Citation: 2008TCC145
Date: 20080310
Docket: 2005-3350(IT)G
BETWEEN:
LOGITEK TECHNOLOGY LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
(Delivered orally from the Bench on March 7, 2008)
Woods J.
[1]
These are reasons delivered orally
in the matter of Logitek Technology Ltd. and Her Majesty the Queen.
[2]
The appeal concerns an income tax
assessment for the 2000 taxation year which disallowed certain claims for SR&ED.
[3]
Logitek is not disputing all of
the amounts disallowed. It is only claiming additional investment tax credits
in the amount of $106,557.
[4]
The questions to be decided in the
appeal are fairly technical. I will therefore give a very brief summary of my
conclusion before I begin. Essentially I am not able to agree with Logitek’s
claim, mainly because the corporation did not present sufficient detail
regarding the work that was carried out.
[5]
It is important to note that the
statute provides a detailed definition of what SR&ED is. Essentially it
requires that there be a technological problem where the resolution is not
reasonably predictable using standard procedures. What are standard procedures?
They have been described by the Chief Justice of this Court as being procedures
that are generally accessible to competent professionals in the field.
[6]
In this case, I find that the evidence
is not sufficiently detailed for me to conclude that this requirement is
satisfied.
[7]
That is a general summary of my
conclusion. I will now go back to the beginning and analyse the question in
greater detail.
[8]
The amount at issue is an investment
tax credit of $106,557. I will not go into detail here as to how Logitek has
computed this. The computation is set out in exhibit A-1. In general though,
Logitek seeks an investment tax credit on two types of expenditures: testing,
qualification and integration of a computer software program designed for the Hudson’s Bay
Company and the cost of hardware and software purchased by Logitek in the
relevant period.
[9]
I will first consider the claim as
it relates to testing, qualification and integration, which I will refer to as
TQI.
[10]
The TQI that is being claimed
generally relates to Logitek’s labour cost in providing TQI on a computer software
program it developed for the Hudson’s Bay Company. The program is called L’eBiz.
[11]
By way of background, L’eBiz was
developed at the request of the Hudson’s Bay Company to streamline The Bay’s processes in
dealing with suppliers. The software was different from other programs
available at the time because it used a web-based approach in interfacing with
suppliers. It is understandable that this would be a much more efficient way of
dealing with a large number of suppliers.
[12]
The L’eBiz software has been
highly successful for Logitek and it is in use today by many companies.
[13]
Turning now to the tax issue
regarding TQI, Logitek submits that its TQI activities qualify as SR&ED.
The notice of appeal suggests that there is support for this in information
circular IC-97-1.
[14]
The Circular sets out the
administrative position of the CRA and if the Circular is favourable to Logitek’s
position, I think it should be followed unless it is clearly wrong. The
Circular suggests that post development work such as TQI will qualify as
SR&ED as long as it relates to the SR&ED work itself by being part of
the resolution of the technological problem. This test seems to make sense and
I accept it for purposes of this appeal.
[15]
The essential question, then, is
whether the relevant TQI activities undertaken by Logitek relate to SR&ED
activities. This gives rise to two separate questions: first, what part of the
L’eBiz project involves SR&ED, and second, does the TQI activity support
the SR&ED work that was done.
[16]
These questions are largely
questions of fact to be determined by the evidence presented.
[17]
Logitek was represented at the
hearing by its founder and CEO, Latiq Qureshi. He submits that all of the work
undertaken in developing L’eBiz is SR&ED and accordingly the TQI activities
should qualify as well.
[18]
The first question, then, is
whether the development of L’eBiz involved activity that mostly could be
described as SR&ED. As I understand Logitek’s position, it submits that the
entire L’eBiz project is SR&ED because at its core it solved technological
problems by way of research.
[19]
Before discussing whether the
evidence supports this, I first wish to comment about a procedural point and
that is that this issue was not raised in Logitek’s notice of appeal. In fact
to the contrary, the notice of appeal suggests that Logitek accepts the
Minister’s determination of what activities qualify for SR&ED. Logitek
should not be changing the fundamental nature of its argument at the hearing
without giving the Crown notice of this so that the Crown could prepare its
case. Nevertheless counsel for the respondent graciously allowed Logitek to make
this argument so that there could be a decision on the merits of the case
rather than a procedural point.
[20]
Turning to the substantive issue,
then, the question is whether and to what extent the L’eBiz project constitutes
SR&ED.
