Indusol Industrial Control Ltd. v. The Queen

Indusol Industrial Control Ltd. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2020-09-14
Neutral citation
2020 TCC 103
File numbers
2016-5458(IT)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Income Tax Act
Decision Content
Docket: 2016-5458(IT)G
BETWEEN:
INDUSOL INDUSTRIAL CONTROL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on February 10, 11 and 12, 2020 at Trois-Rivières, Quebec
Before: The Honourable Justice Dominique Lafleur
Appearances:
Agent for the Appellant:
Robbert Jan van Eijle
Counsel for the Respondent:
Christina Ham
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessment, the notice of which is dated July 21, 2014, made under the Income Tax Act for the Appellant’s 2012 taxation year (being the period from April 1, 2011 to March 31, 2012) is dismissed with costs to the Respondent.
Signed at Montreal, Quebec, this 14th day of September 2020.
“Dominique Lafleur”
Lafleur J.
Citation: 2020 TCC 103
Date: 20200914
Docket: 2016-5458(IT)G
BETWEEN:
INDUSOL INDUSTRIAL CONTROL LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lafleur J.
I- INTRODUCTION
[1] Indusol Industrial Control Ltd. (“Indusol” or the “Appellant”) filed an appeal with this Court in respect of a reassessment, the notice of which is dated July 21, 2014, made under the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)) (the “Act”) for its 2012 taxation year, being the period from April 1, 2011 to March 31, 2012 (the “2012 taxation year”).
[2] In so reassessing, the Minister of National Revenue (the “Minister”) was of the view that the activities undertaken by Indusol with respect to a project called the “Draught [Draft] Information System” (the “DIS” or the “DIS Project”) during the 2012 taxation year did not meet the criteria of the definition of scientific research and experimental development (“SR&ED”) in subsection 248(1) of the Act. Consequently, the Minister rejected Indusol’s claim that expenses totalling $111,883 were SR&ED expenditures under the Act. The Minister denied the deduction of the said expenses as well as the investment tax credit (“ITC”) of $49,224 claimed in connection with those expenses.
[3] At the hearing, Mr. Robbert Jan van Eijle, the president of Indusol, as well as its sole shareholder and director, represented Indusol and testified on its behalf. Ms. Sandrine Nothomb, a Canada Revenue Agency (“CRA”) financial examiner, as well as Ms. Nadine Bisson, a CRA research and technology advisor, who both reviewed the DIS Project, also testified at the hearing.
[4] In these reasons, all references to statutory provisions are to provisions of the Act, unless otherwise indicated.
II- ISSUES
[5] There are two issues in this appeal: 1) whether the activities undertaken by Indusol during the 2012 taxation year in respect of the DIS Project constitute SR&ED; and 2) whether expenses totalling $111,883 are deductible under section 37 as SR&ED expenditures and are qualified expenditures for the purposes of the calculation of the ITC under subsection 127(5). These expenses consist of an amount of salary totalling $104,578 paid to Mr. van Eijle and to Ms. Francine Clément, an amount totalling $3,901 for the purchase of a portable computer (the “Computer”) and an amount totalling $3,404 for the renewal of a Microsoft Developer Network Platform licence (the “Licence”).
III- THE DIS PROJECT
The 3D-Navigator system and the DIS
[6] The DIS Project is an extension of another project, called the “3D-Navigator Electronic Navigation System” (the “3D-Navigator system”) project, carried out during previous years by Indusol. The 3D-Navigator system, the project for which started in 1999, is an electronic marine navigation system for commercial vessels that allows for either 2D or 3D perspectives. Over the years, the 3D-Navigator system was improved to include more features, including the DIS. As the 3D‑Navigator system was the display system for the DIS, changes had to be made to the 3D-Navigator system to accommodate the DIS.
[7] The DIS is an aid to navigation that provides real-time graphical representation of anticipated underwater obstacles and conditions for a vessel. The DIS addresses multiple factors, such as ship dynamics, channel dynamics and the behaviour of vessels. It calculates and indicates the distance between the deepest point of the vessel and the bottom of the channel (which is referred to as “under‑keel clearance” or “UKC”) in order to facilitate navigation of vessels. The DIS also takes into account the squat, which is the extra sinkage of a vessel created by the speed of the vessel through the water. The formulas to calculate the squat in various situations were originally developed by the Université Laval in 2002.
