Canalerta Technologies Inc. in Tax Court Canada 1992
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Canalerta Technologies Inc. v. Minister of National Revenue
Canalerta Technologies Inc. v. Minister of National Revenue
Rip, T.C.C.J.
Judgment: December 24, 1992
Docket: Court File No. 90-1129
1 Canalerta Technologies Inc. (“Canalerta”) has appealed assessments issued in
accordance with Part VII of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,
c. 63) (the “Act”) denying its request for refunds of tax (“Part VII refund”) as set out in the
corporation’s Part VII Tax Returns for 1986 and 1987. The Minister of National Revenue
(“Minister”), the respondent, determined the appellant’s Part VII refunds, as defined by
subsection 192(2), and its refundable Part VII tax on hand, as defined by subsection 192(3), to
be nil since expenditures incurred by the appellant in 1986 and 1987 were not “qualified
expenditures” within the meaning of subsections 127(9) and 37(1) of the Act. In the
respondent’s view, the appellant, at the relevant times, did not carry on “scientific research
and experimental development” within the meaning of subsection 2900(1) of the Regulations to the Act (“Regulations”).1
2 The appellant claimed it carried out research and experimental development in two
areas. The first area was with respect to application of electromagnetic radiation to
pre-impregnated matrix materials to effect rapid and uniform curing of polyester and other
resin plastics. Fibreglass matting, for example, would be pre-impregnated with an epoxy resin
in a manner that such matting could be moulded readily and easily into thicker structural
components and then cured uniformly and quickly on a production basis by the application of
electro-magnetic radiation directly to the pre-impregnated fibreglass matting. This technology
would avoid difficulties encountered in moulding and curing on a uniform basis, without
damage, bulky fibreglass composite resin parts. I refer to this area as “electro-magnetic
radiation”.
3 The second area of research claimed by the appellant was in the technology of
electro-muscular stimulation and transcutaneous nerve stimulation towards the advancement
of new therapeutic applications. I refer to this area of activity as “muscle and nerve
therapy”.
Preliminary matters
4 At the commencement of the trial in these appeals, counsel for the Minister
acknowledged that in relation to the first area, electro-magnetic radiation, Canalerta did
conduct scientific research and experimental development within the meaning of section 2900
of the Regulations. However, the parties could not agree as to the allocation of the
expenditures attributable to each project.
5 Counsel for the appellant, Richard B. Jones, then applied to the Court to allow the
appeals on the basis that the concession by the Minister put him in an untenable position: the
pleadings do not refer to any allocation of expenditures and he was not prepared to lead
evidence as to such allocation. In Mr. Jones’ view, the appeals are “all or nothing” appeals
and since the Minister conceded on the electro-magnetic radiation issue the appellant’s
appeals must succeed on the muscle and nerve therapy issue as well.
6 I rejected appellant’s application. Litigation is not a “gotcha” contest where a
concession by a party of one issue affects his or her ability to defend his or her position on
another issue unless, of course, the two issues are related, which is not the situation at bar. To
have allowed such an application would destroy any willingness by a party to an appeal to
consider any settlement of litigation and would promote unnecessary litigation.
7 It is clear from the pleadings and the evidence that in assessing, the Minister
considered only whether or not Canalerta carried on “scientific research and experimental
development” within the meaning of section 2900 of the Regulations. No consideration was
given to allocating expenses between the electro-magnetic radiation and the muscle and nerve
therapy activities the appellant claims it carried on; that was not an issue until trial.
