Date: 19981118
Docket: 97-3115-IT-I
BETWEEN:
GESTION CHOISY-TEK INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] The appellant is appealing from reassessments by the
Minister of National Revenue (the "Minister") for the
taxation years ending on April 30, 1993 and 1994 and from
the assessment by the Minister for the taxation year ending on
April 30, 1995.
[2] The reason for the Minister's assessments is that the
appellant did not show that the amounts of $37,323 in 1993,
$42,378 in 1994 and $11,951 in 1995 constituted amounts allocated
to scientific research and experimental development during those
years for the purposes of the investment tax credit provided for
under subsections 127(5) and 127(9) of the Income Tax
Act (the “Act”). Subsection 2900(1)
of the Income Tax Regulations (the
"Regulations") defines what is meant by
"scientific research and experimental development
(“SR & ED”)" and it does not include
development of software in which no technological advancement is
involved. Accordingly, the investment tax credits of $7,465,
$8,476 and $4,183 respectively claimed under
subsection 127(5) of the Act were disallowed. The
Minister allowed as current expenses the SR & ED expenses
claimed and disallowed under subsection 37(1) of the
Act. The amounts so allowed were slightly larger, namely
$40,515, $49,034 and $10,443 respectively for each of the years
in issue.
[3] The notice of appeal reads as follows:
[TRANSLATION]
Technological uncertainty:
Despite all our attempts to explain to the various auditors
that our project involved technological uncertainties, we are
still convinced that there were and still are considerable
technological uncertainties in this project.
Technological advancement:
We firmly believe that there is technological advancement
because there is nothing else on the market that can do the work
this software does. No one has dared go as far in the development
of this kind of software.
Adaptation:
This is not an adaptation of a common practice to a new
situation, but merely the use of this programming platform to
develop the Mikado software. We could very easily have used
another platform to reach the same conclusion, but this platform
appeared to be the most suitable. We are therefore convinced that
this project is not an adaptation of a current practice to a new
situation.
[4] In making the assessments, the Minister relied on the
facts set out in paragraphs 3 and 4 of the Reply to the
Notice of Appeal (the "Reply"). I reproduce
subparagraph 3(i) and paragraph 4 below:
[TRANSLATION]
3(i) the scientific project was examined for the first time by
a scientific adviser for 1993 and 1994 and a second time by
another scientific adviser for 1995, and both came to the same
conclusion, namely that the project did not meet the
technological uncertainty criterion;
. . .
4. At the objection stage, the project was presented to a
superior scientific adviser who came to the same conclusion as
the other two scientists who had previously considered this case,
which was that the appellant's project did not meet the
technological uncertainty criteria for qualifying as R & D
expenditures.
[5] Roger Lessard, Director and President of the
appellant, and Pierre Richard Lavallée, the
appellant's Director of Development, testified for the
appellant. Roger Andria, an engineer, testified for the
respondent as an expert witness.
[6] Mr. Lessard explained that the appellant operates in
the field of sanitary maintenance management. With a view to
providing a computer tool for building managers, the appellant
set about developing sanitary maintenance software for hospitals,
schools and industry. The software contains seven or eight
modules, which identify the various areas in a building, together
with their materials and use, and enable managers to establish a
work plan. The business derives its revenue from two sources: the
sale of the software and preparation of work plans for
institutions based on that software.
[7] Mr. Lavallée began working for the appellant
in 1991. The appellant initially required the services of a
specialized computer firm. Subsequently there were a few people
who worked with Mr. Lavallée on software development.
That team had only one programmer at a time.
[8] The appellant's witnesses relied on Information
Circular 86-4R3, entitled Scientific Research and
Experimental Development. Referring more particularly to
paragraph 6 of the circular: Criteria for Identifying
Eligible Activities in Computer Science and Associated
Technologies, they argued that the computer field includes a
software component and a hardware component and that their
activities related to software development. They cited the
following passage from paragraph 6.4:
. . . A technological uncertainty, on the other
hand, arises when the solution is not readily apparent to someone
familiar with the basic stock of commonly used knowledge and
techniques within the business context of the firm. Only
activities aimed at resolving technological uncertainties are
eligible.
[9] Neither Mr. Lessard nor Mr. Lavallée has
any academic training in computer science. They have acquired
practical experience. In the years at issue, the appellant
employed a young computer scientist, Sylvain Godin, who had
earned a bachelor's degree in computer science at the
University of Quebec at Trois-Rivières in 1995. When
he began working for the business, he held a Diplôme
d'études collégiales (DEC), which he had
received in May 1993. He had at most one year's work
experience. Exhibits I-3 and I-4 show that the
young programmer was hired at the earliest on the date appearing
on the grant application, namely June 1, 1994.
[10] An application for a government grant to cover
Mr. Godin's salary was filed as Exhibit I-2
and reads as follows:
[TRANSLATION]
WORKER: Godin, Sylvain 269 023 438
To promote the young worker's entry into the job market.
Young computer science graduate who has held a DEC since May 1993
and has very little experience in his profession.
Recent graduate, therefore the business will receive no
payment for training. However, the worker will receive training
in the business's specific needs.
Upon termination of the agreement in November 1994, the worker
will have mastered the various programs currently used in the
business and will be able to transform them as necessary. He will
also be able to provide technical customer service.
. . .
