REASONS
FOR JUDGMENT
Boyle J.
[1]
The Appellant, Life Choice Ltd. (“Life Choice”),
is appealing a reassessment of its 2012 taxation year. Life Choice limited its
claimed relief in order to proceed under this Court’s informal procedure. The
issue to be determined is whether certain activities of Life Choice constituted
scientific research and experimental development (“SR&ED”) as defined in
the Income Tax Act (the “Act”).
Introduction
[2]
The Appellant describes itself as a natural
health product company based in Alberta that has 92 products on the market. The
founder and president of Life Choice is Dr. Eldon Dahl, an accredited
naturopathic doctor. Dr. Dahl described his patient load in his clinical
practice as focused on chronic care for those that had exhausted the medical
route and went to him as a last resort in dealing mainly with stage IV cancer,
multiple sclerosis (MS) or full-blown AIDS.
[3]
The activities in question relate to the
formulation by Life Choice of three new natural health products. The first
(“Project 1”) was generally described as a product for the treatment of cancer.
The second (“Project 2”) was generally described as the formulation of a
natural health product alternative that could mimic the positive effects of a
pharmaceutical product (acetyl‑L‑carnitine) in remapping
neurological pathways and reversing neurological degradation. The third
(“Project 3”) was generally described as the formulation of a natural health
product alternative to remove arterial plaque in the treatment of vascular
disease.
[4]
Dr. Dahl was the principal witness in this
appeal. In addition to being the Appellant’s President, he led each of
Project 1, Project 2 and Project 3 (collectively the
“Projects”). He gave me no reason to doubt his credibility. He described what
activities were undertaken in each of the Projects and he identified and
described the documents in evidence relating to Life Choice’s activities on the
Projects.
[5]
Dr. Dahl’s testimony was often difficult to
follow and piece together. In a number of his answers to questions (including
those from counsel for the Appellant) he did not appear fully responsive, at
times in key respects. I do not conclude that he was intentionally evasive or
deflecting or unresponsive. Rather, I conclude from looking at his testimony as
a whole that, in testifying as a witness in a court proceeding, he was not a
particularly organized and focused communicator. Whether that reflects his
normal communication style or reflects insufficient preparation for the hearing
was not clear to me and does not matter. By the end of his testimony he had
answered, to the best of his ability in the circumstances, all of the questions
put to him, by counsel for the Appellant and counsel for the Respondent, as
well as my questions at the end of his testimony seeking clarification of parts
of his answers. His answers and testimony were as complete as he and counsel
for the Appellant chose to make them.
[6]
The Appellant also had Julie Bond, President of
Bond Consulting Group, testify. Bond Consulting Group acted for Life Choice in
seeking SR&ED recognition from the Canada Revenue Agency (the “CRA”) for
the Projects. It was not involved in the Projects themselves whatsoever.
Virtually all of Ms. Bond’s testimony was advocacy, or related to the back
and forth between the Appellant and the CRA after the relevant activities in
support of the Projects had been performed. Ms. Bond’s testimony does not
help or inform me with respect to the factual findings and determinations I
have to make in this case, the most significant of which are the scope and
nature of the activities undertaken by Life Choice in pursuit of the Projects.
[7]
The Respondent had David Szwarc of the CRA
testify. He was and is a research and technology manager with the CRA. Many of
the questions asked of Mr. Szwarc by both parties’ counsel might have been
helpful if this was a judicial review of the CRA’s decision. It is not; it is
an appeal on the merits, little concerned with what the CRA did in arriving at
its decision.
SR&ED under the Income Tax Act
[8]
The definition of SR&ED is set out in
subsection 248(1) of the Act:
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scientific research and
experimental development means
systematic investigation or search that is carried out in a field of science
or technology by means of experiment or analysis and that is
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activités de recherche
scientifique et de développement expérimental Investigation
ou recherche systématique d’ordre scientifique ou technologique, effectuée
par voie d’expérimentation ou d’analyse, c’est‑à-dire :
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(a) basic research, namely,
work undertaken for the advancement of scientific knowledge without a
specific practical application in view,
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a)
la recherche pure, à savoir les travaux entrepris pour l’avancement de la
science sans aucune application pratique en vue;
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(b) applied research,
namely, work undertaken for the advancement of scientific knowledge with a
specific practical application in view, or
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b) la
recherche appliquée, à savoir les travaux entrepris pour l’avancement de la
science avec application pratique en vue;
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(c) experimental
development, namely, work undertaken for the purpose of achieving
technological advancement for the purpose of creating new, or improving
existing, materials, devices, products or processes, including incremental
improvements thereto,
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c)
le développement expérimental, à savoir les travaux entrepris dans l’intérêt
du progrès technologique en vue de la création de nouveaux matériaux,
dispositifs, produits ou procédés ou de l’amélioration, même légère, de ceux
qui existent.
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and, in applying this definition in
respect of a taxpayer, includes
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Pour l’application de la présente
définition à un contribuable, sont compris parmi les activités de recherche
scientifique et de développement expérimental :
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(d) work undertaken by or
on behalf of the taxpayer with respect to engineering, design, operations
research, mathematical analysis, computer programming, data collection,
testing or psychological research, where the work is commensurate with the
needs, and directly in support, of work described in paragraph (a), (b),
or (c) that is undertaken in Canada by or on behalf of the taxpayer,
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d)
les travaux entrepris par le contribuable ou pour son compte relativement aux
travaux de génie, à la conception, à la recherche opérationnelle, à l’analyse
mathématique, à la programmation informatique, à la collecte de données, aux
essais et à la recherche psychologique, lorsque ces travaux sont proportionnels
aux besoins des travaux visés aux alinéas a), b) ou c)
qui sont entrepris au Canada par le contribuable ou pour son compte et
servent à les appuyer directement.
