http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/98243/index.do
Abeilles Service de Conditionnement Inc. v. The Queen (October 23, 2014 – 2014 TCC 313, Jorré J.).
Précis: At issue in this appeal were four research projects in respect of which CRA had denied SRED credits. Three of the projects concerned the partial sub-assembly by the appellant for Mabe (a company 49% owned by General Electric) of dryers for sale by General Electric. Those three projects dealt with enhancing the assembly process for motors, heating elements and control panels. The fourth project dealt with a printing business carried on by the appellant. The project was to increase production times from 6,000 units per hour to 11,000 units per hour.
The Crown argued that in all four cases the appellant was just engaged in standard engineering with no element of technical uncertainty. The Court disagreed. It found that all of the projects went well beyond standard engineering, involved technically uncertainty and resulted in technological advancement. The appeal was allowed with costs.
Decision: The Court first stated the questions to be answered and the well known jurisprudence:
[140] Thus, the following questions must be answered:
(a) Were the projects undertaken for the purpose of achieving technological advancement?
(b) Were they undertaken for the purpose of creating new processes, including incremental improvements?
[141] The case law has developed a number of useful criteria to determine whether or not activities constituted scientific research or experimental development. These criteria, which were listed by Judge Bowman, as he then was, were approved by the Federal Court of Appeal. These criteria are summarized in CW Agencies Inc. v. Canada,where the Court of Appeal states as follows:
17 Both sides in front of us relied on the test outlined in Northwest Hydraulic Consultants Limited v. Her Majesty the Queen, 98 DTC 1839. In that case, Judge Bowman of the Tax Court outlined five criteria which are useful in determining whether a particular activity constitutes SRED. Those criteria have been approved by this Court in RIS-Christie v. Her Majesty the Queen, 99 DTC 5087 at page 5089. The criteria are as follows:
1. Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
2. Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
3. Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?
4. Did the process result in a technological advancement?
5. Was a detailed record of the hypotheses tested, and results kept as the work progressed?
[142] It must be borne in mind that these criteria are used to help determine whether or not a technological advancement has occurred. The first criteria, technological uncertainty, is one way of dealing with the technological advancement criteria; there can hardly be a technological advancement if one already knows how to achieve the end result; the second and third criteria are, inter alia, one way of ensuring that the work was undertaken for the purpose of achieving technological advancement and that it was not, for example, an advancement achieved by accident rather than work undertaken for the purpose of achieving technological advancement.
[Footnote omitted]
Turning to the first project, the assembly of motors, the Court found as follows:
[154] The evidence is very clear that the appellant did not know at first how it would go about increasing the production rate of motors from every 14 seconds to every 9 seconds; nor did it know how it would go about changing the production line to able to produce all motors on the same line.
[155] The appellant had access to the knowledge network of Mabe/General Electric. Mabe/General Electric engineers were only able to provide general principles. The appellant was unable to find a ready-made solution by speaking with its suppliers or by conducting Web searches.
[156] The appellant had to come up with its own solutions, at relatively modest cost—its total claim for this project was less than $239,000.
[157] I accept, as Mr. Gariépy testified, that there was “systematic investigation”. This can be seen very clearly in the numerous documents produced, including those found in Tabs 8 and 9 of Exhibit I-2. It is clear from these documents that hypotheses were formulated and that the scientific method was applied. I note that this is also true for the three other projects.
[158] To find solutions, the appellant had to conduct 32 tests and invest over 9,000 person-hours. For each test the appellant had to make necessary changes to the production line and, after the testing, the appellant restored the line to the same state it was in prior to the changes made for the tests. The sub-assemblies were then disassembled.
[159] These were not tests where adjustments were made to a known production process. They entailed a series of changes, some of which helped with the objectives and others that were unsuccessful. There was no certainty of the result, and indeed, the appellant, despite all of its efforts, was unable to achieve its sub assembly objective of every nine seconds in 2009.
[Footnotes omitted]
On this basis the Court concluded that there had been technological uncertainty and advancement:
[161] I do not see how, under these circumstances, what the appellant did in 2009 can be classified as an application of standard procedures or routine engineering. There was technological uncertainty. These were not standard procedures.
[162] At the end of the year, the appellant had a new process that consisted of certain equipment arranged and adjusted in such a specific way so as to henceforth produce more quickly and with greater flexibility.
[163] There is no doubt that it is technological advancement and that the work was undertaken for that purpose.
[Footnotes omitted]
The Court reached similar conclusions about the other three projects.
As a result the appeal was allowed, with costs.