8 If I find the muscle and nerve therapy activity constituted scientific research and
experimental development the matter will be concluded. The assessments were wrongly made
and the appellant will have the right to a refund of Part VII tax. However, at trial I informed
counsel that if I find the muscle and nerve therapy activity was not scientific research, the
proper course would be to allow the appeals and refer the assessments back to the Minister to
consider the allocation of the expenses between the two activities, which he had never done,
and to reconsider the calculation of the Part VII refund on the basis that the electro-magnetic
radiation was scientific research. (See Kit-Win Holdings (1973) Ltd. v. The Queen, [1981]
C.T.C. 43, 81 D.T.C. 5030 at page 46 (D.T.C. 5031-32), per Cattanach, J. where pleadings
were accordingly amended with an analogous result.) I informed counsel that if the appellant
did not agree with the respondent’s allocation of expenses I would hear evidence on this
matter at a later date. However, the parties should bear in mind that David Walter Horst
(“Horst”), the appellant’s only witness, testified in cross-examination that he could neither
remember nor estimate the expenses for each of the two areas and all he could do was to
“guesstimate” an allocation.
Evidence
9 The issue before me is to determine whether any muscle and nerve therapy activity
carried on by the appellant constituted scientific research and experimental development
within the meaning of section 2900 of the Regulations to the Act.
10 Horst is a building contractor in Waterloo, Ontario. In the course of discussing a
potential construction project in 1985 he was introduced to one Dr. Mario d’Alerta
(“d’Alerta”), a “technical person” employed by or associated with the potential client. The
project was not proceeded with but d’Alerta discussed with Horst the work he was to have
undertaken and his background. Horst was impressed with d’Alerta’s background.
11 In his resumé d’Alerta claimed to be a medical doctor, receiving a degree from the
University of Havana, Cuba, who had practised in Miami, Florida. He informed Horst that he
was also an American citizen and had worked as a consultant to the U.S. National Aeronautics
and Space Agency (“NASA”). His resumé also states that he is a professional engineer and
had received Ph.D. degrees in cybernetics from University of Havana, in Motion Pictures
from University of Notre Dame, Paris, France and in Education from the National University
of José Marti, Havana.
12 D’Alerta claimed he had developed novel theories in the two areas of
electro-magnetic radiation and rehabilitation and proposed Horst and his associates, who
included a professional engineer, finance the research of his theories. Horst and his associates
agreed to finance the research and at the end of August, 1985 caused the appellant, 635816
Ontario Inc., to be incorporated to be used as the vehicle by which d’Alerta would carry on
his research. By Articles of Amendment dated September 12, 1985, the name of the
corporation was changed to Canalerta Technologies Inc. The shareholders of the appellant
were the source of the appellant’s funds to carry on the activities.
13 On September 10, 1985 the appellant entered into an employment contract with
d’Alerta, conditional upon him receiving a work permit. D’Alerta agreed to devote his full
time and attention “to the business of the company being in charge of all research and
development activities”. He also had a right to acquire up to 40 per cent of the issued shares
of the appellant, the same amount as Horst. D’Alerta received a permit to work in Canada and
the appellant leased facilities in Waterloo, Ontario to enable it to carry on its activities. A
secretary and technical assistants were also hired.
14 D’Alerta transferred equipment and technology to Canalerta in exchange for shares.
D’Alerta used the equipment and acquired the technology while working in the United States.
The equipment included a transcutaneous nerve stimulator, a bio-electric muscle stimulator, a
transcutaneous nerve stimulator (different model) and a pulse meter. The technology
consisted of “certain inventions relating to the moulding of reinforced plastics utilizing radio
frequency radiation” and “certain electrical bio-medical diagnostic and treatment technology”.
Horst stated that d’Alerta told him the equipment consisted of unique pieces built especially
for him, but in fact it consisted of modifications of available equipment.
15 Horst was the first president of Canalerta and later on was its secretary-treasurer.
Horst said he would visit Canalerta’s facilities “two or three times a week, sometimes daily, at
least once per week…”. He insisted he maintained a “day to day awareness of what was going
on.”
16 It was Horst’s understanding that d’Alerta worked in Waterloo on the two projects.
He said he “observed d’Alerta getting information from various places”. D’Alerta did “lots of
reading”. On a regular basis d’Alerta, Horst and the other investors would have discussions
“to see what he (d’Alerta) was establishing”.
