RIS Christie in Federal Court of Appeal December 1998
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name: RIS -Christie Ltd. v. Canada
Date: 1998-12-21
numbers: A-710-96
Date:
Docket:
STRAYER J.A.
ROBERTSON J.A.
SEXTON J.A.
RIS -CHRISTIE LTD.
Appellant
(Plaintiff)
-and –
HER MAJESTY THE QUEEN
Respondent
(Defendant)
at Toronto, Ontario on December 3, 1998
delivered at Ottawa, Ontario on December 21, 1998
FOR JUDGMENT BY: ROBERTSON J.A.
IN BY: STRAYER J.A.
SEXTON J.A.
Date:
Docket:
STRAYER J.A.
ROBERTSON J.A.
SEXTON J.A.
RIS -CHRISTIE LTD.
Appellant
(Plaintiff)
-and –
HER MAJESTY THE QUEEN
Respondent
(Defendant)
REASONS FOR JUDGMENT
J.A.:
Section 37 of the Income Tax Act encourages the private sector to develop new products by offering tax incentives to those willing to undertake or invest in “scientific research” of the kind outlined in 2900 of the Income Tax Regulations. The issue raised on this appeal is whether such taxpayers to adduce documentary evidence of test results in order to claim the tax benefits available under The Tax Court Judge imposed such an evidentiary burden under the aegis of what he termed the criterion. Since the appellant failed to produce the necessary documentation, it was denied tax treatment, in spite of findings by the Tax Court Judge that testing had been conducted and technological advance in the construction industry had resulted. In my respectful view, the learned Judge in imposing such an evidentiary burden on the taxpayer in the circumstances of this case. The relative of the reasons to follow is a reflection of the clarity and comprehensiveness of the Tax Court Judge’s for judgment, reported at 97 DTC 99 (T.C.C.). In 1982, Leonid Slonimsky (a professional engineer) and Daniel Dorcich (a businessman) conceived of idea of developing a concrete forming medium for cast-in-situ concrete construction (a “spatial membrane in order to decrease costs and increase the quality of insulation in the formation of concrete panels construction industry. In November, 1982, they drafted a research and development proposal and it to a consulting firm which, in turn, approached the appellant. In December of the same year, invested $230,000 in the project, through a numbered company. Slonimsky and Dorcich agreed to
the necessary research. The appellant claimed a deduction of $160,000 in respect of scientific
under paragraph 37(1)(a) of the Act, a research allowance of $80,000 under subsection 37.1(1), investment tax credit of $40,000 under subsection 127(9) in respect of its 1982 taxation year. The National Revenue disallowed these expenditures for the 1982 taxation year and, consequently, reassessed appellant’s 1983 taxation year by reducing its small business deduction in accordance with section 125 of
taxation year, not its 1982 taxation year as originally claimed by the appellant. Phase I of the project was undertaken in 1983, with a working prototype being developed by the end that year. Additional funding for Phases II and III of the project was secured in April, 1984, and work in 1984 and 1985. The project culminated in an application for a Canadian patent being filed on 31, 1986. A patent was issued on April 30, 1991. The issue before the Tax Court was whether the development work on the spatial membrane panel “scientific research” within the meaning of Regulation 2900. This Regulation, as applicable to the years in question, reads as follows:
(1) For the purposes of this Part and paragraphs 37(7)(b) and 37.1(5)(e) 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, 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…. [emphasis added]
The respondent’s expert witness (Dr. Razaqpur) articulated the following non-controversial definition research as including: formulating the problem, constructing the model, testing the model, deriving from the model, testing and implementing the solution. Both expert witnesses agreed that “scientific and development is considered to be the application of scientific and engineering principles to the
of a scientific or technical problem”. As in other cases involving scientific research and
Tax Court Judge relied heavily on expert testimony. The Tax Court Judge accepted counsel for the argument that “scientific research” expenditures should not receive favourable tax treatment under 2900 unless “it is possible to provide a recorded basis upon which others can perform the same and are able to verify or disprove the hypothesis by setting up the exact same test parameters (at 103). Thus, the Tax Court Judge adopted the Minister’s position that an “essential attribute” of
as contemplated by the above provision, is “repeatable steps which are clearly noted”. He
repeatability requirement by reference to his earlier decision in Sass Manufacturing Ltd., 88 DTC 1363 As I understand the jurisprudence, the repeatability criterion flows from the legislated definition of research, which states that “scientific research… means systematic investigation…”. The Tax Court Judge noted that there were “substantial shortcomings” in the appellant’s evidence to the criterion of repeatability. Whether the dearth of documentary evidence was due to the fact Slonimsky (the engineer) had died prior to trial and Mr. Dorcich (the business partner) was in poor health had to testify by affidavit evidence was never addressed. Apparently, there were relevant documents at Slonimsky residence at Georgetown but, for some unexplained reason, they were not produced at trial. the Tax Court Judge expressly refused to draw any adverse inference from the appellant’s failure to those documents (at 108); instead, he found that the Georgetown documents “reflected work done tests carried out”. Nevertheless, in his opinion, the fact that this information was incapable of making repeatable was fatal to the taxpayer’s position that “scientific research” had been conducted. Thus, its was dismissed. In spite of his conclusions with respect to repeatability, the Tax Court Judge made the following of fact:
[i]n this case, there is some evidence that an engineering uncertainty existed, that a hypothesis was formulated and that by testing models and by observation of the results, 541185 [the numbered company] resolved the problem and created a practical product which embodied a technological advance [at 107].
