Allegro Wireless Canada Inc. v. The Queen

Allegro Wireless Canada Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-03-31
Neutral citation
2021 TCC 27
File numbers
2014-1690(IT)G, 2014-1691(IT)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Income Tax Act
Decision Content
Dockets: 2014-1690(IT)G
2014-1691(IT)G
BETWEEN:
ALLEGRO WIRELESS CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence on May 6, 7 and 8, 2019 and September 21, 22 and 23, 2020 at Toronto, Ontario and written arguments received on October 8, 21 and 28, 2020.
Before: The Honourable Justice Steven K. D’Arcy
Appearances:
Counsel for the Appellant:
Jonathan N. Garbutt
Justin Pon (Articling Student)
Counsel for the Respondent:
Alisa Apostle
Natasha Mukhtar
Aaron Tallon
JUDGMENT
In accordance with the attached Reasons for Judgment:
The appeals from reassessments under the Income Tax Act with respect to the Appellant’s 2010 and 2011 taxation years are allowed, with costs, and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant incurred qualifying scientific research and experimental development expenditures of $449,878 and $508,351 in the 2010 and 2011 taxation years, respectively, and is entitled to corresponding investment tax credits of $157,457 and $177,923 for the 2010 and 2011 taxation years, respectively.
Signed at Ottawa, Canada, this 31st day of March 2021.
“S. D’Arcy”
D’Arcy J.
Citation: 2021 TCC 27
Date: 20210331
Dockets: 2014-1690(IT)G
2014-1691(IT)G
BETWEEN:
ALLEGRO WIRELESS CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
[1] The Appellant has filed an appeal in respect of its taxation year ending on September 30, 2010 (the “2010 Taxation Year”) and an appeal in respect of its taxation year ending on September 30, 2011 (the “2011 Taxation Year”). I heard the two appeals together on common evidence.
[2] The Appellant carried out a number of projects in an attempt to develop software that would address the various needs of its clients. In computing its tax liability for the 2010 Taxation Year and the 2011 Taxation Year, the Appellant took the position that a number of these projects constituted scientific research and experimental development (“SR&ED”) under the provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).
[3] Specifically, when computing its income tax liability for the 2010 Taxation Year, the Appellant claimed SR&ED expenditures of $798,342 and corresponding investment tax credits (“ITCs”) of $279,420 in respect of three projects. The Minister of National Revenue (the “Minister”) disallowed $697,723 of the amount claimed as SR&ED and $244,208 of the corresponding ITCs in respect of two projects.
[4] In computing its income for the 2011 Taxation Year, the Appellant claimed SR&ED expenditures of $615,906 and corresponding ITCs of $215,567. The Minister disallowed $463,401 of the amount claimed as SR&ED and $162,190 of the corresponding ITCs.
[5] During the six days of hearings, the Appellant called three fact witnesses, Mr. Wesley Rupel, Mr. Khalid Eidoo, and Mr. Russell Roberts, and one expert witness, Doctor Gerald Penn. The Respondent called one fact witness, Ms. Cathy Sporich, and two expert witnesses, Doctor Shrinavensen Keshav and Doctor Shirook Ali.
[6] I found all four fact witnesses to be credible. For reasons I will discuss, I have only relied on the expert evidence of Doctor Penn.
[7] The parties filed a short partial Agreed Statement of Facts (the “PASF”).
I. Summary of Facts
[8] Mr. Rupel described the Appellant’s business and the various research projects. During the relevant period, Mr. Rupel and his business partner controlled the Appellant.
[9] Mr. Rupel holds an undergraduate degree in physics and mathematics. In 1981, he started a combined Masters and Ph.D. program in physics at the University of California, Santa Barbara. He completed the Masters portion of the program, however in 1985, while his professor was on sabbatical, he took a break from the program and joined Dynamical Systems Research (“Dynamical”), a software start-up company located in Berkeley, California.
[10] A year later Microsoft acquired Dynamical. The acquisition allowed Microsoft access to Dynamical’s software, which it used when creating the Windows operating system. Mr. Rupel was one of 10 people involved in the initial stages of creating the Windows computer operating system.
