Béton mobile du Québec Inc. v. The Queen

Béton mobile du Québec Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-12-11
Neutral citation
2019 TCC 278
File numbers
2015-3425(IT)G, 2016-4491(IT)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Income Tax Act
Decision Content
Dockets: 2015-3425(IT)G
2016-4491(IT)G
BETWEEN:
BÉTON MOBILE DU QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeals heard on common evidence
on April 8, 9, 10, 11 and 12, and May 29, 30 and 31, 2019,
at Montreal, Quebec.
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the appellant:
Me Maude Piché Me Olivier Verdon
Counsel for the respondent:
Anne Poirier
JUDGMENT
In accordance with the attached reasons for judgment, the appeals against the reassessments made under the Income Tax Act (the Act) for the tax years ending on January 31, 2010, January 31, 2011, and January 31, 2012, are allowed. The reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the activities carried out by the appellant under projects B‑10‑18, B‑11‑04, B‑11‑07, B‑12‑01, B‑12‑03 and B‑12‑07 fall under Scientific Research and Experimental Development (SR&ED) activities and that the following amounts are deductible as current expenditures under section 37 of the Act and expenditures that qualify for investment tax credits (ITCs) under subsection 127(5) of the Act:
i) For the tax year ending January 31, 2010: $3,521 for salaries, $427 for materials and $360 for subcontractor fees;
ii) For the tax year ending January 31, 2011: $37,668 for salaries, $2,520 for materials and $3,425 for subcontractor fees;
iii) For the tax year ending January 31, 2012: $44,192 for salaries, $4,433 for materials and $9,204 for subcontractor fees;
No costs are awarded.
Signed at Ottawa, Canada, this 11th day of December 2019.
“Dominique Lafleur”
Lafleur J.
Translation certified true
on this 4th day of March 2020.
François Brunet, Revisor
TABLE OF CONTENTS
A. EVIDENCE – CONTEXT OF THE PROJECTS 3
1) Business carried on by BMQ 3
2) The concrete 4
3) The research 5
B. ISSUES 8
C. THE ACT AND CASE LAW 8
1) SR&ED activities according to the Act 9
1.1 Technological or scientific uncertainty 12
1.2 Hypotheses 13
1.3 Scientific method 13
1.4 Technological or scientific advancement 14
1.5 Detailed record 15
2) SR&ED expenditures deductible under section 37 and expenditures that qualify for ITCs 15
D. THE PROJECTS 18
1) Project B-10-03: Determining moisture in latex concrete 18
1.1 Project description 18
1.2 Positions of the parties 19
1.3 Discussion 20
a) Qualification of the project 20
b) The expenditures 21
2) Project B‑10‑05: Development of a self-placing Ter‑C3concrete 22
2.1 Project description 22
2.2 Positions of the parties 24
2.3 Discussion 24
a) Qualification of the project 24
b) The expenditures 26
3) Project B-10-07: Characterization of Ter-C3 cement 28
3.1 Project description 28
3.2 Positions of the parties 30
3.3 Discussion 30
a) Qualification of the project 30
b) The expenditures 32
4) Project B‑10‑08: Development of a Type V Ter‑C3concrete 33
4.1 Project description 33
4.2 Positions of the parties 35
4.3 Discussion 35
a) Qualification of the project 35
b) The expenditures 37
5) Project B‑10‑09: Characterization of a new‑generation plasticizer 38
5.1 Project description 38
5.2 Positions of the parties 39
5.3 Discussion 39
a) Qualification of the project 39
b) The expenditures 41
6) Project B­10­12: Development of a no‑fines concrete with a high void content 41
6.1 Project description 41
6.2 Position of the parties 43
6.3 Discussion 44
a) Qualification of the project 44
b) The expenditures 46
7) Project B‑10‑18: Develop a light self-placing mortar for mobile concrete mixer 48
7.1 Project description 48
7.2 Position of the parties 50
7.3 Discussion 50
a) Qualification of the project 50
b) The expenditures 52
8) Project B-11-01: Permeability study on chlorine ions and durability with various pozzolanic add‑ons and cements 53