17 D’Alerta contracted the Ferro Corporation in Massachusetts to obtain
pre-impregnated materials. Ferro Corporation, according to Horst, is a leading manufacturer
of such product and provided product to d’Alerta. D’Alerta worked on the electro-magnetic
radiation project in the appellant’s laboratory which consisted of a room with a counter top,
shelving units and the equipment.
18 During 1985 and 1986, d’Alerta would frequently verbally explain his work to the
investors. In 1986, Horst testified, the investors requested d’Alerta to put forward a written
outline of his work and how he intended to proceed. D’Alerta complied with the request and
his written explanations were produced into evidence. This material consisted of five
“protected” summaries and reports. The first summary consisted of 66 pages and included the
following:
(i) Preimpreg technical data, “Mobaloy ERS”, produced by Ferro Corporation;
(ii) Ciba-Geigy Journal, April, 1986 -“New high temperature tool hardener from Ren”;
(iii) Re-print from Plastics Technology, December, 1965 “Controlled flow impreg solves
Helicopter Canopy Problem”;
(iv) Re-print from 1965 issue of modern plastics “Preimpreg licks tough wiring problem”;
(v) Article by Grant Brown, technical director and Charles Andrew Murray, technical
consultant, Cordo Division of Ferro Corporation “New Technique for Checking cur of
B-stage material”
(vi) Re-print from modern Plastics, October, 1965 “Doing the tough jobs in space”;
(vii) Re-print from Plastics, Design and Processing, May, 1965 “D.A.P. impreg
Mouldings Make Intricate Designs Practical for Short Run Parts at Cessina Aircraft”;
(viii) Summary of test results, Dr. d’Alerta, September 8, 1986;
(ix) Report No. 1 “material testing of a fibre glass and epoxy composite”, February 1987,
prepared by Geotechnical Resources Ltd. on behalf of Canalerta Technologies Inc.;
19 These documents relate to the electro-magnetic radiation activity of the appellant
which was accepted by the respondent as “scientific research and experimental development”.
There is therefore no need to consider this material.
20 The four other reports which concerned efforts improving therapy for muscle and
nerve damage are:
(i) a 36 page ITCM report entitled “Electro-chemical modulation of cell and tissue
function” by Dr. Mario d’Alerta;
(ii) an 11 page report on ITMC entitled “Scientific Explanation and basic principles
supporting the ITMS System” by Dr. Mario d’Alerta;
(iii) a 19 page report of the ITMC setting forth background neurological concerns and
overview of ITMC system; and
(iv) a 132 page report by Canalerta Technologies Inc. setting forth the model of the
biomedical micro processor.
21 The first of these four reports, which is attributed to d’Alerta, states, at the end of the
report it was “taken from Chapter 12 of Mechanics of Growth Control, Robert O. Becker, ed.,
Charles C. Thomas, Springfield, Illinois, 1981″. Horst could not state with any degree of
certainty that this was an original work of d’Alerta and it appears to me to be a photostatic
copy of the publication to which it is attributed. On the evidence before me I cannot accept
this report as a work emanating from d’Alerta.
22 The second of the four reports, Horst admits, does not deal with electrochemistry but
with something called International Telemetric Medical Centre (“ITMC”) system. The ITMC
system was d’Alerta’s representation to the investors of how his theory could be applied to the
market place; the term ITMC was coined by d’Alerta. This report contains his explanations of
the cellular composition of the human body, the structure of the atom and the position of
atomic particles, electrolytes, polarity of the human body and stimulation of the nervous
system, nerve stimulation, nerve impulse, stimulation of enervated muscle, effects of the
electrical muscular contractor, electrical stimulation and his theory. The report appears to
explain various functions but here too there is no evidence of any work undertaken by
d’Alerta.
23 The third report contains a “considerable” number of extracted copies from other
publications, Horst acknowledged. It also includes a sketch or layout of d’Alerta’s pain
treatment centre, a market analysis and 1984 medical form.
