ITC Invoice (20376525 Ontario) v. R. - TCC: Development of factoring software not SRED

ITC Invoice (20376525 Ontario) v. R. - TCC:  Development of factoring software not SRED

2037625 Ontario Inc. (ITC Invoice to Cash Inc.) v. The Queen (October 30, 2015 – 2015 TCC 269, Campbell J.).

Précis:   The taxpayer operated a factoring business.  In the course of that business it developed factoring software known as Factorsuite.  It claimed SRED credits in respect of the development cost of Factorsuite and CRA denied the credits.  It appealed to the Tax Court.  The Court held that the Factorsuite project did not amount to SRED because it did not entail a sufficient degree of uncertainty.  They were retooling off the shelf programs.

The appeal was dismissed but since it was an informal procedure appeal there was no order as to costs.

Decision:   This was a classical case of a taxpayer over-reaching in an SRED claim:

[30]        I will review each individual uncertainty separately. In respect to the first claimed uncertainty, the attempt to understand the structure of data belonging to a third party software vendor in order to have it work in conjunction with its own Factorsuite application, Mr. Caicedo testified that the processes of data mining and data mapping were used to determine the data in the database and its structure. Mr. Sarmiento described the technique that was utilized as process mining, which included the examination of event logs in order to determine how a program was functioning. Although Mr. Sarmiento referred to an article, first published in 2011 on process mining, the Appellant did not produce the article. The Appellant’s agent, in his submissions, also indicated that the technique of process mining may have been available as early as 2008. According to Mr. Pellissero, the technique existed in 2007 and information on it was available. There can be no technological uncertainty if the resolution of a problem is reasonably predictable using already available standard procedures or routine engineering (Northwest Hydraulic, at paragraph 16). The Appellant failed to produce sufficient evidence to support its contention that uncertainty existed in the Factorsoft and Factorsuite interoperability and failed to adduce evidence to specifically identify the work that would have been conducted to accomplish such a process. The third party programs were running without apparent problems and as Mr. Pellissero explained: “… it … tells us that the programming language is coded syntactically correct, the underlying syntax in the program is good, the database was generated according to what the database is doing, according to its limits and constraints.” (Transcript, April 21, 2015, page 77). In fact, it is unclear from the evidence what the precise state of the available knowledge was at this time. Based on the facts, I would conclude that the techniques used, to determine what information or data was contained in the unknown programs and how it could eventually interact with the Appellant’s own Factorsuite program, were the available standard procedures routinely used by a competent programmer.

[31]        With respect to the second uncertainty alleged by the Appellant, the fax sending component of the program, it would appear from the evidence that programs, designed to generate client reports that were sent efficiently and in correct order, are routine and standard procedural work that competent computer programmers perform. The Appellant’s solution involved the examination of the data that the faxes would contain and then a procedure was written and a holding area created where the faxes could be sent in the correct order. The evidence does not support that this procedure involved a technological uncertainty.

[32]        With respect to the third uncertainty, the requirement to find a system that would produce client reports in real time, the Appellant failed to convince me that the procedures to process reports, cache them and refresh them so that those reports that were used more frequently could be accessed more readily, were anything more than routine procedure for a competent programmer.

Moreover the research work was not rigourous or well documented:

[39]        The Appellant’s agent, Mr. Louie, attempted to distinguish “process mining” from “technique”. He referenced Mr. Sarmiento’s evidence in this respect, in which he stated that process mining was a discipline involving a methodology used for research as opposed to a technique, which is presumed to be a known. Whether process mining is, in fact, a methodology or a technique, the integration of the programs or the exchange of information between one program and another necessarily includes some knowledge that was already a known quantity and, therefore, there were no SR&ED activities because there was a product advancement only, which is insufficient to qualify as SR&ED activities.

[40]        In addition, the Appellant has not met the requirement of showing that hypotheses, aimed at reducing or eliminating the alleged technological uncertainties, were specifically formulated and tested and that scientific investigation was conducted and procedures adopted in accordance with the scientific method. According to the Federal Court of Appeal in C.W. Agencies Inc. v Canada, 2001 FCA 393, 2002 DTC 6740, at paragraph 17, this requires that “… a detailed record of the hypotheses tested, and results [achieved was] kept as the work progressed”. There is no evidence that the Appellant adopted this approach nor was there any reasonable explanation offered for its failure to do so and, on this basis also, the appeal cannot succeed. Both Mr. Caicedo and Mr. Sarmiento testified that the Appellant undertook multiple hypotheses to make the differing programs interoperable. For example, in respect to the second uncertainty concerning the faxing problems, Mr. Caicedo explained that the hypothesis was whether the Appellant could create a plain text file containing all of the information that could be manipulated in the manner the Appellant required. However, none of the Appellant’s hypotheses, that were specifically aimed at reducing or eliminating the alleged uncertainties, were reflective of the scientific research method and very little supporting documentation to substantiate the testing was introduced into evidence. I was provided no evidence of specifics respecting the number of tests performed or the nature of the experiments, the modifications or the results. In fact, some of the documentation that was provided included handwritten notes, which were not in English, and no translation was included.

[41]        In conclusion, the work performed by the Appellant on the Factorsuite Project was not SR&ED, as defined in subsection 248(1) of the Act, and the Minister correctly disallowed the Appellant’s SR&ED claim. Consequently, the expenditures claimed by the Appellant in engaging in this Project are not qualified expenditures pursuant to subsection 127(9) and ITCs were properly disallowed in respect to the 2008 taxation year.

The appeal was dismissed but since it was an informal procedure appeal there was no order as to costs.