[11] Mr. Rupel’s work at Microsoft focused on increasing the speed of the Windows operating system, which was a significant issue since the first version of the operating system was extremely slow.
[12] Mr. Rupel left Microsoft in 1992 and, in his own words, basically retired. He returned to Microsoft in 1998. He joined the Appellant in 2002 and became President and Chief Technology officer in 2004.
[13] Mr. Rupel and his business partner formed the Appellant to create software for industries that they believed were underserved from a software perspective. It focused on providing a software platform that allowed its clients to communicate remotely with their workers. This communication was done through wireless hand-held devices with LCD screens that the Appellant’s clients’ workers used to remotely access their employer’s computer system.
[14] The Appellant’s clients include transportation logistics companies such as Manitoulin Transport, retailers such as Loblaws and the Liquor Control Board of Ontario and companies that provide field services to their customers, such as Canon Canada (“Canon”) and Shred-it.
[15] Mr. Rupel provided a number of examples of how the Appellant’s clients used the wireless hand-held devices. For example, he described how Canon’s approximately 400 technicians used the devices to communicate with Canon’s headquarters when conducting repairs at the premises of Canon’s customers. This allowed Canon to track the repair work performed by the technicians. It also allowed Canon to communicate directly with each worker.
[16] Loblaws used the devices in the receiving area of its various stores to scan bar codes, which helped Loblaws control its inventory. Loblaws also used the devices to record deliveries and inventory at various third-party retailers that purchased their goods from Loblaws.
[17] The hand-held devices allowed for the transfer of information between the field workers of the Appellant’s various clients and databases maintained by the clients. During the relevant period, this was a new product that had not previously existed.
[18] Third parties provided the wireless hand-held devices and the Appellant provided the software. The information was transferred through cellular networks, primarily the network operated by Rogers Wireless.
[19] Mr. Rupel described in detail the various technical issues the Appellant faced when developing the software that allowed the hand-held devices to communicate with the servers. These servers held, or were connected to the servers that held, the databases of its various clients.
[20] He noted that all software development was based upon specific client needs. The Appellant spent significant time determining the needs of each of its clients. This involved understanding the client’s business and the issues the client was trying to resolve. Once this was determined, the Appellant developed specifications setting out what the software should do in order to resolve the client’s problems. The specifications were reviewed by the client and the Appellant’s software development team.
[21] The specifications would then go to the Appellant’s software development team to build the software according to the specifications. The software development team frequently encountered problems that resulted in a review of the specifications or changes to the software to resolve the problem.
[22] Once the first version of the software was written, it was then reviewed by the Appellant’s quality analysis team and its business development team. The quality analysis team ensured the software was doing what it was supposed to do and the business development team ensured it did what it was supposed to do from a business standpoint.
[23] Mr. Rupel noted that, when developing software-based products, technical problems are always encountered. For example, the Appellant may build exactly what is specified but once it puts the software into the device, it is “just too slow”. In order to satisfy the needs of its clients, the Appellant had to find solutions to all problems encountered. During the relevant period, this was a complicated exercise because of the state of the wireless technology and the underlying software at that specific point in time. He noted that it would be much easier to meet the specifications today since the underlying technology is much more advanced.
[24] He noted that one of the major problems faced by the Appellant was the fact that third-party software controlled the low-level features of the hand-held devices.
[25] For example, various third parties provided the software that operated the radio that was used to communicate with the various cell towers. Different third parties provided the software for different models of the hand-held devices. This resulted in inconsistency in the operation of one model compared with another model.
[26] Mr. Rupel noted that if the Appellant identified a problem that should not have occurred based upon the specifications of the underlying software, then it had to get creative. Routine engineering would not resolve the problem. It had to “come up with hypotheses of things [it] could try or do and see what work[ed] by experimentation.”
[27] The Appellant also had to account for the different servers used by each of its clients. In many instances, the Appellant would install its own server at its client’s premises and this server would then communicate with the client’s server.
