Abeilles Service de Conditionnement Inc. v. The Queen

Abeilles Service de Conditionnement Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2014-10-23
Neutral citation
2014 TCC 313
File numbers
2011-2054(IT)G
Judges and Taxing Officers
Gaston Jorré
Subjects
Income Tax Act
Decision Content
Docket: 2011-2054(IT)G
BETWEEN:
LES ABEILLES SERVICE DE
CONDITIONNEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
Appeal heard on June 18, 19, 20, 26 and July 11, 2013,
at Montréal, Quebec.
Before: The Honourable Justice Gaston Jorré
Appearances:
Counsel for the appellant:
Julie Patenaude
Counsel for the respondent:
Christina Ham
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessment made under the Income Tax Act for the 2009 taxation year is allowed, with costs, and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that projects 2007-01, 2007-02, 2009-01 and 2009-02[1] constitute experimental development within the meaning of the Act.
If the parties are unable to agree on costs by December 19, 2014, I will hear the parties’ submissions at a date to be set by the Registry of the Court.
Signed at Ottawa, Ontario, this 23rd day of October 2014.
“Gaston Jorré”
Jorré J.
Translation certified true
on this 15th day of June 2015
François Brunet, Revisor
Citation: 2014 TCC 313
Date: 20141023
Docket: 2011-2054(IT)G
BETWEEN:
LES ABEILLES SERVICE DE
CONDITIONNEMENT INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Jorré J.
Introduction [1] On January 27, 2011, the Minister of National Revenue issued a reassessment for the 2009 taxation year. The Minister reduced the amount of the scientific research and experimental development tax credit claimed by the appellant for the following projects:
(a) 2007-01: Development of a new assembling process for motors for dryers (this project started in 2007).
(b) 2007-02: Development of a new assembling process for heating elements for dryers (this project started in 2007).
(c) 2009-01: Development of a new assembling process for control panels using pull flow with electronic sequencing.
(d) 2009-02: High-speed synchronization for the application of secondary components on a print component.
[2] The vast majority of expenditures giving rise to the credit claimed are salary expenditures incurred during testing on the production line.
[3] The Minister submits that the activities of the appellant involved no scientific uncertainty, that they were not based on a systematic investigation or search that was carried out in a field of science or technology and that they were merely routine activities with no basic research, no applied research and no experimental development. For these reasons, the Minister claims that he properly disallowed the appellant’s claim.
[4] There is no doubt that the purpose of the projects in question was to increase production efficiency and, in one case,[2] to ensure innovative production.
[5] The appellant challenges the Minister’s decision and submits that the projects were eligible for the credit claimed.
[6] Section 248 of the Income Tax Act defines “scientific research and experimental development” as follows:[3]
“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
(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,
and, in applying this definition in respect of a taxpayer, includes
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, 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,
but does not include work with respect to
(e) market research or sales promotion,
(f) quality control or routine testing of materials, devices, products or processes,
(g) research in the social sciences or the humanities,
(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
(j) style changes, or
(k) routine data collection;[4]
[7] If we remove those parts which are not relevant to this dispute, the definition reads as follows:
Systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is
(a) . . .
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new . . . devices . . . or processes, including incremental improvements thereto,
and, in applying this definition in respect of a taxpayer, includes
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, 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,
but does not include work with respect to
(e) . . .
(f) quality control or routine testing of materials, devices, products or processes,
(g) . . .
(h) . . .
(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
(j) . . .
(k) . . .
[8] Ultimately, the central isssue is whether the projects in question constitute:
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new . . . devices . . . or processes, including incremental improvements thereto,[5]
[9] At the heart of the controversy is whether it is technological advancement; there is also a significant difference in perspective. The respondent is more likely to look at each test conducted by the appellant in isolation; the appellant takes a broader view of all the tests performed within a project.
[10] I note in passing the context in which the appellant operates. The appellant performs, inter alia, sub-assembly operations for a company that assembles dryers in Montréal. Considering the cost of labour in Montréal, it is an operation that would have easily been relocated elsewhere, such as Mexico or Asia.
[11] The projects at issue are aimed at increasing the efficiency of the appellant’s work obtained without excessive expense, which the appellant could not support while still remaining competitive. Three of those projects are related to the sub-assembly manufacturing of dryers; it is precisely this search for efficiency which allows the appellant and its client to avoid the offshoring of dryer manufacturing.[6]
[12] For the reasons that follow, the appeal will be allowed.
