned
to
this
project
from
Sass
Manufacturing
Ltd.
had
proper
qualifications,
either
by
education
or
experience,
to
carry
out
this
research.
George
Bruinsma,
P.Eng.,
may
have
had
suitable
education
and
experience,
however,
no
record
of
his
qualifications
was
available.
It
was
evident
that
he
was
either
not
capable
or
unwilling
to
produce
the
manufacturing
drawings
for
this
project.
R.M.
Pow
Consulting
Engineers
would
be
qualified
to
carry
out
this
research.
There
are,
however,
notes
on
their
drawings
that
they
did
not
contribute
to
the
concept
of
the
machine
and
that
they
take
no
concept
responsibility.
No
one
from
R.M.
Pow
was
present
at
the
field
tests.
8.
Nature
Data
Collected:
No
data
was
collected
and
preserved
which
would
be
useful
for
further
work
on
this
or
similar
concepts.
9.
Conclusion:
This
project
is
ineligible
as
scientific
research
because:
—
the
project
was
not
started
nor
carried
out
in
a
scientific
fashion;
—
no
proper
records
were
kept;
—
nothing
was
achieved
to
either
prove
or
disprove
concepts
or
hypothesis.
None
of
these
conclusions
were
seriously
challenged
on
cross-
examination.
It
is
the
appellant's
position
that
the
expenses
incurred
in
the
1982
taxation
year
can
properly
be
claimed
by
it
pursuant
to
section
37.1
of
the
Act.
Mr.
McNair
argued
that
the
appellant's
involvement
in
the
Auto-Piper
project
satisfied
the
definition
of
“scientific
research"
set
out
in
Income
Tax
Regulation
2900.
More
precisely
it
fell
into
the
category
of
development,
being
the
use
of
results
of
basic
applied
research
for
the
purposes
of
creating
a
new
device
or
product.
He
contended
that
the
lack
of
written
material
was
to
be
viewed
in
the
context
of
work
being
carried
out
by
a
small
company
where
attention
to
such
detail
was
precluded
by
limited
staff
and
time.
Counsel
for
the
respondent
contends
that
the
appellant’s
claim
for
an
additional
allowance
for
scientific
research
and
experimental
development
pursuant
to
section
37.1
of
the
Act
and
for
an
investment
tax
credit
pursuant
to
subsection
127(5)
of
the
Act
is
properly
disallowed
on
the
basis
that
the
expenses
associated
with
the
manufacture
and
testing
of
the
Auto-Piper
were
not
expenses
incurred
on
account
of
scientific
research
and
experimental
development.
Counsel
further
contended
that
even
if
they
were
such
expenses,
those
expenses
were
not
incurred
by
the
appellant
in
the
1982
taxation
year,
but
rather
were
expenses
incurred
by
a
customer
for
whom
the
prototype
was
manufactured.
Mr.
McNair's
response
was
that
section
37.1
of
the
Act
requires
only
that
a
qualified
expenditure
be
made
by
the
appellant
in
the
year.
Since
the
expenditures
were
not
in
fact
paid
for
by
Bruinsma
then
or
later
(although
charged
to
him),
for
the
purposes
of
this
subsection
the
appellant
could
properly
be
considered
as
having
made
those
expenditures.
I
do
not
agree.
To
be
entitled
to
claim
an
additional
allowance
for
scientific
research
under
the
provisions
of
section
37.1
of
the
Act,
the
appellant
must
establish
that
it
made,
in
the
taxation
year,
a
qualified
expenditure
being
an
expenditure
in
respect
of
scientific
research
carried
on
in
Canada.
The
evidence
discloses
that
although
many
of
the
project
expenses
incurred
in
1982
were
paid
by
the
appellant,
they
were
paid
on
behalf
of
their
customer
Bruinsma,
who
in
due
course
was
billed
for
them.
It
was
only
when
Bruinsma
failed
to
pay
these
accounts
that
the
appellant
took
legal
action,
which
step
was
not
taken
until
late
1983
or
perhaps
1984.
There
is
very
little
evidence
as
to
the
nature
of
the
action
taken
and
the
best
that
can
be
gathered
from
the
testimony
of
Robert
Sass
is
that
the
prototype
machine
was
seized
pursuant
to
some
form
of
lien
action.
There
is
no
evidence
whatsoever
that
the
appellant
acquired
any
rights
to
the
concept
or
the
design.
The
contract
between
Bruinsma
and
the
appellant
is
quite
specific.
The
appellant
was
required
to
do
no
more
than
custom
build
a
prototype
in
accordance
with
specifications
provided
by
Bruinsma.
All
of
the
subsequent
contracts
entered
into
by
the
appellant,
for
example
the
contract
with
R.W.
Pow
for
technical
drawings,
were
undertaken
on
behalf
of
Bruinsma.
Bruinsma
was
a
customer
and
the
appellant
had
no
right
to
his
concept
or
to
the
results
of
his
research
and
investigation.
Its
sole
entitlement
was
to
be
paid
in
accordance
with
the
contract
(Exhibit
R-1).
The
evidence
does
not
support
a
finding
that
qualified
expenditures
for
scientific
research
were
made
by
the
appellant
in
the
1982
taxation
year.
As
to
whether
this
project
qualified
as
scientific
research
I
refer
to
Income
Tax
Regulation
2900
where
for
the
purposes
of
section
37.1
the
term
"scientific
research”
is
defined
as
follows:
2900.
For
the
purposes
of
this
Part
and
paragraphs
37(7)(b)
and
37.1(5)(e)
of
the
Act,
“scientific
research"
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
.
.
.
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.
With
respect
to
the
appellant's
claim
for
an
inventory
allowance
deduction
certain
of
the
contracts
were
described
by
Robert
Sass
as
“supply”
contracts
only.
Counsel
for
the
respondent
did
not
challenge
this
assertion.
Therefore
the
appeal
will
be
allowed
in
respect
of
the
following
"supply
only”
contracts
identified
in
Exhibit
A-5:
As
at
December
31,
1980:
|
Omnitech
—
Cargill
grain
dryers
|
$27,054
|
|
As
at
December
31,1981
:
|
|
|
Tempro
Systems
—
CIMA
supports
|
200
|
|
L.B.
Howe
—
Grondon
pumps
|
8,585
|
|
Ross
Stokes
—
discharge
pipe
|
89
|
|
Ministry
of
Environment
—
covers
|
1,185
|
|
Des
Marais
—
motor
|
329
|
|
L.B.
Howe
—
Morown
pump
|
17,343
|
|
As
at
December
31,
1982:
|
|
|
AWK
Industries
—
tank
extension
|
367
|
|
Sunbrite
Canning
—
re-work
material
|
1,862
|
|
Libby’s
—
cooler
|
700
|
|
Libby’s
—
cooler
|
994
|
|
John
Dick
—
pump
|
1,097
|
|
In
all
other
respects
the
reassessments
are
confirmed.
|
|
Appeal
allowed
in
part.
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