Logix Data Products Inc. v. The Queen

Logix Data Products Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-05-14
Neutral citation
2021 TCC 36
File numbers
2018-369(IT)G
Judges and Taxing Officers
Siobhan Monaghan
Subjects
Income Tax Act
Decision Content
Docket: 2018-369(IT)G
BETWEEN:
LOGIX DATA PRODUCTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal and motions heard on December 12 and 13, 2019 at Toronto, Ontario and February 25, 26 and 27, 2020 at Toronto, Ontario
Before: The Honourable Justice K.A. Siobhan Monaghan
Appearances:
Counsel for the Appellant:
Jonathan N. Garbutt
Counsel for the Respondent:
Angelica Buggie
JUDGMENT
In accordance with the attached Reasons for Judgment;
The appeal from a reassessment of SR & ED expenditures and related ITCs made under the Income Tax Act in respect of the Appellant’s taxation year ending June 30, 2013 (the “2013 taxation year”), denying that the Appellant’s claimed expenditures are scientific research and experimental development and disallowing the related investment tax credits claimed by the Appellant, is dismissed;
Costs of the motions and the appeal are awarded to the Respondent. The parties shall have until June 14, 2021 to come to an agreement on costs, failing which each party shall have until July 12, 2021 to file a single written submission on costs. Each such submission shall not exceed 15 pages in length.
Signed at Ottawa, Canada, this 14th day of May 2021.
“K.A. Siobhan Monaghan”
Monaghan J.
Citation: 2021 TCC 36
Date: 20210514
Docket: 2018-369(IT)G
BETWEEN:
LOGIX DATA PRODUCTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Monaghan J.
I. INTRODUCTION
[1] The issue in this appeal is whether expenditures the Appellant, Logix Data Products Inc., incurred in its taxation year ending June 30, 2013 qualify as expenditures on scientific research and experimental development (“SRED”) as that term is defined in the Income Tax Act (Canada). [1] The Appellant is an information technology services company.
[2] The activity in question is work the Appellant undertook to develop what it describes as a dual purpose solar shingle – that is, a solar panel that could replace shingles. The concept is that the solar shingle would serve as a source of power and be mounted directly on the roof so that shingles would not be necessary.
[3] The Respondent has assessed the Appellant on the basis the expenditures do not qualify as SRED. The Respondent’s position is that:
there was no technological uncertainty in the solar shingle project;
the Appellant did not engage in a systematic investigation to overcome any technological uncertainties in the project;
no experimentation was performed in the project to achieve a technological advancement;
the activities were ones for which the required knowledge was in the public domain; and
the Appellant did not keep sufficient records and documents in respect of the work performed.
[4] The Appellant claims that its activities qualify as SRED.
II. PRELIMINARY MATTERS: EXPERT REPORT
A. The Expert Report and Motion to File Amended Expert Report
[5] Under section 145(7) of the Tax Court of Canada Rules (General Procedure) (the “Rules”), [2] unless otherwise directed by the Court, no evidence in chief of an expert witness will be heard unless the expert report has been both served on the other party not less than 90 days before the commencement of the hearing and prepared in accordance with Rule 145(2). By virtue of Rule 145(3), the expert must comply with the Code of Conduct for Expert Witnesses (the “Code”) [3] or the Court may exclude all or portions of the expert report.
[6] At least 90 days before the appeal hearing date, [4] the Appellant filed and served on the Respondent an expert report (“Report 1”). However, on November 15, 2019, the Appellant filed a notice of motion seeking leave of the Court to file an amended expert report (the “Amended Report”). The Amended Report is dated October 27, 2019. The notice of motion was filed within 30 days of the scheduled hearing of the appeal. However, it was not served on the Respondent until November 25 or 28, 2019.
