2020 QCCQ 4190, 2020 QCCQ 4190

MDA Systems Ltd. c. Agence du revenu du Québec 2020 QCCQ 4190 COURT OF QUEBEC “Administrative and appeals division” CANADA PROVINCE OF QUEBEC DISTRICT OF MONTREAL “Civil Division” Nos.: 500-80-031531-156 500-80-031702-153 500-80-031918-155 500-80-033749-160 500-80-035829-176 DATE: October 5, 2020 ______________________________________________________________________ PRESIDING: THE HONOURABLE DANIEL BOURGEOIS, J.C.Q. ______________________________________________________________________ MDA SYSTEMS LTD Plaintiff v.

AGENCE DU REVENU DU QUÉBEC Defendant ______________________________________________________________________ REVISED JUDGMENT [1] ______________________________________________________________________ The rectification aims to add a lawyer to the defendant’s law firm.

THE DISPUTE [ 1 ] The Court has before it five appeals of tax assessments in the following files: − 500-80-031918-155 (taxation year 2009); − 500-80-031531-156 (taxation years 2010 and 2011); − 500-80-031702-153 (taxation year 2012); − 500-80-033749-160 (taxation year 2013); − 500-80-035829-176 (taxation year 2014). [ 2 ] The plaintiff corporation MDA Systems Ltd (“MDA”) has its place of business in Vancouver, British Columbia. [ 3 ] It was incorporated on November 28, 2008. It operates in the computer systems engineering industry.

Its principal activities are providing computer services to other businesses. [ 4 ] MDA entered into several contracts with the Canadian Space Agency (“CSA”), through Public Works and Government Services Canada (“PWGSC”), for the RADARSAT Constellation Mission program (“RCM Program”). [ 5 ] The RCM Program provides for the development of a three-satellite constellation to perform radar imaging from space, to support maritime surveillance, disaster management, and ecosystem monitoring.

The Program includes three (3) spacecraft, a ground segment, and operations. [ 6 ] The total cost of these contracts for the Canadian government was over $1 billion. [ 7 ] For the taxation years reported above, MDA reported qualifying scientific research and experimental development (“SR&ED”) expenditures and claimed the Quebec tax credit for salaries and wages (“QLTC”). [ 8 ] However, following an audit by the Agence du Revenu du Québec (“Revenu Québec”), it was determined that the amounts paid by the Government of Canada to MDA were “contract payments” for SR&ED work for the RCM Program. [ 9 ] At the conclusion of the audit, Revenu Québec assessed MDA, which subsequently filed Notices of Objection.

Revenu Québec ultimately issued Decisions on Objection, all of which according to the following timetable: Year-End Assessments Notices of Objection Decisions on Objection

December 31, 2009 July 31, 2015 September 23, 2015 October 15, 2015 December 31, 2010 November 22, 2013 February 19, 2014 June 17, 2015 December 31, 2011 April 15, 2014 July 7, 2014 June 17, 2015 December 31, 2012 February 20, 2015 May 12, 2015 September 14, 2015 December 31, 2013 February 26, 2016 May 20, 2016 July 27, 2016 December 31, 2014 April 28, 2017 June 22, 2017 August 14, 2017 Year-End Assessments Notices of Objection Decisions on Objection [ 10 ] Pursuant to the assessments, Revenu Québec disallowed the QLTC claimed by MDA with respect to the SR&ED expenditures incurred for taxations years 2009 to 2014 as follows: Year-End SR&ED Expenditures Reported by Plaintiff QLTC Claimed by Plaintiff QLTC Allowed by the Defendant December 31, 2009 $2,827,299 $1,060,237 $0 December 31, 2010 $5,545,970 $970,545 $0 December 31, 2011 $7,783,940 $1,362,190 $22,656 December 31, 2012 $5,364,937 $938,864 $12,022 December 31, 2013 $11,203,560 $1,960,623 $15,427 December 31, 2014 $18,850,368 $2,904,916 $3,242 [ 11 ] According to Revenu Québec, payments to MDA on account of the RCM Program were “contract payments”, as this expression is defined in s.1029.8.17 ( c ) (ii) of the Quebec Taxation Act . [2] 1029.8.17.