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but does not include work with
respect to
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Ne constituent pas des activités de
recherche scientifique et de développement expérimental les travaux relatifs
aux activités suivantes :
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(e) market research or
sales promotion,
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e)
l’étude du marché et la promotion des ventes;
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(f) quality control or
routine testing of materials, devices, products or processes,
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f)
le contrôle de la qualité ou la mise à l’essai normale des matériaux,
dispositifs, produits ou procédés;
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(g) research in the social
sciences or the humanities,
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g)
la recherche dans les sciences sociales ou humaines;
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(h) prospecting, exploring
or drilling for, or producing, minerals, petroleum or natural gas,
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h)
la prospection, l’exploration et le forage fait en vue de la découverte de
minéraux, de pétrole ou de gaz naturel et leur production;
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(i) the commercial
production of a new or improved material, device or product or the commercial
use of a new or improved process,
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i)
la production commerciale d’un matériau, d’un dispositif ou d’un produit
nouveau ou amélioré, et l’utilisation commerciale d’un procédé nouveau ou
amélioré;
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(j) style changes, or
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j)
les modifications de style;
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(k) routine data
collection;
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k)
la collecte normale de données.
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[9]
The Appellant’s position is that its activities
in pursuit of the Projects were applied research described in paragraph (b)
of this definition. Therefore, for purposes of determining if the activities
undertaken by Life Choice in pursuit of the Projects are SR&ED, the
following requirements of the Act must be met:
1. The
activities must constitute (i) a systematic investigation or search, (ii) that
is carried out (iii) in a field of science (iv) by means of experiment or
analysis.
2. The
objective or purpose for carrying out those activities must be (i) the
advancement (ii) of scientific knowledge (iii) with a specific practical
application in view — i.e. applied research.
[10]
In order to come within subsection 37(1) of the Act,
qualifying SR&ED must be carried on and directly undertaken by or on behalf
of the particular taxpayer. Subsection 37(8) makes it clear that current
expenditures on SR&ED must be in respect of the prosecution of SR&ED to
qualify.
[11]
Former Chief Justice Bowman of this Court wrote,
in Northwest Hydraulic Consultants Ltd. v. Canada, that the Act’s
incentives for SR&ED are intended to encourage scientific research by
Canadians and should therefore be given a fair, large and liberal construction
and interpretation to best ensure the attainment of that objective. In Consoltex
Inc. v. Canada,
Justice Bowman (as he then was) had earlier written: “If
one takes a couple of steps back and seeks to determine what the scientific
research provisions of the Act are designed to accomplish, it is clear that
they should be interpreted in a manner that encourages scientific research in
this country.”
The Northwest Hydraulic Considerations
[12]
In Northwest Hydraulic, Justice Bowman (as
he then was) set out the approach to be taken in assessing a taxpayer’s
activities against the statutory definition of SR&ED that involves five
considerations in paragraph 16 of his reasons. These five considerations have
been consistently approved and adopted in a number of decisions of the Federal
Court of Appeal: RIS - Christie Ltd. v. Canada, CW Agencies Inc. v. Canada, Jentel Manufacturing Ltd.
v. Canada,
and R&D Pro‑Innovation Inc. v. Canada. (See also Wojcik v. Canada
(Attorney General).)
Justice Bowman wrote as follows:
16 Although I
do not presume to have the technological expertise of the persons who assisted
in the preparation of the circular, or the witnesses who appeared before me,
including the highly qualified experts who appeared on behalf of the appellant
and the respondent, I should like to set out briefly my own understanding of
the approach to be taken:
1. Is there a
technical risk or uncertainty?
(a) Implicit in the term
“technical risk or uncertainty” in this context is the requirement that it be a
type of uncertainty that cannot be removed by routine engineering or standard
procedures. I am not talking about the fact that whenever a problem is
identified there may be some doubt concerning the way in which it will be
solved. If the resolution of the problem is reasonably predictable using
standard procedure or routine engineering there is no technological uncertainty
as used in this context.
(b) What is “routine
engineering”? It is this question, (as well as that relating to technological
advancement) that appears to have divided the experts more than any other.
Briefly it describes techniques, procedures and data that are generally
accessible to competent professionals in the field.
2. Did the person
claiming to be doing SRED formulate hypotheses specifically aimed at reducing
or eliminating that technological uncertainty? This involves a five stage
process:
(a) the observation of
the subject matter of the problem;
(b) the formulation of
a clear objective;
(c) the identification
and articulation of the technological uncertainty;
(d) the formulation of
an hypothesis or hypotheses designed to reduce or eliminate the uncertainty;
(e) the methodical and
systematic testing of the hypotheses.
It is important to recognize that although
a technological uncertainty must be identified at the outset an integral part
of SRED is the identification of new technological uncertainties as the
research progresses and the use of the scientific method, including intuition,
creativity and sometimes genius in uncovering, recognizing and resolving the
new uncertainties.
