Konda v. The Queen

Konda v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2007-09-18 Neutral citation 2007 TCC 648 File numbers 1999-780(IT)I Judges and Taxing Officers Brent Paris Subjects Income Tax Act Decision Content Court File No. 1999‑780(IT)I TAX COURT OF CANADA IN RE: the Income Tax Act BETWEEN: BALESH W. KONDA Appellant - and - HER MAJESTY THE QUEEN Respondent * * * * * ORAL REASONS FOR JUDGMENT BY THE HONOURABLE JUSTICE PARIS in the Courts Administration Service, Courtroom, 200 Kent Street, Ottawa, Ontario on Tuesday, September 18, 2007 at 2:00 p.m. * * * * * APPEARANCES: Mr. Balesh W. Konda for himself Ms. Marie‑Andrée Legault for the Respondent Mr. Simon Petit Also present: Ms. Line Lanthier Court Registrar A.S.A.P. Reporting Services Inc. 8 2007 200 Elgin Street, Suite 1004 130 King Street West, Suite 1800 Ottawa, Ontario K2P 1L5 Toronto, Ontario M5X 1E3 (613) 564-2727 (416) 861-8720 Ottawa, Ontario ‑‑‑ Upon commencing on Tuesday, September 18, 2007, at 2:00 p.m. REASONS FOR JUDGEMENT BY MR. JUSTICE PARIS, ORALLY: This is an appeal from a reassessment of the Appellant’s 1988 taxation year, by which the Minister of National Revenue disallowed the Appellant’s claim for investment tax credit with respect to his investment in A.L.H. Systems. A.L.H. is a partnership which undertook to do scientific research and experimental development. The Minister refused the investment tax credit on the basis that A.L.H. had not done any scientific research and experimental development within the meaning of paragraph 37(1)(a) of the Income Tax Act and Regulation 2900 of the Income Tax Regulations in the 1988 year. Therefore, the Appellant as partner of A.L.H. was found to not have had any “qualifying expenditures” as defined in subsection 127(9) of the Act, and no investment tax credit could be claimed. There are a number of issues set out in the Reply to the Notice of Appeal, but at the outset of this hearing for the sake of expedience, I directed the parties to present evidence and argument on two of the issues, and to postpone presenting evidence and argument on the remaining issues until the first two issues had been decided, if it were still necessary to do so. Therefore, the two issues to be decided at this point are, firstly, whether the Appellant has shown that A.L.H. did in fact carry out any scientific research and experimental development in 1988, and secondly, whether the Appellant was a specified member of A.L.H. as that term is defined in subsection 248(1) of the Act. The Appellant conceded in argument that he was a specified member of A.L.H., because he did not participate actively in the operations of the partnership on a regular, continuous and substantial basis. I, too, am satisfied that the evidence shows that the Appellant was a specified member of A.L.H. The Appellant became a partner in A.L.H. in the Fall of 1988, after attending a presentation in Ottawa. He understood that the partnership would carry out research and development leading to the development of software for use in the financial industry, and with applications in other fields as well. The project was referred to as “INCOM”. The partnership activities were to be carried out in Montreal, but the Appellant said he did not go to Montreal. He received and read some progress reports on the research activities, and attended three or four meetings in Ottawa to discuss the program and to give his opinion on whether the research work was going in the right direction. He also received some diskettes containing basic computer exercises to be done by each investor in the partnership, but says that he himself did not do the exercises. After a meeting in early 1989, the Appellant said the project appeared to run into difficulties, and his attempts to get further information from A.L.H. were unsuccessful. The activities carried out by the Appellant cannot be considered to have been continuous, regular or substantial in relation to the activities of A.L.H. The Appellant was a passive investor, and relied on others to carry out all of the partnership operations. His input into the project was limited to his attendance at a few meetings to review the progress of the partnership’s research work, and to offering his opinion at these meetings regarding the progress of the research. As a specified member of A.L.H., the Appellant is not permitted any investment tax credit as set out in subsection 127(8) of the Act. This conclusion alone is sufficient to dispose of the appeal, but I will also deal with the question of whether the Appellant has shown that A.L.H. carried out scientific research and experimental development in 1988. Section 2900, sub (1) of the Regulations sets out the meaning of “scientific research and experimental development” . It reads in part as follows: For the purposes of this part, paragraphs 37(7)(b) and 37.1(5)(e) of the Act, ”scientific research and experimental development is a systematic investigation or search carried out in the field of science and technology by means of experiment or analysis, that is to say, basic research namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view or development, namely, use of the results of basic or applied research for the purpose of creating new, or improving existing, materials, devices, products or processes. According to the Respondent’s scientific expert, Mr. Claude Papion, no evidence was presented by directors of A.L.H. to show that any research and development work was actually performed by or on behalf of A.L.H. in 1988. The documentation that was submitted consisted of a number of project proposals, each different from one another, and a series of studies, plans and discussion papers that did not show any research work done. Whether or not there was a link between the various project proposals that Mr. Papion looked at, the important point is that no research or development work was ever documented to him by the A.L.H. directors. None of the progress reports that were purportedly received by the Appelant were given to Mr. Papion, and unfortunately none were put into evidence at the hearing. I also note that, according to a letter sent to Revenue Canada by Mr. Vohoang (on behalf of A.L.H.) in January 1992 (Exhibit R-10), the work done by A.L.H. on INCOM in 1988 consisted of two project proposals, a system summary and an analysis of some questionnaires filled in by brokers and partners. This appears at page 3 of the letter. Again, none of this work has been shown to qualify as research and experimental development as defined in Regulation 2900. As an aside, it is almost inconceivable that the limited work that Mr. Vohoang lists as being done by A.L.H. on the INCOM project in 1988 could have resulted in expenditures of over $3.17 million as claimed. The Appellant presented no evidence that any scientific research and experimental development done by A.L.H. The onus in this case is on him to show that the basis for the reassessment is incorrect and in the absence of any such evidence, I must conclude that the assumptions relied on by the Minister in reassessing are correct. Therefore, on this basis as well, the appeal cannot succeed. It is clear to me that the Appellant invested in A.L.H. in good faith, and did what he believed was required of him in order to receive the tax benefits that the promoters of the partnership claimed would be available. It appears to me that the Appellant was misled in this regard, however, the fact that he was misled can have no bearing on the outcome of this appeal. Given the foregoing conclusions it is not necessary to hear evidence or argument concerning any of the Respondent’s alternative arguments. On the basis of all of the evidence that has been presented, the appeal is dismissed. --- Whereupon the proceedings concluded at 2:10 p.m. I HEREBY CERTIFY THAT I have, to the best of my skill and ability, accurately recorded by Shorthand and transcribed therefrom, the foregoing proceeding. Sue Rochon