The facts[7] [13] Serge Caouette is the president and, at the time of the hearing, the sole shareholder of Les Abeilles.
[14] The company was founded in 1987 by Mr. Caouette’s mother. In the early years, the company provided various packaging and printing finishing services to tobacco companies. However, the restrictions on the advertising of tobacco products forced the company to diversify its activities.
[15] While continuing to perform printing finishing activities, the appellant began providing packaging services for businesses operating in the food and cosmetic industries.
[16] The appellant also broadened its activities in the industrial sector. That is when it started the assembly of mechanical components.
[17] In essence, its activities involve the assembly of components supplied by the client. Once the sub-assembly is complete, it is sent to the client who inserts it in its [Translation] “main line” to obtain the end product.
[18] The appellant began development projects in 2002. Its first application for scientific research and experimental development dates back to 2003. Since then, it has made several applications per year.
The projects concerned [19] For 2009, the appellant made applications to obtain credit for scientific research and experimental development for six projects. Only two were approved. The other four were denied.
Projects related to the sub-assemblies for Mabe/General Electric [20] Three of the four projects denied were related to the sub-assemblies for Mabe. Mabe manufacturers General Electric dryers. These three projects are as follows:
(a) 2007-01: New assembling process for motors for dryers.
(b) 2007-02: New assembling process for heating elements for dryers.
(c) 2009-01: New assembling process for control panels using pull flow with electronic sequencing.
[21] The first two projects started in 2007 and were accepted by the Canada Revenue Agency in the years prior to 2009.
[22] The purpose of these projects is not only to increase efficiency, but also to do so while meeting very stringent quality standards.
[23] Mabe has a plant in Montréal which performs assembly operations for General Electric. General Electric holds 49% of the shares of Mabe and initiated the collaboration between Mabe and the appellant, as it was General Electric that requested that certain items be produced at the appellant’s facilities. However, Mabe and the appellant are the ones under contract.
[24] It was in 2004 that discussions began with Mabe to obtain contracts from Mabe and undertake the projects at issue. Mabe benefited from collaborating with the appellant as the appellant’s projects were aimed at increasing efficiency of production at the appellant’s and at Mabe’s plants.
[25] Over the course of a project, extensive testing is performed on the production line.[8] This testing typically lasts several hours.
[26] When the appellant does not follow the normal process of production, it is a [Translation] “deviation” from normal production. There are three types of [Translation] “deviations”, according to the appellant:
(a) substitution;
(b) change in engineering; and
(c) experimental development.
[27] The controversy here concerns only those tests that represent the last type of deviation.
[28] Prior to performing tests, approval from Mabe is required.[9] An application for tests is made to Mabe and, if Mabe agrees, Mabe submits a document entitled “DSI” providing authorization.
[29] Mabe provides the components used for testing for free and, after testing is completed, the sub‑assemblies are sent to Mabe which sends them to Mexico to be disassembled.[10]
[30] Mr. Caouette explained that it was during daily operational meetings that it was decided whether tests would be performed the same day.
[31] During testing, commercial production stops, changes to be tested are installed or modified, the test is performed, everything is put back together as it was before the test[11] and, then, production starts again. Mr. Caouette explained that when performing a test, an attempt is made to ensure a large number of assemblies, thus allowing an evaluation of quality and cycle time.
[32] There are a series of specific problems that must be resolved to achieve the objective sought and several tests could be required to resolve one particular problem.
[33] Each test relates to a change in process.
[34] If the test is conclusive, or if the series of tests is conclusive, the project will have to be approved by both the appellant and General Electric before it can go to market. Once approved by the appellant, the project goes to the first piece stage. This involves, for example, producing approximately ten sub‑assemblies and having them approved by General Electric. Then, the project must pass the pilot [run] A and pilot [run] B stages. Each stage entails providing more parts to General Electric, which must then approve production. During the pilot [run], the parts are placed in the dryers and sold on the market.[12]
[35] However, the stages that took place after the testing stage are not part of what is at issue here.