[8] Before the implementation of the DIS, no real-time information about UKC during the transit of a vessel was available. When a vessel was in Canadian waters, the officer in charge of that vessel would use charts prepared by the Canadian Hydrographic Service (“CHS”), which gave an average water level without indicating what obstacles might lay in front of the vessel, while transiting the St. Lawrence Seaway (the “Seaway”).
The Origin and development of the DIS
[9] The idea for the DIS originated in 2003 during a meeting between Indusol and Canadian Steamship Lines (“CSL”) at a time when CSL was looking for better UKC information for vessels transiting the St. Mary’s River. To meet the request made by CSL, Indusol enhanced its 3D-Navigator system to include DIS capability. Throughout 2008 and 2009, Indusol tested its expanded system on board ships. By 2010, every ship using the enhanced system was allowed additional draft of three inches following approval of an application for authorization to use the DIS, which enabled ship operators to load more cargo onto ships. The draft is the depth to which a vessel is immersed when carrying a given load.
The Timeline
[10] In March 2009, Mr. van Eijle and a representative of CSL met with the American and Canadian seaway authorities, namely the Saint Lawrence Seaway Development Corporation and the Saint Lawrence Seaway Management Corporation (together, the “Seaway Authorities”) and various industry players, to propose the DIS Project on the basis of work done by Indusol in 2003 and 2004 in the St. Mary’s River (the timeline at Exhibit A-24, p. 21 and following; a timeline can also be found in Exhibit A-28, p. 15 and following) (the “Timeline”).
[11] The DIS Project objective was described as being to determine whether it is possible for a vessel to transit from Montreal to Lake Erie (via Lake Ontario and the Welland Canal) consistently at a draft of 8.15 m with a minimum UKC of 30 cm.
[12] As part of the DIS Project, the Seaway Authorities required the standardization of the DIS technology and the development of DIS implementation specifications to prove that the DIS technology was safe. The purpose of the DIS implementation specifications was to increase the safety of navigation in the Seaway by increasing knowledge about the UKC of vessels transiting the Seaway. In November 2010, the Seaway Authorities published a first draft of the DIS implementation specifications that was clearly unsatisfactory.
[13] Later in November 2010, a workgroup which included industry players (system manufacturers and shipping enterprises) and representatives of the Seaway Authorities, as well as Mr. van Eijle and Mr. O’Brien of Idon Technologies (the “DIS Workgroup”) was formed and met for the first time. The objective of the DIS Workgroup was to oversee the process for the drafting of the DIS implementation specifications, including the various conformance test procedures. Since the first draft prepared by the Seaway Authorities was clearly unsatisfactory, Mr. van Eijle, through Indusol, volunteered to act as the technical reference for the drafting of these implementation specifications, and Mr. O’Brien was hired to actually write them.
[14] Throughout 2011, various drafts of the DIS implementation specifications were prepared and posted on the Seaway Authorities’ websites for public comment, and various meetings of the DIS Workgroup were held. The Seaway Authorities accepted that some testing of the DIS be done by Indusol in the Seaway. After each round of publication, the DIS Workgroup met to resolve any concerns raised, and additional research was done to that end.
[15] However, in mid-July 2011, the Saint Lawrence Seaway Development Corporation (the US Seaway authority) suspended all overdraft transit through the Seaway until standards were developed and then approved to be part of the Seaway regulations.
[16] In August 2011, a first draft of DIS test data specifications was prepared.
[17] From September 2011 to March 2012, according to the Timeline, Indusol spent most of its time in the creation and testing of the procedures for the verification of the DIS implementation specifications. The conformance testing procedure was created and consisted of a total of 135 tests.
[18] On March 15, 2012, the Seaway Authorities approved the DIS implementation specifications. The final version of the DIS implementation specifications was published on that same day. On March 17, 2012, LRQA Inc. (part of Lloyds International) certified that Indusol’s DIS complied with the implementation specifications.
[19] In July 2012, the DIS implementation specifications and the DIS conformance tests were published by the Seaway Authorities and became applicable for waterways between Montreal and Lake Ontario and for the Welland Canal. Mr. van Eijle adduced as evidence Exhibit A-11: “Implementation Specifications – a Draught Information System for the St. Lawrence Seaway” (the “DIS implementation specifications”), and Exhibit A-12: “Implementation Specifications – a Draught Information System for the St. Lawrence Seaway, Test data specifications” (the “DIS conformance tests”).