[7] The Appellant’s motion was brought on the basis that:
i) in preparing for trial, the expert became aware of errors in Report 1, including typographical errors, that he believed he had a duty to correct in accordance with the Code;
ii) the errors were inadvertent and not deliberate;
iii) the Respondent is not prejudiced because Report 1 was timely served and the expert’s overall conclusions remain unchanged, although restated in a different manner in the Amended Report; and
iv) the changes to Report 1 reflected in the Amended Report “correct minor errors and clarify his [the expert’s] opinions” so it is in the interests of justice to allow the Amended Report to be filed.
[8] The Respondent objected to the motion, claiming that the Amended Report is in fact a new expert report, filed and served well after the 90-day deadline, and that neither Report 1 nor the Amended Report comply with Rule 145 (including the requirements found in the Code) (collectively “the Expert Report Requirements”).
[9] With the permission of the parties, I reviewed Report 1 and the Amended Report prior to hearing the Appellant’s motion. I dismissed the Appellant’s application to file the Amended Report.
[10] Appellant’s counsel suggested that it was not clear that a motion was required because of the expert’s duty to report any material changes affecting the expert’s opinions expressed or the data contained in the expert report. [5] In other words, he argued that this duty provided the Appellant with the right and obligation to file the Amended Report. The Appellant’s assertion was that although the expert’s opinions were expressed in a different way, the changes in the Amended Report corrected minor errors and clarified the expert’s opinions, but did not change the overall conclusions.
[11] I do not agree with the Appellant’s characterization of the differences between the two reports. Contrary to the Appellant’s assertion, in my view, the changes reflected in the Amended Report are quite significant. Appendices were added to the Amended Report that were not in Report 1 and appendices in Report 1 were deleted, without explanation. Significant parts of the text from Report 1 were deleted, including the assumptions and caveats. The Amended Report is reorganized and written in a way that differs significantly from Report 1. The opinions in the Amended Report are different than those expressed in Report 1. [6]
[12] In other words, in my view, Report 2 is more appropriately characterized as a new expert report rather than an amended expert report. Thus, in my view, the Appellant is not permitted to admit the Amended Report without the Court agreeing to waive compliance with requirement that the expert report be filed and served at least 90 days before the hearing.
[13] However, in the circumstances, I need not decide whether the Court would do so because I agree with the Respondent that the Amended Report does not comply with the Expert Report Requirements.
[14] The Amended Report is stated to be the expert’s “independent expert opinion on whether Project 1 constitutes scientific research and experimental development.” The opinion expressed is that:
Project 1 constitutes experimental development in the field of mechanical engineering specific to the semi conductor and photovoltaic industries that was performed by a competent researcher in this field.
[15] With respect, this is not the purpose of an expert report.
What constitutes scientific research for the purposes of the Act is either a question of law or a question of mixed law and fact to be determined by the Tax Court of Canada, not expert witnesses, as is too frequently assumed by counsel for both taxpayers and the Minister. An expert opinion may assist the court in evaluating technical evidence and seek to persuade it that the research objective did not or could not lead to a technological advancement. But, at the end of the day, the expert’s role is limited to providing the court with a set of prescription glasses through which the technical information may be viewed before being analyzed and weighed by the trial judge. Undoubtedly, each opposing expert witness will attempt to ensure that its focal specifications are adopted by the court. However, it is the prerogative of the trial judge to prefer one prescription over another. [7]
[Emphasis added.]
[16] But more particularly, the Amended Report states several opinions without explaining the facts and assumptions on which those opinions are founded [8] or the reasons for the opinions expressed. [9] Nowhere in the Amended Report are the relevant facts and assumptions described. The Amended Report consists largely of conclusory statements - statements without explanation, context or support.