[21]
There was very little evidence
presented by Logitek on this issue but during argument Mr. Qureshi referred me
to a document that was in the material presented by the Crown. That document
was Logitek’s submission to the CRA and Mr. Qureshi submitted that it provides
sufficient evidence for me to conclude that the L’eBiz project fundamentally
was an SR&ED project.
[22]
I am not able to agree with this.
The Logitek submission to the CRA does provide considerable detail as to the
technological problems that Logitek was tackling, but there was very little
detail as to the nature of the research that was undertaken to solve these
problems. For example, the submission states that research was conducted but it
does not provide detail as to what that research entailed. Further, in some
cases the submission states that the research involved testing existing
software programs. I am not satisfied that such testing goes beyond the
application of standard procedures and that is what is necessary for work to be
SR&ED.
[23]
For these reasons, I conclude that
Logitek has not established that any of the work undertaken on the L’eBiz
project qualifies as SR&ED activities beyond the activities that the
Minister has already accepted.
[24]
That is not the end of the matter,
however. The question that remains is whether some of the TQI activity can be
said to relate to the SR&ED activity because some of it was accepted by the
Minister. I understand that the amount that was accepted was about 1,500 hours
which is a small portion of the entire project.
[25]
Logitek submits that the Minister
accepted 43 percent of its development activity as SR&ED. I disagree with
this calculation because it appears that it includes SR&ED work from
projects other than L’eBiz. I cannot tell from the evidence properly before me
what the correct percentage is but it appears to be much lower than 43 percent.
[26]
In these circumstances, I do not
think that there is a sufficient evidentiary basis for me to conclude that any
TQI activities are sufficiently connected to SR&ED work for any of
Logitek’s TQI to qualify as SR&ED itself.
[27]
For all these reasons, then, I
find that the TQI activities undertaken by Logitek in its 2000 taxation year in
connection with the L’eBiz project do not qualify for investment tax credits.
[28]
In light of this conclusion, it is
not necessary that I consider the evidence presented by David Dutch for the
Crown. However, I would comment briefly that I have some difficulty with some
of the reasoning in Mr. Dutch’s report. Specifically, it appears that Mr. Dutch
may have approached the problem on the basis that activities would not qualify
as SR&ED if there was an existing computer program in the market that
solved the technological problem that was identified by Logitek. It is not
entirely clear to me that Mr. Dutch took this approach, but if he did, I have
some difficulty with it because I do not think that the statutory provisions
are so restrictive.
[29]
If a taxpayer undertakes SR&ED
activities to solve a technological problem, the activities should qualify,
even if those SR&ED activities were not necessary because there was an
existing solution in the marketplace that the taxpayer was not aware of. I
think the wording of the definition of SR&ED in the statute supports this
view, and I quote from the relevant definition in the statute: “work undertaken
for the purpose of achieving technological advance.” The emphasis in the
statute on the purpose of the work suggests that the SR&ED activity should
qualify based on what the taxpayer was trying to achieve, and the means that
the taxpayer used to do so. It should not be disqualified merely because there
was a solution available in the marketplace if the taxpayer was unaware of it.
[30]
The weaknesses of Mr. Dutch’s
report do not help Logitek in its appeal, however, because Logitek failed to
establish that the work constituted SR&ED. The burden of proof should be on
Logitek, particularly because its argument had changed from what was stated in
its notice of appeal.
[31]
That completes my reasons with
respect to TQI. I now turn to the hardware and software.
[32]
Under the relevant provisions in
the statute, a taxpayer is not allowed an investment tax credit for a capital
property such as computer hardware or software unless the property was used
primarily for SR&ED activities.
[33]
It is not necessary that I go into
much detail on this issue. Based on the evidence presented, I am not satisfied
that the computer hardware and software on which this claim is based were used
for more than a small amount of time on SR&ED activities. This would not
satisfy the test of being used primarily for SR&ED.
[34]
In argument, the Crown suggested
that Logitek’s SR&ED activities amounted to just over 11 percent of the
activities undertaken. I had trouble confirming the 11 percent figure, but
Logitek did not present sufficient evidence for me to conclude that the correct
figure should be much higher than this. Certainly there is no evidence that it
comes close to 50 percent, which is what the word “primarily” generally is
interpreted as.
[35]
For this reason, I find that
Logitek is not entitled to an investment tax credit with respect to computer
hardware and software.
[36]
These are the two issues that were
raised in this appeal and unfortunately for Logitek I must dismiss its appeal.
Costs will be awarded to the respondent.
Signed at Toronto, Ontario this 10th
day of March 2008.
“J. Woods”
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