[36] It is possible to retrace the steps of the various projects through the log, the record or chronology of tests.[13] Mr. Caouette explained that the projects required many hours of work from many individuals. At a minimum, it took as many employees to conduct a test as it did to ensure regular commercial production.
[37] There are also detailed descriptions of the projects and tests produced.[14]
Project 2007-01: motors [38] The appellant’s project had several objectives.
[39] This project began in 2007 after the main conveyor was received. The objective was to increase production efficiency, which was measured in terms of the manufacturing time required, and to adapt the conveyor so that it could assemble all families of motors.
[40] Initially, the production of each different type of motor at Mabe was carried out on a different carousel. There was a different template for each type of motor. It took quite a long time to change the templates on the carousel.[15]
[41] In early 2009, the conveyor was in commercial operation and the appellant built one type of motor, regular motors. The appellant still used the carousel (or carousels[16]) for all other types of motors.
[42] For 2009, the primary objective of this project was to make it possible to assemble all the different types of motors[17] on the same production line. It was also hoped that a motor could be assembled every 9 seconds while meeting the required quality standards of the client, that is, a maximum of 300 sub‑assemblies of motors rejected per million sub‑assemblies, that is, a maximum of 3 rejects out of 10,000 motors; at the beginning of the year, the appellant was at approximately 14 seconds.[18]
[43] Not only did the appellant want to get rid of assembly carousels, which were less efficient, but the appellant also wanted to be able to change the production model without having to stop the production line so as to be able to quickly change the model of motor at the client’s request.
[44] For these objectives to be met, the following problems had to be addressed:
(a) the adaptation of equipment to the various types of motors (pulley press, jigs, mandrels);
(b) the synchronization of equipment.
[45] On the line developed by the company, there is only one motor template for all the families, rather than multiple templates on the carousel. On the new line, no there are no parts to change when a decision is made to produce a different model, which makes it possible to never stop the line.[19]
[46] At the end of 2009, all families of motors could be assembled on the line. The equipment was therefore adapted (pulley press, jigs, mandrels) and the carousel was eliminated.[20] The cycle time was reduced to approximately 10 seconds.
[47] Over the course of 2009, as part of this project, 32 tests were conducted. Appendix A to the judgment lists all the tests and certain other work undertaken for the project.
[48] In 2009, the appellant invested over 9,000 person‑hours in this project. The breakdown of hours is provided in Appendix B to the judgment.[21] The expenses claimed for this project are approximately $137,000 in salaries and $1,300 in materials.[22]
[49] When the appellant began working with avec Mabe/General Electric, they tried to find solutions already available to achieve the required objectives.
[50] The appellant’s agreement with the client provides the appellant access to all knowledge available in the Mabe/General Electric network, but despite all the experience available through the network, no one was able to provide more than general principles; no one had specific solutions. The appellant was unable to find any more information by speaking with its suppliers or from Web searches.[23]
[51] The appellant itself had to find the necessary solutions to meet the objectives.
Project 2007-02: heating elements [52] It was in 2005 that discussions with Mabe about this project began. The idea was still to improve the productivity of Mabe’s plant. Indeed, the assembly of the heating elements was done at the time on six production lines. The appellant’s plan was to centralize this production on a single line, while adhering to a cycle time of 7 seconds and a quality standard of less than 300 rejects per million sub-assemblies.
[53] In 2009, new models of heating elements had to be added to the line. The required cycle time and desired quality standard still had to be met[24] in a safe manner (hence the use of “foolproof devices”[25]). To that end, it was necessary, among other things, to address the following problems: too much proximity between the heating element and the housing, false rejects caused by the test station, instability caused by concrete dust, uncleaned lubricant deposit formation in the equipment and overall stability.
[54] At the end of 2009, the cycle time was 8.9 seconds and the quality standard had yet to be met. However, the four families of elements could be assembled on the same line and the proximity and false reject problems were solved.
[55] The proximity problem was solved by the use of a cylinder system. This solution was the third of a series of three. The first was manual and required a special tool. The second was hybrid and included a thumb detector.
[56] The false reject problem was caused by the impact between the element and the stop designed to keep the element at the test station. The solution found was to install a linear motion stop that did not cause a shock that would move the element.