[17] An expert report is required to contain any literature or other materials specifically relied on in support of the opinions. [10] The Amended Report states the expert’s knowledge relevant to the matters considered in formulating his opinions was gained from his own experience and reading the scientific literature. None of that scientific literature is appended or even described. The only research referred to is CRA’s Policy Paper and “research into commercially available solutions.” [11]
[18] In addition to a list of the Appellant’s documents [12] that the expert said he reviewed, the Appendices consist largely of CRA Policy Papers and the Appellant’s or CRA’s documents relevant to the Appellant’s SRED claim, the CRA’s review of that claim, and the appeal. The only appendices that do not fit that description are the expert’s resume, a copy of a US patent for a frame design for a roof-integrated solar panel, and an article from a Facebook page that is described as a research paper. [13] Yet the Amended Report states the expert has considered “prior art in the field of this technology, thermal design technologies and structural design considerations gained from reading scientific literature.” Beyond that statement, none of this material considered, or scientific literature reviewed, is described in the report or appended thereto. Troubling is that the patent appended to the Amended Report references other solar shingles, several other patents (US and foreign) for solar shingles, and two publications that predate the Appellant’s taxation year under appeal. The so-called research paper refers to solar shingles that may be purchased, specifically identifying Dow Powerhouse Solar Shingles as efficient and having received multiple safety certifications when announced in 2011. It also refers to an article in Scientific American on the subject. Yet there is no suggestion that any of this material was considered or reviewed by the expert.
[19] An expert has an overriding duty to assist the Court impartially. They must be independent and not be an advocate for a party. [14] In large part, the Amended Report consists of statements of CRA’s positions of what constitutes an element of SRED [15] and assertions that the particular element is satisfied by the Appellant. In my view, it is in the nature of advocacy.
[20] Accordingly, I decided the Amended Report did not meet the Expert Report Requirements and dismissed the Appellant’s motion to file the Amended Report.
[21] The Respondent asserted that Report 1, though timely filed, similarly did not comply with Rule 145. I agree. It suffers from all of the deficiencies of the Amended Report. Most notably it is an advocacy piece citing, quoting and applying jurisprudence and criticizing the CRA’s conclusions about the Appellant’s project with general statements unsupported by facts and assumptions. [16] It expresses the opinion that the Appellant’s asserted technical challenge and technical uncertainty were valid according to the Act. This appears to be an opinion of domestic law, which is not the proper subject of an expert report. The documents the expert reviewed as described in Report 1 consist only of the Appellant’s documents, correspondence between the CRA and the Appellant or persons acting for the Appellant, answers to written discovery questions of the Appellant’s nominee, and the US patent referred to above. Report 1 does not refer to any other materials reviewed by the expert, including the scientific literature mentioned, though not described, in the Amended Report. Accordingly, I determined that Report 1 was not admissible and the evidence of the Appellant’s expert would not be admissible.
B. The Second Motion to File the Revised Amended Expert Report
[22] On January 24, 2020, following the testimony of the first witness on December 12, 2019, but prior to the continuation of the appeal scheduled for February 26, 2020, the Appellant filed another motion, seeking the Court’s permission to file a Revised Amended Expert Report (“Report 2”). The motion suggested there was no prejudice to the Respondent and the changes to the expert report reflected in Report 2 corrected errors and clarified the expert’s opinion. The Appellant conceded that Report 2 was not timely filed but asked the Court to exercise its discretion to waive compliance with the time lines, as it is empowered to do by Rule 9. In the Appellant’s view, it was in the interests of justice that the Appellant be entitled to file Report 2.
[23] It is well established that the Court has discretion to waive compliance with or amend time limits. Whether the Court will do so in a particular case is to be determined based on the four factors outlined in Canada (Attorney General) v. Hennelly: [17]
The Appellant had a continuing intention to pursue the application.
The application has some merit.
There is no prejudice to the Respondent arising from the delay.
There is a reasonable explanation for the delay.
[24] As the party who seeks a change to the time limits, the burden of satisfying those tests rests with the Appellant.
[25] The Respondent contends that the Appellant has not met three of the four tests established by Hennelly, conceding that the Appellant had a continuing intention to submit an expert report. The Appellant argues that the overriding consideration is whether it is in the interests of justice to allow the motion.
