CW Agencies in Federal Court of Appeal December 2001
Download PDFCourt of Appeal Decisions
Case name: CW Agencies Inc. v. Canada
Date: 2001-12-11
citation: 2001 FCA 393
File numbers: A-601-00
Date:
Docket:
Neutral citation: 2001 FCA
STONE J.A.
J.A.
J.A.
C.W. AGENCIES INC.
Appellant
-and –
HER MAJESTY THE QUEEN
Heard at Toronto, Ontario, Tuesday, December 11, 2001
Judgment delivered from the Bench at Toronto, Ontario,
on Tuesday, December 11, 2001
FOR JUDGMENT OF THE COURT BY: SEXTON J.A.
Date:
Docket:
STONE J.A.
J.A.
J.A.
C.W. AGENCIES INC.
Appellant
-and –
HER MAJESTY THE QUEEN
REASONS FOR JUDGMENT OF THE COURT
(Delivered from the Bench at Toronto, Ontario
on Tuesday, December 11, 2001)
J.A.
This is an appeal from the decision of Judge Bonner of the Tax Court of Canada in which he
the Appellant’s appeal from the assessments of income tax for the years 1991-95 in which
the Minister of National Revenue had disallowed claims made by the Appellant that it had
current and capital expenditures on Scientific Research and Experimental Development (“SRED”) in years.
At the relevant times the Appellant carried on the business of marketing tickets in
lotteries to customers in many parts of the world. The Appellant’s marketing activities were
by telephone and computer in a number of languages.
The Appellant had two to three millions customers and received as many as 25,000 purchase in a day which were recorded in the Appellant’s computer system. The computer system was required cope with orders which were received and, in addition, such things as the method of payment, payment to the client, informing the client of the details of the lottery tickets purchased, communication winning lottery numbers to Appellant’s clients, and searching of the Appellant’s database to identify and for payments to clients who had won.
The needs of the Appellant’s business were such that it was not possible to buy ready made capable of addressing the Appellant’s requirements of its computer system. Therefore, the Appellant about to develop its own software in-house. The business objectives for the new system imposed the system requirements: flexibility, scalability, instant response time, accuracy and reliability. The Appellant was successful in developing this customized computer application software, to as the International Distributed Lottery System (“IDLS”). The Appellant claimed for the cost of the developers and consultants directly involved in this
process, arguing that the development of the IDLS by the Appellant constituted scientific
defined in Regulation 2900 of the Income Tax Act of Canada.
The Tax Court Judge found that the software developed by the Appellant did not constitute research and experimental development within the meaning of Regulation 2900.
2900. (1) For the purposes of this Part and sections 37 and 37.1 of the Act,
research and experimental development” means systematic investigation or search carried out in a of science or technology by means of experiment or analysis, that is to say, basic research, namely, work undertaken for the advancement of scientific knowledge without a application in view,
applied research, namely, work undertaken for the advancement of scientific knowledge with a specific application in view, experimental development, namely, work undertaken for the purposes of achieving technological
for the purposes of creating new, or improving existing, materials, devices, products or
including incremental improvements thereto, or
work with respect to engineering, design, operations research, mathematical analysis, computer data collection, testing and psychological research where that work is commensurate with the and directly in support, of the work described in paragraph (a), (b) or (c), but does no include work respect to
quality control or routine testing of materials, devices, products or processes,
routine data collection.”
The Appellant argued that the Trial Judge improperly relied on a test articulated by the produced by the Respondent and that, in any event, the evidence of that witness should not have over the evidence of the Appellant’s expert.
It should be noted that the Appellant did not retain documentation which might have assisted it discharging its onus to disprove the Minister’s assumptions, nor did the Appellant choose to call as a person directly and personally involved in the development process. Rather, the Appellant called an similarly was handicapped by the lack of reliable documentation. This expert was compelled, by the of a detailed project management plan, to examine the results of the Appellant’s work and to arrive regarding the problems which he thought must have been faced by the Appellant and the steps to solve those problems. The Tax Court Judge noted that the failure to call the project manager or some similarly placed was never explained by the Appellant. It is certainly arguable that an inference could be drawn that of such evidence would not have been helpful to the Appellant.