[28] The Appellant’s core product was its platform (software), which it built to accommodate the different idiosyncrasies of the various hand-held devices used by its clients. The platform had to take into account the different operating systems and the frequent updates to the software controlling the low-level features of the devices. The Appellant’s goal was to have one system that all the different applications used in the operation of the devices could be written to.
[29] This required the Appellant to develop and maintain a significant amount of software. It was also constantly developing software to improve the operation of the various hand-held devices on its platform.
[30] Mr. Rupel described the process the Appellant used to ensure the devices worked properly for its clients. He provided background on why the Appellant was required to perform research when conducting its business.
[31] He noted that the Appellant did not have access to the source codes for the various underlying software that operated the hand-held devices. He referred to this software as a black box, something the Appellant could not see the “insides of”. He noted that as the Appellant developed its various products, various bugs and quirks occurred.
[32] Bugs arose when the underlying tools and software performed as expected and the Appellant made a mistake when writing its software, which it needed to fix.
[33] Quirks arose when, after looking at the problem, the Appellant could not determine why the event was occurring. It did not make sense to the Appellant. In Mr. Rupel’s words, there was something mysterious going on and it required a deeper investigation.
[34] Mr. Rupel noted that a quirk may or may not end up on the Appellant’s SR&ED claim. The Appellant made the decision later, after it finished its investigation and hopefully found a solution to the quirk. It would review the work it had done and determine whether it had conducted a significant amount of experimentation or whether the issue had been relatively straightforward and resolved in a direct manner. In the latter instance, the work was not included in the Appellant’s SR&ED claim.
[35] He then discussed the nature of the software development the Appellant carried out in order to provide its service in a reliable manner.
[36] He noted that in the late 1980s, when he was working at Microsoft, if Microsoft’s source code was not working properly it was because of something Microsoft had done incorrectly when developing the software. The Microsoft employees would then look through all of the source codes that went into Microsoft Windows to determine where the error occurred. Microsoft built everything from scratch.
[37] Mr. Rupel noted that by 2010 and 2011 things had evolved. Instead of writing all of the software from scratch, companies, when building a product, utilized software from various sources. He described the various software as software components.
[38] Most of the actual functionality that was being executed when someone built a product was not being done by the people who appeared to be writing the software, but rather by their use of various components that performed a number of different functions. What was occurring was that a company built its products by taking these components and writing software that “glue[d] them together”.
[39] This required the builder of the product to rely on the various software components to do what they were intended to do. A quirk would arise when there was some kind of interaction between the different software components that was not expected, that is, when a software component was not doing what the builder expected it to do.
[40] When this occurred, the Appellant would call the product support department at the company that had developed the specific software component to see if it had a solution. If it did not have a solution, then the Appellant would have to start experimenting to determine under what circumstances the software component behaved in a certain way and when it did not behave in that manner. Sometimes the Appellant could avoid the problem by doing something in a different way. Experimenting was required in the first instance because the Appellant was working with black boxes (the third-party software components) that were not behaving in the way the Appellant expected them to behave.
[41] The Appellant had to experiment and test to find out what it could do to get all of the software components to execute in the manner the Appellant required in order for the hand-held (or another one of its devices) to provide the service the Appellant’s client required.
[42] Mr. Rupel provided a general example of the nature of the problems that the Appellant encountered. He noted that component A, component B and component C may all be working as designed, but when you put them together, an unexpected complicated interaction occurs. He noted that the resolution of this problem requires making a hypothesis, testing, getting a result, learning from it and finding a solution.
[43] Mr. Rupel also explained how the Appellant kept track of the work it performed. He referred to how it tracked and managed changes to source codes. He noted that software is what operates a computer, and source code is basically how someone produces software.
[44] The Appellant maintained a source code control system that kept track of every change someone made to the source code. It allowed anyone making changes to the source code to be aware of any previous changes that he or she or another employee had made to the source code. It also maintained a version control system that kept track of the current and previous versions of a particular software.
[45] Mr. Rupel explained that there is a place in the source code control system to place comments. When a person makes a change to the source code, he or she explains in the comments why the change was done.