[11] Roger Andria is an engineer and scientific adviser
at Revenue Canada. His report was filed as Exhibit I-8
and his assessment of the research submitted was as follows:
[TRANSLATION]
ASSESSMENT
According to the aforementioned documentation provided by the
client and based on telephone conversations with
Mr. Lessard, the project for which the claim has been made
does not meet the technological uncertainty criterion as
described in Revenue Canada Information Circular IC
86-4R3.
The uncertainties as described by the taxpayer are more at the
conceptual level and linked to the codification of work
standards, not to the implementation of the computer program. The
problem relating to the Clipper 87 version required a great
deal of work, but no EDP approach involving any technological
uncertainty was taken. The client solved the problem by creating
libraries for screens with the Clipper 5.2 version.
For a project to be eligible, there must be technological
uncertainty as described in paragraph 2.10.2 of
Circular 86-4R3 or in paragraph 6.10(d) of that
circular dealing with applications software. The uncertainty must
be at the software development level or related to the
improvement of computer hardware.
[12] In his testimony, Mr. Andria established the
distinction between a business project and a technological
project, and I cite him at page 103 of the transcript:
[TRANSLATION]
. . . a major distinction must be drawn between
a business project and a technological project.
A business project is a project with a business management or
commercial purpose; within that business project there may be
zero, one or a number of technological projects, and what is
meant by technological project is a set of activities that meet
these three criteria: technological uncertainty, technological
advancement and technical content.
And in what was presented to me, the documentation was much
more focused on the business’s product, that is to say on
the functions the project must have, than on what it provides
from a technological standpoint in the way of advances and
technological uncertainty in that particular case, in the
document, that . . .
[13] In his cross-examination, the following sentence from
paragraph 6.8 of the Circular was cited to him:
Work on improving or advancing the user interface in computer
systems, including developing technological objectives for the
user interface, can be an integral part of eligible experimental
development activities.
[14] With respect to this sentence, the witness explained that
these statements must be read in context and he referred to the
following sentence:
. . . They are eligible when carried out
directly in support of the needs of an activity that itself is
established as eligible. . . .
[15] The reports of the other two experts mentioned in the
Reply reveal that difficult work had been done, but that it did
not go beyond common professional practice in computer
science.
Analysis
[16] Subsection 2900(1) of the Regulations reads
as follows:
For the purposes of this Part and sections 37 and 37.1 of
the Act, "scientific research and experimental
development" means systematic investigation or search
carried out in a field of science or technology by means of
experiment or analysis, that is to say,
(a) basic research, namely, work undertaken for the
advancement of scientific knowledge without a specific practical
application in view,
(b) applied research, namely, work undertaken for the
advancement of scientific knowledge with a specific practical
application in view,
(c) experimental development, namely, work undertaken
for the purposes of achieving technological advancement for the
purposes of creating new, or improving existing, materials,
devices, products or processes, including incremental
improvements thereto, or
(d) work with respect to engineering, design,
operations research, mathematical analysis, computer programming,
data collection, testing and psychological research where that
work is commensurate with the needs, and directly in support, of
the work described in paragraph (a), (b) or
(c),
but does not include work with respect to
(e) market research or sales promotion,
(f) quality control or routine testing of materials,
devices, products or processes,
(g) research in the social sciences or the
humanities,
(h) prospecting, exploring or drilling for, or
producing, minerals, petroleum or natural gas,
(i) the commercial production of a new or improved
material, device or product or the commercial use of a new or
improved process,
(j) style changes, or
(k) routine data collection.
[17] Counsel for the respondent referred to the decision by
this Court in Sass Manufacturing Limited v. M.N.R.,
88 DTC 1363, and more particularly to the following passage
at page 1371:
The evidence falls far short of establishing the existence of
any systematic investigation or search carried out in a field of
technology by means of experiment or analysis. In my view
Regulation 2900 requires an appellant to adduce cogent
evidence of such investigation or search. Systematic
investigation connotes the existence of controlled experiments
and of highly accurate measurements and involves the testing of
one's theories against empirical evidence. Scientific
research must mean the enterprise of explaining and predicting
and the gaining knowledge of whatever the subject matter of the
hypothesis is. This surely would include repeatable experiments
in which the steps, the various changes made and the results are
carefully noted. There is no evidence of such an approach in the
case at bar, either in the context of applied research or
development. The appeal on this issue cannot succeed.
[18] Thus it must be shown, as contemplated in section
2900 of the Regulations, that a systematic investigation
or search was carried out in a field of science or technology by
means of experiment or analysis.
[19] The various experts agreed that the people involved here
possess considerable skill in the area of computers. However, in
this specialized field, successfully overcoming difficulties does
not mean one has made a technological discovery. I found that
Mr. Andria expressed well the importance of distinguishing
between a business project and a scientific research and
experimental development project. The project in the instant case
was a business project. I must also say that the absence of
expert testimony for the appellant cannot but raise doubts as to
the technological advances achieved through the development of
the software at issue. The persons involved in developing the
software were not computer science graduates, with the exception
of the young graduate, and in his case, he had not yet earned his
first university degree and had very little work experience.
[20] The appellant has not shown on the balance of evidence
that the development of its software constituted scientific
research and experimental development within the meaning of
subsection 2900(1) of the Regulations. The appeals
are accordingly dismissed.
Signed at Ottawa, Canada, this 18th day of November 1998.
"Louise Lamarre Proulx"
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
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