24 The last report, entitled Biomedical Microprocessor, Horst said, was produced by
d’Alerta while an employee of Canalerta. The report contains sketches of what would appear
on a computer to assist a medical practitioner in applying d’Alerta’s work. According to
Horst, this report describes a medical diagnosis and treatment system to be operated by a
physician and contains specifications for the creation of an interactive software program. The
proposed computer system would be effective only if the muscle and nerve therapy theory
project of d’Alerta did in fact have application, Horst acknowledged. In cross-examination,
Horst stated that this report was an attempt by d’Alerta to develop his muscle and nerve
therapy theory “… to bring (it)… into a lab setting”. This program was never tested by
d’Alerta. In my view this report describes how a program may work but there is no evidence
that any effort was put forth to determine whether the basic theory underlying this program
was practical.
25 D’Alerta claimed to have done much of the work on muscle and nerve therapy while
with NASA, before coming to Canada, and at clinics in Miami. He arranged to visit with
Horst the Kennedy Space Centre in Florida as well as clinics in the Miami area where he had
previously worked. Horst testified that d’Alerta introduced him to medical staff of the clinics
and, at NASA, where he had security clearance, his questions were answered without any
reservation. At NASA, d’Alerta discussed his therapeutic work with several people and
introduced Horst to various officials. Horst said he came away from NASA with the feeling
d’Alerta was “legitimate”; however he could not obtain confirmation d’Alerta had graduated
in medicine from the University of Havana or that he had worked at the University of
California at Los Angeles (“UCLA”) as he claimed. Horst said that with respect to UCLA, the
report he received was that such information was “classified”; d’Alerta had previously
informed Horst his work at UCLA was classified. At this stage, Horst concluded, “we had
confidence in him… much of his past had been confirmed”.
26 Horst recalled d’Alerta performing at least two applications of muscle and nerve
therapy. One of Horst’s fellow investors, Richard Kline (“Kline”), was “intrigued” with
d’Alerta’s ideas due to his son’s muscular problems. D’Alerta treated Kline’s son and
according to Horst the son believes the treatment was beneficial. At another time, a friend of
Kline’s son who was in a motorcycle accident and confined to a wheelchair sought help and
was treated by d’Alerta. The friend, again according to Horst, enjoyed benefit from the
treatment. However Horst and his co-investors were of the view it was premature for d’Alerta
to treat humans and requested he stop such treatments.
27 In cross-examination Horst stated d’Alerta wrote up his ideas for a computer
program, documenting his theory, in the 132 page report. However, except for working with
Kline’s son and his friend, d’Alerta did no laboratory research with respect to the project of
electrical stimulation to rehabilitate muscles on humans. D’Alerta simply wrote reports. “That
is the work”, Horst declared.
28 Horst stated that the shareholders of Canalerta wished to expose d’Alerta to areas
where he could perform his work, in particular a medical environment. Arrangements were
made for him to meet medical staff at Wellesley Hospital in Toronto. He met doctors at the
hospital but, said Horst, he would stress the results of his work or his theories with them.
D’Alerta insisted that any work on muscle and nerve therapy be done by himself without any
assistance. Horst revealed antagonism was thus built up and he and his fellow investors found
themselves in a difficult situation.
29 Sometime in 1986, Kline brought to d’Alerta’s and Horst’s attention an article from
the April, 1986 issue of “Discover” magazine. The article discussed the claim of Dr. Björn
Nordenström (“Nordenström”), a Swedish radiologist, to have found in the human body
electrical activity that is the foundation of the healing process. Kline had d’Alerta attend a
conference in Stockholm where he arranged for d’Alerta to meet Nordenström, and in fact
they did meet and discuss their theories, said Horst.