[46] The Appellant also used bug/quirk tracking software: one called FogBugz and a second called Jira X. This allowed the Appellant to keep track of all bugs/quirks that were reported, when the bug/quirk was fixed and when a quality assurance team reviewed the fix.
[47] With respect to determining when the work preformed with respect to quirks constituted SR&ED, the Appellant, with the help of its Canada Revenue Agency (“CRA”) SR&ED technical advisor, Mr. Paul Wong, had set up a system in the bugs/quirks tracking software (particularly Jira X). This system allowed the Appellant to keep track of the problems it identified as quirks, the things that were not working the way the Appellant expected them to work. When the Appellant’s developers were attempting to find a solution to a quirk, they would place information in the bug tracking software with respect to the work they were performing in an attempt to fix the identified quirk.
[48] The Appellant also stored information with respect to specific projects in the source code control system. The Jira X bug tracking software provided a reference for information in the source code control system. The source code control system would contain a similar reference to the Jira X bugs/quirks software. They were cross-referenced.
[49] The Appellant would ultimately review the bug tracking software and the source code control system to determine what quirks had been identified, the testing the Appellant’s developers carried out in an attempt to fix the quirk and the ultimate resolution of the issue. After conducting this review, it would determine whether the work constituted SR&ED.
[50] During the relevant years, the Appellant filed claims in respect of SR&ED performed on five separate projects. It identified technological objectives for each of the five projects. The Appellant worked on three of the projects in its 2010 Taxation Year and two of the projects in its 2011 Taxation Year.
[51] The Minister accepted the Appellant’s claim for SR&ED in respect of the second project carried out in 2011. As a result, the Appellant only filed appeals in respect of the three projects carried out in 2010 and the remaining project carried out in 2011.
[52] The PASF notes that the Appellant’s SR&ED claim for its 2010 Taxation Year included three projects, consisting of a number of activities defined as follows:
2010 Taxation Year Project 1 (“2010 Project 1”), “Protocol Compliant Methods to Extend Bluetooth Functionality”
- TA1/TO1
- TA2/TO2
2010 Taxation Year Project 2 (“2010 Project 2”), “Methods to Optimize TCP Services over Cellular Networks”
- TA1/TO1
- TA2/TO2
- TA3/TO3
2010 Taxation Year Project 3 (“2010 Project 3”), “Methods and Techniques to Improve Messaging Performance”
- TA1/TO1
- TA2/TO2
[53] TA/TO stands for technological advancement/technological obstacle. Mr. Eidoo testified that the actual claims made by the Appellant did not delineate between different TAs or TOs. The Appellant filed claims in respect of the three SR&ED projects. The delineation between TA1/TO1, TA2/TO2, and TA3/TO3 was done by the CRA. Basically, the CRA converted the three projects into seven projects.
[54] 2010 Project 3 is no longer before the Court. The CRA accepted that the portion of the project it identified as TA1/TO1 was a valid SR&ED claim. The Appellant conceded, during the hearing, that the remaining portion of its SR&ED claim with respect to 2010 Project 3 did not constitute SR&ED.
[55] Only a portion of 2010 Project 1 and 2010 Project 2 are before the Court. The CRA accepted that the portion of 2010 Project 1 that it identified as TA2/TO2 and the portion of 2010 Project 2 that it identified as TA2/TO2 constituted SR&ED. Therefore, the following are the only portions of the Appellant’s SR&ED claim for the 2010 Taxation Year that are before the Court:
TA1/TO1 of 2010 Project 1, and
TA1/TO1 and TA3/TO3 of 2010 Project 2.
[56] The PASF notes that when computing income for its 2011 Taxation Year the Appellant claimed expenditures in respect of the two SR&ED claims described as follows:
2011 Taxation Year Project 1 (“2011 Project 1”), “Multi-point Integration Platform for Mobile Applications”
- TA1/TO1
- TA2/TO2
- TA3/TO3
2011 Taxation Year Project 2 (“2011 Project 2”), “Methods and Techniques to Improve Messaging Performance”
- TA1/TO1
- TA2/TO2
[57] As noted previously, 2011 Project 2 is not before the Court. The CRA accepted that the entire 2011 Project 2 constituted SR&ED.
