http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/110146/index.do
Highweb & Page Group Inc. v. The Queen (June 8, 2015 – 2015 TCC 137, Bocock J.).
Précis: The appellant was in the business of marketing and design of digital software and web-based accessibility systems. The dispute concerned SRED expenditures in its 2007 and 2008 taxation years. The Minister denied the bulk of these claims. The Court reviewed the claims against the standards of technological uncertainty and technological advancement and found them lacking. Similarly there was no clear evidence of a research hypothesis which the taxpayer was pursuing. Finally the record keeping of the taxpayer was simply insufficient to support its claim.
The appeal was dismissed (without costs as the appellant had elected to proceed under the Informal Procedure).
Decision: This decision turns on the Minister’s denial of SRED expenditures in 2007 and 2008:
[1] The Appellant, Highweb & Page Group Inc. (“HPGI”), appeals the Minister of National Revenue’s (the “Minister”) disallowance of certain scientific research and experimental development (“SR-ED”) expenditures. The sum of $25,200 was disallowed in the 2007 taxation year (Phase I) and $37,975 in the 2008 taxation year (Phase II). The Minister did allow SR-ED investment tax credits (“ITCs”) of $2,704 in the 2008 taxation year (“STA2 - Phase II”).
[2] HPGI appeals on the basis that it undertook technological investigation or experiments to resolve identified technological uncertainties. Specifically, HPGI asserts it conducted the required systematic investigation which yielded 6 technological advancements in Phase I and a total of 4 technological advancements in Phase II, 3 more than the 1 allowed by the Minister (STA2 – Phase II). There is no dispute as to the amounts, dates, or other criteria.
[3] Therefore the one issue before the Court is: does the work undertaken by the Appellant beyond STA2 – Phase II constitute SR-ED?
Where the taxpayer primarily failed was on the questions of technological uncertainty and advancement:
[18] For technological uncertainty to exist there must be a gap in knowledge. It was described by the Appellant’s agent as “a missing piece of a jigsaw puzzle”. It cannot be that the knowledge exists, but is merely unknown to an ITC claimant, or that the gap is soluble by the application of another product through usual techniques applied by, in this case, skilled and experienced software developers. Simply applying such skills with generally available knowledge and/or other products is not scientific or experimental development. It is product research and development. The fact that readily available programs such as J# and JavaScript formed the bedrock of such undertakings suggests the uncertainty was not of a technological unknown, in the sense of a knowledge gap, but rather that of selective trial and procedural sequencing errors: knowing which available products applied in the correct sequence utilizing routine, standard or customary modifications would accomplish the best enhancement to the existing, but outdated, iFactum software.
[19] This point is further demonstrated by the SR-ED ITCs allowed by the Minister in STA2 - Phase II. Considerably more recordal information was generated and referable to this technological uncertainty, technological experiment, and technological advancement. Further, there was a resolution of identified technological uncertainties within the differential encoding of .NET and Java platforms. Individual testing and modification, duly recorded, modified the functions in phased protocols. The STA2 – Phase II undertaking generated learning around the uncertainty of reconciling data-type mapping of QueryBeans. It had been incompatible. A technique was devised to discover a reconciliation of shared data types between .NET and JavaScript based platforms. The knowledge was not gained in the positive achievement of the postulate or hypothesis, but in learning an outcome in the context of the uncertainty proved by a negative result. No other detailed technological experiment or technological advancement of another claimed technological advancement in either of Phase I or Phase II was so defined, examined, analyzed, and/or resolved. HPGI’s agent suggested that Information Circular 86-4R3 provided assistance where, at first glance, technological uncertainty might not exist. He submitted that “system uncertainty” existed. It required “work on combining technologies, devices, and/or processes” since “non-trivial combinations of established (well-known) technologies and principles for their integration carry a major element” of system uncertainty. This is factually not apparent from the evidence. The Appellant did not tender sufficient concurrent documentation or records to show that the challenge of system and internet incompatibility (beyond STA2 - Phase II) was analyzed sufficiently to establish a need for technological experiments or investigation to solve the alleged technological gap related to iFactum.
Similarly, the taxpayer advanced no clear evidence of a research hypothesis:
[21] Evidence was not offered to indicate that the work undertaken was, on balance, more than HPGI’s core business of software design and modification of its existing product. The program, iFactum, required usual and customary updating, a task prolific in the industry. The evidence did not show that the work undertaken went beyond applying standard practices and procedures, albeit with newly released or updated, third-party products. Little evidence suggested such work was more than enhancing the iFactum product, with existing, but newly released products through computer programming manipulated by the skills of a person suitably trained: C.W. Agencies Inc. v. Canada, 2002 DTC 6740 at paragraph 18. On balance, based upon the evidence, the enhancement of iFactum was the deployment of steps constituting the application of existing products and the debugging of code deficiencies and incompatibilities between iFactum and other platforms by using usual software design techniques. These products and skills were applied to iFactum to commercially enhance its marketability.
Finally, the taxpayer had simply not maintained adequate records to support its claims:
[22] Quite apart from anything else, the evidence of having followed scientific procedures was simply not sufficient in the disallowed technological investigation, experiments, and advancements. This was demonstrated by Mr. Sarmiento’s need at the hearing to describe the technological uncertainty, technological advancement, and work undertaken not through any cogent, recognizable or organized technical records generated by HPGI, but rather by extensive, and almost exclusive reference in his evidence-in-chief to the CRA Technical Review Report. The Technical Review Report was helpful because it referenced Mr. Sarmiento’s commentary at interviews during the CRA audit and review phase which, notably, occurred after the work. This is not a suitable substitute for contemporaneous record keeping. Nothing approaching similar records or documents created by HPGI at the time the SR-ED work was undertaken was before the Court. While evidence of the outcome is important, it is critical to technological advancement that the rigours of adherence to the scientific and experimental method be kept on a detailed and concurrent basis with the conduct of the experiments. Since a negative answer to the hypothesis is a more frequent outcome and frequently as helpful in advancing technological knowledge, detailed step-by-step logging, analysis, and measurement is a mandatory requirement, not an optional addendum. It is the roadmap. If one loses the way and failure results, retracing through these accurate records provides one with the deductive process for developing a different direction, speed or mode to create, locate, size, and arrange the “missing piece in the puzzle”. The “only reliable method of demonstrating that scientific research was undertaken in a systematic fashion is to produce documentary evidence”: Zeuter Development at paragraph 28. Factually, that necessary recordal process was not present in this appeal.
As a result the appeal was dismissed (without costs as the appellant had elected to proceed under the Informal Procedure).