In this division, … ( c ) “contract payment” means … ii. an amount in respect of an expenditure of a current nature (within the meaning of

section 230.0.0.1.1) of a taxpayer, other than a prescribed amount, payable by the Government of Canada or a provincial government, a municipality or other Canadian public authority or by a person exempt from tax under this Part by virtue of sections 980 to 985 and 985.23 to 999.1 for scientific research and experimental development to be performed for the authority or person, or on behalf of the authority or person, … ISSUE IN DISPUTE [ 12 ] The sole issue to be decided by this Court is whether an amount in respect of an expenditure of the Plaintiff payable by the Government of Canada was for SR&ED to be performed for or on behalf of the Government of Canada during taxation years 2009, 2010, 2011, 2012, 2013, and 2014.

UNCONTESTED FACTS Corporate Structure and Operations [ 13 ] MacDonald Dettwiler and Associates is a systems engineering business founded in British Columbia in the 1960s. [ 14 ] During the taxation years at issue, MDA was part of a corporate group whose parent company was MacDonald, Dettwiler and Associates Ltd., a public company headquartered in Richmond, British Columbia. [ 15 ] MacDonald, Dettwiler and Associates Ltd. holds shares in various subsidiaries, including MDA Systems Holdings Ltd. [ 16 ] MDA Systems Holdings Ltd. is the holding company for Canadian operations. [ 17 ] The Canadian operations are conducted through three different companies located in Richmond (British Columbia), Montreal (Quebec), and Brampton (Ontario) (the MDA Group or MDA). [ 18 ] Operations in Richmond are conducted through MDA, while the operations in Montreal are conducted through MacDonald, Dettwiler and Associates Corporation and the operations in Brampton through MacDonald Dettwiler Systems Ltd. [ 19 ] The operations in Richmond consist of system engineering, mission planning for large satellite constellations, and geospatial services. [ 20 ] The operations in Brampton consist of command and control for robotics, including space robotics, medical and mining robotics, and high precision system instrumentation. [ 21 ] The Montreal site is a manufacturing facility where satellites are built. [ 22 ] There are approximately 700 employees in Richmond, 450 in Brampton, and 650 in Montreal.

Radarsat Constellation Mission (RCM) [ 23 ] RCM Program was segregated into five contractual phases and sub-phases: A, B, C, D, and E. The phases were awarded separately and were contractually designed so that there was no guarantee that a contractor who was awarded or who qualified for a particular phase would be awarded the contract for a subsequent phase.

[ 24 ] Phase A, which included phases A0, A1, and A2, comprised smaller contracts for concept study and research and included SR&ED designed to establish the feasibility of the RCM Program.

Phase A is not at issue in these appeals. [ 25 ] Phase B concerns the preliminary designs (preliminary plans) of the three (3) satellites and their components. [ 26 ] Phase C, which started at some point during Phase B, concerns the critical designs (detailed plans) of the three (3) satellites and their components. [ 27 ] The total amount paid to MDA for Phases B and C was $280,706,259.46. [ 28 ] Phase D concerns the manufacturing and delivery of the three (3) functioning satellites and all of their components, including the ground segment. [ 29 ] The total amount paid to MDA for Phase D was $741,300,000. [ 30 ] Phase E shall require the operation of the satellites for the first year and training of personnel.

Phase E is not at issue in these appeals. [ 31 ] There is no dispute with respect to the quantum of SR&ED expenditures and QLTC, for all taxation years at issue. [ 32 ] The sequence of the assessments, objections, and confirmations is also undisputed. [ 33 ] For taxation years 2009, 2010, 2011, and 2012, the following assumptions are not subject to dispute: − In the context of its activities, MDA offers engineering and computer science services; − The RCM contracts and related agreements in dispute are those contained in Volumes 1 and 2 of the Compendium; − MDA and CSA are dealing at arm’s length; − The project comprised Phases B, C, and D and is intended to build three satellites, the purpose of which is maritime surveillance, disaster management, and ecosystem monitoring by the CSA; − The SR&ED expenditures incurred by MDA are considered eligible by the Defendant; − MDA has received progress payments from the CSA/PWGSC. [ 34 ] For taxation years 2013 and 2014, the same facts are non-contentious and the basis of the assessments for Phase D is the same as the basis for Phases B/C.

TESTIMONY [ 35 ] In total, ten people testified, including five for the plaintiff and five for Revenu Québec. [ 36 ] The Court accepts the following principal elements from the testimony recorded in the transcript of stenographic notes that will be analyzed under different headings, as required. Plaintiff’s witnesses Mr. Hiten Makim [ 37 ] Mr.