[26] I dismissed the Appellant’s application to file Report 2. In ruling against the Appellant:
I agreed with Respondent’s counsel that the application to extend the time had no merit because, like Report 1 and the Amended Report, Report 2 does not meet the Expert Report Requirements. Again, it is an opinion whether the project constitutes SRED which is not the role of an expert. Report 2 does not distinguish between facts and assumptions. For example, it contains what are described as facts relevant to the expert’s opinion on whether there was technological uncertainty. The following page or so of text contains some statements that might be described as facts, but mostly appear to be assumptions or opinions. Many so-called facts are qualified with “to my knowledge” or “to my personal knowledge.” The expert’s other opinions do not have any facts or assumptions associated with them.
Report 2 contains several opinions that are supported by reference to statements the Appellant itself made or to CRA materials. Reasons for opinions are not explained. For example, Report 2 states the expert worked with the patent holder of the appended patent and expresses the view that that the patented product does not meet the Appellant’s economic viability test. While the relevance of this opinion is unclear, there are no facts and assumptions, and no analysis to support this opinion. Report 2 states that the work was carried out or led by trained and experienced personnel because Mr. Baird is a qualified CAN, Master ACE and has over 30 years of experience in technology. Yet Mr. Baird’s qualifications relate to computer software and hardware. There is no analysis or explanation as to how these qualifications are relevant or make Mr. Baird the appropriate person to lead the project and to develop a solar shingle. Moreover, the Appellant claims three other people were engaged in the project and the expert does not even mention them in Report 2.
Report 2 purports to make factual findings. For example, it states that the existence of iterative design concepts, test plans and tabulate test results sufficiently prove that development work was performed. [18] The Court, not the expert, makes factual findings and determines whether the evidence establishes the asserted fact on a balance of probabilities.
There was no reasonable explanation for the delay. In the affidavit in support of the application, the expert states he was unaware that he could not usurp the role of the trier of fact and he tried to prepare a report that complied with the Expert Report Requirements and that would inform the Court about his knowledge in the area. Not knowing how to prepare an expert report is not, in my view, a reasonable explanation for the delay. The Expert Report Requirements outline specific items to be addressed by an expert report. If the expert is not aware of the requirements, then it is up to counsel to explain the purpose, scope and relevant limitations to the expert.
The Appellant submitted any prejudice to the Respondent could be adequately addressed through costs and by giving the Respondent additional time. The Rule regarding the time by which an expert report must be filed has a specific purpose – to permit the other side to prepare its case. In this appeal, the Appellant served Report 1 within the required time. After reviewing that report, the Respondent proceeded on the basis that it would not engage an expert because the Respondent decided Report 1 did not comply with the Expert Report Requirements. If Report 1 did not comply, the Respondent concluded the Appellant’s expert would be unable to testify. Respondent’s counsel prepared for the hearing of the appeal on that basis. If the Court permitted Report 2 to be filed in the middle of the trial, the Respondent might wish to engage an expert and/or change its approach and trial strategy. But it may be too late. For example, Respondent’s counsel has been deprived of the opportunity to ask questions of the witness (whose testimony was received before the motion was filed) that she might have considered desirable or necessary had she had Report 2, or the benefit of an expert for the Respondent, before that witness testified. [19] She also may have chosen to not ask the questions she asked, or to have posed them in a different way. Thus, the prejudice to the Respondent goes beyond the delay and the cost of reviewing another expert report and possibly engaging an expert.
I do not agree that it is in the interests of justice that the Appellant be entitled to file Report 2. Upon recognizing the failure of Report 1 to meet the Expert Report Requirements, the Appellant proceeded twice to try to file what were described as amended expert reports, but which, in my view, are properly characterized as new expert reports. It would completely undermine the purpose of the rule requiring 90 days advance notice of the expert report if, following a determination that a report did not qualify with the Expert Report Requirements, a party was permitted to keep trying until its expert report complies. Yet this is exactly what the Appellant seeks to do. In my view, in this appeal, the interests of justice were best served by proceeding with the appeal.
