http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/127183/index.do
Emotion Picture Studios Inc. v. The Queen (December 11, 2015 – 2015 TCC 323, C. Miller J.).
Précis: The taxpayer claimed SRED expenses in relation to research to improve search results on Google. The Court held that the taxpayer was conducting “thorough, extensive but routine research” [para. 10] that did not amount to SRED.
The appeal, which was an informal procedure appeal, was dismissed without costs.
Decision: The nature of the research was described by the taxpayer’s principal, Mr. Wilson:
[5] Emotion produced two witnesses at trial, the chief executive officer, Mr. Scott Wilson and a data scientist, Mr. Moodley. Mr. Wilson emphasized at the outset that in the world of big data, the internet world, there is considerable uncertainty. In the area that Emotion is interested in, optimizing the efficiencies of search engines, the very fact that only one trillion of thirty trillion pages of information is ever accessed glaringly points out the uncertainty with respect to search engines generally. In the Appeal Emotion summarized the technological uncertainties as follows:
The technological uncertainty proposed in this work, is to identify and evaluate the contributing variables greater than 200 used in Google algorithms to structure the data better for indexing the pages in accordance with the key word that has been searched.
The Court accepted the taxpayer’s evidence but concluded that it did not meet the thresholds of uncertainty and technological advancement necessary to qualify as SRED:
[9] I have particular concern with respect to two areas of the usual SRED analysis: first, the issue of uncertainties, and second, the identification of a technological advancement. While Mr. Wilson claims in sweeping terms there are unlimited uncertainties when dealing with the internet generally, I do not find this as an adequate response to clearly establishing the particular uncertainties addressed by Emotion’s research. I glean from Mr. Wilson’s testimony that the particular uncertainty was how on-page and off-page variables interrelate to determine ranking and how to structure data to improve ranking. Certainly, I would consider this in the nature of applied research, but is this type of uncertainty one that, citing Northwest Hydraulics, “cannot be removed by routine engineering or standard procedures”. With the greatest respect to Mr. Wilson whose enthusiasm for and considerable knowledge in the research carried on by Emotion was evident, I have not been convinced that the work was other than routine engineering or standard procedures. The experiments of submitting several different versions of websites to determine the significance of variables relies on existing technology in a routine manner. As explained in Northwest Hydraulics, “routine” describes techniques, procedures and data generally available to competent professionals in the field. And that is how I interpret what Emotion did.
[10] The second area of concern is the question of identifying the technological advancement. Here, the advancement would be the determination of algorithms that relate variables for purposes of ranking sites. I entertain no doubt this is complicated given the hundreds or thousands of variables, but I fail to see how it is a scientific advancement to figure this out. It strikes me more of solving an equation someone has already solved, rather than coming up with a new proof. Or using the well-worn mousetrap analogy, it is not creating a better mousetrap, just figuring out why mice get caught in existing traps (location, nature of enticement etc.). I simply do not see the technological advancement. I see thorough, extensive but routine research leading to a practical application for example, for those who rely on the internet to market their product. I see neither the evolution of computer hardware or software that I could label as a technological advancement that would justify qualifying Emotion’s expenditures as SRED.
The appeal was dismissed, but without costs since the case was an informal procedure appeal.