October 07, 2011

C.W. Agencies Inc. (Appellant) v. Her Majesty the Queen (Respondent)

2000 DTC 2372
Tax Court of Canada
August 30, 2000

(Court File No. 98-1324(IT)G.)

Deductions — Scientific Research and Experimental Development (“SRED”) expenses — Corporate taxpayer carrying on the business of marketing tickets in government sponsored lottery schemes to customers throughout the world (save Canada) — Taxpayer creating application software for use in its business — Whether the creation and development of such software constituting SRED activity — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?37(1)(a) and 37(1)(b) — Income Tax Regulations, s.?2900(1).

The corporate taxpayer carried on the business of marketing tickets in government sponsored lottery schemes to customers throughout the world (save Canada). Its profits were generated by service fees charged to its customers. From 1990 to 1995, it created application software for use in its business. In the course of creating such software (known as the International Distributed Lottery System or “IDLS”), the taxpayer had utilized a computer platform based on object oriented technology. It had also utilized a CASE tool, and rapid prototype methodology. Object-oriented technology constitutes technology bringing together data structures and functions to create objects capable of further use. The Minister assessed the taxpayer for 1991 to 1995, on the basis that the creation of the said software did not involve the conducting of SRED. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was dismissed. In Northwest Hydraulic Consultants Limited v. The Queen (98 DTC 1839), the Tax Court identified three basic criteria which apply in the determination of whether SRED has taken place in a particular case. There must first be technological uncertainty. Next, there must be scientific or technological content. Finally, there must be technological advancement. In this case, oddly enough, all of the evidence relating to what the taxpayer had done in designing and writing the software in issue was given, not by a person directly and personally involved in the process, but by an expert, S. In addition, S was compelled by the absence of a detailed project management plan, to examine the results of the taxpayer’s work, and to arrive at conclusions which he thought must have been faced by the taxpayer. In deciding what must have happened, based on conjecture with regard to “the numerous uncertainties in this project”, S arrived at conclusions not justified by the evidence. Conversely, the Minister’s expert, T, took a more prudent and defensible stance, when coming to the conclusion, inter alia, that a significant amount of inference would be required in order to infer some sort of an advance. Furthermore, T said that he had not seen anything in the documentation which would have been unknown in the technological field. No doubt the IDLS resulting from the taxpayer’s work was large and complex. But mere size and complexity do not support a conclusion that the work was anything more than routine information systems development. T’s evidence, moreover, was to be preferred to that of S. To summarize, T could not be said to have ignored the taxpayer’s context in arriving at his conclusion that “the project used commercially available products and services, and current information systems development methodologies and practices throughout”. As a result, the work involved did not constitute SRED. The Minister’s assessments were affirmed accordingly.