3. Did the procedures
adopted accord with established and objective principles of scientific method,
characterized by trained and systematic observation, measurement and
experiment, and the formulation, testing and modification of hypotheses?
(a) It is important to
recognize that although the above methodology describes the essential aspects
of SRED, intuitive creativity and even genius may play a crucial role in the
process for the purposes of the definition of SRED. These elements must however
operate within the total discipline of the scientific method.
(b) What may appear
routine and obvious after the event may not have been before the work was
undertaken. What distinguishes routine activity from the methods required by
the definition of SRED in section 2900 of the Regulations is not solely the
adherence to systematic routines, but the adoption of the entire scientific
method described above, with a view to removing a technological uncertainty
through the formulation and testing of innovative and untested hypotheses.
4. Did the process
result in a technological advance, that is to say an advancement in the general
understanding?
(a) By general I mean
something that is known to, or, at all events, available to persons
knowledgeable in the field. I am not referring to a piece of knowledge that may
be known to someone somewhere. The scientific community is large, and publishes
in many languages. A technological advance in Canada does not cease to be one
merely because there is a theoretical possibility that a researcher in, say,
China, may have made the same advance but his or her work is not generally
known.
(b) The rejection after
testing of an hypothesis is nonetheless an advance in that it eliminates one
hitherto untested hypothesis. Much scientific research involves doing just
that. The fact that the initial objective is not achieved invalidates neither
the hypothesis formed nor the methods used. On the contrary it is possible that
the very failure reinforces the measure of the technological uncertainty.
5. Although the Income
Tax Act and the Regulations do not say so explicitly, it seems self-evident
that a detailed record of the hypotheses, tests and results be kept, and that
it be kept as the work progresses.
[13]
Former Chief Justice Bowman’s foundational five
useful criteria to consider in determining whether activities constitute
SR&ED are outlined by the Federal Court of Appeal in CW Agencies
as follows:
1. Was
there a technological risk or uncertainty which could not be removed by routine
engineering or standard procedures?
2. Did
the person claiming to be doing SR&ED formulate hypotheses specifically
aimed at reducing or eliminating that technological uncertainty?
3. Did
the procedure adopted accord with the total discipline of the scientific method
including the formulation, testing and modification of hypotheses?
4. Did
the process result in a technological advancement?
5. Was
a detailed record of the hypotheses tested and were results kept as the work
progressed?
The Federal Court of Appeal’s summary
outline of Justice Bowman’s five considerations does not take anything away
from paragraph 16 of Northwest Hydraulic.
[14]
Question 2 from Northwest Hydraulic, as
originally expressed by Justice Bowman and adopted by the Federal Court of
Appeal, specifically involves a five‑stage process which adds substance
and breadth to the consideration of the formulation of an hypothesis: (i)
observation of the subject matter of the problem, (ii) the formulation of a
clear objective, (iii) the identification and articulation of the uncertainty,
(iv) the formulation of one or more hypotheses designed to resolve the
uncertainty and (v) the methodical and systematic testing of the hypotheses.
See paragraph 16 of Northwest Hydraulic.
[15]
Further, Justice Bowman, in setting out Question
2, states that an integral part of SR&ED is the use of the scientific
method, including intuition, creativity and sometimes genius in uncovering,
recognizing and resolving new uncertainties as the research progresses.
[16]
I would note that each of Northwest Hydraulic,
RIS - Christie, CW Agencies and Jentel involved
claims in respect of “experimental development” described in paragraph (c)
of the SR&ED definition. Paragraph (c) dealing with experimental
development refers to technological advancement. Paragraphs (a) and (b)
dealing with basic research and applied research refer to the advancement of
scientific knowledge. In a case involving research as opposed to development,
the references in the Northwest Hydraulic considerations to
technological risk, uncertainty and advancement should therefore be considered
as references to scientific risk and uncertainty, and the advancement of
scientific knowledge.
[17]
The five Northwest Hydraulic
considerations are questions the Court should turn its mind to in deciding if
the statutory requirements of the definition of SR&ED are met in a
particular case. They do not purport to comprehensively restate or replace the
statutory language. For example, with respect to Question 4, a technological
advancement is not a required result of the activity; the statutory requirement
is only that it be the objective of the activity. Similarly, scientific or
technological knowledge can be advanced by activities that fail to support or
prove a theory or hypothesis being investigated or searched for. A further
example with respect to Question 5 is that the statutory language does not, by
its terms, require detailed records of the testing and results. Justice Bowman
in Northwest Hydraulic says it would normally be reasonably expected to
be kept. The Federal Court of Appeal in RIS - Christie mandates
testing as part of a systematic scientific research and requires rigorous
scrutiny by the courts that the testing itself was performed in a methodical
and systematic fashion. The Federal Court of Appeal helpfully adds that, if
testing was done by a taxpayer and if a technological advancement in fact
resulted, a judge might be expected to infer that the testing was carried out
in the systematic manner required by the SR&ED definition.
[18]
On the other hand, Questions 1 through 3 of the Northwest
Hydraulic considerations or criteria appear designed to develop and focus
on useful information upon which the Court is to determine whether the activity
constituted a systematic investigation or search, and whether that was done by
means of experiment or analysis, both of which are required by the terms of the
statute.