8.1 Project description 53
8.2 Positions of the parties 54
8.3 Discussion 55
a) Qualification of the project 55
b) The expenditures 57
9) Project B-11-04: Analysis of the impact of binders and admixtures on self‑placing concrete performance 59
9.1 Project description 59
9.2 Positions of the parties 60
9.3 Discussion 60
a) Qualification of the project 60
b) The expenditures 62
10) Project B-11-07: Develop a quick‑setting mortar for installation in a marine environment 64
10.1 Project description 64
10.2 Positions of the parties 65
10.3 Discussion 65
a) Qualification of the project 65
b) The expenditures 67
11) Project B-12-01: Development of quick-setting concrete without latex 68
11.1 Project description 68
11.2 Positions of the parties 70
11.3 Discussion 70
a) Qualification of the project 70
b) The expenditures 71
12) Project B-12-02: Improvement of quick-setting self-placing concrete 73
12.1 Project description 73
12.2 Positions of the parties 74
12.3 Discussion 74
a) Qualification of the project 74
b) The expenditures 76
13) Project‑B‑12‑03: Development of quick‑setting concrete topping without latex 77
13.1 Project description 77
13.2 Positions of the parties 79
13.3 Discussion 80
a) Qualification of the project 80
b) The expenditures 81
14) Project B‑12‑07: Development of a repair product for roller‑compacted concrete 83
14.1 Project description 83
14.2 Positions of the parties 84
14.3 Discussion 85
a) Qualification of the project 85
b) The expenditures 86
E. CONCLUSION 88
SCHEDULE A 1
Income Tax Act, R.S.C. 1985, c. 1 (5th supp.) 1
Paragraphs 37(1)(a) and (b), subparagraph 37(1)(b)(i) and subclause 37(8)(a)(ii)(A)III and clause 37(8)(a)(ii)(B) 1
Subsection 127(5) 3
Subsection 127(9) 3
Income Tax Rules, C.R.C. c. 945 5
Rule 2900(4) 5
ANNEXE A 6
Loi de l’impôt sur le revenu, L.R.C. 1985, ch. 1 (5e suppl.) 6
Alinéas 37(1)a) et b), sous-alinéa 37(1)b)(i) et subdivision 37(8)a)(ii)(A)III et division 37(8)a)(ii)(B) 6
Paragraphe 127(5) 8
Paragraphe 127(9) 8
Règlement de l’impôt sur le revenu, C.R.C., ch. 945 10
Paragraphe 2900(4) 10
Citation: 2019 TCC 278
Date: 20191211
Dockets: 2015-3425(IT)G
2016-4491(IT)G
BETWEEN:
BÉTON MOBILE DU QUÉBEC INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lafleur J.
[1] Béton Mobile du Québec inc. (“BMQ” or the “appellant”) is appealing against the reassessments made by the Minister of National Revenue (the Minister) under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended) (the Act), for the tax years ending on January 31, 2010, (“2010 tax year”), January 31, 2011 (“2011 tax year”) and January 31, 2012 (“2012 tax year”). The appeals for all the tax years at issue were heard on common evidence.
[2] In making these reassessments, the Minister refused to consider the activities exercised by BMQ under certain projects as scientific research and experimental development (SR&ED), refused to acknowledge the deductibility of the amounts BMQ deducted as SR&ED expenditures under section 37 of the Act and refused to allow the related investment tax credit (ITC). The deductibility of BMQ’s expenditures beyond those under section 37 of the Act is not at issue in these appeals.
[3] As regards tax year 2010, the parties agree that SR&ED qualification of activities carried out by BMQ as part of seven projects is at issue (namely, projects B‑10‑03, B‑10‑05, B‑10‑07, B‑10‑08, B‑10‑09, B‑10‑12 and B‑10‑18). Similarly, the parties agreed that, had I found that the activities carried out as part of any of these seven projects could qualify as SR&ED, the deductibility under section 37 of the Act for expenditures for salaries, materials and subcontractor fees totalling $140,614, and whether they qualified for ITCs, is in dispute. The appeal was initially based on twenty projects, but the appellant agreed to withdraw their appeal regarding all projects aside from those indicated above and in regard to those related expenditures.