[58] Only the portion of 2011 Project 1 identified by the CRA as TA1/TO1 is before the Court. The CRA accepted that the portion it identified as TA2/TO2 qualified as SR&ED. The Appellant conceded during the hearing that the portion of 2011 Project 1 identified as TA3/TO3 did not constitute SR&ED.
[59] Mr. Rupel described in detail each of the four projects before the Court.
II. Expert Witnesses
[60] I heard from three expert witnesses. The Appellant called Doctor Gerald Penn and the Respondent called Doctor Shrinavensen Keshav and Doctor Shirook Ali.
[61] Doctor Penn provided his opinion on whether the work performed by the Appellant on its five projects was research and/or experimental development according to the standards of a researcher in information technology.
[62] Doctor Keshav provided his opinion with respect to whether the Appellant’s work relating to TA1/TO1 and TA3/TO3 of 2010 Project 2 and TA1/TO1 and TA3/TO3 of 2011 Project 1, as the work was described in certain documents provided to him by the CRA, complied with the guidelines established for SR&ED credits by the CRA.
[63] Doctor Ali provided her opinion on the degree to which the work carried out by the Appellant qualifies for SR&ED credits on the following two technical objectives:
Implementation of a throttling mechanism to prevent overruns when sending more than 64KB across a Bluetooth printer connection.
The determination of a concurrency limitation with MSMQ when approximately 200 concurrent devices attempt to perform messaging operation.
[64] These are the two projects identified by the CRA as TA1/TO1 of 2010 Project 1 and TA2/TO2 of 2010 Project 3.
A. Expert Report of Doctor Penn
[65] At the time Doctor Penn was presented to the Court, the Respondent stated that she had numerous concerns with respect to the admissibility of Doctor Penn’s expert report. The Court held a voir dire to determine the admissibility of Doctor Penn’s expert opinion evidence. Doctor Penn testified during the voir dire.
[66] At the end of the voir dire, I accepted Doctor Penn’s report and qualified Doctor Penn as an expert witness to provide the Court with his opinion on whether the Appellant’s work during the 2010 and 2011 on the relevant projects constituted research and/or experimental development according to the standards of a researcher in information technology. I informed the parties that I would provide my reasons for accepting Doctor Penn’s report in my written reasons for judgment.
[67] The test for admissibility of expert opinion evidence is a two-step test as set out by the Supreme Court of Canada in White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23 (“Inman”). Inman confirms and clarifies the common law principles previously described by the Supreme Court of Canada in R. v. Mohan, [1994] 2 SCR 9 (“Mohan”).
[68] The first step of the test requires the party putting the proposed expert forward to establish that the evidence satisfies the following four threshold requirements (the so-called Mohan factors):
- Relevance;
- Necessity in assisting the trier of fact;
- The absence of any exclusionary rule; and
- A properly qualified expert.
[69] The second step requires the trial judge to conduct a cost-benefit analysis to determine if otherwise admissible expert evidence should be excluded because its probative value is overborne by its prejudicial effect. This requires the trial judge to consider such things as consumption of time, prejudice and the risk of causing confusion.
[70] At the commencement of the voir dire, the Respondent’s counsel stated that she had concerns with Doctor Penn’s qualifications and concerns with respect to Doctor Penn’s expert report. She noted that her concerns with the report were related to relevance and necessity.
[71] I have no difficulty qualifying Doctor Penn as a properly qualified expert. He had the requisite special knowledge and experience relating to the specific subject matter on which he was being offered. He acquired this peculiar knowledge through study and experience.
[72] Doctor Penn holds a Ph.D. from the School of Computer Science at Carnegie Mellon University in Pittsburgh, Pennsylvania.
[73] Since 2013, he has been a full professor with the Department of Computer Science at the University of Toronto. He was formerly the associate chair of research and industrial relations in the Department of Computer Science at the University of Toronto. He has taught at the University of Toronto since 2005.
[74] As part of his job, he has often worked with private sector partners to determine whether they are entitled to claim SR&ED credits for certain research and development projects.