….
Dorcich’s testimony confirms that investigation and experimentation to develop a product
was conducted in the taxation years in issue and that a new product was created [at 108].
In summary, the Tax Court Judge accepted that research involving experimentation and testing had undertaken, a new product had been developed, and a technological advance had been made in the
industry. Against this factual background, I am unable to conclude that the taxpayer is not
to the benefits of the legislation because of its failure to adduce sufficient documentary evidence to the repeatability criterion, thereby enabling tests to be replicated by third parties. With respect to the above findings of fact, counsel for the Minister argued that no such findings were by the Tax Court Judge. Counsel’s argument hinged on the Tax Court Judge’s statement that there was “some evidence” of testing leading to a technological advancement. In response, I simply point out that those words are read in context it is clear that the Tax Court Judge was satisfied with the sufficiency of regarding testing and technological advancement. As expressly stated by the Tax Court Judge, the factual matter in issue was with respect to the repeatability factor. The discrete issue raised in this case does not require a dissertation on the legal meaning of as used in the Act and Regulations; therefore, I have confined my analysis to a few self-evident
surrounding the evidentiary burden upon taxpayers claiming the tax deductions and credits
with scientific research. [For a comprehensive analysis, see Northwest Hydraulic Consultants
The Queen, 98 DTC 1839 (T.C.C.)]
As a preliminary matter, the parties raised the issue of the proper role of expert witnesses in
the scientific research provisions of the Act. In light of Dr. Razaqpur’s conclusion that
an essential element of scientific research, some guidance on this issue is required. What constitutes scientific research for the purposes of the Act is either a question of law or a of mixed law and fact to be determined by the Tax Court of Canada, not expert witnesses, as is too
assumed by counsel for both taxpayers and the Minister. An expert may assist the court in
technical evidence and seek to persuade it that the research objective did not or could not lead to advancement. But, at the end of the day, the expert’s role is limited to providing the court with of prescription glasses through which technical information may be viewed before being analyzed and by the trial judge. Undoubtedly, each opposing expert witness will attempt to ensure that its focal
are adopted by the court. However, it is the prerogative of the trial judge to prefer one
over another.
Obviously, scientific research and experimental development, as outlined in Regulation 2900, the introduction of a new or improved product or process. Thus, research must be directed toward technological advancement and involve an element of creativity, rather than the mere application engineering principles. At the same time, research objectives must be realistic. The committed who seeks to turn base metals into gold should not look to the Income Tax Act for tax incentives.
that a research project is eligible for favourable tax treatment, there is no express or implied
requirement that such project actually culminate in a technological advancement. Regulation 2900 of research undertaken for the advancement of knowledge and for the purpose of creating new
It does not state that eligible research must actually achieve those ends. Otherwise, the very
for which the legislation was enacted would be undermined. Presumably, not all of Alexander
research initiatives bore fruit. To maintain that failed research efforts do not constitute scientific the Act is contrary to common sense and the goal of encouraging entrepreneurship. In addition to developing new products or processes, scientific research connotes the existence of
experiments involving the testing of models or prototypes. Thus, evidence of scientific research
adduced by the taxpayer in order to demonstrate that such research (including testing) was undertaken it is eligible for favourable tax treatment: see, for example, Progressive Solutions Inc. v. R., 96 DTC Not only must taxpayers establish that tests were performed, they must also demonstrate that they conducted in a systematic fashion. In my view, the requirement that research efforts be “systematic” is threshold than simply requiring that research, including testing, be conducted. Although both
and viva voce evidence are admissible, the only sure-fire way of establishing that scientific
was undertaken in a systematic fashion is to adduce documentary evidence which reveals the logical
between each test and preceding or subsequent tests.
Thus, it is reasonable to expect a taxpayer to adduce documentary evidence of systematic research, testing. If, however, a taxpayer has a plausible explanation for the failure to adduce such evidence,
where research notes are accidentally destroyed, it should be permissible for the trial judge to infer systematic research was conducted, having regard to the totality of the evidence. During oral argument,
for the Minister accepted this proposition, if only because that scenario was inapplicable in the
However, in my view, it should also be permissible to infer that a taxpayer had conducted systematic where it is established that such research led to a technological advancement. I say this because foundation of the scientific research provisions of the Act and Regulations should not rest solely on the criterion. Otherwise, repeatability would negate the validity of all other evidence pertaining to research. In the present case, the Tax Court Judge made two important findings. First, he found that testing been undertaken and, second, that the research efforts of Slonimsky and his assistant constituted a advancement. In my respectful view, once the Tax Court Judge reached these conclusions, a
inference was raised that the testing conducted by the taxpayer was carried out in accordance
2900. In the circumstances of this case, I see no need to impose an additional evidentiary burden
the taxpayer of having to adduce documentary evidence relating to the repeatability of testing data. If were any doubt as to whether a technological advance had been achieved, then it would have been the Tax Court Judge to conclude that, on a balance of probabilities, “scientific research” had not been within the meaning of the Act and Regulations. In this case, a technological advance was achieved the construction industry. In Sass Manufacturing, however, there was no technological advance because had been abandoned and documentary evidence of testing could not be adduced because the records been discarded. In my respectful opinion, the facts in the present case are materially different than
Sass Manufacturing.
For the above reasons, I would allow the taxpayer’s appeal, with costs here and in the Tax Court, the judgment below, and allow the appeal from the Minister’s assessments.
___________________________
J.A.
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