[4] As regards tax year 2011, the parties agree that the qualification of activities carried out by BMQ as SR&ED under three projects is at issue (namely, projects B‑11‑01, B‑11‑04 and B‑11‑07). Similarly, the parties agree that, were I to find that the activities carried out as part of any of these three projects could qualify as SR&ED, the deductibility under section 37 of the Act for expenditures for salaries, materials and subcontractor fees totalling $27,338, and whether they qualified for ITCs, is in dispute. The appeal was initially based on seven projects, but the appellant agreed to withdraw their appeal regarding all the projects aside from those indicated above and in regard to those related expenditures.
[5] As regards tax year 2012, the parties agree that the qualification of activities carried out by BMQ as SR&ED under four projects is at issue (namely, projects B‑12‑01, B‑12‑02, B‑12‑03 and B‑12‑07). Similarly, the parties agree that, were I to find that the activities carried out as part of any of these four projects could qualify as SR&ED, the deductibility under section 37 of the Act for expenditures for salaries, materials and subcontractor fees totalling $49,338, and whether they qualified for ITCs, is in dispute. The appeal was initially based on seven projects, but the appellant agreed to withdraw their appeal regarding all projects aside from those indicated above and in regard to those related expenditures.
[6] Jacques Bertrand testified at the hearing. He is an engineer and also one of the founders of BMQ; he was the President of BMQ during the relevant periods. Gérard Dubé, an engineer at BMQ, also testified at the hearing.
[7] Research and Technology Advisors (RTAs) from the Canada Revenue Agency (CRA), namely, Cédric Durban, who examined the 2010 tax year projects, and Karim Mimoune, who examined the 2011 and 2012 tax year projects, also testified. Mr. Durban earned a doctorate in mechanical engineering in 1997. Mr. Durban began his career as a private SR&ED consultant; he joined the CRA in 2009, where he held the position of RTA at the time of the audit. Mr. Mimoune holds a PhD in mechanical engineering and has worked at the CRA as an RTA since 2002.
[8] The financial auditor who participated in the audits of the three tax years at issue did not testify. Also, no expert witnesses were called to testify as part of these appeals.
[9] Unless otherwise indicated, any statutory provision referred to in these reasons is a provision of the Act.
A. EVIDENCE – CONTEXT OF THE PROJECTS
1) Business carried on by BMQ
[10] Mr. Bertrand is an engineer by training and has been practising this profession since 1967. For many years, he worked in the civil engineering field on major projects, such as James Bay and Churchill Falls, in which concrete was widely used. He also worked on the construction of the Montreal metro station.
[11] Mr. Bertrand founded BMQ in 1979 together with two partners. Mr. Bertrand testified that, at the time, there was a lack of businesses capable of meeting the demand for smaller projects, or even more specific projects or repairs.
[12] BMQ carries on its activities, as a concrete supplier, in the ready‑mix and specialized concrete domain. This company is a leader in this industry. Its clients are comprised of entrepreneurs who work for public or private worksites. The majority of BMQ’s business stems from public‑sector contracts. Usually, before a contract is awarded to BMQ, and particularly when a contract is awarded in the public sector, the concrete mix to be supplied to the entrepreneur by BMQ is pre-approved by the client and the entrepreneur, since the concrete must comply with the minimum industry standards.
[13] BMQ supplies freshly mixed concrete using mobile concrete mixers and not “drum concrete mixers” or classic concrete mixers, which allows it to offer innovative solutions and products to its clients to meet their various needs when completing and repairing concrete structures. A classic concrete mixer transports a concrete mix that was prepared at the factory and which must be delivered within an hour and a half after leaving the factory; otherwise, the concrete cannot be used for the purposes for which it was prepared. A mobile concrete mixer makes it possible to prepare a concrete mix directly at the site where the concrete must be poured, since the inputs are mixed on site by the concrete mixer. In addition, the mobile concrete mixer can deliver various types of concrete to different clients in a single trip, i.e., without having to return to the business premises in between deliveries, since the concrete mixer can be calibrated based on the different needs. Mr. Bertrand testified that 99% of the concrete market was comprised of classic concrete mixers and 1% by mobile concrete mixers.
[14] Mr. Dubé completed his technical training in civil engineering at the Ahuntsic Cégep in 1986 and earned a diploma in the same field in 1990 at the École de technologie supérieure. He began working at BMQ in February 1991. During the tax years at issue, Mr. Dubé handled special projects and was responsible for quality control at BMQ. He directly participated in research projects.