[27] As a result of my determination that there was no admissible expert report, the evidence of the Appellant’s expert witness was not received by the Court.
III. BACKGROUND FACTS
A. The Appellant
[28] The Appellant is an information technology services company that develops microcomputers, including for the fast food restaurant business (its original business), provides IT services (including computer hardware and software sales, network administration, and development of software and computer systems [20] ), and provides internet services across Canada (i.e., is an internet service provider (ISP)). In the 2013 taxation year the Appellant had nine employees.
[29] Robert Baird is the President and CEO of the Appellant. In the early 80s, Mr. Baird started working in technology, initially as an employee of Pizza Pizza but then on his own as a sole proprietor, before incorporating the Appellant in 1986. Initially the Appellant’s business was microcomputers but it expanded its offerings over the first decade of operation to include the other computer technology services it provides today.
[30] The Appellant is not in the power business or the solar panel business. So how did the Appellant decide to pursue the development of a solar shingle?
B. Background to the Solar Shingle Project
[31] Silfab S.r.l. (“Silfab”) is an Italy-based solar panel manufacturer that decided to establish a manufacturing plant in Canada. Mr. Baird explained that the Appellant was engaged by Silfab to work with it in an IT capacity, to develop Silfab’s IT infrastructure for its Canadian manufacturing plant. The Appellant’s work commenced when the Silfab building in Canada was empty and carried on until Silfab produced its first solar panel in Canada. Mr. Baird said that the Appellant continues to provide IT services to Silfab. Silfab produces solar panels for utility power generation at that plant.
[32] Mr. Baird said that it was through the IT work with Silfab that he learned a lot about the design and production of solar panels, “basically how they work and what they are used for”. [21] Mr. Baird explained that a typical solar panel has a glass front and a polycarbonate backing layer which is protective and acts as an insulator. A series of solar cells [22] are “bussed” together in the center of those two external surfaces to produce the desired power output, with an EBA layer (a substance that acts as a glue as Mr. Baird described it) on the inside of the glass and polycarbonate layers. [23] Those five layers [24] are framed in metal to provide rigidity (support) and a means of mounting the solar panels where they are to be used. As he explained it, solar panels are typically mounted on brackets, that sometimes accommodate changing the tilt of the panel towards the sun and sometimes are fixed so the solar panels do not move.
[33] Mr. Baird explained that typical residential solar panel installations use the same solar panels as are used in commercial or utility power generation projects. Mounting brackets are put on the residential roof, on top of the shingles, so the panels are elevated approximately five inches from the surface of the roof shingles. He explained this gap allows for natural air cooling of the panels and space for power cables to be run.
[34] In Mr. Baird’s view, solar panels on residential roofs are ugly. It is very easy to identify when a homeowner has installed solar panels. Moreover, because of their size and shape, often solar panels cannot be installed on large portions of a roof, particularly if the roof has gables. These observations led the Appellant to pursue the dual purpose solar shingle. The objective was to produce a reliable solar shingle with a power output similar to conventional solar panels (based on area covered) and within the same cost constraints, but that could replace shingles. In other words, the solar shingle would be mounted on the roof and would both produce power and act as the cladding so no shingles would be necessary. [25] The idea is that a roof covered with solar shingles would appear as a conventional roof from the street (albeit glass). I refer to this as the Solar Shingle Project.
C. Experience of People involved in the Solar Shingle Project
[35] Mr. Baird said that he and three other employees of the Appellant were involved in the Solar Shingle Project.
[36] Mr. Baird describes himself as a computer engineer. He holds certifications from several manufacturers of computer hardware and software systems but these are vendor or product specific qualifications. Following secondary school, Mr. Baird commenced training as a pilot but was unable to complete the program because of health issues. Other than this limited pilot training, Mr. Baird has not taken any programs or courses at college or university. With the exception of some high school courses completed as part of what he described as the technical track, [26] Mr. Baird has not taken any courses or training in engineering (including mechanical or electrical engineering). Mr. Baird did not explain what it was about his experience working on the IT installation project that gave him the requisite knowledge.
