http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108663/index.do
Hypercube Inc. v. The Queen (March 17, 2015 – 2015 TCC 65, Lamarre ACJ.).
Précis: Hypercube Inc. claimed SRED expenses of $28,800 for the development of a program used to analyze web sites to find weaknesses and optimize performance. The Court rejected the claim on the basis that the work done was all based on existing technology and did not go beyond routine engineering and standard procedures.
Decision: Hypercube claimed SRED expenses in connection with the development of a web site analysis tool:
[10] The SR&ED expenditures claimed by the appellant are the wages paid to the employees who took part in developing the program. However, the logs showing the hours worked record only Mr. Villeneuve’s work (Tab 8 and Exhibit I 1).
[11] Mr. Villeneuve stated that he began thinking about this project in 2010 and discussed it with the appellant’s other employees around the beginning of 2012. The project was the product of a reconsideration of the various programming tools available.
[12] Currently, when a programmer analyzes a Web site’s code to find weaknesses and optimize performance, the programmer analyzes the code manually, page by page. The appellant wanted to use the program to automate this analysis. Mr Villeneuve explained that the appellant’s goal was to develop a new technique to allow programmers to work more efficiently. The program was supposed to analyze the Web sites’ code quickly and help the programmers do their checks.
[13] The initial hypothesis on which the project was based, as Mr. Villeneuve mentioned in his testimony, was that if a new way of performing Internet diagnostics was adopted, significant effects in terms of technological advancement could be observed (transcript, page 15).
[14] With this hypothesis established, the appellant’s employees conducted research to determine whether there was an existing technology that could be used to carry out the project, or whether it was possible to achieve this by improving on existing technologies.
[15] Mr. Villeneuve claimed that no existing solution or technology could be used to test the hypothesis. This is why, he said, the appellant developed the program.
[16] Mr. Villeneuve explained that the program was based on a “crawler”. According to his explanations, a crawler is a computer program that reads a Web site’s source code. It is created by writing a computer program. The appellant therefore wrote a crawler as the first step in developing its program. On cross-examination, Mr. Villeneuve noted that crawlers are a commonly used tool in computer science (transcript, page 70).
The Court concluded that the work was not SRED since it was not beyond routine engineering:
[44] However, the appellant has not satisfied me that the technological uncertainties that it overcame could not have been removed by routine engineering. On the contrary, the evidence showed that the appellant used standard software development techniques to deal with the various difficulties it experienced.
[45] In my opinion, the appellant’s activities were generally accessible to competent professionals in the field. Mr. Villeneuve himself mentioned that a crawler is a commonly used tool in computing. Even if the crawler was developed to accomplish new actions, the evidence showed that the appellant used commercially available programming tools and existing computer languages.
[46] In my view, the testimonial evidence shows that all the difficulties described by the appellant were resolved in the end by using recognized programming techniques to modify the program’s code. The appellant confined itself to using available computer languages. In my opinion, the program’s development did not go beyond the limits of current technological standards. It seems to me that the solutions that the appellant used are standard techniques and not the product of a technological advancement. As Mr. Andria mentioned in his testimony, the programming problems that arose during the program’s development were normal ones.
[47] Although the appellant’s program could constitute an entirely new product, it was created using well-known techniques. Novelty or innovation in a product is not sufficient to illustrate technological advancement (Zeuter Development Corporation, supra, at paragraphs 23 and 24).
The appeal was accordingly dismissed.
TAGS: Income Tax Act, Tax Litigation, SRED Expenditures