[15] In addition, during the tax years at issue, BMQ employed three or four people who were ACI (American Concrete Institute) technicians and who were authorized to carry out concrete tests in laboratory and worksite settings. BMQ also employed experienced mobile concrete mixer operators; these operators assisted the engineer in conducting tests and prepared the mixes. BMQ also employed interns—all civil engineering students who apparently obtained their ACI technician qualification through working at BMQ.
2) The concrete
[16] Concrete is comprised of several inputs: cement, sand, stone and potable water. Various admixtures can be added to it, such as entrained air, superplasticizers, colloidal agents and latex. These admixtures are added to give certain characteristics to the concrete, such as greater strength or enhanced durability.
[17] BMQ has receipts for approximately 300 concrete mixes and develops 15 to 20 of them per year. According to Mr. Bertrand, the possible combinations of the various inputs are extremely vast, as there are six or seven types of cement, 100 types of stones, a very high number of soil types and from 500 to 1,000 different admixtures. Moreover, the mix proportion of each of these inputs can be subject to variations.
[18] A concrete mix must comply with certain standards to be used for public work sites. For example, standard 3101 of the Ministère des Transports du Québec (MTQ) Cahier des charges et devis généraux must be met. According to Mr. Bertrand, even when inputs are long-known, industry needs change and, as a result, BMQ strives to create new mixes. Minimum standards also evolve. The 3101 standard is revised every year and the CSA standards (Canadian Standards Association) are revised every five years. For example, Mr. Bertrand explained that the compressive strength standards increased from 35 megapascals to 50 megapascals from the 1960s to today. Moreover, BMQ is not necessarily limited to complying with the standards and can strive to improve products even though they already comply with minimal standards. Each concrete mix must meet certain thresholds, and some twenty laboratory tests must be conducted for the mix to be approved for use at a public work site. These tests are designed, for example, to verify the compressive strength, scaling strength and chlorine ion permeability.
[19] In addition, other tests are done directly at a site before pouring the concrete. These tests are done when the concrete was still in the plastic state, that is, while it was still in liquid form. This consists of an air content test, a settlement test and a temperature test, which take approximately 10 minutes to complete, and a compression/density test, i.e., taking samples in cylinders, which requires approximately 15 minutes.
3) The research
[20] Mr. Bertrand testified that BMQ has been conducting research and development since the late 1980s, to create new products or to enhance existing products. New products are either developed at the request of clients, or because industry standards have changed. At times, a project may be initiated directly by the company, because it is always seeking to remain competitive. Both Mr. Bertrand and Mr. Dubé, as well as Mr. Fournier (BMQ’s master mechanic) can decide to implement a project.
[21] In terms of BMQ’s approach as part of various projects, Mr. Bertrand explained that the company regularly works with the MTQ and different universities. A project generally begins with bibliographic research and discussions with colleagues, people in the industry and university professors. However, the results of studies conducted in locations such as the United States cannot necessarily be transferred to Quebec, where winter must be taken into account to determine whether the concrete is durable; what also must be taken into account is the fact that the concrete mix is prepared in a mobile concrete mixer. The assumptions are then established: Mr. Bertrand’s assumptions are the characteristics sought in a mix, whereas, according to Mr. Dubé, they involve the standards to be met.
[22] BMQ then begins conducting tests and pursues the project as it seems promising following the initial tests. BMQ has a laboratory that includes equipment—such as a scale, cones of subsidence, an air meter, cylinders, a concrete washout container, a cold chamber and a small concrete mixer—to conduct certain tests. In the laboratory, the concrete is prepared in a stand‑alone concrete mixer. If a mix is satisfactory, the next requirement is to verify if the results are similar when the mix is prepared in a mobile concrete mixer, and whether the mix complies with the standards. To do this, BMQ uses its own concrete mixers. The durability tests, such as those for compressive strength, are carried out by independent laboratories.
[23] The direction the research takes will then depend on the desired characteristics. For example, a specific admixture may be considered at the start of the project to meet a certain standard. Mr. Dubé explained that, despite his expertise, he does not always find the solution to a problem on the first attempt. In addition, BMQ must redo the standard tests (air, settlement, temperature and density/compression) to verify whether the standards are still met each time an element is changed in the mix.