[37] Two of the other three individuals Mr. Baird described as involved in the Solar Shingle Project are IT technicians. The third is a sales consultant. Their biographies emphasize their experience in computer products, IT technical support, network administration support, IT troubleshooting and IT consulting.
[38] Each biography states that the individual gained the relevant knowledge and skills for the Solar Shingle Project through his or her work on the successful launch, implementation and ongoing support of Silfab Ontario’s IT infrastructure. One IT technician’s biography states the individual worked as a lab technician, prototype design consultant and technical writer on the Solar Shingle Project. The biographies for the other two include a statement that the individual gained an extensive knowledge of solar production systems, data collection and lab assist skills.
[39] Mr. Baird confirmed that the individual who worked primarily in technical sales did not have any education in engineering. As to the two technicians, Mr. Baird said he did not know whether they had any training in engineering because that was not relevant for the position for which the Appellant hired them. Their principal role with the Appellant is providing technical support in the Appellant’s information technology services business. Their biographies do not mention any other experience or training relevant to the Solar Shingle Project.
[40] The Appellant’s position is that through their work on an IT installation for Silfab, a solar panel manufacturer, these three individuals, like Mr. Baird, acquired the necessary solar panel production, data collection, research and technician skills to work on the Solar Shingle Project. However, it is not clear how they would have gained that knowledge through IT installation work. Mr. Baird did not mention any data collection, research or similar work being conducted at the Silfab manufacturing plant. None of these three individuals testified. The statements in the biographies are self-serving and can be given no weight.
[41] The only witness other than Mr. Baird was Amit Saini. Mr. Saini is the founder of National R&D Inc. (“National”). National was engaged by the Appellant to assist with its SRED filings and claims. National also assisted the Appellant in responding to CRA questions regarding the Solar Shingle Project in the context of CRA’s review of the Appellant’s SRED claim. Although I permitted Mr. Saini to testify, under objection from the Respondent, I have determined that his evidence is largely irrelevant to the issue before me.
[42] Mr. Saini was not an employee of the Appellant. He did not participate in the design of the solar shingle or the testing process. He said that he visited the Appellant every six months, although he had many conversations with Mr. Baird over the life of the Solar Shingle Project. He said that in December 2012 he met with Mr. Baird to discuss the Solar Shingle Project and together he and Mr. Baird reviewed some research. Mr. Saini described this process as him finding something through internet searches and asking Mr. Baird to explain why the Solar Shingle Project was different. In my view, this sounds like Mr. Saini undertaking his own due diligence in his capacity as SRED consultant assisting the Appellant in planning for and making a SRED claim. [27]
[43] The Appellant submitted that Mr. Saini was a participant expert [28] but I do not agree. While I do not dispute that Mr. Saini has significant experience and perhaps expertise assisting with SRED claims and disputes, the issue before me is whether the Appellant’s Solar Shingle Project qualifies as SRED. Mr. Saini was not engaged by the Appellant to assist with the design, testing, analysis of test results or research. Mr. Saini did not participate in the activities the Appellant undertook that are the subject of this appeal. [29] While Mr. Saini testified he sent emails to Mr. Baird suggesting ideas, none of those emails are in evidence. Mr. Baird did not testify that he discussed challenges in the project and ideas for addressing them with Mr. Saini or describe any emails he received from Mr. Saini that are relevant to solar shingle design or solving problems. Mr. Saini is not a participant expert. Mr. Saini’s involvement was, in my view, too peripheral to the work the Appellant claims to have done in the course of the Solar Shingle Project to be meaningful to the issue before me.
[44] It is obvious that the testimony of the other three individuals who Mr. Baird said directly participated in the testing and analysis would have been far more relevant and informative. [30] Unfortunately, the Appellant chose not to call them as witnesses.
