Bowman J.T.C.C.: — I shall now render judgment in the appeals of Myers’ Humane Information Systems Inc., Carlyle Valentine Myers and Patricia Agnes Myers. At the opening of the trials herein there still appeared to be no agreement between the parties as to what the issues were, notwithstanding the fact that a pre-trial conference had been held, and notwithstanding a statement of issues prepared by counsel for the Respondent.
Mr. Myers, who represented himself, his wife, Agnes Patricia Myers, and the corporate Appellant, did not agree entirely with the statement of issues prepared by the Respondent and submitted a “correction to statement of issues.” Indeed, there was no agreement even on the years that were before the Court.
Accordingly, before the evidence was called, I spent two hours seeking to narrow the issues. The following so far as I can determine are the years before the Court and the questions that I must consider. With respect to Myers’ Humane Information Systems Inc., i.e, Systems, the years under appeal are 1989 and 1990.
The issue is: is the Appellant entitled under subsection 127(5) of the Income Tax Act to Investment Tax Credits (ITCs) in those years within the meaning of subsection 127(9) of the Income Tax Act, on the basis that it “acquired” in the year “qualified property” as defined in subsection 127(9) at a capital cost to it, for 1989, of $594,363 and, for 1990, $636,512.
The definition of “qualified property” in subsection 127.9 is so far as it is relevant here, is:
(b) prescribed machinery and equipment acquired by the taxpayer after June 23, 1975, that has not been used, or acquired for use or lease, for any purpose whatever before it was acquired by the taxpayer that is,
(c) to be used by him in Canada primarily for the purpose of,
(i) manufacturing or processing of goods for sale or lease.
Investment Tax Credit of a taxpayer is defined in subsection 127(9) to be essentially a specified percentage of the capital cost to the taxpayer of a “qualified property” acquired by him in the year or “a qualified expenditure” made by him in the year. Qualified expenditures are essentially scientific research expenditures under section 37 of the Income Tax Act. Mr. Myers specifically in response to a question by me, denied that he was relying upon the provision relating to qualified expenditures.
“Prescribed machinery and equipment” is defined in section 4600(2) of the Income Tax Regulations as being essentially depreciable property of the taxpayer that falls under certain specified classes of depreciable property described in Schedule II to the Regulations.
Counsel for the Respondent suggested that I should consider whether the property fell within Class 10 paragraph (f), but I need not read that because Mr. Myers stated that he was not relying upon Class 10(f) in respect of the company’s claim, but that he intended to base his claim solely upon Class 29 which reads in part:
Property that would otherwise be included in another class of the schedule, that 1s,
(a) property manufactured by the taxpayer, the manufacture of which was completed by him after May 8th, 1972 or other property acquired by the taxpayer after May 8th, 1972
(i) to be used directly or indirectly by him in Canada primarily in the manufacturing or processing of goods for sale or lease.
I don’t think that I need to read the rest of that provision.
The class in which Mr. Myers contends the property would otherwise be included is Class 8 as;
...a structure that is manufacturing or processing machinery or equipment...or a tangible capital property that is not included in another class in this Schedule except”.
I don’t need to deal with the exceptions.
The basis upon which this Court has jurisdiction to hear the appeals is that although nil tax was assessed for the years ’89 and ’90, the Minister, having previously paid to the Appellant an amount of Investment Tax Credits, subsequently decided that it was not entitled to the Investment Tax Credits and asked for the return thereof and assessed interest on the amount of the ITCs which it had previously paid to the Appellant.
Therefore, since interest was assessed, the Appellant’s entitled to appeal to this Court from such assessment. In determining whether the assessment of interest was correct, it is necessary that I consider whether the ITCs were properly claimed by the Appellant or whether the Minister was entitled to claim the return of the amount so paid.
In respect to Carlyle Valentine Myers, the year under appeal is 1988. The issue is the same as for the corporation, that is to say, the correctness of the assessment of interest on the ITCs paid to him. Inherent in this is the question of this right of Mr. Myers to claim the ITCs which he did and which I will describe later.