[24] Two steps must be successfully completed for BMQ to be satisfied with a mix. First, standard, the standard air, settlement, temperature and density/compression (cylinders) tests are done in the laboratory; if the results are acceptable, this is followed by chlorine ion permeability tests, scaling tests and freeze/thaw tests. If the first step of the results is not satisfactory, BMQ will try to determine the causes and reformulate the mix to then redo the tests.
[25] The second step consists of calibrating the mobile concrete mixer and pouring the mix to conduct the same tests again to ensure that the mixing in the mobile concrete mixer did not affect the characteristics of the mix. According to Mr. Dubé, three persons are required to conduct a test: one mobile concrete mixer operator, one technician qualified to take samples and himself. Mr. Dubé testified that approximately two to three hours are required to calibrate the mobile concrete mixer.
[26] The analysis of the results is largely carried out by Mr. Bertrand and Mr. Dubé. A meeting is called with the employees involved in a project, as well as the technicians who operate the mobile concrete mixer and take samples, when the results of tests are received by the company, because these employees may have an idea about the causes of a test failure and should be kept informed of the project’s evolution.
[27] A project ends either when the objective has been achieved, or when the objective has not been achieved and no solution is planned to overcome the problems.
[28] No report is prepared at the end of each project. However, Mr. Dubé completed form T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim (Form T661) and submitted it to the CRA. This form contains a description of the progress that BMQ tried to achieve, obstacles that had to be overcome and the steps taken to implement a project.
[29] Mr. Bertrand explained that, during the years at issue, he was directly involved in research activities related to the drafting, design and development of research plans and that he attended conferences relating to projects. He also directly participated in tests carried out in the field, in BMQ’s laboratory, as well as at universities.
[30] With regard to expenditures, Mr. Dubé testified that, in general, the date, time and a brief description of the tests conducted as part of this project are written in a notebook. Mr. Dubé admitted that the notes retained will not necessarily be understandable for another civil engineer, but he can understand them and consult his computer files to determine what was done in a project.
[31] Each month, the documents related to a project, such as handwritten notes and emails, are submitted by the employees to Mr. Dubé, who compiles the work hours spent on each project in the BMQ computer system. The only employees who fill out time sheets are those paid based on hours worked, which excludes Mr. Bertrand, Mr. Dubé and Mr. Fournier. To calculate the hours spent working on a research project, Mr. Bertrand indicates the time he has spent on a project and submits it to Mr. Dubé, who compiles the hours. Mr. Dubé testified at the hearing that he rounded the hours indicated on the time sheets.
[32] Mr. Dubé also compiles the subcontractor invoices and equipment use hours. When an invoice contains both commercial and research elements, he himself separates the two types of elements.
[33] Mr. Bertrand testified that BMQ does not invoice its clients for tests conducted when a mix is changed, even if this change is done due to a client request. According to Mr. Bertrand, BMQ only charges for the concrete actually delivered, not the work time spent on delivery. Test costs are assumed by BMQ, unless the MTQ decides, for example, to be involved in a project and to assume a portion of these expenses. BMQ also has a quality control system that it excludes from its SR&ED claims.
B. ISSUES
[34] The issue is whether the activities carried out by BMQ as part of the 14 projects at issue fall under SR&ED, within the meaning of the Act. If I find that the activities carried out by BMQ as part of any of the projects can qualify as SR&ED, the issue is then whether the expenditures incurred by BMQ as part of the projects are deductible as SR&ED under section 37, as well as expenditures that qualify for ITCs under subsection 127(5).
C. THE ACT AND THE CASE LAW
[35] To answer the questions at issue, the Act sets out a two-pronged test. The first step is to determine whether the activities meet the definition of SR&ED under subsection 248(1). If this is not the case, the review will end at this step. However, if it is concluded that the activities meet the definition of SR&ED, the deductibility of an expenditure must then be determined under section 37 for SR&ED activities, given the facts specific to each project, and qualification of this expenditure for ITCs (Zeuter Development Corporation v. The Queen, 2006 TCC 597, at paragraph 20, 2007 DTC 41 (Zeuter Development)).
[36] BMQ has the burden of establishing, on a balance of probabilities, that the activities it carried out meet the definition of SR&ED. In addition, BMQ has the burden of establishing that the expenditures it incurred are deductible as SR&ED activities under section 37 and that the expenditures qualify for ITCs.
