REASONS
FOR JUDGMENT
Graham J.
[1]
Mac & Mac Hydrodemolition Services Inc.
claimed various scientific research and experimental development expenditures
and related investment tax credits in its taxation years ending July 31, 2012
and 2013. The Minister of National Revenue denied the deductions and the
credits. Mac & Mac has appealed that decision.
[2]
The sole issue in this appeal is whether the
expenditures qualified as SR&ED expenditures.
[3]
The expenditures related to two different
projects. Both projects involved large metal pipes used to transport bitumen.
The inside of the pipes was lined with a quarter inch of rubber and that
rubber, in turn, was coated by a one-inch polyurethane coating. Over time, the
bitumen travelling through the pipes caused wear to the lining, which meant
that eventually the pipe had to be replaced. Mac & Mac was approached by a
potential client to see if Mac & Mac could develop a method of removing the
entire lining without damaging the pipe. The first project was to develop a
method of removing the entire lining. After Mac & Mac succeeded in this goal,
the second project was to develop a method of removing only the polyurethane
lining while leaving the rubber lining intact.
[4]
Mac & Mac tried many different techniques to
remove the linings. As Mac & Mac’s company name indicates, its speciality
is hydrodemolition. Thus, all of the techniques that Mac & Mac employed involved
the application of high-pressure water. It tried hydraulicing, cutting and
milling. Hydraulicing involves using a water jet to pierce through the material
that you are trying to remove in such a way that large pieces of the material
are removed when the water rebounds from the hard surface behind the material.
Cutting involves using a focused water jet to removing very small slices of
material one at a time. Milling involves removing one layer of material at a
time until, after multiple passes over the material, it is all gone.
[5]
Mac & Mac began the first project by trying hydraulicing.
The initial approach was to use two nozzles attached to a device that they
would drag through the pipe. Changes that Mac & Mac tried included using
different angles of spray, using different water pressures, increasing the
number of nozzles, altering the size of the nozzles, adjusting the distance
between the nozzles and the linings, making the arms on which the nozzles were
mounted rotate, changing the length of the arms, making the nozzle heads
themselves spin, altering the speed of the arm rotation, altering the speed of
the nozzle spin, adjusting the speed with which the nozzles were moving through
the pipe, and adjusting the means by which the apparatus was moved through the
pipe. Mac & Mac changed only one of these variables at a time.
[6]
Hydraulicing and cutting would not work for the
second project so Mac & Mac had to develop a method of milling. This required
a different process than that used in the first project. Changes that Mac &
Mac tried included using two different pressures of water at the same time, rotating
the pipe itself (both in the same direction as the arms and in the opposite
direction), altering the speed of the rotation of the pipe, altering the number
of passes that the apparatus made through the pipe, altering the speed of those
passes, mounting the apparatus on a long beam instead of wheels, changing
nozzle heads between passes, and changing the water pressure between passes.
The move to the apparatus being suspended on a beam required Mac & Mac to
find a beam construction that was strong enough to withstand the kickback from
the water yet light enough to avoid sagging. Again, Mac & Mac changed only
one of these variables at a time.
[7]
Northwest Hydraulic Consultants Ltd. v. The
Queen sets out five tests that must be met for a taxpayer to succeed on a
SR&ED claim. There is no need for me to consider whether Mac & Mac’s
claims meet all of the tests as it is clear to me that they do not meet the
last test. That test requires Mac & Mac to have kept detailed records of
hypotheses, tests and results as the work progressed.
[8]
Mac & Mac kept a set of handwritten notes.
The notes were compiled weekly. The notes describe the various parameters that
were being tested in only vague terms. The notes do not contain any hypotheses.
There is no way of telling what Mac & Mac hoped to achieve from the
changes. The notes also contain scant details about the changes being made. For
example, the notes indicate that Mac & Mac tried different nozzle sizes and
angles but they do not specify what those sizes or angles were. Finally, the
notes contain very little information about the results of the tests. Given the
large number of parameters described above, I would have expected the notes to have
been much more detailed. There is simply no way that someone, even someone very
experienced in the industry, could hope to replicate or confirm Mac & Mac’s
results from these notes.
[9]
A spreadsheet was also entered into evidence. It
provided more detail than the notes. However, it was prepared after the fact
for the purpose of supporting the SR&ED claim and still did not contain the
level of detail I would have expected. I have not given the spreadsheet any
weight.
[10]
As noted by Justice Bocock in Highweb &
Page Group Inc. v. The Queen:
. . .While evidence of the outcome is
important, it is critical to technological advancement that the rigours of
adherence to the scientific and experimental method be kept on a detailed and
concurrent basis with the conduct of the experiments. Since a negative answer
to the hypothesis is a more frequent outcome and frequently as helpful in
advancing technological knowledge, detailed step-by-step logging, analysis, and
measurement is a mandatory requirement, not an optional addendum. It is the
roadmap. If one loses the way and failure results, retracing through these
accurate records provides one with the deductive process for developing a
different direction, speed or mode to create, locate, size, and arrange the
“missing piece in the puzzle”. . . .
[11]
Based on all of the foregoing, the fifth Northwest
Hydraulic test is not met and Mac & Mac’s appeal cannot succeed. The
appeal is accordingly dismissed.
Signed at Ottawa, Canada, this 22nd day of December 2017.
“David E. Graham”
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