[19]
The Federal Court of Appeal in RIS - Christie,
above, after referring with approval to Justice Bowman’s reasons in Northwest
Hydraulic, specifies that systematic research includes testing. The Federal
Court of Appeal wrote:
13 Obviously,
scientific research and experimental development, as outlined in Regulation
2900, envisages the introduction of a new or improved product or process. Thus,
research must be directed toward a meaningful technological advancement and
involve an element of creativity, rather than the mere application of routine
engineering principles. At the same time, research objectives must be
realistic. The committed alchemist who seeks to turn base metals into gold
should not look to the Income Tax Act for tax incentives. Assuming that
a research project is eligible for favourable tax treatment, there is no
express or implied statutory requirement that such project actually culminate
in a technological advancement. Regulation 2900 speaks of research undertaken
for the advancement of knowledge and for the purpose of creating new products. It
does not state that eligible research must actually achieve those ends.
Otherwise, the very purposes for which the legislation was enacted would be
undermined. Presumably, not all of Alexander Graham Bell’s research initiatives
bore fruit. To maintain that failed research efforts do not constitute
scientific research under the Act is contrary to common sense and the goal of
encouraging entrepreneurship.
14 In addition
to developing new products or processes, scientific research connotes the
existence of controlled experiments involving the testing of models or
prototypes. Thus, evidence of scientific research must be adduced by the
taxpayer in order to demonstrate that such research (including testing) was
undertaken and that it is eligible for favourable tax treatment: see, for
example, Progressive Solutions Inc. v. R., 96 DTC 1232 (T.C.C.). Not
only must taxpayers establish that tests were performed, they must also
demonstrate that they were conducted in a systematic fashion. In my view, the
requirement that research efforts be “systematic” is a higher threshold than
simply requiring that research, including testing, be conducted. Although both
documentary and viva voce evidence are admissible, the only sure‑fire
way of establishing that scientific research was undertaken in a systematic
fashion is to adduce documentary evidence which reveals the logical progression
between each test and preceding or subsequent tests.
15 Thus, it is
reasonable to expect a taxpayer to adduce documentary evidence of systematic
research, including testing. If, however, a taxpayer has a plausible
explanation for the failure to adduce such evidence, it is still open to the
court to hold that, on a balance of probabilities, systematic research was
undertaken. For example, where research notes are accidentally destroyed, it
should be permissible for the trial judge to infer that systematic research was
conducted, having regard to the totality of the evidence. During oral argument,
counsel for the Minister accepted this proposition, if only because that
scenario was inapplicable in the present case. However, in my view, it should
also be permissible to infer that a taxpayer had conducted systematic research
where it is established that such research led to a technological advancement. I
say this because the whole foundation of the scientific research provisions of
the Act and Regulations should not rest solely on the repeatability criterion.
Otherwise, repeatability would negate the validity of all other evidence
pertaining to scientific research.
16 In the
present case, the Tax Court Judge made two important findings. First, he found
that testing had been undertaken and, second, that the research efforts of
Slonimsky and his assistant constituted a technological advancement. In my
respectful view, once the Tax Court Judge reached these conclusions, a
rebuttable inference was raised that the testing conducted by the taxpayer was
carried out in accordance with Regulation 2900. In the circumstances of this
case, I see no need to impose an additional evidentiary burden on the taxpayer
of having to adduce documentary evidence relating to the repeatability of
testing data. If there were any doubt as to whether a technological advance had
been achieved, then it would have been open to the Tax Court Judge to conclude
that, on a balance of probabilities, “scientific research” had not been
conducted within the meaning of the Act and Regulations. In this case, a
technological advance was achieved in the construction industry. In Sass
Manufacturing, however, there was no technological advance because the
project had been abandoned and documentary evidence of testing could not be
adduced because the records had been discarded. In my respectful opinion, the
facts in the present case are materially different than those in Sass
Manufacturing.
This underscores the expectation that a
systematic search or investigation by analysis or experiment should include
testing, as clearly set out in Questions 2, 3 and 5 of Northwest Hydraulic,
in order to constitute SR&ED.
[20]
It can be observed and recognized that the five Northwest
Hydraulic considerations along with their discussion and application by the
Federal Court of Appeal are designed to have the Court focus on the extent to
which a taxpayer claiming to have conducted SR&ED followed what is
generally understood to be the scientific method. The scientific method has
been referred to and followed for centuries and is taught in Canadian high
schools. The statutory language is itself highly suggestive of the scientific method
when it mandates a systematic investigation or search in a field of science or
technology by means of experiment or analysis.
The Project Planning
Documents
[21]
The Appellant prepared a one‑page Planning
sheet in respect of each of the Projects. These were the only contemporaneous
documents prepared by Life Choice or Dr. Dahl with respect to the Projects
that were put into evidence (apart from a one‑page listing of possible
supportive ingredients for B17 effectiveness relating to Project 1 at Tab
11 of the Appellant’s book of documents). These Planning documents were
completed by Dr. Dahl by hand on a preprinted form.
Project 1
[22]
The Planning document for Project 1 at Tab 7
provides as follows:
Project name:
laetrile (P1)
What
technological questions are you trying to answer?
How to design a
formulation that addresses cyano‑toxicity concerns of amygdalin and
therefore safe for human (daily) use?
What is your
plan?
My plan is:
currently we have combined amygdalin with B12 for cyanide binding properties.