1) SR&ED activities according to the Act
[37] SR&ED activities are defined as follows under subsection 248(1):
“scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is
« activités de recherche scientifique et de développement expérimental » Investigation ou recherche systéma-tique d’ordre scientifique ou technologique, effectuée par voie d’expérimentation ou d’analyse, c’est-à-dire :
a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
a) la recherche pure, à savoir les travaux entrepris pour l’avance-ment de la science sans aucune application pratique en vue;
(b) applied research, namely, work undertaken for the advance-ment of scientific knowledge with a specific practical application in view, or
b) la recherche appliquée, à savoir les travaux entrepris pour l’avance-ment de la science avec application pratique en vue;
(c) experimental development, namely, work undertaken for the purpose of achieving technolo-gical advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improve-ments thereto,
c) le développement expérimental, à savoir les travaux entrepris dans l’intérêt du progrès technologique en vue de la création de nouveaux matériaux, dispositifs, produits ou procédés ou de l’amélioration, même légère, de ceux qui existent.
and, in applying this definition in respect of a taxpayer, includes
Pour l’application de la présente définition à un contribuable, sont compris parmi les activités de recherche scientifique et de déve-loppement expérimental :
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematic-cal analysis, computer program-ming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,
d) les travaux entrepris par le contribuable ou pour son compte relativement aux travaux de génie, à la conception, à la recherche opérationnelle, à l’analyse mathé-matique, à la programmation infor-matique, à la collecte de données, aux essais et à la recherche psychologique, lorsque ces travaux sont proportionnels aux besoins des travaux visés aux alinéas a), b) ou c) qui sont entrepris au Canada par le contribuable ou pour son compte et servent à les appuyer directement.
but does not include work with respect to
Ne constituent pas des activités de recherche scientifique et de dévelop-pement expérimental les travaux relatifs aux activités suivantes :
(e) market research or sales promotion,
e) l’étude du marché et la promotion des ventes;
(f) quality control or routine testing of materials, devices, products or processes,
f) le contrôle de la qualité ou la mise à l’essai normale des matériaux, dispositifs, produits ou procédés;
(g) research in the social sciences or the humanities,
g) la recherche dans les sciences sociales ou humaines;
(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
h) la prospection, l’exploration et le forage fait en vue de la découverte de minéraux, de pétrole ou de gaz naturel et leur production;
(i) the commercial production of a new or improved material, device or product or the comer-cial use of a new or improved process,
i) la production commerciale d’un matériau, d’un dispositif ou d’un produit nouveau ou amélioré, et l’utilisation commerciale d’un pro-cédé nouveau ou amélioré;
(j) style changes, or
j) les modifications de style;
(k) routine data collection;
k) la collecte normale de données.
[Emphasis added.]
[38] In Northwest Hydraulic Consultants Ltd. v. Canada, [1998] TCJ. No. 340 (QL) (Northwest Hydraulic), Judge Bowman (as he then was) stated that legislation bearing on SR&ED tax incentives must be given “such fair, large and liberal construction and interpretation as best ensures the attainment of its objects,” which is to encourage scientific research in Canada (paragraph 11).
[39] In that decision, based on Information Circular 86‑4R3 dated May 24, 1994, published by the CRA (the Circular) and acknowledging that the Circular was a “useful and reliable” guide since it was the result of extensive consultations between government and the scientific community (paragraphs 13 and 15), Judge Bowman set out five criteria for determining whether work constitutes SR&ED activities (paragraph 16). These criteria, which must be met for the activities to qualify as SR&ED, were confirmed by the Federal Court of Appeal in R I S ­ Christie Ltd. v. Canada, [1998] FCJ No. 1890 (QL) (R I S ­ Christie) and reiterated in C.W. Agencies Inc. v. Canada, 2001 FCA 393, 2002 DTC 6740 (paragraph 17) as follows:
1. Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
2. Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
3. Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?