[57] To Mr. Caouette’s knowledge, this type of assembly line does not exist elsewhere. Indeed, neither the General Electric network nor the appellant’s suppliers, the Web search or the manufacturer of the heating elements were helpful in identifying a business that performed this type of assembly. Moreover, General Electric and the appellant were the first in America to use the mica heating elements.
[58] In 2009, the appellant conducted 19 tests and invested over 7,500 person‑hours in this project.[26] The appellant claimed approximately $110,000 in salaries and $1,100 in materials.[27]
Project 2009-01: control panels (backguards) [59] It was in 2009 that Mabe approached the appellant to centralize the assembly of dryer control panels on a single line. The objectives were to develop a system that (i) was capable of producing 174 variations of panels, variations made on the basis of 600 possible components, (ii) could achieve the particular variation ordered within four hours following the order;[28] and (iii) could produce the panels much faster than Mabe.
[60] To accomplish this, the appellant applied the [Translation] “surgeon approach” to its assembly method. This approach consisted of one employee[29] who would put together the components necessary to assemble a given panel model and bring everything to the assembler, who performs his or her work without having to move around, like a surgeon who is provided with the tools required for an operation.
[61] The so-called [Translation] “surgeon” approach was the appellant’s second choice, as its first choice was too expensive to implement.
[62] Not only was it necessary to validate the idea of the [Translation] “surgeon approach” applied to the assembly of control panels, but it was also necessary to be able to assemble all models and change from one model to the other within 30 seconds. Here again, the quality standard sought was less than 300 rejects per million sub-assemblies and foolproof devices were necessary.
[63] In March 2009, it became apparent that it was necessary to automate the communication process between the various stakeholders, otherwise further improvements would have been impossible. To do this, new software had to be developed as none of the existing software products met the company’s needs. To that end, the appellant sought the assistance of subcontractor ISG. The following modules were created: order automation module, import/export module for transferring information between the company’s system and the client’s system, survey module showing what the client has to produce, assembly module ensuring that the assembler is provided with the right model, shipping module allowing the client to confirm shipping of orders and know the status of the appellant’s inventory of components.
[64] The appellant did not claim any credits for the “development” of the software, because ISG performed the task.
[65] At the end of 2009, many objectives had yet to be attained. The above-mentioned modules were nonetheless all developed and the [Translation] “surgeon approach” was validated.
[66] With regard to the problems encountered, a problem of static likely to produce a spark causing the electronic controls to burn out had to be resolved. The problem was solved with grounding placed between the assemblers.
[67] Assembly testing as such was not interrupted by the automation of communication. Tests were still being conducted with respect to the conveyor, templates, etc.
[68] This project continued in 2010.
[69] In 2009, the appellant conducted 22 tests and invested over 9,000 person‑hours in this project.[30] The appellant claimed approximately $160,000 in salaries and $2,600 in materials.[31]
[70] Subsequently, Mabe/General Electric attempted to apply the knowledge developed by the appellant in plants in Mexico.[32]
Project 2009-02: printing finishings (application of secondary components)[33] [71] This is the only project with no connection to Mabe/General Electric. Prior to 2009, the appellant had already established a printing finishing line that made it possible to handle a variety of printing components (magazines, cartons, advertising inserts) and to add secondary components; there was a suction conveyor and various equipment (a primary feeder, a secondary feeder, a glue applicator, a label maker, two folding modules, etc.).
[72] These operations were all conducted at a nominal rate of 6,000 applications per hour. Individually, the various equipment types could operate much faster than together.
[73] In 2009, the objectives were to (i) increase the speed at which all operations could be conducted together to 11,000 applications per hour; (ii) modify the secondary power supply so as to accommodate larger components; and (iii) add new secondary components.
[74] Among the issues to be addressed to achieve the key objectives were the irregularity in the amount of glue applied to the components, the positioning of a new module generating labels, the elements not detected by the detection module and the synchronization of equipment.
[75] In 2009, the secondary feeder that was modified to accommodate larger components was installed and its stability was confirmed. By the end of the year, the objective of 11,000 applications per hour still had not been reached when all the modules were working together.
[76] Once the testing was completed, the materials were recycled, and not disassembled as in the case of the other projects.