Analyze dosage
and effects of this formula on cyanide blood levels. Identify risk
warnings, any other ingredients that we can add to further support safety.
Look for side effects.
What
resources (people) are you planning to assign to this project and why?
Eldon – lead researcher
Agnes, Kristina, Michelle – support research
Jake – cross‑check raw materials
Don – consult
on customer’s demand, concerns, competitor products
Anticipated
major milestones and phases:
1. Finish
adverse effects
2. Submissions
to NHPD [Natural Health Products Division of Health Canada]
3. Address
any concerns they may have with supportive research
4. NPN
[Natural Product Number from Health Canada]
5. Production
Project start date June 2010
Project end date April 2011
[23]
With respect to the Planning document for
Project 1, Dr. Dahl testified as follows:
So it shows my
plan that I was working with, and I made these notes while I was going through
and really the anticipated major milestone phase is the finished adverse
effects. So we want to lessen the adverse effects that cancer causes, when you
have your hypothesis and prepare a submission to the Health Canada NHPD for
addressing the issue, if they would allow my research to be licensed and then
to deal with the concerns and then finally if approved, final production.
Project 2
[24]
The Planning document for Project 2 at Tab 15 is
as follows:
Project name:
neuro support (P2)
What
technological questions are you trying to answer?
How to design a
formulation that matches effects of acetyl‑L‑carnitine and alpha‑lipoic
acid but works with or without carnitine?
What is your
plan?
Research acetyl
mechanisms.
Analyze
existing ingredients for support of neurological functions. Cross‑reference
ingredients to form supportive rationale.
What
resources (people) are you planning to assign to this project and why?
Eldon Dahl – lead researcher
Agnes, Kristina, Michelle – support researchers
Jake – cross‑check raw materials
Don – concerns,
competitor products, customer’s demand
Anticipated major milestones and phases:
1. Confirmation on individual ingredients to create a
formulation by dicentra’s research (also)
2. Submission to NHPD – HC
3. (NPN
– production)
Project start date July 2011
Project end date July 2012
Project 3
[25]
The Planning document for Project 3 at Tab 24
reads as follows:
Project name:
chelatory
What
technological questions are you trying to answer?
To only use
naturally derived ingredients in order to create an orally administered
chelation formulation that is equally equivalent in therapeutic effect as the
drip. Producing a vasodilation for plaque removal.
What is your
plan?
To research
well‑known vasodilation solutions and cross‑referencing the
information in order to create cardio‑support using oral ingredients.
Improving the effectiveness naturally.
What
resources (people) are you planning to assign to this project and why?
People planned for development
Eldon Dahl – lead researcher
Agnes, Kristina and Michelle – support research
Jake – cross‑checking selection of raw materials
Don – consultation with customers and demand
and competition in the marketplace
Anticipated
major milestones and phases:
1. To
finish adverse effects
2. Submission
to NHPD
3. Address
any and all concerns presented
4. Backed
by clinical research and evidence
5. Therapeutic value with
noticeable results
Project
start date July 2011
Project end
date July 2012
[26]
With respect to the Planning document for
Project 3, Dr. Dahl testified as follows:
This is my
original planning stage. This is a question that I’m trying to answer. My
uncertainty is to use a naturally derived [ingredient] in order to create an
orally administered chelation formulation that is equally equivalent in
therapeutic effect as the drip, the IV drip, and producing a vasodilation
effect for plaque removal from the body.
And so then --
and then the planning stage is to research well‑known vasodilation
solutions and cross‑reference the information in order to create a cardio
support system for using these oral applied ingredients to improving the
effectiveness naturally, without the side effects.
And it’s a
project that I consulted with several different groups and the resources that I
used, and use experts to help, and the milestone was to finish the adverse effects and to
submit it to Health Canada, NHPD, for approval and to address all their
concerns because my end goal was not to create a prescription‑based
product but an over‑the‑counter product to be used in the patient’s
home or the customer’s home. And backed by clinical research and evidence. And
really to find therapeutic results with noticeable results. The project was
started in July 2011 and [ended] in July 2012.
Life Choice’s Activities on the Projects
Project 1
[27]
Dr. Dahl was aware of a laetrile natural
health product licensed for sale in Slovakia. The laetrile was derived from
apricot seed kernels and contained cyanide. Dr. Dahl contacted the company
in Slovakia by letter. He said he also spoke with a dispensing pharmacist of
the Slovakian over‑the‑counter product. He said he learned from
them that the results were said to be very good and favourable if the dosage
and ingestion directions on the box are followed.
[28]
Dr. Dahl’s formulation added other
supplements to the laetrile found in the Slovakian product. He had a theory to
support the laetrile using vitamin B12. He started with a big list of potential
ingredients. He said he kept handwritten notes of the studies he drew
information from. In his own words “[a]nd so this is
where the research was that I did through analysis was either through clinical
review, speaking to colleagues, it was laying out my project looking for the
pieces of the puzzle that fit. And it was a systemic review of analysis that
was done to lessen or to satisfy originally my hypothesis”. When asked by counsel for the
Appellant to describe the “real activities”
performed, Dr. Dahl answered “I started to put
together the formulation and did research with complementary ingredients that
would work synergistically with this product. I was, as I say, I was in contact
with several people I know that are authorities, either dealing with raw
material or U.S. pharmaceutical grade material, products in their nature form
which I would say are, in a simplistic word, in a pre‑digested form”. He communicated with other
doctors on vitamin B12. He reviewed various university studies. He was aware of
evidence and discussion by the World Health Organization on laetrile. He
consulted with a health product licensing company, dicentra inc. When Health
Canada would not accept his 100 mg daily laetrile formulation, he
reformulated the product. The 100 mg was based on the Slovakian product.