4. Did the process result in a technological advancement?
5. Was a detailed record of the hypotheses tested, and results kept as the work progressed?
[40] All of these cases involved paragraph (c) of the definition of SR&ED activities in subsection 248(1), namely, experimental development, i.e., work undertaken for the purpose of achieving technological advancement. Paragraphs (a) and (b), which relate to basic and applied research, respectively, instead relate to the advancement of scientific knowledge. Thus, as Judge Boyle concluded in Life Choice Ltd. v. The Queen, 2017 TCC 21 (paragraph 16) (Life Choice), in cases challenging paragraphs (a) and (b), the criteria set out above, involving technological risk, uncertainty and advancement, should therefore be considered as references to scientific risk and uncertainty, and the advancement of scientific knowledge.
1.1 Technological or scientific uncertainty
[41] In Northwest Hydraulic, above, Judge Bowman stated the following about technological uncertainty (paragraph 16):
[16] . . .
(a) Implicit in the term “technical risk or uncertainty” in this context is the requirement that it be a type of uncertainty that cannot be removed by routine engineering or standard procedures. I am not talking about the fact that whenever a problem is identified there may be some doubt concerning the way in which it will be solved. If the resolution of the problem is reasonably predictable using standard procedure or routine engineering there is no technological uncertainty as used in this context.
(b) What is “routine engineering”? It is this question, (as well as that relating to technological advancement) that appears to have divided the experts more than any other. Briefly it describes techniques, procedures and data that are generally accessible to competent professionals in the field.
. . .
[Emphasis added]
[42] The Circular states:
4.2 . . . Standard Practice refers to directly adapting a known engineering or technological practice to a new situation when there is a high degree of certainty that the known technology or practice will achieve the desired objective. . . .
[43] Therefore, creating a new product using techniques, procedures and data that are generally accessible to competent professionals in the field is not SR&ED even if there is doubt concerning the way in which the objective will be achieved. In other words, the mere fact that a product does not exist does not necessarily support the inference that its development involves technological or scientific uncertainty (Flavor Net Inc. v. The Queen, 2017 TCC 179 (Flavor Net), paragraph 38).
[44] In Zeuter Development, above, Justice Little specified that resolving uncertainties associated with a project is not necessarily resolving technological uncertainties if competent professionals in the field can resolve these issues with predictability using standard and established techniques (paragraph 22).
[45] In addition, in R&D PRO-innovation Inc. v. The Queen, 2015 TCC 186 (affirmed by the Federal Court of Appeal, 2016 FCA 152), Justice Masse concluded that there was no technological uncertainty within the meaning of the definition of SR&ED in that specific case, because the uncertainty was removed by standard procedures or routine engineering.
[46] Moreover, in Formadrain Inc. v. The Queen, 2017 TCC 42, 2017 DTC 1022 (Formadrain), Justice D’Auray concluded that creating a product that could stand up to specific constraints (specifically, thin, resistant and flexible rubber) met the technological uncertainty criterion because the lacking knowledge truly did not exist in the base of scientific or technological knowledge and was not simply unknown to the appellant, Formadrain (paragraph 93).
1.2 Hypotheses
[47] Judge Bowman set out a five-stage process to meet the second criterion: (a) the observation of the subject matter of the problem; (b) the formulation of a clear objective; (c) the identification and articulation of the technological uncertainty; (d) the formulation of an hypothesis or hypotheses designed to reduce or eliminate the uncertainty; and (e) the methodical and systematic testing of the hypotheses (Northwest Hydraulic, above, at paragraph 16).
[48] Justice Sommerfeldt revisited the concept of hypothesis for SR&ED purposes in Joel Theatrical Rigging Contractors (1980) Ltd. v. The Queen, 2017 TCC 6: “. . . a hypothesis is a statement to be tested by an experiment or a trial” (paragraph 26).
1.3 Scientific method
[49] As Judge Bowman stated in Northwest Hydraulic, above, “the procedures adopted” must “accord with established and objective principles of scientific method, characterized by trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses” (paragraph 16).
[50] It can be inferred from Judge Bowman’s comments that trial and error does not come within the scientific method if used alone. This principle was also affirmed by this Court in Flavor Net, above (at paragraphs 53 and 54).
1.4 Technological or scientific advancement
[51] The technological or scientific uncertainty and technological or scientific advancement criteria are interrelated.
[52] Regarding the technological advancement criterion, Judge Bowman wrote the following (Northwest Hydraulic, above, at paragraph 16):
[16] . . .