[75] He has extensive experience in computer science, including working with NASA when he was a visiting researcher at the Ames Research Centre in California. His work with NASA focused on human/computer interaction. The work involved research on a dialogue system for extra-vehicular missions on the Mars mission.
[76] Doctor Penn has 20 years of experience in information technology research. He noted that he has worked on projects similar to the projects the Appellant undertook during the relevant period. He provided numerous examples of specific research projects that related to Bluetooth and wireless networks in areas similar to Allegro’s projects.
[77] The Respondent did not question Doctor Penn’s independence. In fact, Doctor Penn’s independence is evidenced by the fact that he agreed with the Minister that the work carried out by the Appellant on one of the subprojects (TA3/TO3 of 2011 Project 1) was not research and/or experimental development.
[78] Doctor Penn’s expert opinion evidence is necessary. I require his opinion evidence because of the highly technical nature of the projects at issue. His evidence is also relevant. It relates to the main issues before the Court.
[79] The Respondent did not raise any exclusionary rule.
[80] I also find that the benefits of his testimony outweigh any potential costs. In fact, I do not see any significant costs.
[81] Doctor Penn’s report identifies the issues he was retained to address, notes what documents and discussions he relied on, provides a summary of his opinion and then for each of the projects provides an analysis of how he reached his conclusions. That is exactly what the Court expects to find in an expert report.
[82] The Respondent’s main concern with Doctor Penn’s report is his numerous references to a technical review of the Appellant’s projects authored by the Appellant’s CRA scientific research and technology advisor, Mr. Paul Wong. As discussed previously, Mr. Wong had helped the Appellant develop the system in its bugs/quirks tracking software to document the quirks found by the Appellant.
[83] Mr. Wong’s report is the report in which the CRA splits the Appellant’s five projects into twelve separate projects. Mr. Wong’s report is one of the 284 electronically encoded document files reviewed by Doctor Penn.
[84] When providing his expert opinion on the Appellant’s projects, Doctor Penn references Mr. Wong’s conclusions with respect to whether each of the 12 projects identified by Mr. Wong qualifies as SR&ED and states whether he agrees or disagrees with Mr. Wong. Doctor Penn refers to Mr. Wong’s conclusions in the course of providing his expert opinion on each project.
[85] Doctor Penn provides his expert opinion on pages 2 to 16 of his report. On pages 17 to 24 of his report, under the title Exhibit C, Doctor Penn provides his views on certain documents that Mr. Wong provided to the Appellant in response to an undertaking given during Mr. Wong’s discovery. I have ignored this portion of Doctor Penn’s report. It does not form part of his expert opinion with respect to whether the work performed by the Appellant constitutes research and/or experimental development. My understanding is that the Appellant requested the comments on these pages in the hope that they could be used to settle the appeal. However, no settlement discussions occurred.
[86] The Respondent’s counsel argued that Doctor Penn’s written opinion is “so dependent” on its rebuttal of Mr. Wong’s report that it is impossible to extricate the stand-alone opinions with respect to whether the projects qualify as SR&ED. In the Respondent’s view, to do so would be prejudicial to the Respondent.
[87] I do not accept the Respondent’s argument. Doctor Penn’s report is very clear and concise. I have no difficulty differentiating his comments with respect to Mr. Wong’s report from his own conclusions with respect to whether the Appellant’s work on individual projects constituted research and/or experimental development. In fact, it is not clear to me how Doctor Penn could have provided his opinion without referring to Mr. Wong’s report. He was required to inform the Court of the information he referred to when forming his opinion. It was the CRA, not the Appellant, that divided the Appellant’s five projects into twelve projects. Doctor Penn would need to understand why the CRA subdivided the Appellant’s five projects into twelve projects before providing his opinion.
[88] Certainly the Respondent’s expert witness, Doctor Ali, felt that it was important to review Mr. Wong’s report since it is listed in her report as one of the primary references she used when preparing her expert report (Mr. Wong’s report is filed as Exhibit A-8).