He reformulated it to 23 mg daily based upon his understanding of the
World Health Organization’s published safe and tolerable limit.
[29]
Dr. Dahl testified they submitted the
laetrile and B12 formulation to Health Canada just to get acceptance, and from
there they would be building a formulation using other supportive ingredients
from the list he wrote down (Tab 11) based upon his knowledge from past
medical experience he had compiled and kept on the shelf in his mind. The
reformulations were not further described.
[30]
In the end, Health Canada would not license any
of the Appellant’s formulations containing any laetrile whatsoever. Life Choice
instead formulated a natural health product without laetrile but which would still
mimic the effects of laetrile. It is on the market today. I was not told
anything else about the formulation and reformulation activities of this product.
[31]
Dr. Dahl testified that Life Choice did not
proceed to clinical trials after obtaining a proposal from a third party to
provide them. They would have been too expensive. Health Canada did not require
them for natural health products. Dr. Dahl said clinical trials would have
been even more difficult because, as a member and supporter of People for the
Ethical Treatment of Animals (PETA), he did not believe in animal
experimentation — it would have to be done on humans instead.
Project 2
[32]
This Project involved the formulation of a
natural health product that would mimic acetyl‑L‑carnitine’s effect
of increasing neural activity within the brain. Dr. Dahl corresponded with
a doctor and research scientist who was then researching the use of massive
dosages of methylated B12 for the treatment of MS. She reported seeing great results
with nerve impulses. He was aware of a Berkley study that involved putting old
and young rats through mazes which led to a patented formula including acetyl‑L‑carnitine
and alpha‑lipoic acid. Dr. Dahl also studied reviews of projects of
others, notably one involving the cannibalization of flat worms and learned
memory. His “real activities” were reviewing
clinical studies which he documented and analyzed to start to look at ways to
reformulate. He did a systemic review of the literature and the ingredients and
the science. He knew from past experience the advantages of using threonine. He
tried to get Health Canada to remove acetyl‑L‑carnitine from the
restricted schedule, so he could just use it in his natural health product
instead of looking for a product to mimic it. Health Canada did this in late
2011, so he reformulated his product using acetyl‑L‑carnitine. The
reformulated product was licensed in June 2013 by Health Canada and contains 21
medicinal ingredients including acetyl‑L‑carnitine, alpha‑lipoic
acid, vitamin B12 and threonine. Dr. Dahl was of the opinion that his
first formulations without acetyl‑L‑carnitine would also have
worked but would have been less effective. No explanation for this opinion was
given.
[33]
Dr. Dahl said he feels advancements in
knowledge were achieved by Life Choice’s Project 2. With Project 2, Life Choice
“could take key components that were backed by science
to show that you can actually increase and alter brain level activity,
lessening spasticity, opening the synapses within the brain so you can -- the
neurons fire and you can have the ability to access memories that have been
blocked”.
The Court was not given any further description nor any supporting evidence
that Life Choice’s Project 2 formulation activities or Life Choice’s natural
health product contributed to such knowledge or had been shown to perform as
described.
Project 3
[34]
Project 3 is a natural health product to remove
arterial plaque. Dr. Dahl hypothesized he could create an oral chelatory
form that would deal with chelation (binding) to take the arterial plaque from
the blood vessels, to vasodilate the blood vessels to increase circulation to
the extremities, and to take the plaque off the organic material from the brain
stem. EDTA was being used in intravenous form for this purpose. Dr. Dahl
believed that, if EDTA were instead used in oral form with complementary
ingredients to accomplish the same thing, it could be available over the
counter for home use and would lessen damage to other organs such as the liver
and pancreas.
[35]
Dr. Dahl had studied the matter for several
years; he did systematic reviews on what makes up the blockage in arteries. The
blockage was known to be caused by inorganic material, including heavy metals
forming within the blood vessels and the brain. It was his belief that EDTA
being administered by medical doctors intravenously was not complete and could
further impact other areas of the body.
[36]
Dr. Dahl wished to use EDTA in a manner
that was complementary with other ingredients. He understood Health Canada
would not allow EDTA as a medicinal ingredient. Health Canada would, at some
later time, permit it to be added as a supportive non‑medicinal
ingredient. Dr. Dahl studied the research and methodology of a German
doctor and read studies from that doctor’s institute. Dr. Dahl analyzed
his research on the German studies. He described his “real
activities” as isolating the two components he was going to use and then
formulating a final product within his mind and on paper, while also incorporating
other selected ingredients that would not compete with the two ingredients
needed for the chelation process itself.
[37]
Dr. Dahl said he knew certain chelating
ingredients but he realized through further study that some were antagonistic
to each other. Therefore he said he decided through hypothesis which would be
the most effective. He said he originally wanted to choose between EDTA and
DMSA, but Health Canada would not allow the use of DMSA as a medicinal
ingredient in over‑the‑counter products. So he then set out to
create a formulation with the EDTA that would not be toxic to the body.