30 By May, 1987, Horst and his fellow investors caused the appellant to cease
operations. The electro-magnetic radiation work was abandoned because the appellant
concluded that effective patent protection could not be obtained. Discussions with staff at
Wellesley Hospital and with other medical practitioners resulted in the investors realizing
d’Alerta’s attitude and lack of cooperation with others would cause the muscle and nerve
therapy work to come to no good conclusion. “D’Alerta was unwilling to co-operate”, said
Horst, “and… led us to cease… [carrying on]… the project”. In Horst’s view the “proprietary
and secret domain in d’Alerta’s mind couldn’t be changed… [he]… couldn’t agree to
co-operate… [and]… we agreed to part company”. D’Alerta left Canada.
Submissions
31 This appeal turns on whether or not the activities conducted by the appellant during
1986 and early 1987 with respect to muscle and nerve therapy constituted “scientific research
and experimental development” within the meaning of section 2900 of the Regulations to the
Act. If such activities fall within that meaning, the appellant will be successful in its appeal.
32 Subsection 2900(1) reads, in part, 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,
and, where such activities are undertaken directly in support of activities described in
paragraph (a), (b) or (c), includes activities with respect to engineering or design,
operations research, mathematical analysis or computer programming and psychological
research….
Appellant’s argument
33 Counsel analyzed subsection 2900(1) to determine what is meant by “scientific
research and experimental development”. He concluded that the semantics of the definition
suggest that if a taxpayer qualifies under any of the alternative definitions of basic research,
applied research or development he is carrying on “scientific research and experimental
development”. He stated that his client was carrying on applied research.
34 Canalerta’s counsel cited Steinman v. Minister of National Revenue (1952), 7 Tax
A.B.C. 255, 52 D.T.C. 415 at page 262 (D.T.C. 419) and Partington v. Attorney General
(1869), L.R. 4 H.L. 100 at page 122 per Lord Cairns in support of the principle that, in
dealing with the construction of taxation statutes, if the taxpayer is caught within the strict
words of the statute then he will be taxed regardless of the court’s view of equity. Similarly,
where the taxpayer seeks a deduction, he must come within the words of the statute. Thus, if
his client is to succeed, counsel stated, he must show that his client’s activities clearly fall
within the strict words of the definition contained in subsection 2900(1).
35 Appellant’s counsel conceded that his client does not claim “d’Alerta ever did, during
the course of his employment with it, experimental work in the application of his claimed
therapeutic utilization of electrical stimulations to the human body”. Counsel stated, “the fact
that d’Alerta did no experimental work, no tangible physical work with recording of data and
results” is not an issue.
36 What activities did Canalerta carry on in 1986 and 1987 which one may reasonably
conclude constitute scientific research and experimental development, in particular applied
research, within the meaning of subsection 2900(1)? Its counsel described d’Alerta’s activities
as follows:
… Dr. d’Alerta apparently sought to assemble data, to assemble prior art, to study the
literature, to study this field, to think, contemplate and meditate upon the work that he had
done in Miami on what he believed were healing, curative processes attributable to
electromuscular treatments, that he applied to patients.
37 As counsel for Canalerta explained, it was a known art in 1986 and 1987 to apply, by
means of conductive pads fixed to different portions of the human body, a pulsed electrical
impulse. However, he contended that at that time it was not known that such technology had
important therapeutic benefits, a fact upon which “Dr. d’Alerta, by happenstance, good luck,
mere misfortune, kismet, whatever, in fact, had stumbled upon….”
38 Counsel for the appellant emphasized that d’Alerta carried on his work by means of
analysis. He suggested “the thoughtful assembly of prior known facts, the consideration of the
logical relationships between those prior known facts, the analysis of those prior known facts
… the detection of errors within those prior known facts, and the assembly of that into a
reasoned presentation can well be of the very essence of scientific research and experimental
development. It is certainly work… it is… with a specific practical application in view… it…
is analysis…”. Finally he declared “experiment is the gathering of data or the testing of
hypotheses, but the analysis of data and the formulation of hypotheses are equally vital,
integral parts of the process of scientific research and experimental development”.
