Robotx Solutions Inc. v. The Queen (2017)
Key Lessons / Points
- To be eligible for SR&ED Investment Tax Credits (ITCs), work must be approached through a systematic investigation where hypotheses formed using the existing knowledge base are tested through experimentation and analysis. Hypotheses are tested and the results are analyzed to determine what can be learned to improve future attempts. This process seeks to address an uncertainty to achieve scientific and technological advancement.
- In this case, the Appellant was unable to prove they had identified a technological uncertainty and sought to reduce or eliminate that uncertainty through experimentation or analysis in all of their projects.
- Please see the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives for more information.
- Documentation detailing the process of the project(s), including the technological uncertainties involved and the decisions and progress made in solving said uncertainties is imperative for SR&ED applications. SR&ED applicants must be able to show during an audit or trial enough proof that the scientific method was followed.
- In this case, the judge noted multiple times that the lack of documentation prevented the Appellants’ claim from being accepted.
- Please see our article Why do I need contemporaneous documentation for SR&ED? for more information.
Fiscal Years in Question
Court Heard In
Tax Court of Canada (Montreal, Quebec)
October 31, 2016 & December 14, 2016
Length of Process
2017 TCC 73
Amount Under Dispute
Decision For these reasons, the appeal is dismissed without costs.
The Appellant, Robotx Solutions Inc. (Robotx), is a private corporation established in 2002 that enhances equipment at their clients’ request, particularly by increasing their life expectancy, by improving their safety mechanisms with a view to making them compliant with current standards or by standardizing them to generate economies of scale. In this case, Robotx sought to appeal the federal Income Tax Act determination made with regards to their scientific research and experimental development (SR&ED) expenditures (and accordingly refundable investment tax credits) pertaining to the Appellant’s taxation year ending on November 30, 2012. The claimed expenditures were incurred by the Appellant in connection with four separate contract projects for four separate companies.
The initial claimed SR&ED expenditures for the 2012 taxation year had been reassessed and the Minister of National Revenue disallowed $182,483 for SR&ED expenditures claimed in respect of the four contracts. The judge evaluated each project separately using the definition of SR&ED as written in the Income Tax Act in addition to related legal rulings such as Northwest Hydraulic Consultants Limited v. The Queen (1998) to evaluate the eligibility of the Appellants’ SR&ED ITC application. The Judge noted the documentation presented was inadequate, and the Appellant failed to prove that any technological advancement had been sought and that therefore there was no proof of technological uncertainty relating to the projects. The judge stated that the Appellant did not persuade them that they carried out experimental development within the meaning of the
Key Excerpts The issue is whether the appellant conducted scientific research or experimental development during the performance of four contracts with clients.  During the taxation year ending November 30, 2012, the appellant claimed, when filing its T2 tax return, Scientific Research and Experimental Development (“SR&ED”) expenditures for some of the work performed for four contracts: 
 In July 2014, the Minister of National Revenue issued an assessment against the appellant for the 2012 taxation year and disallowed $182,483 for SR&ED expenditures claimed in respect of the four contracts (“disallowed SR&ED expenditures”).  Accordingly, the Minister disallowed the investment tax credits of $48,043. No question of quantum was raised.   The appellant chose to use the informal procedure and renounced the excess disallowed credits over $25,000.  Essentially, with respect to the work that resulted in the SR&ED expenditures claimed by the appellant, the Minister submitted that said work did not involve technological uncertainty and that it was not completed using a systematic investigation or search.  He submitted, on the contrary, that during the course of the work there were only technical issues that could be resolved by current practices that are part of existing scientific or technological knowledge. He also submitted that the appellant was unable to show that any technical advancements were made.  In light of the foregoing, this Court must determine, for each contract, whether the Minister was correct when it concluded that the work that generated the disallowed expenses did not constitute SR&ED within the meaning of the Income Tax Act (Act).  There were two witnesses, one of whom was Mathieu Billette, the appellant’s President. Through this testimony, the appellant filed certain documentary evidence and photos to allow the Court to better understand the scope of the work performed. Jonathan Assouline, Research and Technology Advisor for the Canada Revenue Agency (CRA), also testified. Mr. Assouline is the official in charge who determined the eligibility of the appellant’s projects at the assessment stage. No expert witness was called to testify by either party.  In order to determine whether the work undertaken by the appellant meets the definition of the Act, the courts adopted certain criteria developed in 1998 by Judge Bowman (as he was then) in Northwest Hydraulic Consultants Ltd. v. Canada.  This approach was confirmed on a number of occasions, namely in the Federal Court of Appeal decisions RIS – Christie Ltd. v. Canada  and CW Agencies Inc. v. Canada  . See also the very recent decision of Justice D’Auray in Formadrain Inc. v. The Queen.  These criteria, as expressed by the Federal Court of Appeal in CW Agencies at paragraph 17, are as follows: 
1. a contract for Diageo Canada (“DICA” project) aimed at improving the safety of employees using palletizers and depalletizers for cases of alcohol bottles;
2. a contract for the MDA Corporation (“MDCO” project) intended to optimize the performance and security of a digitally controlled milling machine;
3. a contract for the Municipality of Saint-Zotique (“VSZO” project) aimed at improving and integrating the control system of a drinking water filtration plant and 13 pumping stations;
4. a contract for Metra Aluminium (“MEAL” project) aimed at minimizing production costs by adding a specific system to the production line.
 Prior to specifically examining the projects, I will note that it was not always easy to follow the appellant’s evidence and that often the evidence was relatively general and vague.  The DICA project was undertaken for Diageo Canada, a company specializing in alcohol products. The plant where the appellant carried out its work is located in the Municipality of Valleyfield.  In financial terms, the SR&ED expenditures claimed for this project, around $81,500, are by far the highest of the four projects. That is approximatively two thirds of the SR&ED expenditures claimed.   Specifically, the purpose of the contract was 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?
 According to Mr. Billette, the equipment used for the work was outdated and no longer met current safety standards. Moreover, the original manufacturers no longer provided technical support for the equipment, which allegedly made data collection more complicated than initially expected.  As for the project’s technological aspects, the appellant’s witness submitted that there were many: first, under the agreement between the parties, it was vital to ensure that the outdated equipment met the safety standards currently in force, and therefore, that the platform loaded with cases could not fall on the operators who had to clean the equipment. These changes had to take place while respecting the production flow.  Moreover, the obsolescence of the equipment and the loss of certain operators with on-the-ground knowledge of the use of the equipment allegedly raised significant technological uncertainties discovered only after the start of the work.  Following these changes, a number of issues cascaded, which forced the appellant to conduct several tests and make a few modifications to the components used. Along the way, the option of a one-size-fits all system proved impossible to achieve, which required the implementation of new working hypotheses. However, the appellant was able to design and use a control panel in almost all the equipment, which ensured the communication of break system sensors with the rest of the safety system through automation.  As for Mr. Assouline, the respondent’s witness, he submitted that the appellant was unable to show that any technological advancement had been sought, and that therefore there was technological uncertainty relating to this project. The respondent acknowledged that the appellant had to work with fairly old equipment to make it compliant with current standards, but according to her, this did not amount to SR&ED work.   Furthermore, he claimed that the documentation submitted by the appellant identifying the various tests and hypotheses presented purely technical work, that is to say the identification of the problem, and then its resolution through the practical application of the technological knowledge generally available. None of the documents submitted indicate that there were technological limitations sought to be overcome, neither at the start of the project nor along the way.  Finally, upon reading said documentation, he is of the view that it is impossible to confirm when the work was conducted, which is a problem considering that the work began in 2011 and not 2012.   It is worth noting that when the Act states “for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto”, one cannot read these words without taking into account the entire provision, notably, the requirement that the purpose must be technological advancement.  It is therefore not enough to improve a particular existing device or process; there must be improvement in relation to existing technology and one must be incapable of making any progress by using routine engineering, standard procedures or current knowledge.  Therefore, the improvement of an old machine that performs specific work to increase the level of safety cannot represent technological advancement if other machines doing the same work with the desired level of security already exist, or if the improvement can be done without technological advancement in terms of how to make the improvement.   There is no doubt that there were some uncertainties at the outset and that various problems arose during the performance of the work; I have no doubt that it was not always obvious, when a problem was discovered, how exactly to solve the problem.   However, it is not the mere fact that uncertainties exist, that problems arise and that it may take a certain effort to determine how to solve these problems that makes is so that the effort to solve these problems necessarily constitutes experimental development. There must be technological uncertainties. Many people who have undertaken renovations of old homes have experienced it: unknown situations as to what is hidden behind the wall, surprises when opening the wall, and so on. In and of itself, difficulties are not sufficient for the resolution of these problems to become experimental development.   If one seeks to achieve technological advancement in respect of a process,  I would expect the novelty or improvement sought to be clearly and specifically described in relation to current processes. That is not the case here.  Although the provisions of the Act do not require contemporary documentation with specific content to demonstrate experimental development work, it is very important to be able to present clear, detailed and precise evidence; this could be extremely difficult, if not impossible, in the absence of adequate documentation during the course of the work.  As stated by Judge Archambault in 116736 Canada Inc. v. Canada: 
1– PROJECT ISSUE
Eliminate the risk of the lifting platform for palletizers and depalletizers falling during an intervention that requires the presence of an operator/mechanic under the machine’s platform.