[77] To Mr. Caouette’s knowledge, a Chicago-based company reportedly has similar facilities, but he did not wish to share that knowledge. Mr. Caouette had not been able to find an assembly line already capable of performing the required work. Certain modules, such as the glue application module and the label application module, were purchased “as is” but had to be adapted to the line developed by the appellant. Other modules were entirely developed by the appellant, including the primary feeder, the detection system, the secondary feeder, the modified secondary feeder and the folding modules.
[78] In 2009, the appellant conducted 13 tests and invested close to 6,000 person‑hours in this project.[34] The appellant claimed approximately $74,000 in salaries and $300 in materials.[35]
Expert evidence[36] [79] The appellant called Martin Gariépy as an expert witness. Mr. Gariépy has a bachelor’s degree in pure mathematics, a master’s degree in aerospace engineering and a doctoral degree in mechanical engineering. He taught some courses at the École polytechnique de Montréal and carried out various work related, inter alia, to aerodynamics.
[80] Mr. Gariépy was recognized as an expert.
[81] The respondent called Steven Kooi as an expert witness. Mr. Kooi has a Bachelor of Science in chemical engineering and master’s and doctoral degrees in mechanical engineering. Prior to working for the Canada Revenue Agency, Mr. Kooi had 22 years of varied experience in the industry.
[82] He was a scientific advisor at the audit stage.
[83] The appellant objected to Mr. Kooi’s recognition as an expert witness. The appellant did not challenge Mr. Kooi’s training and experience, but rather his independence. I took the objection under reserve and allowed Mr. Kooi to testify. For reasons that will become apparent below, it is not necessary for me to adress that objection. I note that what is important is the impartiality of the expert witness rather than his independence.[37]
[84] The findings of the two expert witnesses are that the projects are or are not, scientific research and experimental development within the meaning of the Act. However, that is a question that must be answered by the Court and cannot be the subject of an expert opinion.[38] While the old rule that an opinion is never admissible when it concerns the very question to be decided by the judge has been discarded for some time now, “the closer an expert opinion comes to opining on the ultimate issue in dispute, the more the trial judge must scrutinize its probative value.”[39]
[85] I note that, generally speaking, it would have been useful to have expert evidence that focused more specifically on the current state of practices and knowledge respecting assembly methods and techniques.
[86] I note that Mr. Gariépy’s report is relatively general.
Mr. Kooi’s testimony [87] I have several difficulties with Mr. Kooi’s testimony and report as an expert witness.
[88] My first difficulty is the following. In his testimony and in his report, there is some confusion between his role as a scientific advisor during the audit and that as an expert witness.
[89] As a scientific advisor at the audit stage, it is completely normal that Mr. Kooi would be guided by the Canada Revenue Agency guidelines with respect to scientific research and experimental development, including certain proof of facts standards that the taxpayer is required to establish to satisfy the Agency.
[90] However, his role is different as an expert witness, as it is his personal expertise on such matters as whether there is technological uncertainty. An expert may agree with a recognized authority within a field, but he or she must nevertheless form his or her own opinion.
[91] In his testimony and in his report, there are times when Mr. Kooi often seems to be guided more by the Canada Revenue Agency’s guidelines and policies than his personal expertise.
[92] For instance, Mr. Kooi gave considerable importance to whether a degree of contemporaneous documentation exists as required by the Agency.[40] At the audit stage, the Agency is at liberty to decide what the taxpayer should normally do to convince it of certain facts.
[93] However, in the course of an expert’s testimony, he or she expresses an opinion on the basis of certain facts; it is not the role of the expert witness to determine the facts.[41] If there is a controversy about the facts, it is for the court to decide what the facts are.
[94] Whether contemporaneous documentation exists, or not, and the fact that documents contain, or not, certain information are relevant to the resolution by the Court of controversy about facts. However, the existence of contemporaneous documentation, or contemporaneous documents with specific content, is not a condition to the recognition of scientific research or experimental development.[42]
[95] This confusion about roles is also illustrated by a number of references to the requirements of the Canada Revenue Agency, such as [Translation] “the Agency requires that the analysis take into account the following probative evidence” preceding a list of 14 elements about one page long.[43]
[96] The penultimate conclusion at page 47 of the report[44] is as follows:
[Translation]
We conclude that the documents adduced by Les Abeilles to support the testing claimed were not contemporaneous with the testing. Despite the fact that materials used for the testing were provided by the clients, and not claimed by Les Abeilles, the materials used and applied in the testing are part of the supporting documentation required for the progress, evolution and justification of the testing.