IV- POSITIONS OF THE PARTIES
4.1 Appellant’s position
[20] Indusol’s activities can be classified as either applied research or experimental development within the meaning of the definition of SR&ED. Indusol’s work with respect to the DIS in the 2012 taxation year satisfied the CRA’s criteria for considering work to be SR&ED. Those criteria are: (i) scientific or technological uncertainty; (ii) scientific or technological advancement; and (iii) scientific and technical content. SR&ED activities included prototyping, specification development, marine industry peer evaluation and an independent verification by LRQA Inc.
[21] As regards applied research, Indusol’s research results were published in the DIS implementation specifications and the DIS conformance tests, and in various articles.
[22] As regards experimental development, Indusol tested the research on board CSL vessels and integrated the research into the 3D-Navigator system in order to evaluate the functionality of the DIS. This experimental development made incremental improvements to the 3D-Navigator system and allowed vessels to navigate safely with a draft of 8.15 m and a minimum UKC of only 30 cm. The introduction of the DIS technology is a very great improvement to marine navigation.
[23] The Appellant is of the view that all expenditures claimed are reasonable, are deductible under section 37 as SR&ED expenditures and are qualified expenditures for the purposes of the ITC.
4.2 Respondent’s position
[24] The DIS Project does not qualify as SR&ED. The criteria developed by the case law in order for an activity to qualify as SR&ED under the Act are not met in the case at bar. The Appellant did not submit any evidence on the nature of the activities carried on by Indusol during the 2012 taxation year. The evidence does not show how the SR&ED was conducted, what methodology was used or whether hypotheses were formulated.
[25] The evidence suggests that the 3D-Navigator system with DIS capabilities was operating in 2008, 2009 and 2010. In 2010, the Seaway Authorities decided to develop, and proceeded with the drafting of, the DIS implementation specifications, which set out the minimum requirements for a certified DIS to be used in the Seaway. From 2010 to 2012, Indusol participated in the development of both the implementation specifications and the DIS conformance tests. However, drafting the DIS implementation specifications and developing the DIS conformance tests at the request of regulatory authorities cannot be considered as the resolution of technological uncertainties. The DIS implementation specifications were not prepared in order to advance the technology because the DIS technology was already available by 2010.
[26] The Respondent argues that the salaries are not SR&ED expenditures under section 37 because the Appellant’s claim with regard thereto was extremely general, without any documentation or evidence to support the estimate. Furthermore, the expenses claimed for the cost of the Licence and the Computer are not deductible under section 37 since the requirements of the Act are not met. Furthermore, these expenses are not qualified expenses for the purposes of the ITC.
V- ANALYSIS
[27] For the determination of the issues in this appeal, the Act has created a two‑part test. First, I have to determine whether the activities undertaken by Indusol during the 2012 taxation year in respect of the DIS Project meet the criteria of the definition of SR&ED as set in subsection 248(1). The Appellant bears the burden of showing, on a balance of probabilities, that its activities undertaken in the 2012 taxation year with respect to the DIS Project constitute SR&ED. If those activities do not constitute SR&ED, that is the end of the analysis. However, if the activities meet the criteria set out in subsection 248(1), I must determine whether expenditures incurred by Indusol are deductible under section 37 as expenditures on or in respect of SR&ED and whether those expenditures are qualified expenditures for the purposes of the ITC (Zeuter Development Corporation v. The Queen, 2006 TCC 597, at para. 20).
5.1 SR&ED: Law and case law
[28] SR&ED is defined in subsection 248(1) 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
activités de recherche scientifique et de développement expérimental Investigation ou recherche systématique 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'avancement de la science sans aucune application pratique en vue;
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
b) la recherche appliquée, à savoir les travaux entrepris pour l'avancement de la science avec application pratique en vue;
(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,
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 développement expérimental:
(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,
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 mathématique, à la programmation informatique, 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 développement 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 commercial 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 procédé nouveau ou amélioré;
(j) style changes, or
j) les modifications de style;
(k) routine data collection.
k) la collecte normale de données.
