October 07, 2011

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

Federal Court of Appeal
2002 DTC 6740
December 13, 2001

(Court File No. A-601-00.)

Deductions ? Scientific research and experimental development (“SR&ED”) expenses ? Corporate taxpayer carrying on the business of marketing tickets in government-sponsored lotteries to customers in many parts of the world ? Taxpayer creating application software for use in its business ? Whether the creation and development of such software constituting SR&ED 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 lotteries to customers in many parts of the world. The needs of the taxpayer’s business were such that it could not buy ready-made software for its computer system. The taxpayer, however, was successful in developing customized computer application software, referred to as the International Distributed Lottery System (“DLS”). In assessing the taxpayer for 1991 to 1995, the Minister assumed that the creation of the said software did not involve the conducting of SR&ED, and thus disallowed the current and capital SR&ED expense deductions which the taxpayer had claimed for those years in respect of such software creation. In dismissing the taxpayer’s appeal (2000 DTC 2372), the Tax Court of Canada concluded, in part, that the software developed by the taxpayer did not constitute SR&ED within the meaning of Regulation 2900. The taxpayer appealed to the Federal Court of Appeal, arguing that the Tax Court judge had improperly relied on a test articulated by the Minister’s witness, and that the evidence of that witness should not have been preferred over the evidence of the taxpayer’s witness in any event.

Held: The taxpayer’s appeal was dismissed. The taxpayer had not retained any documentation which might have assisted in discharging its onus to disprove the Minister’s assumptions. Nor did the taxpayer choose to call as a witness any person directly and personally involved in its software development process. Instead, it called an expert who was similarly handicapped by a lack of reliable documentation. Hence, it was certainly arguable that an adverse inference could have been drawn that the calling by the taxpayer of its project manager (or some similarly placed person) would not have been helpful to it. All of that having been said, the Tax Court judge balanced and exhaustively reviewed the expert evidence adduced by both parties, and, as a result, preferred the expert evidence adduced by the Minister, for the detailed reasons which he (i.e., the Tax Court judge) gave. Nor did he err in the conclusion which he reached. He referred to the five criteria for determining whether a particular activity constitutes SR&ED which were set out by Bowman, T.C.C.J. in Northwest Hydraulic Consultants Limited v. The Queen (98 DTC 1839) (T.C.C.). He was mindful of these criteria in reaching his conclusions. In the end, there was no basis for concluding that the Tax Court judge did not have regard to all of the evidence and its reliability in determining whether the work claimed by the taxpayer as SR&ED met the test prescribed by Regulation 2900, as set forth in the jurisprudence. As a result, the taxpayer was not entitled to the SR&ED expense deductions claimed. The Minister’s assessments were affirmed accordingly.