4. Did the process result in a technological advance, that is to say an advancement in the general understanding?
(a) By general I mean something that is known to, or, at all events, available to persons knowledgeable in the field. I am not referring to a piece of knowledge that may be known to someone somewhere. The scientific community is large, and publishes in many languages. A technological advance in Canada does not cease to be one merely because there is a theoretical possibility that a researcher in, say, China, may have made the same advance but his or her work is not generally known.
(b) The rejection after testing of an hypothesis is nonetheless an advance in that it eliminates one hitherto untested hypothesis. Much scientific research involves doing just that. The fact that the initial objective is not achieved invalidates neither the hypothesis formed nor the methods used. On the contrary it is possible that the very failure reinforces the measure of the technological uncertainty.
. . .
[53] The Circular states:
4.1 . . . A technological advance is incorporating, by means of experimental development, a characteristic or capability not previously existing or available in standard practice, into a new or existing process or product that enhances a product’s performance. Novelty, uniqueness, or innovation alone do not indicate a technological advance.
. . .
4.3 Adapting a known technology or practice to new situations is ineligible when the routes for the progression of work that will lead to successful solutions to a technological or engineering problem can be identified in standard practice. In other words, if the project involves directly adapting a known technology to a new situation, when it is reasonably certain that the approach will work, it is ineligible. If a technological uncertainty is present, however, then experimental development will occur . . . . . . .
1.5 Detailed record
[54] The scientific method normally requires the preparation of a detailed record or at least the taking of notes throughout the process of testing the hypotheses previously formulated. However, as stated by this Court in Formadrain, above (paragraph 118), and by the Federal Court of Appeal (RIS‑Christie, paragraphs 14 and 15), it is not mandatory that the evidence be documentary; testimonial evidence may be presented (see also Abeilles Service de Conditionnement Inc. v. The Queen, 2014 TCC 313, paragraph 94).
[55] Therefore, although risks are associated with not adequately documenting a step in an SR&ED project, testimonial evidence may be used to meet this criterion.
2) SR&ED expenditures deductible under section 37 and expenditures that qualify for ITCs
[56] Taxpayers engaged in SR&ED within the meaning of subsection 248(1) may, under section 37, deduct from their business income certain expenditures they made for SR&ED, and may be entitled to the related ITCs. Whether expenditures qualify will depend on whether taxpayers elect to use the so-called “proxy method” under clause 37(8)(a)(ii)(B).
[57] In this case, BMQ elected to use the proxy method for all the taxation years at issue. In such a case, under paragraph 37(1)(a) and clause 37(8)(a)(ii)(B), as they read in the taxation years at issue (attached as a schedule to these Reasons), expenditures that are deductible under paragraph 37(1)(a) are expenditures of a current nature made by the taxpayer in the year and that are, specifically:
– expenditures in respect of the prosecution of SR&ED in Canada directly undertaken on behalf of the taxpayer;
– that portion of an expenditure made in respect of an expense incurred for salary or wages of an employee who is directly engaged in SR&ED that can reasonably be considered to relate to the SR&ED;
– the cost of materials consumed or transformed in the prosecution of SR&ED in Canada.
[58] In addition, paragraph 37(1)(b) and clause 37(8)(a)(ii)(B), as they read in the taxation years at issue (attached as a schedule to these Reasons), provide for the deductibility of a certain portion of expenditures of a capital nature that were for the provision of premises, facilities or equipment, where it was intended that it would be used during all or substantially all of its operating time in its useful life for, or that all or substantially all of its value would be consumed in, the prosecution of SR&ED in Canada. In this case, the lesser of the cost of the depreciable property acquired for SR&ED (subparagraph 37(1)(b)(i)) and the undepreciated capital cost of the property (subparagraph 37(1)(b)(ii)) will be deductible.
[59] The ITC is a function of the “SR&ED qualified expenditure pool”, which includes any “qualified expenditure” made by the taxpayer in the year, according to the definition of these expressions in subsection 127(9) (attached as a schedule to these Reasons).
[60] Qualified expenditures include expenditures of a current nature under paragraph 37(1)(a), expenditures of a capital nature under subparagraph 37(1)(b)(i), expenditures for shared-use-equipment (that is, capital property mainly used for SR&ED without necessarily being almost exclusively consumed or used for this purpose) and, when the taxpayer elects to use the proxy method, the prescribed proxy amount (subsection 2900(4) of the