Hiten Makim (“Makim”) [3] is a CPA and the current CFO of MDA’s Canadian operations. [ 38 ] Makim has been with MDA since the late 1990s, and has been with MDA during the entirety of the RCM Program. [ 39 ] Makim testified on the RCM Program, on the negotiation process with PWGSC and CSA for the Phases B/C contract, the amendments, and the Phase D contract. He also testified on the annual negotiation of the rate packages and the financial aspect of the RCM Program.

His testimony can be summarized as follows: − The objective of the RCM Program was to develop a series of new activities that would become the basis for Canada’s satellite program. − Therefore, it was clear at the start of the RCM Program that SR&ED would be carried out to reach the program objectives. − Preliminary discussions were held to establish the extent of the RCM Program and to identify potential problems with its implementation. − Pre-existing plans could not be used for the RCM Program to rebuild something else. − Furthermore, Makim explained how the ownership of the intellectual property (“IP”) varied throughout the contract phases. − In 2008, negotiations concerning the RCM Program’s intellectual property led to it being granted to the Government of Canada. − He acknowledged that intellectual property was developed for the RCM Program and that if MDA built a new satellite for the Government of Canada, it could not invoice the Government for previously developed technology.

− He acknowledged that the general clauses in the contracts with the Government of Canada (General Conditions 9624 – General Conditions – Research and Development and General Conditions 2040 – Research and Development with respect to intellectual property) were difficult to amend. − In short, in the future, the Government of Canada would be able to build additional satellites, or have additional satellites built. − Prior to May 2011, IP developed in the course of the RCM Program was owned by MDA. − At some point during the Phase C negotiations, the Government of Canada requested the assignment of IP rights developed during the RCM Program. − The Government of Canada had some concerns that a U.S. corporation would acquire MDA and the RCM Program technology would migrate to the United States. − The repatriation of the IP was also motivated by CSA’s international commitments to other countries. − MDA did not want to part with the ownership of IP it developed for the RCM Program, so a compromise was reached by which MDA agreed to transfer the ownership of IP to the Government of Canada in return for a sole, worldwide, perpetual, fully paid, royalty- free, and irrevocable licence. − Therefore, the Phases B/C Contract was amended so that existing and future IP would be transferred to the Government of Canada, and the licence agreement was entered into on May 18, 2011. − Pursuant to the IP licence, the Government of Canada can only use the IP for the RCM Program, while MDA can use it at no cost on any project. − In addition, it is clear in the various contracts that the Government of Canada expected to have or be able to use the intellectual property (“IP”) rights related to the RCM Program. − During the implementation of the RCM Program, MDA was to deliver not only the plans or the three satellites, but also all of the deliverables listed in the various “Statements of work”. − Although MDA had some latitude in the way it met RCM Program specifications and solved the various issues related to its implementation, MDA had to inform Government of Canada engineers of its solutions to the technical issues with the project specifications. − MDA was to notify the Government of Canada when the budget for a deliverable reached 75% and was expected to overrun the budget.

In that case, the parties were to agree on whether additional payments would be made for the overrun. − As the RCM Program progressed, it was possible that a component that had been designed and developed would not end up being integrated into the project for technical reasons.

In that case, an amendment could be made to add an amount to be paid by the Government of Canada to allow that component to be modified accordingly. − MDA’s risks were related to its business in general, for example, the risk of not obtaining other contracts to spread out its general expenses. − Although the Government of Canada contemplated tendering the contract at cost plus pricing, MDA preferred to bid at fixed cost in order to increase its profits. − In order to mitigate risks and costs, the Government of Canada divided the RCM Program into five contract phases and sub- phases A, B, C, D, and E.

The contract phases were awarded separately and were designed so that there was no guarantee that a contractor who was awarded or who qualified for a particular phase would be retained for a subsequent phase. − Phase A, which included phases A0, A1, and A2, comprised smaller contracts for concept study and research and included SR&ED designed to establish the feasibility of the RCM Program.

Phase A is not at issue in these appeals. − The Phase B Contract was awarded through a public submissions process initiated by a Request For Proposal (RFP) issued by PWGSC on November 15, 2006. − Contract negotiations were then undertaken with CSA and PWGSC.