Respondent’s argument
39 In his submission that Canalerta’s activities did not constitute scientific research and
experimental development, counsel for the respondent cited several reported cases where this
Court considered whether a particular activity fell within the subsection 2900(1) definition of
that term. In Sass Manufacturing Ltd. v. Minister of National Revenue, [1988] 1 C.T.C. 2524,
88 D.T.C. 1363 (T.C.C.), Sarchuk, J., at page 2535 (D.T.C. 1371), stated the test to determine
whether an activity constitutes scientific research or experimental development within the
meaning of subsection 2900(1) as follows:
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.
40 Counsel suggested Sass was dismissed because the learned trial judge found that the
activities undertaken by that appellant fell short of meeting the criteria set out in subsection
2900(1) since there was no cogent evidence of a systematic investigation or of controlled
experiments, of highly accurate measurements, of testing of theories against empirical
evidence.
41 Counsel argued that it is not the intention of the appellant that governs. The words of
paragraph 37.1(6)(a) of the Act require that an expenditure must be of a current nature on
scientific research and experimental development directly undertaken by or on behalf of the
taxpayer. To support this contention, counsel referred to Revelations Research Corp. v.
Minister of National Revenue, [1992] 1 C.T.C. 2136, 92 D.T.C. 1036 (T.C.C.) in which
Christie, A.C.J. dismissed the appeal of a taxpayer who had some ideas that he believed might
be fruitful, yet did not have a plan of how he was going to go about putting them into action
and did not undertake the kind of systematic investigation, search, analysis or controlled
experiments as required in Sass. At page 2144 (D.T.C. 1043) of his reasons for judgment,
Christie, A.C.J. concluded:
… it has not been established that there was any systematic investigation or research
carried out of the nature described in Sass Manufacturing Ltd.
42 Finally counsel compared the facts in Satellite Earth Station v. Minister of National
Revenue, [1991] 1 C.T.C. 2416, 91 D.T.C. 337 (T.C.C.) with those in the case at bar. In
Satellite, the witness described the activities of the appellant in the following manner at page
2419 (D.T.C. 340):
Our research effort wasn’t what you would characterize as being high technology by any
means. We were working initially out of a converted pig barn and other buildings on a
farm, a chicken coop. Much of our work was actually done by taking bits of paper and
drawing out, sketching out various components. We did not use a methodology that might
be followed by the Spar Aerospaces or by the big firms. Often it was a case of going to
the blackboard or taking the chalk and writing on the shop floor, sketching out different
ideas and hypotheses. You actually had to try them.
43 Bonner, T.C.C.J., gave his reasons for dismissing the appeal at page 2420 (D.T.C.
340):
I cannot find in the evidence of the activities described in the passages quoted or in any of
the other testimony or in Exhibits A-10 and A-11 any indication of “… systematic
investigation or search carried out in a field of science or technology by means of
experiment or analysis…” within the meaning of section 2900 of the Income Tax
44 Respondent’s counsel concluded that “casual doodling with ideas”, even trying out
those ideas, where it is not done in a systematic scientific fashion, does not constitute
scientific research or experimental development. He added that the appellant’s activities
which consisted of contemplating, meditating, and thinking do not constitute scientific
research because analysis, if it consists exclusively of mental work, must involve the
disciplined analysis that advances knowledge or at least attempts in a disciplined fashion to
resolve an area of scientific uncertainty. Counsel concluded as follows:
This man [d’Alerta] did not postulate any specific hypotheses. He didn’t analyze any data.
He didn’t advance knowledge in any way…. He obviously thought he was attempting
something in his own air, I suppose, but he was doodling. He was a dreamer. He was not
practising scientific research and experimental development within the criteria that the
courts have laid down.
Analysis
45 The appellant insists that “thinking, contemplating and meditating” are acceptable
activities which constitute “scientific research and experimental development” within the
meaning of subsection 2900(1) of the Regulations. Its counsel stated:
The Regulation does not say no daydreaming allowed. The section does not say you can’t
take something that you dreamt about last night and wonder whether or not you’ve got
some inspiration that will lead you into profitable scientific enquiry. The section doesn’t
say you have to succeed.
46 I agree with appellant’s counsel. Daydreaming may be a vital component of scientific
research. However the daydreaming must be coupled with a “system atic investigation or
research… by means of experiment or analysis….” Work must be undertaken. Mr. Jones
pointed out that if a taxpayer is claiming a deduction, he must fall squarely within the words
of the statute. Subsection 2900(1) does not exclude daydreaming from the concept of
scientific research and experimental development but that provision insists that other factors
be present. This is apparent from the words of the Act and the conclusions of this Court in
Sass, Satellite, and Revelations as well as J and J Cameron Venture Corp. v. Minister of
National Revenue, unreported judgment dated October 2, 1989 (Court File No. 87-1774).
47 Several steps should normally be present in an endeavour that might represent
scientific research and experimental development for the purposes of subsection 2900(1):
Sass, op cit. In this regard, scientific research contemplates activities which might be based on
hypothesis in respect of which the objective is the gaining of knowledge. To attain that
objective, theories must be tested against empirical data. This testing is accomplished through
controlled experimentation, and must be done with extremely accurate measurements.
Without the presence of these elements, an activity will not meet the requirements of
subsection 2900(1). From the arguments presented by the appellant, it is evident that the
activities of d’Alerta with respect to muscular and nerve therapy did not represent those
targeted by section 2900 of the Regulations.
48 Subsection 2900(1) states that “scientific research and experimental development”
means research in a particular field by means of experiment or analysis. Intuition is not
research, although it can trigger research.
49 There is no evidence that anything d’Alerta did with respect to any research in nerve
and muscle therapy was “systematic”. The Shorter Oxford Dictionary on Historical
Principles defines the word “systematic” as:
3. Arranged or conducted according to a system, plan, or organized method, involving or
observing a system, (of a person) acting according to system, regular, methodical….
50 There was no evidence produced by the appellant to indicate d’Alerta carried on any
of his work in nerve and muscle therapy research according to any plan or organized method.
He was by nature secretive and reluctant to part with any knowledge. D’Alerta himself was
not called by the appellant to testify as to the work he performed and the method of analysis
he employed. D’Alerta apparently kept no records of his analyses. This made it difficult for
Horst to give evidence.
51 In my view the appellant’s work, if any, in muscular and nerve therapy did not
constitute “scientific research and experimental development” within the meaning of
subsection 2900(1) of the Regulations.
52 The appeals will be allowed and the assessments referred back to the respondent to
reconsider the allocation of expenses between the electro-magnetic radiation research and the
muscular and nerve therapy activity and to calculate the Part VII refund on the basis that only
the electro-magnetic radiation activity was scientific research or experimental development
within the meaning of subsection 2900(1) of the Regulations. The decision to award costs will
await such allocation.
Appeal allowed in part.
1 As stated in paragraph 6 of the reply to notice of appeal:
Under subparagraph 192(2)(a)(ii) of the Act a taxpayer’s “Part VIII refund” is calculated
reference to the definition of “Investment Tax Credit” in subsection 127(9) of the Act.
definition refers to a “Qualified Expenditure”. “Qualified Expenditure” is also defined
subsection 127(9) of the Act as meaning an expenditure “in respect of scientific research
experimental development that qualifies as an expenditure described in paragraph 37(1)(a)
subparagraph 37(1)(b)(i) “. Subsection 37(7) of the Act states that in section 37 “scientific
and experimental development” has the meaning given to that expression by Regulation.
the resort to subsection 2900(1) of the Income Tax Regulations which contains a
definition of the phrase “scientific research and experimental development”.