ACSIS EHR v. R. - TCC: SREDs for creation of health info system in Belize

ACSIS EHR v. R. - TCC:  SREDs for creation of health info system in Belize

ACSIS EHR (Electronic Health Record) Inc. v. The Queen (October 27, 2015 – 2015 TCC 263, Campbell J.).

Précis:   The taxpayer designed and implemented a nation-wide health information system for the nation of Belize.  It claimed SRED credits which the Minister denied on the basis that the work “did not resolve any scientific or technical uncertainties” (para. [5]).

The Court found that in fact that the appellant engaged in “systematic investigation and undertook tests to resolve the technological uncertainties” (para. [40]).  As a result the appeals were allowed, with costs.

Decision:   The appellant was a Canadian tech company hired by the nation of Belize to implement a national health information system.  This case concerned the Minister’s decision to deny SRED credits on the basis that the work done did not involve scientific or technical uncertainties:

[2]             The Appellant is a company based in Fredericton, New Brunswick. Its business activities focus on the development of health information systems, resource management software and process improvement consulting. This includes the creation of software applications for the centralized management of national, regional and local healthcare sectors.

[3]             In 2004, Belize sought the assistance of the Appellant in implementing a national healthcare system in that country. The parties executed a contract on October 28, 2004. After commencing the project, the Appellant encountered a number of challenges in Belize, including poor telecommunication infrastructure. As a result of these challenges, the Appellant was unable to utilize its Electronic Health Record (“EHR”) solution to address the project’s goals, primarily because of the inability of the limited infrastructure in Belize to support this EHR technology. Consequently, the Appellant was unable to link the various health institutions, including health care centres, rural clinics, labs and pharmacies for the comprehensive exchange of data, as required pursuant to the terms of the project contract.

[4]             According to the Appellant, it engaged in organized experimental and developmental activities to establish a new technology, the Accesstec Capacity Strengthening Information System, in order to adapt its existing EHR technology in an attempt to overcome the infrastructure challenges. The Appellant contends that this new technology represents a significant advancement for which it claims that it incurred SR&ED expenditures, consisting primarily of wages.

[5]             The Minister of National Revenue (the “Minister”) denied the Appellant’s claims for both taxation years because the work performed did not meet the definition of “SR&ED” pursuant to subsection 248(1) of the Income Tax Act (the Act”) as the activities did not resolve any scientific or technical uncertainties.

The Court did not accept the Minister’s position:

[27]        Based on the facts before me, I am satisfied that the Appellant’s activities constituted SR&ED within the meaning of subsection 248(1) of the Act, that expenditures were properly incurred and claimed in the 2005 and 2006 taxation years and that corresponding refundable ITCs were properly claimed in respect of the Belize project.

[28]        When the Appellant decided to proceed with the Belize project, rather than abandon it, the project necessitated consistent and dependable service despite the persistent and irregular connectivity issues encountered in Belize. Despite the constant interruptions in network service, each individual node had to function autonomously while maintaining the integrity of each patient’s medical data in the absence of replicated data. In addition, the Appellant had to focus on protecting critical data where potential conflicts could arise when data from another node had been significantly delayed. The technology that the Appellant was required to develop was meant to support and accommodate the applications that would preserve, transmit and store critical medical data with certainty and predictability in an unstable network environment.

[31]        Although the Respondent argued that some of the uncertainties were not technological and that possible available solutions were restricted by budgetary constraints and licensing considerations, the evidence of the Appellant’s witnesses, which was not challenged on cross-examination, demonstrated that it was impossible to resolve the uncertainties, encountered by the Appellant, through routine engineering or standard procedures. The Appellant had no reasonable expectation of success with the Belize project unless new knowledge could be obtained. According to the evidence, the Appellant developed a new approach by creating a multi-write database replication system. There is no doubt that this system was innovative, as evidenced by the accolades given to the Appellant’s comprehensive HIS in the Vital Wave Consulting report of May, 2009 (Exhibit A-1, Tab 18, Health Information Systems in Developing Countries). This report, commissioned by the Bill & Melinda Gates Foundation, completed a landscape analysis of the health information systems in developing countries and concluded that Belize’s innovative HIS system is perhaps the most comprehensive system in the world. However, the “result achieved” for SR&ED purposes is not a measure of a technological uncertainty. As noted in Northwest Hydraulic, the inability to achieve an objective invalidates neither the hypotheses formulated nor the methods used. I am satisfied, based on the evidence, that the project problems and uncertainties could not be reasonably resolved using routine engineering or standard procedures, as the Respondent suggested. The first criterion of technological risk or uncertainty, as enunciated in Northwest Hydraulic, has been satisfied.

[32]        I am also satisfied, in respect to the second criterion, that the Appellant formulated and tested hypotheses to address the technological uncertainties it encountered in the Belize project. Mr. Rutter testified that the approach adopted by the Appellant was in accordance with planned testing that included several levels of trials or tests being conducted. Trials that were conducted were distinguished from a trial and error approach. Mr. Kilburn testified that his journal notes, whiteboard photos and computer script notes corroborate his testimony that he and his colleagues engaged in planned testing. On cross-examination, Mr. Rutter stated that the Appellant did not “measure these connectivity issues”, except through observation and experience, because the Appellant had no control over the private company in Belize that was in charge of connectivity in that country. When asked how the Appellant measured effectiveness, Mr. Rutter testified that this measurement related more to the integrity of the data and the accuracy with which it reached its destination despite connectivity challenges:

… the record had to be what was sent. It had to be the same. So what was sent is what was received.

The test was, is it the same information? So, did – what was it – at the node, is that what ended up on the master?

(Transcript, April 8, 2015, page 106)               

As a result the appeals were allowed, with costs.