Once again, it is a matter of determination of facts and not expertise.[45]
[97] I conclude from all of this that Mr. Kooi was not impartial.
[98] Before moving on to my second difficulty, I note that Mr. Kooi’s emphasis on the absence of certain documents is such that it is not always obvious what the factual basis of the opinion expressed is.[46]
[99] Second, in view of contain numerical errors, it is quite clear that, in reaching his conclusions, Mr. Kooi’s perception of part of the context was somewhat flawed.
[100] Specifically, it is clear that in preparing his report, the witness believed that the amount of time claimed for production-line testing was greater than it actually was.
[101] Mr. Kooi’s report regarding project 2007-02, reads, in part:
[Translation]
In reviewing Table 2, eighteen tests were conducted and between 11 (test 2456) and 56 persons (test 2282) were involved in said tests. We found that in these two extreme cases, the estimated time spent on these tests and claimed as experimental production, based on the machine operating twenty-four-seven, were 11 days and 26 days. The justifications for these lengthy tests, such as test data, the report and reasons for continuing testing following tests, were not established. It is difficult for us to confirm the validity of the claim.[47]
[102] It is apparent from this paragraph that the witness assumed that the two production tests in question, 2456 and 2282, lasted the equivalent of 11 and 26 days, respectively, operating continuously on a 24-hour basis.
[103] In Table 2, there is a summary of all the tests conducted during the year for project 2007-02. Test 2282 is the one with the most number of hours, 627.25 hours. Test 2325 is the one with the least number of hours, 113 hours. That is the equivalent of 4.7 periods of 24 hours, approximately five days.
[104] The total hours in Table 2 is over 6,000 [Translation] “hours of tests.” It is the equivalent of 250 periods of 24 hours or 250 days.
[105] If that particular production line operated 365 days per year, 24 hours per day, the tests would represent over 68% of the annual operation of the production line in question. However, if the line 24 hours per day, 5 days per week, it would be the equivalent of close to 100% of the annual operation of the line.
[106] If that were the case, I could see how this would raise doubts from a factual perspective given that it is an operational production line.
[107] This error does not occur only with project 2007-02. In the last paragraph of page 43 pertaining to project 2009-02, the same type of presumption of fact is made according to which the 537.5 hours represent a test that lasted 22 days.
[108] In the report, there is a Table 1,[48] similar to Table 2, pertaining to project 2007-01.[49] The total [Translation] “hours of tests” in Table 1 is over 8,000 hours or 330 periods of 24 hours. In the light of how the witness construed the hours of testing, this implies that he understood the claim as being for hours of tests, which is almost the entire use of the production line for the year.
[109] However, in reviewing the evidence, it is clear that it is person-hours of work over the course of testing, not hours of operation of the production line. The tests lasted far less time than the witness thinks.[50]
[110] In the paragraph cited above, the report also says that 56 persons were involved in test 2282. However, the witness corrected that at the beginning of his testimony and indicated that it should have been 28 persons instead of 56.
[111] More generally in Table 2, he corrected the column entitled [Translation] “Number of persons in Table 2;” the number indicated on each line must, as a general rule, be divided by two.[51]
[112] I conclude that, in preparing his report, Mr. Kooi’s findings were drawn from, inter alia, a factual basis where the tests pertaining to the four projects in question accounted for the primary use of the four production lines for the majority of the year. The evidence shows that the tests lasted far less time.[52]
[113] Such a contextual error must necessarily affect one’s opinion.[53]
[114] For these reasons, I give very little weight to Mr. Kooi’s testimony as an expert witness.[54]
[115] However, insofar as Mr. Kooi testified about what he did as a scientific advisor at the audit stage, I accept his testimony, but I note that it is not expert evidence.
[116] The reasons that led Mr. Kooi, as a scientific advisor, to conclude that it was not experimental development are summarized in his technical review report dated November 18, 2010.[55]
[117] Except for project 2009-01, Mr. Kooi concluded that there was no technological obstacle, as they were engineering challenges and the solutions were based on current standard engineering practice.