For Patricia Agnes Myers the years under appeal are 1986, 1988 and 1989 and there are two issues: the deductibility of expenses which the Appellant contends were business expenses relating to certain costs alleged to have been incurred in connection with a business said to be carried on by the corporation, and capital cost allowance on office furniture and software.
I shall deal first with the corporate Appellant (Systems). It was formed in 1986 under the Canada Business Corporations Act. Mr. Myers argued that it had the power to carry on any business and I agree. The question is not, however, what business it could have been carried on, but rather what, in fact, it did. Its stated purpose was to own and sell computer information generated by a computer system called “Land, People, Living” (LPL). The project was vast in its intended scope, covering over 200 countries and containing information relating to peoples and geographic distribution, their mode of living, their income, and occupations. It’s essentially a system entailing a compilation and analysis of statistics and information relating to these matters.
Mr. Myers appears to have considerable expertise in the matter of computers and describes himself as a systems analyst. I have no reason to doubt that description. He’s a graduate from Ryerson Polytechnical Institute in Business Administration and has taken a 64 week course in computer systems analysis at Sheridan College.
Each year he has generated, for a preceding year, tables, charts and information containing the data relating to demographic, geographical and economic information which he puts into the computer which is a Commodore 128 and the hard copy is thereby produced. The data forming the basis of the information so generated is derived from many sources, including libraries and other places.
Mr. Myers applied for and received from the Copyright Office of the Department of Corporate and Consumer Affairs three copyright certificates for the literary work and information, the computer programs (Systems) and procedures for “Land, Peoples and Living” and the manuals and special data, all relating the (LPL) system.
The basis for the claim for ITCs by Systems is that it acquired “qualified property” in each of 1989 and 1990 at a capital cost to it in 1989 of $594,363 and for 1990, $636,512. In order to qualify for Investment Tax Credits, therefore, it is necessary that this corporation demonstrate the following; first of all, that it acquired the property in the years; secondly, that the property was qualified property; and thirdly, that it had a capital cost equal to the amount claimed. These among other things are matters that the corporation must establish.
I will deal first with the question of what the property was that the corporation says that it acquired. I made a note of Mr. Myers’ comment. I asked him what the property was, and he said it was “the manufacturing system of software dedicated to manufacturing and processing information for the entire world, the planet Earth, and encompasses each country and continent of a final summary for the planet Earth. It includes continental summaries and sub-regions and is intended to cover every aspect of information for the planet relative to the three areas of land, people and living; that is to say, what they do, where they live, how they earn their living, the goods and services they produce. The property is the system.”
Specifically, I think the property is the disk or disks containing the program, and the hard copy. He also went on to argue that it included the computer.
Question one, did it acquire the property in 1989 or in 1990? The evidence does not support this. The evidence shows or at least the evidence indicates that it is shown in the returns of income and in the financial statements as having been acquired, but in at least 1989 it was stated that the property did not pass until all of the money was paid.
There was no agreement of purchase and sale. There is no document transferring the property. It just seems to have happened. It should be borne in mind that the corporation has its registered office in the residence of Mr. and Mrs. Myers and their three sons. It was said the agreement was that the company would not pay the amounts indicated until it had the funds to do so.
I do not think that it has been established that the property was acquired in either 1989 or 1990, nor do I think that it had a capital cost equal to the amounts claimed at $594,000 and $626,000 odd dollars. These amounts were contingent, they were supposed to be paid when and if the company ever had any money. They cannot, in my opinion, form any reliable basis for the calculation of an Investment Tax Credit.
Moreover, the manner in which the alleged price was arrived at involved simply taking Mr. Myers’ hourly rate of $100 or $125 and multiplying it by the number of hours that he says he spent as well as the number of hours that he says that his wife and sons had spent as well. This arrives at figures that, in my respectful opinion, are inflated to the extent of being fanciful.
