Legal Analysis – The Belize Case

On October 27th, 2015, the Honorable Judge Diane Campbell of the Tax Court of Canada released her judgment on the ACSIS HER (Electronic Health Record) Inc case Docket 2012-4645(IT)G, which was heard on April 8, 9, and 10th, 2015 in Nova Scotia. I like to refer to this case as the “Belize” case, as the technology involved developing an on-line information technology solution in a country that had very poor internet infrastructure at the time.

In the Belize case, the Judge overturned CRAs position, a denial from the fiscal years 2005 & 2006.

This is a fascinating case for many reasons. In this article, I will review the important aspects of the decision.

The dates involved provide insight into the lengths that an SR&ED claimant must go to, in order to seek justice. The fiscal years in question are 2005 & 2006. It is likely that the claims were first filed in 2007. However, the tax court docket date refers to 2012. So, between 2007 to 2012, this claimant was likely embroiled with CRA in regular audit, perhaps some escalations, and most certainly a lengthy Notice of Objection which can take 1-3 years. After the case was submitted to tax court, it took another 3 years to get in front of a judge in 2015. And after that, the judge took 6 months to deliberate.

The ITCs in question were worth $125,858 & $113,573, which are significant amounts of money for a small company.

The Judge does not discuss CRA’s position at length. From the language used, however, one can infer that CRA did the following:

• broke the activities down into routine components;
• criticized the documentation kept by the claimant;
• ignored the credibility of the claimant;
• considered the approaches taken to be random or unscientific, thereby not systematic;
• sought records of exact measurements, as if Information Technology was a pure Science
• considered the problems to be technical as opposed to technological
• ignored the existence of hypotheses, experiments, tests, simulations, development of pseudo-code, experimental algorithms
• ignored accolades from industry peers
• trivialized the technological hurdles faced in the developing nation of Belize

The judge went to lengths to describe the claimant’s difficulties, which resonated as technological problems. The judge repeated that CRA did not refute any of the testimony given by the claimant’s witnesses. One must then naturally wonder, if CRA has no real position or solid argument against a claimant, why do they continue down a futile path that only creates additional injustice and aggravation?

The judge described at length largely eligible activities:

• Identification of at least 10 distinct technological objectives
• Identification of at least 6 distinct technological uncertainties
• Identification of technological obstacles and hurdles
• Development of hypotheses
• Brainstorming, maintaining test plans, whiteboards
• Development of pseudo-codes, ie. prototypes, simulations
• Construction of algorithms
• Testing in laboratories, and then in live environments
• Comparison to available technology at the time and understanding the relative technical deficiencies thereof
• Lack of any clear expectation of success for the project
• Evidence and documentation that were consistent with oral testimony

The Belize case demonstrates how different Tax Court is from CRA audit. Often times, a CRA auditor will latch on to their negative perceptions of the work in a claim, and they will defend to the bitter end. And then the office of the Chief of Appeals practically never overturns any denial if it means defying the opinion of the original CRA auditor. In this case, the Judge even cited the accolades awarded to the claimant from a report that was commissioned by the Bill & Melinda Gates Foundation, and repeated the recognition “Belize’s innovative HIS system is perhaps the most comprehensive system in the world”. Apparently, nobody at CRA thought that was relevant.

The judge took a common sense approach. There was uncertainty, there were fundamental problems that were not merely technical, the available solutions were inadequate, the claimant followed a systematic process that involved hypotheses, experiments, observations, and then the project resulted in significant technological advancements.

The Belize case leads us to ask a few fundamental questions.

• How could CRA get this case wrong in the first place, when it was so obvious to the Judge that the entirety of the work was eligible?
• Why did CRA go to lengths to defend in tax court when they had no intention of disputing or challenging any of evidence given by the claimant?
• Why does CRA ignore critical aspects of a claim, like the credibility of the claimant, or their business circumstances?
• Why does CRA continue to assert that exceptional levels of documentation are required, when judges routinely remind them that there is no legislative requirement to file those documents in order to qualify for the deduction of expenditures?

The Belize case serves as an excellent reminder that the Tax Court of Canada views SR&ED very differently than the administering body of CRA.

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