[118] For example, his conclusion regarding project 2007-01 is as follows:
[Translation]
. . . we found that tests were conducted to address issues that did not constitute a technological obstacle. The issues to be addressed for these projects as described were as follows. . .: improvements in the hub of the pulley press capable of working on all types of motors, the alignment of motors, the alignment of pulleys, improvements in cycle time, the validation and confirmation of the operation of equipment, etc., are engineering challenges. The solutions applied to address these issues are based on current standard engineering practice by trial and error. We conclude that, with respect to this claim, some of the work performed is related to the application of developed technology to a new situation to stabilize the process and improvement of several assembly stations.[56]
[119] The case of project 2009-01 is a little different, as the report concluded that [Translation] “the work was uncorroborated” and therefore no opinion was provided.[57]
[120] In reading the report dated November 18, 2010, given the importance Mr. Kooi attached to it during his testimony, there is surprisingly no mention of a lack of contemporaneous documents.[58]
A note on the facts and documents [121] It is useful at this point to note that the documents were filed by consent and their content was not disputed.[59]
[122] Therefore, I assume that the factual descriptions of the projects and tests in these documents correctly reflect the purpose and accomplishments of the projects as well as what was done during testing.[60]
Mr. Gariépy’s testimony[61] [123] Mr. Gariépy began testifying by providing some definitions. First, he explained what “scientific uncertainty” means. On the one hand, he cited the definition by the Canada Revenue Agency and, on the other hand, he gave his interpretation of the phrase. According to him, there is scientific uncertainty when a specific objective is identified but it is unknown whether and how it will be achieved. He then defined the concept of “systematic investigation.” This means that once the uncertainties have been identified, a literature review will have to be completed to find existing solutions, make hypotheses and perform tests to support or disprove them. He added that the systematic investigation need not assume a particular form.[62]
[124] Finally, he explained what “technological advancement” is. It is, based on his understanding of the Agency’s policy, an advancement of the company’s knowledge or processes that is not easily accessible; for example, such an advancement is not attainable through a literature review or the purchase of a machine.[63]
[125] Then, Mr. Gariépy provided his opinion on the presence of uncertainties in the various projects. With respect to project 2007-01, pertaining to the assembly of motors, Mr. Gariépy was of the view that it was obvious that there were scientific uncertainties in this project. It was unknown, at first, whether the objective of achieving a nine-second cycle time was attainable. The same is true for the basic objective of assembling all motor types on the same line.
[126] As for project 2007-02, regarding heating elements, there were uncertainties with respect to cycle time, rejection rates and the assembly of the various models on the same line.
[127] As for project 2009-01, pertaining to control panels (backguards), Mr. Gariépy stated that the sum total of what was being sought was uncertain. Although lean manufacturing is a known theoretical concept, its practical application requires development.
[128] Finally, project 2009-02, regarding printing finishings, was also uncertain. The fact that each separate element has the potential of achieving the intended objectives does not preclude uncertainty about the overall objective of having everything work together.
[129] Mr. Gariépy stressed the fact that it is necessary to look at the projects [Translation] “from the highest level,” that is to say, that it is necessary to look at a project as a whole. To look at every little step would be tantamount to distorting the project. He noted that it is possible that a secondary objective does not represent uncertainty, which does not preclude the validation of the project as a whole. Later in his testimony, Mr. Gariépy stated that, according to his interpretation of the Canada Revenue Agency’s directives, it is necessary to look at the project in its entirety, not just in the fiscal year concerned.[64]
[130] According to Mr. Gariépy, there is no question that there was a systematic investigation on the appellant’s part. Team meetings were held to determine objectives, accessible solutions were sought in the literature, tests were planned and documented, and conclusions were drawn.
[131] Mr. Gariépy then provided his opinion about technological advancement in each project.[65] For project 2007-01, (the fact of )attaining 10.9 seconds is an advancement. The adaptation of the hub, of the pulley press, etc., are advancements.
[132] As for project 2007-02, numerous advancements were also made. The mere fact of making the assembly process more stable is an advancement.
[133] Project 2009-01 itself is an advancement. A [Translation] “new assembly line concept” was developed that did not exist before, at least not in practice. In Mr. Gariépy’s view, a major indicator of the level of advancement was the subsequent technological transfer to Mexico.
[134] As regards project 2009-02, the more than 50% increase in the number of applications per hour by increasing synchronization is a major advancement.
[135] Mr. Gariépy was critical of the re