Therefore, I think the appeal fails on the basis that there’s no evidence that the property was acquired and no evidence that it had a capital cost equal to the amount claimed.
Thirdly, it is questionable in my mind whether information which is essentially what was being sold is property at all. I need not decide that point.
The forth point is that it is questionable whether it falls within Class 29. Class 29, of course, is a class which requires that the property be otherwise in another class, and in this case Mr. Myers argued that the property fell within Class 8. Class 8 of Schedule 2 to the Regulations reads as follows in part:
Property not included in Class 2, 7, 9, 11 or 30 that is; a structure that is a manufacturing or processing machinery or equipment.
Let us recall what the property is that he says was being transferred. Perhaps a computer, certainly a disk containing a program, or disks containing programs and a hard copy. None of these, in my opinion, can, by any definition that I’m aware of of the word “structure” be considered to be a structure. The word structure has a meaning, it’s been set out in many cases what it means and it certainly does not mean this.
Moreover, subsection 127(9) requires the property be used in manufacturing or processing or that it be intended for that use. There’s a good question whether what the Appellant, the corporation, intended to do was manufacturing and processing. One could argue that it is in the same way in which a book publisher manufactures and processes books.
However, I think the case is somewhat closer, in my opinion, to two decisions in the Federal Court of Appeal, R. v. Veritas Seismic (1987) Ltd. (sub nom. Canada v. Veritas Seismic (1987) Ltd.), which is found in [1994] 1 C.T.C. 241, 94 D.T.C. 6123 (F.C.A.), and International Petrodata Inc. v. R. (sub nom. Canada v. International Petrodata Inc.), [1995] 2 C.T.C. 13, 95 D.T.C. 5335 (F.C.A.), where it was held that the collection of data from various sources and gathering, processing and providing information did not constitute manufacturing and processing in the sense that the information, which is the essence of the company’s business, or intended business, is not “goods”. I have great difficulty in distinguishing these two cases. However, it is not necessary that I reach a concluded decision on this point simply because there are so many other bases upon which the Appellant’s case must fail.
I come now to the appeals of the individual, Carlyle Valentine Myers. Mr. Myers claimed an Investment Tax Credit, and I will read from his basis of his claim in his return of income that the claim for the property fell under Class 10. The property in respect of which he says the claim is made is the “software, sales campaign, mailing lists, letters, word pro software, et cetera.” He claims that that property was acquired in 1988 at a cost of $67,000. On this he based a claim for $800 as an Investment Tax Credit. The $67,000 appears to be, as in the case of the Myers’ Humane Information Systems, simply a computation of his hourly rate multiplied by a number of hours.
I find it very questionable whether he acquired it. I do not think that the cost has been substantiated, but more importantly than anything else, Mr. Myers is the sole shareholder of Myers’ Humane Information Systems Limited and he’s a director and I presume the president. He is not, himself, whatever the corporation may be doing, engaged in manufacturing and processing at all. There appears to have been a certain confusion on his part as to the distinction between himself and his corporation. Either he is carrying on a business himself or he is doing so as an employee, if there was a business, indeed, being carried on. But certainly he was not engaged in manufacturing or processing anything at all.
This property was intended to, if it was property, to be used on behalf of the corporation and arose out of a sales campaign, which I do agree, was a serious campaign. He sent out letters to many, many people throughout Canada, but this was in connection with the company’s business, not his business. I can see no possible basis which Mr. Myers can deduct the cost of developing this program for the use of the company in connection with its sales campaign, nor, indeed, do I think the property falls within Class
29. It’s certainly not equipment to be used by him primarily in the manufacturing or processing of goods. There’s no equipment at all really except to the extent that perhaps the computer might be equipment. There’s no evidence that he acquired the computer in 1988. He acquired it sometime earlier. I might say that there’s no evidence that the computer was ever transferred to the company. Therefore, I must reject Mr. Myers’ claim as well.