[38]
Dr. Dahl said he researched well‑known
vasodilation solutions and cross‑referenced the information. He consulted
with several different groups and called on experts to help minimize adverse
side effects because his end goal was to create an over‑the‑counter
product that was backed by clinical research and evidence and would be licensed
by Health Canada. He again wrote to dicentra inc. to consult on his originally
proposed ingredients and to get their feedback.
[39]
Dr. Dahl said he also determined that the
desired formulation should be taken in dosages and for periods that would
depend upon age and upon environmental considerations particular to the person.
[40]
Dr. Dahl stated that “[m]y original formulation, once effective, would achieve the
desired results”.
However, once acetyl‑L‑carnitine was taken off the restricted
schedule by Health Canada and could be used in over‑the‑counter
formulations, as described above, Dr. Dahl reformulated Project 3 as well
to incorporate that ingredient in lieu of EDTA which was not allowed to be used
as a medicinal ingredient. Acetyl‑L‑carnitine is also a
vasodilator. So he analyzed existing documentation he had and checked for
compatibility. He described acetyl‑L‑carnitine coming off Health
Canada’s restricted schedule as a godsend since he knew clinical studies,
especially those by another particular doctor, and he had used it on patients
for 20‑plus years. He knew it would accelerate the effectiveness.
[41]
Dr. Dahl said he had undertaken lots of
literature review before beginning his third project. He had studied the
subject immensely. He referred again to his fascination with another doctor’s
work, findings, results and discoveries. He consulted several articles and had
one translated from German.
The Three Projects
[42]
At the end of his examination‑in‑chief,
counsel for the Appellant asked Dr. Dahl to evaluate his time spent on all
three Projects. He answered as follows:
Well, it’s --
my review is commensurate with my work that I perform due to analysis, studies;
incorporating the use of outside sources like dicentra, the -- my raw material
supplier who has his master’s degree as a pharmacist; consulting with several
naturopathic doctors; and my staff who help me do the research and do some of
the leg work.
[43]
At the end of his testimony, I asked
Dr. Dahl to please clarify what he meant when he used the phrase systemic
review or systematic review. Specifically, I asked what it was he
systematically reviewed and how he performed that systematic review. He
answered that he did a systematic review of the analysis he had extracted of
the clinical studies of others by completing a literature review and
correspondence and dialogue with other authorities such as naturopaths,
professors and pharmacists. He added that he did additional analysis by
evaluating the calculation of the ingredients in his formulations by drawing on
his accumulated knowledge and expertise and then submitting his formulations to
Health Canada for licensing. He said he did not have clinical trials done
because of the expense; he had earlier testified that clinical trials were not
needed for natural health product licensing by Health Canada. He said his
testing of his hypotheses was based upon evidence he received from other
authorities like the World Health Organization. He said his formulations were “tested through hypothesis and in evaluation based on
evidence”.
It was clear from his earlier testimony this was pre‑existing evidence of
others and his own accumulated knowledge and clinical observations. He
described his final testing, short of clinical trials, was to submit his
formulations to Health Canada for approval which, once obtained, deems the
formulations to be effective.
[44]
Dr. Dahl was even more clear and succinct
when then asked by counsel for the Appellant what scientific analysis or work
was done. Dr. Dahl said he first evaluated the condition that was to be
treated. Secondly, he reviewed the human body concerning the diseased state and
produced a formulation to address that condition. His analysis was done using
clinical evidence from a review of authoritative scientific studies. He used
this combined research to formulate a unique product that would address these
authorities analyzed as part of his literature review.
[45]
Dr. Dahl’s answers were consistent with
paragraph 29 of Life Choice’s notice of appeal: “The
Plaintiff asserts that the formulas were developed in a scientific manner,
requiring analysis of available information collected from existing literature,
suppliers, regulatory bodies and analysis of ingredients.”
Considerations, Findings, Analysis and Conclusion
[46]
I am prepared to accept that there was
scientific uncertainty in each of the three Projects. There was uncertainty
that natural health products could be effective in mimicking the existing
pharmaceuticals in use. There was uncertainty as to whether other supplemental
complementary natural ingredients could minimize adverse effects of the
principal new mimicking natural ingredients in an effective manner. Once the
Projects were reformulated to use the existing pharmaceutical instead of a
mimicking ingredient, as in Projects 2 and 3 described above, there remained
the uncertainty of identifying supplemental complementary natural ingredients
that would be effective in lessening or removing adverse side effects of the
existing chemical ingredients.
[47]
I accept that Life Choice’s Dr. Dahl hypothesized
formulations aimed at being effective in their abilities to mimic the existing
pharmaceutical products, and aimed at minimizing adverse effects of the
mimicking ingredient and/or the existing ingredient.
[48]
I can conclude that there was nothing
approaching detailed records of the hypotheses or of any results. This appears
clearly to result from the fact that all of what Dr. Dahl referred to as testing
was done only as part of the development of his hypotheses for an effective
formulation. There was no testing in any fashion performed to gauge, verify,
quantify, determine the repeatability or lack thereof, or compare or otherwise
assess the effectiveness or any other aspect of the products formulated by
hypothesis alone. His formulations were only reformulated in response to Health
Canada either not approving the hypothesized formula or removing the
restriction it had on his preferred ingredient. His reformulation efforts were
analysis by way of “a systemic review of the literature
that I had pulled and combined together in a synergistic way to create a
formulation”.
