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Docket: 2002-4673(IT)I |
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BETWEEN: |
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SYNCHROSAT LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
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Appeal heard on May 6, 2003, at Ottawa, Ontario.
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Before: The Honourable Judge Lucie Lamarre |
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Appearances: |
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Agent for the Appellant: |
Asim K. Sen |
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Counsel for the Respondent: |
Jennifer Neill |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2001 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled to allowable scientific research and experimental development expenditures in the amount of $20,338. The refundable tax credit is to be recalculated on that basis, in accordance with subsections 127(5) and 127(9) and section 127.1 of the Act.
Signed at Ottawa, Canada, this 29th day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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Citation:2003TCC380 |
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Date: 20030529 |
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Docket: 2002-4673(IT)I |
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BETWEEN: |
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SYNCHROSAT LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Lamarre, J.T.C.C.
[1] This is an appeal under the informal procedure from an assessment made by the Minister of National Revenue ("Minister") under the Income Tax Act ("Act") for the appellant's 2001 taxation year. Through that assessment, the amount of $41,398 claimed by the appellant as allowable scientific research expenditures for that year was reduced to $19,424 and the claimed refundable investment tax credit in the amount of $13,040 was reduced to $6,119.
[2] The amount of $21,974 that was thus disallowed as scientific research and experimental development ("SR & ED") expenditures, which disallowance resulted in the disallowance of $6,921 of the refundable investment tax credit claimed, is the portion of the salary earned by the appellant's main shareholder, Dr. Asim K. Sen, in 2001, plus Canada Pension Plan ("CPP") contributions, that was considered not to be related to eligible SR & ED activities. The facts upon which the Minister relied to assess the appellant are set out in paragraph 9 of the Reply to the Notice of Appeal ("Reply") as follows:
(a) the Appellant operated research on Alternative Energy Sources-Momentum Turbine (the "Project"), its sole eligible S.R. & E.D. project; (admitted)
(b) the fiscal year end of the Business was December 31; (admitted)
(c) Dr. Asim K. Sen (the "Appellant's shareholder") was the president and shareholder of 97% of the common shares of the Appellant during the taxation year 2001; (admitted)
(d) the Appellant's shareholder was the sole employee and sole scientist working for the Appellant during the entire 2001 taxation year; (admitted)
(e) the Appellant's shareholder agreed in writing with CCRA representatives that the Project of the Appellant can be divided into the following four set [sic] of activities:
A. Re-installation and modification of the experimental set-up;
B. Purchase of an IBM personal computer and installation of the internet facility;
C. Preparation and Posting of the Company Website;
D. Application for New and Preparation of the Response for the Already-applied patents;
(admitted)
(f) the Appellant's shareholder admitted in the description of the S.R. & E.D. project that much of his work done during the taxation year 2001 was related to patent development work in order to protect proprietary rights; (admitted)
(g) the Appellant's shareholder admitted that the activity A, (25% of the activities described in paragraph e)), were [sic] eligible R.S. & E.D. activities; (admitted)
(h) the Appellant's shareholder did not provide a breakdown of his time spent for the entire activities (A,B,C,D) related to his work for the Appellant; (admitted)
(i) only 25% of the shareholder's working time spent on the entire activities for the Appellant during the taxation year 2001 were allowable S.R. & E.D. expenditures; (admitted)
(j) the salary of the Appellant's shareholder during the entire 2001 taxation year is an amount of $28,080, plus CPP contributions in the amount of $1,219 for a total of $29,299;
(k) CPP contributions in the amount [of] $1,219 for the Appellant's shareholder were paid during the taxation year 2001; (admitted) and
(l) the calculation of the total salary of the Appellant's shareholder related to eligible S.R. & E.D. activity is $29,299 x 25% = $7,324.66.
[3] The appellant disputed two points. The first was in respect of the CPP contributions paid by it in 2001. The appellant agreed that Dr. Sen earned an accrued salary of $28,080 in 2001, which was in fact paid in 2002, but denied that the CPP contributions in the amount of $1,219 paid in 2001 were attributable to that salary. The appellant argued that the CPP contributions of $1,219 were attributable to salary that was paid to Dr. Sen in a previous year and that had been accepted as an SR & ED expenditure. At the hearing, counsel for the respondent conceded that point and no longer disputed that the total amount of $1,219 was an allowable SR & ED expenditure.
[4] The second issue raised by the appellant was that the accrued salary of $28,080 earned by Dr. Sen in 2001 was for "540 man-hours" only, which in fact represented just 25 per cent of the total hours worked by Dr. Sen in the year on the entire project. In other words, the appellant argued that the Minister erred in allowing only 25 per cent of the salary expense of $28,080, that is, $7,020, as the amount of $28,080 Dr. Sen charged the appellant represented only three months' salary in the year and Dr. Sen worked full-time for the appellant during all of 2001. In the appellant's view, the salary earned by Dr. Sen in 2001 was wholly attributable to the only activity that qualified as an eligible SR & ED activity.
[5] When asked why he charged the appellant for only three months' salary for the year 2001, Dr. Sen answered that the appellant could not afford to pay more and that he himself also wanted to save tax.
[6] In the Notice of Appeal, the appellant submits the following:
18. The Appellant submits that, during the entire 2001 taxation year, the scientist [Dr. Sen] worked as a full-time employee of Synchrosat Limited working more than 40 hours a week to undertake all four activities (A), (B), (C) and (D) as described in paragraph 8 above, but he charged for only 540 man-hours of his time to the company for all his work performed during the year. This represents only about 25% of his total time he spent in carrying out all four activities (A), (B), (C) and (D). All four activities undertaken by the scientist in the year relate to work on Project 1.