The third issue is the claim of Mrs. Myers, his wife. There’s no question of a claim for Investment Tax Credits here. Rather it is a claim to deduct substantial amounts in the computation of her income. In 1986 she claimed $21,781. In 1988 she claimed $18,721 and in 1990 she claimed a similar amount.
MS SINGER: Excuse me for interrupting. I think it was 1989 you meant instead of 1990.
HIS HONOUR: 1989, yes. In ’86, ’88 and ’89; is that right?
MS SINGER: Yes.
HIS HONOUR: She claimed some $23,228. Most, if not all of this, was disallowed by the Department. The basis of these claims is a little unclear. At one point it was suggested that these were office and employment expenses, and at other times it seems as though they were treated as business expenses. Among other things, she claimed half of the apartment rent
— the apartment where she, her husband and her three sons lived. She claimed cleaning supplies, coffee, meals. It’s not even clear whether she incurred these amounts. She probably paid some of them. She seems to have been earning more money than her husband. She had a job with the Ontario government.
She claimed capital cost allowance, among other things on computer software and hardware of $15,000 in 1986, 7,700 dollars odd in 1988 and $17,402 in 1989. Dealing only with the computer software, there’s no evidence that she owned it in the first place, and certainly no evidence that she had a cost equal to the amount so claimed. I think the evidence supports the view that the costs, so called, that she is claiming are actually a compilation of her husband’s hourly rate multiplied by a certain number of hours. The short answer is, that it’s not evident that she owned it, or that the property was ever transferred to her or that she had ever incurred any such cost. The other costs, such as newspapers and the rent on the apartment, strike me as personal and living expenses.
Moreover, if they are claimed as employment expenses, it would seem to me to be clear that they do not fall within the types of expenses that are allowed to employees under section 8 of the Income Tax Act. They are, in my opinion, largely personal and living expenses. If they are claimed as business expenses, there’s no evidence that she carried on any business. Even assuming for the moment that she was an employee, she is not entitled to this type of expenses. But as far as the business is concerned, again, this illustrates, in my opinion, a confusion between the business of the company, if that’s what it had, and the business of the wife of the president and sole shareholder of the company. There’s been certainly no evidence that she was carrying on business herself. Indeed, she did not testify.
Accordingly, I am dismissing her appeal as well.
I come now to the question of costs, in the informal procedure, there are no costs that can be awarded against the taxpayer.
So far as the corporation is concerned, this has caused me a certain amount of concern because Judge Mogan evidently made an order that this appeal could proceed in forma pauperis. Now, he did not purport in his order to bind the award of costs by the trial judge. I am also deeply aware of the fact that Mr. Myers does not have much money, nor does his company. He’s embarked on a monumental project and it certainly has not made much money. It has made none actually. Perhaps one of the reasons that it claimed such huge losses was the rather exorbitant costs that it claimed in respect of the computer software and material that it got.
The trial was spun out over two days. Mr. Myers argued for upwards of four hours, whereas counsel for the Respondent gave a very succinct, able argument and dealt with the issues in about half an hour. I admonished Mr. Myers to try and stick to the point. I endeavoured to give him ample scope to put in his case.
However, as to costs, the Court has a wide discretion. We have a certain ability not to award costs. I appreciate that every time I feel sorry for a taxpayer it is no reason not to award costs against them. And it may well be an improper exercise of my discretion to say that if I decide not to award costs against the corporation, I’m doing so purely on compassionate grounds.
Mr. Myers’ wife has left him. He is in impecunious circumstances, and I’m also aware of the fact it will probably cost the Crown almost as much to collect the costs as the amount that might be awarded.
In all of the circumstances, notwithstanding the fact that Mr. Myers did cause these proceedings to be much longer than I think they needed to be, I have decided that in the circumstances of this case not to award costs against the Appellant.
The appeals are, therefore, dismissed without costs.
Appeal dismissed.