Make the machines safe according to [current] standards. 
MEAL project Metra Aluminium is a manufacturer of aluminium extrusion. As part of the agreement signed with Metra Aluminium, Robotx was required to conceive, manufacture and install a device that Metra and Robotx called a [translation] “correction roller” or [translation] “plate rectifier”  that had to be integrated into an existing production line.  The device was meant to straighten out aluminium rectangular bars that protruded from an extrusion machine. Metra wanted to integrate the step of rectifying an aluminium plate directly into the production line, in order to avoid displacements, without motorization and in a safe manner. This would allow Metra to modify its processes in order to minimize the costs associated with the operation of its production line, particularly by reducing the number of times it took to manipulate the aluminium plates.  At the start of the project, the appellant’s intention was to create a fixed system, with no pivot, in order to ensure the flatness of the aluminium plate directly on the production line. However, after some experimentation, Robotx realized that this option was not optimal considering the inherent characteristics of the machine, including the established structures that could not be changed.  Mr. Assouline argued that the work presented by the appellant did not describe SR&ED issues, but rather problems presenting physical, dimensional and operational obstacles.  According to the information provided by the appellant in its application, Mr. Assouline submitted that the appellant did not provide any additional information that would allow the Minister to identify a technological uncertainty or a technological advancement.  Regrettably, based on the evidence provided, I cannot conclude that there was experimental development within the meaning of the Act.  I heard no evidence that the purpose was to achieve technological advancement for the purpose of creating a new device or a new process.  However, let us suppose that I had concluded that there was a new device or a new process.  On the contrary, there is evidence to suggest that the uncertainties were not technological. On the one hand, along the way the client imposed, as it learned certain things on its own, new constraints. Such changes are not in and of themselves, for the appellant, a technological uncertainty.
VSZO project The tender form provided by the Municipality of Saint‑Zotique to the appellant indicated that the project title was [translation] “Upgrading water treatment plant control systems and pumping stations”.  The resolution of the municipality granting the contract to the appellant on August 21, 2012, contains the following description in its title [translation]: “Implementation of the Ethernet telemetry in sewage pumping stations and new program for the filtration plant”.   I have the same issues with this project as I did with the two previous projects. These issues are such that the appellant did not persuade me that it carried out experimental development within the meaning of the Act.  However, there is an additional problem here. Even if I were of the view that there was experimental development over the life of the project, the evidence submitted pertained to the entire project. There is nothing in the evidence to draw a conclusion that specific work during the year at issue was experimental development.
MDCO project As part of the contract, according to the project summary contained in the appellant’s T‑661 form, Robotx was asked to design, develop and fine-tune new mechanisms and new components to optimize the performance and the safety of a digitally controlled milling machine.   In essence, the project involved creating a mechanism with a protective part to add to a milling machine that MDA had to improve employee safety.  More generally, Robotx wanted to create a mechanism that could be integrated into various equipment with a rotating part, whether it be a milling machine, a drilling machine or other.  As for Mr. Assouline, he submitted that the development of this system, as presented and described, does not meet the definition of SR&ED under the Act. According to him, it simply involves normal development or normal improvement for this type of equipment based on currently known technological knowledge.  Moreover, despite requests by the CRA for documentation supporting the appellant’s claim, Robotx never provided the documents it said it had in support of this project. Nevertheless, it appears that according to the review record, the CRA granted the appellant a time limit of more than five months to send the documents, when the typical timeframe is 30 days.  However, as with the previous projects, the evidence does not support a finding that the uncertainties are technological uncertainties.   There is therefore no need to vary the assessment with respect to the MDCO project.
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