In these circumstances the Tax Court Judge had no alternative but to consider the expert
tendered by the Appellant and balance it against the expert evidence called by the Respondent. The Tax Court Judge made an extensive review of the evidence involved in the development
and also made an exhaustive review of the evidence of both of the experts. He preferred the
the expert for the Respondent and gave detailed reasons for doing so. We are unable to conclude that the Court Judge erred in this conclusion. The Appellant argued that the Crown expert improperly relied upon the business purpose for the development. However, the Tax Court Judge found that the Crown expert’s conclusion did on any such faulty premise. He said: his evidence is taken in context it is clear that Doctor Takagaki evaluated the Appellant’s activity with to determining whether it was undertaken for the purpose of achieving technological advancement. He not distracted by the Appellant’s overriding commercial goal.
any event, the Judge expressly rejected the notion that one can exclude from the application of Regulation all activity undertaken with a business purpose in view. The Tax Court Judge also concluded as a factual matter that the Crown’s expert had not erred a qualitative decision based on how much technical advancement was required for the work in order under Regulation 2900. It was the prerogative of the Tax Court Judge to prefer one witness over another. We see no for overturning his conclusion. Both sides in front of us relied on the test outlined in Northwest Hydraulic Consultants Limited Majesty the Queen, [1998] D.T.C. 1839. In that case, Judge Bowman of the Tax Court outlined five which are useful in determining whether a particular activity constitutes SRED. Those criteria have
by this Court in RIS-Christie v. Her Majesty the Queen, [1999] D.T.C. 5087 at page 5089. The
are as follows:
Was there a technological risk or uncertainty which could not be removed by routine engineering or procedures? Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or that technological uncertainty?
Did the procedure adopted accord with the total discipline of the scientific method including the testing and modification of hypotheses? Did the process result in a technological advancement? Was a detailed record of the hypotheses tested, and results kept as the work progressed? The Tax Court Judge made reference to these criteria and in our view was appropriately mindful them in reaching his conclusions. Counsel for the Appellant emphasized the failure of the Tax Court Judge refer in his Reasons to the existence of an uncertainty in the system which the Appellant solved when it
the IDLS, and whether this software constituted a technological advance. In our opinion the
specifically addressed these issues when he testified that there were no uncertainty that could not be by the application of standard practices or routine engineering, and hence the software could not a technological advancement. It was open to the Tax Court Judge to rely upon this evidence to the conclusion that the Appellant’s activities did not constitute SRED. In our view, there is no basis for concluding that the Tax Court Judge did not have regard to all the evidence and its credibility in determining whether the work claimed as SRED met the test prescribed 2900 as set forth in the jurisprudence.
This appeal will therefore be dismissed with costs.
“J. E. Sexton”
J.A.
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
A-601-00
OF CAUSE: C.W. AGENCIES INC.
Appellant
MAJESTY THE QUEEN
OF HEARING: TUESDAY, DECEMBER 11, 2001
OF HEARING: TORONTO, ONTARIO
FOR JUDGMENT
THE COURT BY: SEXTON J.A.
FROM THE BENCH AT TORONTO, ONTARIO ON TUESDAY,
11, 2001.
BY: Mr. Douglas H. Mathew
Paul Gibney
the Appellant
Ernest Wheeler
the Respondent
OF RECORD: Douglas H. Mathew, Paul Gibney, Thorsteinssons
&Solicitors
Box 49123, Bentall Centre
British Columbia
1J2
the Appellant
Rosenberg
Attorney General of Canada
the Respondent
COURT OF APPEAL
Date:
Docket:
AGENCIES INC.
Appellant
–
MAJESTY THE QUEEN
FOR JUDGMENT
THE COURT
decisions Mailing List Decisia by
Modified: 2014-01-29 Important