D. The Solar Shingle in the Appellant’s 2013 Taxation Year
[45] Mr. Baird’s testimony suggested the Appellant’s goal in developing a solar shingle was to replace utility grade solar panels currently used in residential applications with a solar shingle that looks like a conventional roof. His motivation appears to have been largely driven by the aesthetics of solar panels:
. . . our main thing is we felt that how this looks on your house, it was very ugly and undesirable, because everyone would know that you had solar cells on your roof because of the way they are mounted. [31]
I wanted to take these purposed utility-grade panels off the roofs of homes and replace it with a solar panel that looks just like a conventional roof, so that when you looked at it from the street . . . you may not be able to tell it’s a solar roof . . . We wanted to do it so that they didn’t have this big bulky ugly thing on their roof.” [32]
[46] Mr. Baird said that the Solar Shingle Project started in 2011. As I understood Mr. Baird’s testimony, in the earlier taxation years, the Appellant was exploring different ways to fabricate a solar shingle – using PVC film, rather than glass. He explained this provided the shingles with flexibility, like asphalt shingles, but did not produce power efficiently [33] and was too expensive to be viable.
[47] Mr. Baird claimed that the CRA accepted the Appellant’s SRED claim in the 2011 and 2012 taxation years, but not 2013 taxation year. The only question before me is whether the Appellant’s activities in its 2013 taxation year qualify as SRED. The fact that the CRA did not dispute a claim in 2011 or 2012 is not relevant to whether the Appellant’s activities in those years, or in the 2013 taxation year, constitute SRED.
[48] When asked to describe the solar shingle at the commencement of the 2013 taxation year, Mr. Baird described a standard utility grade solar panel with two differences – it was a smaller size (67 cm by 17 cm [34] ) and did not have a metal (or other) frame. [35] Mr. Baird said in the 2013 taxation year the Appellant conducted thermal performance, stress (uniform load), and wind resistance tests on the Appellant’s solar shingle. It is this work, together with some design change work he described, that the Appellant claims constitutes SRED.
(a) Thermal Performance Test:
[49] Mr. Baird said because the cells in solar panels are designed to absorb solar energy, solar panels may get very hot. Accordingly, solar panels are mounted above the roof so that the air flow under the panels provides natural cooling. A cooler solar panel will produce more power than a hot or extremely hot one. And, he was not aware of any thermal risks with standard solar panels because they are mounted above the roof so natural air cooling occurs.
[50] Mr. Baird explained the power output of the Appellant’s solar shingle under ideal conditions was known because the Appellant had data sheets for the solar cells used in the its shingle. Mr. Baird said the ideal power output for the shingle was 15.1219 watts. [36] As he explained it, the purpose of the thermal performance test was to determine the effect on that power output of mounting the solar shingle directly on the roof. In particular, the question was whether the power output would be affected by the heat.
(b) Stress (Uniform Load) Test:
[51] Mr. Baird said that the purpose of the stress (uniform load) test was to determine the effects of snow (weight) on the Appellant’s solar shingle.
(c) Wind Resistance Test:
[52] Mr. Baird said the purpose of the wind resistance test was to determine the effects of wind on the Appellant’s solar shingle.
(d) Other work:
[53] In addition to the three categories of tests, Mr. Baird testified that the Appellant also made some design modifications to the solar shingle in the 2013 taxation year. This included a new lattice support, changes to the mounting system and the electrical connection system and increasing the size of the solar shingle.
IV. THE LAW
[54] The Appellant bears the burden of demonstrating, on a balance of probabilities, that the activities it undertook with respect to the Solar Shingle Project during the 2013 taxation year constitute SRED.
[55] SRED is defined in subsection 248(1) of the Act but, for purposes of this appeal, the relevant portion reads as follows:
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
. . .
(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, . . .
[56] SRED envisages a new or improved product or process, involving something more than the application of routine engineering principles. Creativity must be employed. Although the SRED need not result in a new or improved product or process, the objective of the research must be realistic and there must be meaningful technological advancement. [37]
[57] The Federal Court of Appeal has identified five criteria relevant to determining whether a particular activity constitutes SRED:
Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
Did the procedure adopted accord with the total discipline of the scientific method including the formulation, testing and modification of hypotheses?