[29] The case law has established five criteria for determining whether a particular activity qualifies as SR&ED. These criteria were laid down by Justice Bowman, as he then was, in Northwest Hydraulic Consultants Ltd. v. R. ([1998] 3 C.T.C. 2520 (TCC), at para. 16 [Northwest Hydraulic]).
[30] In establishing these criteria, Justice Bowman reviewed Information Circular 86-4R3 dated May 24, 1994 (the “Circular”) and stated that, generally, it was a useful and reliable guide (Northwest Hydraulic, at para. 15).
[31] As regards the application of the criteria, Justice Bowman also commented that “[t]he tax incentives given for doing SRED are intended to encourage scientific research in Canada . . . As such the legislation dealing with such incentives must be given ‘such fair, large and liberal construction and interpretation as best ensures the attainment of its objects’”. (Northwest Hydraulic, at para. 11)
[32] These same criteria were later approved by the Federal Court of Appeal in two subsequent cases, RIS-Christie Ltd. v. R. ([1999] 1 C.T.C. 132, at para. 10 [RIS-Christie]) and CW Agencies Inc. v. The Queen (2001 FCA 393, at para.17 [CW Agencies]).
[33] The Federal Court of Appeal summarized these criteria in CW Agencies 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?
5.2 SR&ED: the DIS Project
Activities carried on by Indusol during the 2012 taxation year
[34] The evidence showed that Mr. van Eijle, through Indusol, volunteered in November 2010 to be the technical reference for the drafting of the DIS implementation specifications and the development of the DIS conformance tests, and that he did so mainly for two reasons. The first reason was that he wanted to document Indusol’s SR&ED efforts made during the previous years in developing the DIS. The second was that he wanted to be in control of the process for creating the implementation specifications and the related conformance tests.
[35] As indicated in a letter from Indusol to the CRA dated October 22, 2013 (Exhibit A-26, p.13): “There were no Seaway specifications; it was Indusol who proposed to the Seaway the results of their SR&ED effort of previous years which allowed ships to make better use of the available water column. The Seaway insisted the results had to be translated into specifications to be published as part of the Seaway regulations.”
[36] The evidence also showed that during the first part of the 2012 taxation year (that is, from April to September 2011), Mr. van Eijle boarded ships to test various things. He also proceeded with data collection on such matters as what mariners prefer with respect to alarms, what information is needed and how that information is displayed. From April to December 2011, Mr. van Eijle made forty-two trips to board ships for the purpose of conducting on-board testing. From September 2011 to March 2012, Mr. van Eijle devoted most of his time to creating, testing and verifying the conformance testing procedure for the DIS implementation specifications.
The state of the DIS at the beginning of the 2012 taxation year
[37] On the evidence adduced at the hearing, I find that a prototype of the 3D‑Navigator system with some DIS capabilities was already available by 2010 and before, but only within a limited area of the Seaway.
[38] An article in the Great Lakes Seaway Review titled “Draft Information System Approved” (Exhibit A-19, pp.13-14) suggests that the DIS technology already existed before the beginning of the 2012 taxation year and that the activities undertaken by Indusol in the 2012 taxation year involved writing the DIS implementation specifications and getting its DIS technology approved.
[39] The articles states (pp.13-14):
To meet requests by CSL, Indusol enhanced its 3D-Navigator to include DIS capability. Throughout 2008 and 2009, the company tested its expanded product onboard ships in the system. By 2010, every ship using the enhanced system was granted permission to take advantage of the three inches of additional draft after they applied.
. . .
Based on positive results, formal review began. In 2011, the specifications for the technology were written in accordance with the ISO-IEC Directives, Part 2, “Rules for the Structure and Drafting of International Standards.”
[40] Furthermore, during his cross-examination, Mr. van Eijle acknowledged that in 2008 and 2009 some of the DIS capabilities were already integrated into the 3D-Navigator system, but for very limited use. In the beginning, the DIS was only allowed to be used in the South Shore Canal from Cote-Sainte-Catherine to Saint‑Lambert. Further, only some of the DIS capabilities were available. For example, the water level data had to be manually input into the system. Slowly, over time, the area expanded, and more tests were done throughout 2010 and 2011 to test new features.
The DIS Project: qualification as SR&ED in the 2012 taxation year
[41] For the following reasons, after reviewing the evidence adduced at the hearing, I find that, on a balance of probabilities, the activities undertaken by Indusol during the 2012 taxation year in respect of the DIS Project do not constitute SR&ED. Even though I find that some technological uncertainties within the meaning of the SR&ED criteria existed in respect of the squat issues, Indusol did not demonstrate that a methodical and systematic testing of the hypothesis or hypotheses was done and that it followed the total discipline of the scientific method, including the formulation, testing and modification of hypotheses in order to resolve those uncertainties, and that the process resulted in a technological advancement.
[42] The Appellant asserted that the activities undertaken during the 2012 taxation year were either applied research or experimental development within the meaning of the definition of SR&ED. Be that as it may, the five criteria as articulated by Justice Bowman in Northwest Hydraulic and later affirmed by the Federal Court of Appeal in RIS-Christie and CW Agencies must still be met in order for an activity to qualify as applied research or experimental development within the meaning of that definition. In a case where a taxpayer asserts that applied research was carried out, the references in the Northwest Hydraulic criteria to technological risk, uncertainty and advancement should therefore be considered as references to scientific risk and uncertainty, and the advancement of scientific knowledge (Life Choice Ltd. v. The Queen, 2017 TCC 21, para. 16). In these reasons, I will use the terms technological risk, technological uncertainty and technological advancement to also refer to scientific risk, scientific uncertainty and scientific advancement.
[43] Mr. van Eijle asserted as well that the DIS Project started in 2009 and that he had worked on the DIS Project during Indusol’s 2010, 2011 and 2012 taxation years. However, in the case at bar, the question is whether experimental development or applied research activities were carried out by Indusol during the 2012 taxation year. Hence, the relevant activities are those carried on during the 2012 taxation year of Indusol, namely, between April 1, 2011 and March 31, 2012. However, the history of the DIS Project will still be relevant to making the determination (Les Abeilles Service de Conditionnement Inc. v. The Queen, 2014 TCC 313, at para. 152).
[44] Since, as shown by the evidence, the DIS was used in 2008 and 2009 in the South Shore Canal of the Seaway, I find that the fundamental technology for the DIS existed by then. However, it is unclear whether the technology could be easily implemented in other sections of the Seaway. Furthermore, as indicated by Mr. van Eijle, the DIS prototype was likely limited in its capabilities and more features needed to be developed and tested between 2010 and 2012. As Mr. van Eijle was also involved in developing the DIS implementation specifications during that same period of time, and given his testimony, which was credible, it is reasonable to accept that DIS prototypes were improved and modified during the period between 2010 and 2012 in order to comply with newly proposed or established standards. Hence, a review of the above-mentioned five criteria is warranted.
1- Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
[45] In Northwest Hydraulic, Justice Bowman clarified that the “technological risk or uncertainty” must be such that it “cannot be removed by routine engineering or standard procedures” and that if “the resolution of the problem is reasonably predictable using standard procedure or routine engineering there is no technological uncertainty”. The term “routine engineering” refers to “techniques, procedures and data that are generally accessible to competent professionals in the field” (Northwest Hydraulic, at para. 16).
[46] In order to meet this criterion, the overall activity undertaken by Indusol during the 2012 taxation year must have involved technological risks or uncertainties which could not be removed by routine engineering or standard procedures.
[47] The Appellant identified several uncertainties and challenges which arose either in the 2012 taxation year or throughout the period from 2010 to 2012. According to the Respondent, these uncertainties and challenges were not technological uncertainties within the meaning of the SR&ED criteria, as many of the stated uncertainties had to do simply with decisions that the DIS Workgroup needed to make with respect to the DIS standards. Also, in some instances, Indusol did no more than identify the problems, which is not an SR&ED activity.
[48] For the reasons stated below, I find that, on a balance of probabilities, only some of the uncertainties raised with respect to the squat issues constitute technological uncertainties within the meaning of the SR&ED criteria. Other uncertainties and challenges identified by the Appellant do not constitute technological risks or uncertainties within the meaning of the SR&ED criteria.
(a) Gathering hydrographical data
[49] The Appellant identified in the charts prepared by the CHS deficiencies that prevented the DIS from functioning properly. The solution to this problem involved doing surveying and then producing new charts with greater accuracy, which work was performed by the Seaway Authorities and the CHS. Indusol then tested the new charts with the DIS system to ensure compatibility.
[50] I find that, while Indusol identified problems with the charts that prevented the DIS from functioning properly, it was not directly involved in resolving these issues. Simply identifying problems is not an SR&ED activity. Furthermore, nothing in the evidence suggests that doing surveying and producing new charts were things that could not be done through use of routine engineering or standard procedures involving techniques and processes that were accessible to competent professionals.
[51] Therefore, I find that the uncertainties identified with respect to the charts are not technological uncertainties within the meaning of the SR&ED criteria.
(b) Hydraulics issues
[52] According to the Appellant, the uncertainties involved whether ships with a deep draft could get into and out of the locks safely without damaging the locks. The Seaway Authorities together with Indusol and CSL conducted experiments with deep draft. Given the successful results of the experiments, the Seaway Authorities committed to the DIS Project.
[53] There may have been uncertainty as to whether ships with deep draft could get into and out of the locks safely, and tests needed to be done in order to address the safety issue. However, the Appellant did not explain in any detail the experiments carried out by Indusol in that respect. Also, regardless of who carried out the experiments and which experiments were carried out, Indusol did not demonstrate that the uncertainties with respect to the hydraulics issues could not be removed by standard procedures.
[54] Therefore, I find that the uncertainties with respect to the hydraulics issues are not technological uncertainties within the meaning of the SR&ED criteria. Furthermore, the evidence showed that the Seaway Authorities committed to the DIS Project given the successful results of the experiments conducted in the locks. I find that, since the Timeline shows that the Seaway Authorities committed to the DIS Project in November 2010, the activities in question were carried on prior to November 2010, and not during the 2012 taxation year.
(c) Under-keel clearance (UKC)
[55] According to the Appellant, the uncertainties with respect to UKC involved whether it was safe to change the minimum UKC requirement in the Seaway from 60 cm to 30 cm. Previously, the Seaway Authorities had required a minimum UKC of 60 cm but Indusol convinced them that a minimum UKC of 30 cm would be acceptable if better charts and technologies were available on ships.
[56] Mr. van Eijle merely testified that he was able to convince the Seaway Authorities that vessels were able to transit safely with a minimum UKC of 30 cm. There was no evidence adduced at the hearing as to whether any tests were performed to investigate the problem. In fact, this problem seemed more like something that required an administrative decision to be made by the Seaway Authorities given the availability of the DIS technology.
[57] Therefore, I find that the uncertainties raised with regard to UKC issues are not technological uncertainties within the meaning of the SR&ED criteria.
(d) Squat issues
[58] According to Mr. van Eijle, issues relating to squat (which is the extra sinkage of a vessel created by the speed of the vessel through the water) were the biggest challenges faced by Indusol in the DIS Project.
[59] The evidence showed that different squat formulas have to be used in various situations, depending on the type of ship, the type of channel, and speed ranges. Indusol tested the accuracy of squat formulas from different sources and decided to implement the formulas developed by the Université Laval in 2002. Furthermore, the evidence showed that Indusol had to determine how to implement and apply the squat formulas within the DIS.
[60] Even though the squat formulas used by Indusol were already available, I find that, on a balance of probabilities, there were still some technological uncertainties involved in the process for the implementation of the squat formulas within the DIS. These uncertainties with respect to the additional squat that occurs when two vessels meet in a channel could not be resolved by routine engineering or standard practices.
[61] Technological uncertainty within the meaning of the SR&ED criteria may occur in either of two ways: “. . . it may be uncertain whether the goals can be achieved at all; or the taxpayer may be fairly confident that the goals can be achieved, but may be uncertain which of several alternatives (i.e., paths, routes, approaches, equipment configurations, system architectures, circuit techniques, etc.) will either work at all, or be feasible to meet the desired specifications or cost targets, or both of these” (the Circular, at para. 2.10.2).
[62] The Appellant identified three uncertainties with respect to implementing the squat formulas in the DIS: (1) the speed of a vessel could not be easily measured because there was no solution for measuring the velocity of the current in real time; (2) the squat formula needed to be altered for different sections of the channel; and (3) the additional squat that occurs when two vessels approach each other at different speeds has to be accounted for.
