http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/218140/index.do
Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen (January 17, 2017 – 2017 TCC 6, Sommerfeldt J.).
Précis: This case dealt with whether two projects dealing with the control of theatrical curtains involved SRED. The 2008 project involved designing a mechanism to control the rate of descent of a fire protection curtain; the 2009 project involved designing a manual override mechanism for a stage curtain. The Tax Court applied the well known tests developed by Bowman J. (as he then was) and concluded that the taxpayer failed to prove that the projects, while innovative and creative, “ did not constitute routine engineering, that there was technological uncertainty in respect of the Fire Curtain Project and the Manual Override Project, that the scientific method was followed, and that technological advancements were achieved in respect of each project.” [para. [53]]. The appeal was accordingly dismissed. There was no order as to costs since this was an informal procedure appeal.
Decision: The Tax Court first cited the well known tests for SRED developed by Bowman J. (as he then was):
[2] The CRA disallowed the SR&ED Claims on the basis that the activities that were the subject of those Claims did not constitute “scientific research and experimental development” (“SR&ED”), as that term is defined in subsection 248(1) of the Income Tax Act. In particular, the CRA took the position that the activities undertaken by JTR did not satisfy the requirements outlined by Bowman J (as he then was), which involved the consideration of five questions, summarized as follows:
1) Is there a technical risk or uncertainty? In other words, is there a type of uncertainty that cannot be removed by routine engineering or standard procedures?
2) Did the person performing the activities formulate hypotheses specifically aimed at reducing or eliminating the technological uncertainty? In other words, was there a process including the following five stages:
a) the observation of the subject matter of the problem;
b) the formulation of a clear objective;
c) the identification and articulation of the technological uncertainty;
d) the formulation of a hypothesis or hypotheses designed to reduce or eliminate the uncertainty; and
e) the methodical and systematic testing of the hypotheses?
3) Did the procedures used accord with established and objective principles of the scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?
4) Did the process result in a technological advance, i.e., an advancement in the general understanding?
5) As the work progressed, was a detailed record kept of the hypotheses, tests and results?
[Footnotes omitted]
The Court meticulously went through all of the tests cited by Bowman J. and found that the evidence adduced by the appellant was lacking, particularly in the area of technical innovation, e.g.:
(b) Manual Override Project
[23] Mr. Marineau explained that, in high-end curtain-control systems, there was technology that would enable a limit switch to maintain its proper orientation when power was restored after the manual operation of the curtain during a power failure. However, that technology had an approximate cost of $25,000, whereas JTR was hoping to develop a solution that would have a cost of approximately $5,000. He stated that, before JTR began to work on the Manual Override Project, no one had found an economical solution.
[24] Mr. Marineau did not explain the type of technology used in the expensive high-end curtain-control systems, nor did he comment on whether that technology could have been adapted to a more economical system, and, if so, the problems or uncertainties that would have been encountered in making such an adaptation. In my view, the technological uncertainty in respect of the Manual Override Project has not been clearly articulated. For instance, in Box 242 in Section B of Part 2 of the 2009 SR&ED Claim, the technological uncertainty was described as follows:
Manual operation of the curtain machine was unprecedented, and as such, there was no available knowledge that could aid us in determining a viable solution. There was no information or methodology for us to follow to achieve our intended advancement of a manual override system. The existing technology consisted of an automated curtain machine, without any back-up method in the event of power or machine failure…. We had to devise a method of manually pulling a rope that was wound around the curtain cable drum to operate the curtain without interfering with and disorienting the limit switch, as this is critical for resuming normal automated functioning of the curtain machine.
It seems to me that the work of finding a way to manually pull the rope wound around the curtain cable drum, without damaging or disorienting the limit switch, was routine engineering. JTR did not discharge the burden of proving otherwise.
Looking at the evidence as a whole the Court concluded that it was obliged to dismiss the appeal:
C. Burden of Proof
[53] JTR has the burden of proving, on a balance of probabilities, that the activities undertaken in respect of the Fire Curtain Project and Manual Override Project constituted SR&ED. While I acknowledge that the activities undertaken by JTR were innovative and creative, JTR has failed to adduce sufficient evidence to establish that those activities did not constitute routine engineering, that there was technological uncertainty in respect of the Fire Curtain Project and the Manual Override Project, that the scientific method was followed, and that technological advancements were achieved in respect of each project.
[Footnotes omitted]
There was no order as to costs since this was an informal procedure appeal.