Did the process result in a technological advancement?
Was a detailed record of the hypotheses tested, and the results kept as the work progressed? [38]
[58] Counsel for the Appellant submits that these are criteria rather than tests, pointing out that they are not specified in the Act or Regulations. Nonetheless, it is well established that these criteria are relevant in assessing whether a particular activity constitutes SRED. [39] The failure to satisfy a particular criterion may not be fatal to a determination that an activity qualifies as SRED. [40] However, it is clear there must be a technological risk or uncertainty, [41] the research efforts must be systematic, [42] and the process must result in technological advancement. [43] As observed in Northwest Hydraulic, some doubt as to the best way to resolve technical issues does not amount to the existence of technological uncertainty. [44]
[59] Technological uncertainty is an uncertainty that cannot be resolved by routine engineering or standard procedures. If the identified problem may be resolved using knowledge, techniques, procedures and data that are generally accessible to competent professionals in the field, [45] there is no technological uncertainty.
[60] Technological advancement is an advancement in general understanding.
[61] The second, third and fifth criteria identified by the Federal Court of Appeal as relevant to identifying SRED, are connected to the experiments and the testing: the formulation of a hypothesis designed to address the technological uncertainty; the procedures undertaken in the experimenting/testing process; and detailed contemporaneous records of the hypotheses, tests and results.
[62] Formulation of a hypothesis involves identifying the problem (technological uncertainty) to be solved, formulating a hypothesis for reducing or eliminating that uncertainty, and methodically and systematically testing that hypothesis.
[63] Testing should accord with the principles of the scientific method: trained and systematic observation, measurement and experiment and the formulation, testing and modification of the hypothesis. [46]
[64] While I agree with the Appellant that neither the Act nor the Regulations expressly requires a detailed record of the hypotheses, tests and results be maintained as the testing or experiments are undertaken, the need to do so is implicit in the requirement that the research be carried out in a systematic way by means of experiment or analysis. [47] The desirability of such evidence is obvious. It is important not only to substantiate that the work was done, but also so that the information and resulting analysis can be revisited and reanalyzed if necessary as the project progresses and hypotheses are modified.
V. ANALYSIS
A. What was the Appellant’s technological uncertainty?
[65] In reassessing the Appellant, the Respondent assumed that there was no technological uncertainty in the Solar Shingle Project.
[66] At the outset, I observe that the Appellant embarked on a project to develop a new product – a dual purpose solar shingle. But what was the technological uncertainty? Mr. Baird described the uncertainty as whether the Appellant could develop a solar shingle that would work with all the components to suit the intended project objective. That objective was to create “a dual purpose, reliable, replicable solar shingle that would produce the same performance as conventional [solar] panels, as well as allowing the same cost”. [48] Mr. Baird said the uncertainty was whether the Appellant could achieve that goal. I agree with counsel for the Respondent that this is more in the nature of a design objective, than a statement of technological uncertainty.
[67] Appellant’s counsel asked Mr. Baird to describe the uncertainties the Appellant faced. Mr. Baird suggested the following:
Whether the solar shingles could be placed directly on the roof in place of shingles?
The durability of the solar shingle, i.e., would a smaller solar panel without a frame break because it had less rigidity and would moisture leak into the edge?
How would the power be “bussed out” of the shingles because smaller panels (i.e., shingles) required more panels to cover the same area as traditional solar panels requiring more connectors?
Whether the smaller panels (shingles) could achieve a target power yield of 250 watts per square meter given greater (non-productive) space needed to connect them together?
Whether the solar shingle could be scaled up in size and achieve the same results?
(i) What was the knowledge in the industry at the time?
[68] Knowledge or experience in the solar power industry with respect to solar shingles is relevant to determining whether there was a technological uncertainty. If knowledgeable competent profe