[63] According to Mr. van Eijle, the first major uncertainty in the implementation process was to ascertain how to measure the speed of a vessel through the water while taking into consideration the velocity of the current. Furthermore, Mr. van Eijle testified that there was no solution for measuring the velocity of the current in real time. Indusol proposed using a table in order to determine the velocity of the current. To calculate the actual speed through the water of a vessel navigating downstream, the velocity of the current would be added to the GPS speed of the vessel. To calculate the actual speed of a vessel navigating upstream, the velocity of the current would be deducted from the GPS speed of the vessel. Indusol was requested to test the proposal on board vessels, and the proposal was ultimately accepted.
[64] Regarding the first uncertainty, I find that, on a balance of probabilities, there was no technological uncertainty within the meaning of the SR&ED criteria, because I am not satisfied that the uncertainty could not be resolved using routine engineering or standard procedures. Mr. van Eijle testified that he proposed to use a table in order to determine the velocity of the current. No evidence was adduced at the hearing as to the difficulty involved in this method, or as to whether the table was readily available to competent professionals in the industry. Therefore, I find that the Appellant has not shown that this was a technological uncertainty which could not be removed by the application of routine engineering or standard procedures.
[65] According to Mr. van Eijle, the second major uncertainty was how to change the squat formulas according to the channel type during a ship’s transit. Indusol proposed dividing the Seaway into multiple sections and assigning a channel type to each section. When a vessel travelled in a certain section, the system would apply the appropriate squat formula for the section depending on the assigned channel type. Indusol was requested to test the proposal and this proposal was also ultimately accepted.
[66] As regards the second uncertainty, I find that, on a balance of probabilities, there was no technological uncertainty within the meaning of the SR&ED criteria because I am not satisfied that the uncertainty could not be resolved using routine engineering or standard procedures. The evidence showed that the various squat formulas developed by the Université Laval in 2002 took into account the different channel types. I find that routine engineering or standard procedure could have been used to resolve that uncertainty.
[67] The third major uncertainty was how to take into account the increased squat when two vessels meet in a channel. Since the additional squat was uncertain, Indusol performed tests to measure the additional squat when two ships were traveling at different speeds. This additional squat was then added to the squat calculation.
[68] Concerning the third uncertainty, the evidence showed that the Université Laval’s research did not include a method to calculate the additional squat when two vessels approach each other at different speeds. The Appellant was uncertain as to whether the proposed solutions would be effective in achieving the goals or desired specifications. Therefore, I find that, on a balance of probabilities, the evidence showed that there was technological uncertainty within the meaning of the SR&ED criteria.
[69] For these reasons, I find that, on a balance of probabilities, there was some technological uncertainty within the meaning of the SR&ED criteria as regards the implementation of the squat formulas within the DIS. This uncertainty was with respect to the additional squat when two vessels meet in a channel. I also find that Indusol carried out the above-described activities during the 2012 taxation year.
(e) User interface and display requirement
[70] According to Mr. van Eijle, the uncertainty involved with the user interface and the display requirement had to do with how to create an unambiguous and precise single display that showed all the relevant information and that did so without overwhelming the officer in charge of a vessel while still respecting international standards. In order to highlight and isolate a danger on the display, Indusol decided to use different colours to indicate unsafe water. Also, there was uncertainty about how far ahead, in terms of time, the system should look so that the officer in charge would have time to make appropriate decisions. Mr. van Eijle testified that six minutes was agreed upon by the DIS Workgroup, which was in accordance with international standards.
[71] Determining how to isolate danger on the display using different colours while respecting an international standard was a decision that needed to be made for the purposes of the DIS specifications. Since there is no evidence on whether any technological difficulty was involved in that decision, the issues raised cannot be construed as technological uncertainties within the meaning of the SR&ED criteria. This is likely a matter of making an administrative decision for the purposes of the DIS implementation specifications rather than a technological issue. Further, the DIS Workgroup simply reached an administrative decision to use the international standard of six minutes for the look-ahead time.
[72] Therefore, I find that the uncertainties raised regarding the user interface and the display requirement issues are not technological uncertainties within the meaning of the SR&ED criteria.
(f) Water level information
[73] According to the Appellant, the uncertainty involved whether there was a backup system to measure the water level if the primary system failed. As a backup system, the Seaway Authorities negotiated agreements with power companies al