He said that it was all of the clinical studies of the ingredients and the
science that he reviewed that became the background of the formulation he
produced in an effort to lessen his uncertainties with his theory.
[49]
The absence of any type of testing by Life
Choice of the hypothesized formulations also results in it remaining to this
day unknown if any of Life Choice’s formulations represented any form of
advancement of scientific knowledge whatsoever. It is not even known if there
was any or no ability of the originally formulated principal ingredients in
Projects 2 and 3 to mimic the existing pharmaceuticals, since Life Choice
reformulated to use the existing chemical pharmaceutical as soon as Health
Canada allowed it to be used in a licensed natural health product. Contrary to
the Appellant’s position, a newly hypothesized formulation cannot on its own be
considered either knowledge or the advancement of knowledge for these purposes.
[50]
It is the absolute absence of testing of the
natural health products by Life Choice after their formulations were
hypothesized by Dr. Dahl that is fatal to this appeal. It is a clear
conclusion from the evidence that, not only was no such testing done, neither
Life Choice or Dr. Dahl ever intended to do any as part of these Projects.
The jurisprudence has clearly, consistently and correctly interpreted the
definition of SR&ED as requiring some form of testing of the hypotheses
developed in order for there to be systematic investigation or search carried
out by means of experiment or analysis. Question 2 of Northwest Hydraulic,
above, in point 5 of its five‑step process requires consideration of
whether there was methodical and systematic testing of the hypotheses. Question
3 of Northwest Hydraulic requires consideration of testing as an
included step in the scientific method. Question 5 requires consideration of
whether records of the testing of the hypotheses and those results were maintained
as the work progressed.
[51]
As stated above, not all aspects of all five of
the Northwest Hydraulic considerations are determinative. Individually,
some are just informative. However, with respect to testing being required, the
Federal Court of Appeal in RIS – Christie could not be more
clear that systematic testing is a necessary requirement to meet the statutory
definition of SR&ED that will be carefully scrutinized. The Federal Court
of Appeal wrote, in paragraph 14, above:
. . . scientific research connotes the existence of
controlled experiments involving the testing of models or prototypes.
Thus, evidence of scientific research must be adduced by the taxpayer in
order to demonstrate that such research (including testing) was
undertaken and that it is eligible for favourable tax treatment
. . . . Not only must taxpayers establish that tests
were performed, they must also demonstrate that they were conducted in a
systematic fashion. In my view, the requirement that research efforts be
“systematic” is a higher threshold than simply requiring that research, including
testing, be conducted. Although both documentary and viva voce
evidence are admissible, the only sure‑fire way of establishing that
scientific research was undertaken in a systematic fashion is to adduce
documentary evidence which reveals the logical progression between each test
and preceding or subsequent tests.
[Emphasis added.]
[52]
It is not the absence of clinical testing that
is fatal to Life Choice’s appeal. It is the absence of testing in any form or
fashion that could be said to have been performed in a systematic fashion.
Systematic testing for any or improved effectiveness of Life Choice’s
formulations could have been done by Life Choice and could have been performed
to assess, verify, statistically infer, or gauge effectiveness without full‑blown
clinical trials sufficient to satisfy Health Canada if the products were
restricted pharmaceutical products, which they were not. Any such testing could
have been performed in a manner that met the requirements of the SR&ED
definition even though it would not have satisfied a Health Canada requirement,
or if, as in this case, there was no Health Canada requirement.
[53]
My decision in this case is in no way intended
to suggest that literature reviews and consultations with other researchers
cannot be qualifying activities giving rise to qualifying expenses as legitimate
constituent parts of SR&ED activities. This appears to be clear from a
fair, liberal and purposive reading of the SR&ED definition, including
paragraph (d) thereof, and from former Chief Justice Bowman’s comments
on the role of intuition, creativity and sometimes genius in Northwest
Hydraulic, above. Nor is this decision intended to suggest that a person
performing SR&ED cannot use the data or results of the completed research
of others in developing and/or testing their own hypotheses or theories.
[54]
Having found that there was no testing by Life
Choice of any of its formulations or reformulations after they were
hypothesized by Dr. Dahl, much less testing performed in any systematic
fashion, the appeal must be dismissed as the activities in support of these
three formulation Projects clearly cannot satisfy the requirements of the
definition of SR&ED in the Act that activities constitute a
systematic investigation or search carried out by means of experiment or
analysis.
[55]
Counsel for the Appellant relies on Hun‑Medipharma
Research Inc. v. Canada
for the proposition that literature review constitutes SR&ED. I do not read
it that way. It was an informal decision in which the trial judge lamented the
lack of clarity of both parties. It does not mention Justice Bowman’s decision
in Northwest Hydraulic, above. It was decided a month after the Federal
Court of Appeal decision in RIS - Christie, above, but it is
not mentioned. The Crown argued clinical experiments were required. Justice
Lamarre Proulx correctly decided in Hun‑Medipharma that the SR&ED
definition required either experiment or analysis and clinical
experiments were not required. She was satisfied on the evidence presented to
her that there had been systematic investigation by analysis. That is not so in
the Life Choice case before me.
[56]
The appeal is dismissed.
Signed at Ottawa, Canada, this 31st day of January 2017.
“Patrick Boyle”
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