[89] The Respondent’s second concern related to Doctor Penn’s telephone interviews with Mr. Rupel and Mr. Wayne Hammerschlag, an employee of the Appellant. In his report, Doctor Penn referred to the interviews when informing the Court of the basis on which he formed his opinion.
[90] During cross-examination, counsel for the Respondent asked Doctor Penn if there was a transcript of these interviews. As one would expect, there is no transcript. However, Doctor Penn stated that he had notes summarizing the interviews. At the request of counsel for the Respondent and before the end of counsel for the Respondent’s cross-examination of Doctor Penn during the voir dire, Doctor Penn produced the notes. The notes (Exhibit A-38) are two pages in length, are in point form and provide a brief summary of Mr. Rupel’s answers to eight questions asked by Doctor Penn and Mr. Hammerschlag’s answers to eight questions asked by Doctor Penn.
[91] The notes are inadmissible as hearsay in proof of any facts asserted in the notes. However, they are admissible as evidence of the basis upon which Doctor Penn formed his opinion.
[92] Doctor Penn testified that he asked the questions in order to clarify certain issues he identified when reviewing the 284 electronic documents. The issues related to the Appellant’s business and procedures.
[93] Counsel for the Respondent argued that I should not accept Doctor Penn’s expert report since a transcript of the interviews was not provided to the Respondent or the Court. As a result, the basis for Doctor Penn’s opinions that were reliant on the interviews could not be tested.
[94] The fact that an expert’s opinion is based in whole or in part on information that is not proven before the Court does not render the opinion inadmissible. It is an issue of weight. The extent to which the factual foundation for the opinion is proven by admissible evidence will affect the weight it will be given.
[95] Doctor Penn’s interviews of Mr. Rupel and Mr. Hammerschlag allowed Doctor Penn to clarify certain questions he had with respect to the Appellant’s business and procedures. Mr. Rupel provided the Court with extensive evidence on both the Appellant’s business and its procedures. I find that all of Doctor Penn’s references to the Appellant’s business in his expert report and during his in-chief testimony and cross-examination are consistent with Mr. Rupel’s testimony. In other words, the factual foundation for Doctor Penn’s testimony was proven by the admissible evidence before the Court.
B. Expert Reports of Doctor Ali and Doctor Keshav
[96] I qualified Doctor Ali and Doctor Keshav as expert witnesses in the fields in which they provided their opinions.
[97] Counsel for the Appellant raised the concern that Doctor Ali’s and Doctor Keshav’s expert reports were based upon very limited factual information. He argued that Doctor Ali and Doctor Keshav were not provided with the key documents they required in order to make an informed opinion.
[98] I informed counsel that I could not address issues relating to the factual foundation of Doctor Ali’s and Doctor Keshav’s reports until I had reviewed the reports in detail and until I had an informed understanding of the factual basis for their opinions. Further, I informed counsel that his concerns went to the weight I would give the reports, something I could not decide until I had read the reports in detail and heard from Doctor Ali and Doctor Keshav.
[99] After reading each of the export reports and hearing from the two experts, I agree with counsel for the Appellant that the factual foundation for each of the reports is based upon insufficient information. Specifically, neither of the two experts called by the Respondent had a sufficient understanding of the Appellant’s business, products or procedures that would allow them to give opinions that would help the Court.
[100] Both Mr. Rupel and Doctor Penn testified that the difficult technological environment that the Appellant was attempting to operate in caused the various technological issues encountered by the Appellant.
[101] As I noted previously, the Appellant’s core product was its platform (software), which it built and constantly improved to accommodate the different idiosyncrasies of various hand-held devices, servers and printers. Mr. Rupel testified that the Appellant was trying to develop products that would address issues that arose when dealing with the interactions of numerous complex systems. At the time, its clients were using numerous hand-held devices and printers that were in the early stages of development. It also had to design systems that operated with the various servers of its clients and recognize the different environments that each of its clients operated in. In my view, an understanding of the Appellant’s business and the technical issues that arose in its working environment was essential to providing an informed opinion with respect to whether its work constituted experimental development.