19. The Appellant submits that this is not the first time the scientist had charged the company just about 25% of the actual cost of his total labour in working on Project 1. He, being also the owner of the company, has been doing it almost every year to reduce his total tax liability on his yearly earnings. In this context, the Appellant would like to quote the following observations made by the Honourable Judge, Pierre Archambault, during his judgement on an earlier appeal hearing heard on January 26, 1996 relating to Project 1:
"... only about 550 man-hours were devoted each year in 1991 and 1992 on the GES project, this represents about three months' of work. These facts raise in my mind the issue if the project was being carried on in a business-like manner. However, this was not the issue raised before me in these appeals. Had it been, it is possible more explanations would have resolved this concern."
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21. Therefore, the Appellant submits that the total salary expense claimed should represent the required 25% of the scientist's actual wages in accordance with the Eligibility Report of the Regional Research and Technology Advisor and should be considered qualified Scientific Research and Experimental Development expenditures under the Income Tax Act (Canada) and the Income Tax Regulations.
[7] The evidence disclosed that the appellant had deducted SR & ED expenditures for several previous years. When the appellant filed its Claim for Scientific Research and Experimental Development (SR & ED) in Canada ("Claim") in January 2002 for the 2001 taxation year (Exhibit F in Exhibit A-1), it claimed total labour expenditures of $28,080 for the "alternative energy sources" project. Along with the Claim there was filed a breakdown of SR & ED expenditures showing a research and development labour expense for the scientist's work ("540 man-hours") of $28,080. In an attachment also filed with the Claim, the appellant described the work performed in 2001. As so described, that work was a combination of the four activities listed in paragraph 9(e) of the Reply, which list I reproduce again here:
A. Re-installation and modification of the experimental set-up;
B. Purchase of an IBM personal computer and installation of the internet facility;
C. Preparation and Posting of the Company Website;
D. Application for New and Preparation of the Response for the Already-applied patents.
[8] Although the breakdown of SR & ED expenditures attached to the Claim indicates that the amount of $28,080 was charged for "540 man-hours", there is no suggestion either there or in the other document, referred to above, that was attached to the Claim, that the "540 man-hours" charged for were only for work done on activity "A", that is, the re-installation and modification of the experimental set-up. Indeed, when the appellant filed its Claim in January 2002, it was under the impression that all the activities gave rise to eligible expenditures. An audit was subsequently performed by the Canada Customs and Revenue Agency ("CCRA") and the project was split into four sets of activities. It was only during the audit that the appellant conceded that activity "A" alone qualified as an eligible SR & ED activity. At that stage, both the CCRA and the appellant agreed on the description of the four sets of activities and on the fact that Dr. Sen had spent 25 per cent of his time on each activity in the year.
[9] Therefore, I do not believe that the amount of $28,080 that Dr. Sen charged the appellant was attributable only to that one eligible activity. Indeed, I do not interpret the reference to "540 man-hours" in the breakdown of SR & ED expenditures filed with the Claim as meaning that the salary charged was only for the work done on the re-installation and modification of the experimental set-up. That is not what that document says. As a matter of fact, Dr. Sen admitted that the appellant could not afford to pay him a higher salary. That is the reason for Dr. Sen's not charging for more than "540 man-hours" and for his accepting from the company he controlled a reduced salary for all of the work he did in 2001. The appellant had the burden of showing that Dr. Sen charged it only for the work done on the eligible activity. Dr. Sen did not file a breakdown of the time he spent on each activity in the appellant's project. The evidence before me is insufficient to refute the allegations of fact stated in the Reply.
[10] For these reasons, I agree with the respondent that the total salary of the appellant's principal shareholder did not relate exclusively to the eligible SR & ED activity, and that only 25 per cent of the salary earned in 2001 qualified as an SR & ED expenditure. The salary earned in 2001 was $28,080, and only 25 per cent of it, that is, $7,020, was related to an eligible activity.
[11] The respondent conceded at the hearing that the CPP contributions in the amount of $1,219 paid in 2001 were attributable to salary earned in previous years that was related to eligible SR & ED activities.
[12] Consequently, the appeal is allowed on the basis that the appellant is entitled to allowable SR & ED expenditures in the amount of $20,338 (which is composed of the amount of $19,424 already allowed by the Minister plus 75 per cent of $1,219, or $914, which counsel for the respondent now concedes should be added). The refundable tax credit is to be recalculated on that basis, in accordance with subsections 127(5) and 127(9) and section 127.1 of the Act.
Signed at Ottawa, Canada, this 29th day of May 2003.
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"Lucie Lamarre" |
J.T.C.C.
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CITATION: |
2003TCC380 |
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COURT FILE NO.: |
2002-4673(IT)I |
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STYLE OF CAUSE: |
Synchrosat Limited v. The Queen |
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PLACE OF HEARING: |
Ottawa, Ontario |
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DATE OF HEARING: |
May 6, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge Lucie Lamarre |
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DATE OF JUDGMENT: |
May 29, 2003 |
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APPEARANCES: |
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Agent for the Appellant: |
Asim K. Sen |
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Counsel for the Respondent: |
Jennifer Neill |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
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Firm: |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |