October 07, 2011

Knowledge Systems Incorporated (Appellant) v. Her Majesty the Queen (Respondent)

2000 DTC 2353
Tax Court of Canada
July 26, 2000

(Court File No. 98-1663(IT)G.)

Scientific research and experimental development (“SR&ED”) activities — Corporate taxpayer engaged in a project based on the hypothesis that it should be possible to link a computer user’s human intelligence and experiences with the memory, storage, retrieval, speed and indexing capabilities of a computer — Whether such project constituting SR&ED, applying the tests formulated in Northwest Hydraulic Consultants Limited v. The Queen — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?37 and 248(1) — Income Tax Regulations, s.?2900(1).

The corporate taxpayer was engaged in a project (“the KDS project”). The hypothesis at the root of the KDS project was that it should be possible to link a computer user’s human intelligence and experiences with the memory, storage, retrieval, speed and indexing capabilities of a computer. The Minister assessed the taxpayer for 1991 through 1996, on the basis that its KDS project did not constitute SR&ED within the meaning of section 37 and subsection 248(1) of the Act. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was dismissed. Applying the tests formulated by Bowman, T.C.C.J. in Northwest Hydraulic Consultants Limited v. The Queen (98 DTC 1839), it could be seen that the KDS project did not involve SR&ED. There was no technological risk or uncertainty that could not be removed by routine engineering. Hypotheses were not formed which were specifically aimed at reducing or eliminating this uncertainty. The taxpayer’s procedures were not in accordance with the scientific method. The process did not result in a technological advance. Nor was the recordkeeping detailed and adequate. It was also to be observed that, although SR&ED does not necessarily have to be successful, it cannot go on forever, whereas, after 10 years, the taxpayer’s project was still not capable of being tested by world-class computer scientists. In light of all of the foregoing, the Minister’s assessments were affirmed.