[102] It was clear from the evidence before me that Doctor Penn spent a significant amount of time understanding the Appellant’s business environment and, more importantly, the technical uncertainty that arose as the Appellant attempted to develop its products in order to carry on and grow its business.
[103] It is clear that Doctor Penn felt that this was essential for him to provide an informed opinion. For example, as I will discuss, when reviewing TA1/TO1 of 2010 Project 1, one of the key facts that Doctor Penn relied on was the fact that the Appellant was dealing with a range of mobile devices that were not manufactured by the Appellant.
[104] After reading Doctor Ali’s and Doctor Keshav’s reports and hearing their oral testimony, I have concluded that neither had the required understanding of the Appellant’s business. In my view, this represents a fatal flaw in their reports. They did not have the necessary factual foundation that would allow them to provide to the Court informed opinions on the projects in question.
[105] Doctor Keshav states in his report that he based his opinion with respect to the four projects he considered on the following documents:
- The Appellant’s summary of its SR&ED claim filed with the CRA (CRA Form T661)
- Documents referred to as the “Allegro Wireless Activity Timeline” for 2010 and for 2011 (the document for 2010 is two pages in length and the document for 2011 is two and a half pages in length).
- A document entitled “2010 Allegro CRA Post Review Supplement” and a document entitled “2011 Allegro CRA Post Review Supplement”.
- A CRA letter to the Appellant.
[106] It is clear from his testimony that Doctor Keshav relied primarily on the Appellant’s Form T661. It is also clear from his testimony, particularly his answers during cross-examination, that Doctor Keshav had very limited knowledge of the Appellant’s business. He was not aware of the nature of the Appellant’s business, its clients, the nature of the various devices used in the Appellant’s business and the source code control system and software that the Appellant used to document its research.
[107] For example, Doctor Keshav was not aware that the Appellant was developing software that would be compatible with multiple hand-helds. He also was not aware of the issues faced by the Appellant because of the limited documentation provided by the manufacturers.
[108] It is not clear to me how Doctor Keshav could provide his opinion without understanding the Appellant’s business, the technological issues that arose as the Appellant tried to develop products to meet its clients’ needs, the systems the Appellant used to track these technological issues and the steps it took to address these issues.
[109] Doctor Keshav concluded at certain points in his report that the Appellant did not attempt to formally present and validate a hypothesis. The problem I have with him making this conclusion is that he admitted that he was not aware of the FogBugz and Jira X software (the bugs/quirks tracking software) that the Appellant used to document the work it performed (including the making of hypotheses) on the so-called quirks it encountered.
[110] The software was a key part of the system the Appellant had developed to make and document its hypotheses as it tried to deal with the technical issues it encountered. For example, the Appellant’s identification of a project as qualifying SR&ED was based primarily on the documentation of its work contained in the Jira X software (which contained the documentation of hypotheses made by the Appellant). Yet, Doctor Keshav was not even aware of the existence of the software, the very software that the Appellant used to identify the projects it carried out in a particular year in order to determine if the work performed on the projects constituted SR&ED.
[111] This lack of information with respect to the Appellant’s business is evident in Doctor Keshav’s report, in which he makes a number of factual assumptions. Throughout his report, when discussing facts he relied on and assumptions he made, he uses phrases such as “it is not clear”, “this seems to indicate” and “perhaps what was meant”. Doctor Keshav’s use of theses phrases, together with his need to make numerous factual assumptions, evidences that Doctor Keshav did not have the factual foundation required to provide the requested information. This was reinforced during his cross-examination.
[112] I have similar concerns with Doctor Ali’s report with respect to the one project she considered that is before the Court, the TA1/TO1 of 2010 Project 1. Similar to Doctor Keshav, her primary reference material was a limited number of documents provided by the CRA. She used three documents that Doctor Keshav also used: the T661s, the activity timelines and the CRA letter referred to in Doctor Keshav’s report. Her primary reference material also included Mr. Wong’s technical report, a CRA policy statement and five short documents of the Appellant.
[113] Similar to Doctor Keshav, Doctor Ali also testified that she was not aware of the Appellant’s business.
[114] Mr. Rupel testified that a number of the technical obstacles the A