PWGSC and CSA drafted the first version of the contract using a standard procurement contract and submitted it to MDA for review. − Since PWGSC and CSA use standardized contracts, terms, conditions, and clauses, MDA had little room for negotiation with respect to certain issues, such as General Conditions 9624 (2007-05-25) “General Conditions – Research and Development” or the monthly reports. − Between February 20, 2009, and July 26, 2013, the parties amended the Phase B Contract 41 times through written amendments to include the changes of scope requested by the CSA and to provide for the development of Phase C (Phases B/C Contract). − The financial terms of the Phases B/C Contract were established on a hybrid cost-reimbursable basis, with annual rates negotiated with PWGSC. − The Phases B/C Contract price was established on a hybrid basis, pursuant to which MDA was bearing some financial risk, namely:

a) If the annual rates to be paid by the Government of Canada were not properly negotiated, MDA would be granted an out-of-pocket expense at the end of the financial year so that it could pay its employees;

b) A fixed profit was negotiated in absolute dollar terms as opposed to a percentage. Such terms decrease MDA’s profitability margin when the costs escalate but no additional fee is paid out;

c) The annual fee package rates submitted by MDA take into consideration their overall level of activity and financial forecast for other projects (not only the RCM Program), such that any shortfall or excess in those other projects is borne by MDA. − The pricing for the Phases B/C Contract (and the amendments) was established pursuant to the standard rates, not SR&ED rates. − The difference between SR&ED rates and standard rates is the general and administrative rate.

In standard rates, the general and administrative rate includes some SR&ED that is inherent to any work to be done. − In research contracts based on SR&ED rates, the general and administrative pool is adjusted by removing the inherent SR&ED: the purpose of the contract is to perform SR&ED, unlike contracts based on standard rates. − Even if MDA had successfully obtained the Phases B/C Contract, there was no guarantee that it would be awarded the Phase D Contract, although it was well positioned due to its involvement in and knowledge of the prior phases. − The Phase D Contract is a firm fixed-price contract totalling $741,300,000. − MDA agreed to a firm fixed price contract since it was comfortable that it could deliver the three satellites, had planned for the risks identified in the previous phases, and was looking for a higher fee compared to a hybrid cost-plus system. − However, even in the context of a firm fixed-price contract, the Government of Canada had the right to conduct a discretionary audit of the amount of profit included in MDA’s price or rate, subject to a claw back clause, to ensure MDA did not make an obscene amount of money. − The Phase D Contract required PWGSC to pay MDA according to a negotiated Milestones Schedule, as opposed to payment upon delivery of the satellites, because MDA could not by itself finance the cost of building the three satellites. − In the event that MDA was late in achieving certain milestones, not only would it not be paid, but also it would be subject to liquidated damages, up to a maximum amount of $48,000,000. − Pursuant to the liquidated damages clause, MDA did pay CSA for an amount of Radarsat 2 data valued at $21,000,000.

Ms. Mélanie Luz [ 40 ] Ms. Mélanie Luz (“Luz”) is a CPA, CGA, and has worked for MDA since 2007. [ 41 ] As a senior tax analyst, from 2009 to 2014, Luz was in charge of preparing MDA’s tax returns, which included the SR&ED claims. [ 42 ] Luz testified that she was also involved in the audit process for each taxation year and the objection process, and was assisted by Deloitte LLP’s Martin Vézina and Jocelyn Hogue. Mr. Martin Vézina [ 43 ] Mr. Martin Vézina (“Vézina”) is a CPA and partner at Deloitte LLP.

He is Deloitte’s lead partner for government incentives for the province of Quebec. [ 44 ] Vézina has been advising MDA for many years. His services were retained in Phases B, C, and D of the RCM Program and during the audit and objection process. [ 45 ] Vézina and his team made written representations to Ms. Sorana Patricia Stancu with respect to the contract payments issue for Phases B and C, but was not able to meet with the Defendant to discuss Phase D. [ 46 ] Vézina confirmed that General Conditions 9624 “General Conditions – Research and Development” is applied to all federal procurement contracts. Mr.

Alan Thompson [ 47 ] Mr. Alan Thompson (“Thompson”) has been employed by MDA since 1999 and is the current chief systems engineer for the RCM Program. He has been working on the RCM Program since its inception. He is an engineer with a PhD in mathematics from the Massachusetts Institute of Technology (MIT). [ 48 ] Thompson testified on the Request for Proposal (RFP) process and the different phases of the RCM Program. He also explained the different components of the project, that is, the ground segment and the space segment.

His testimony can be summarized as follows: − As the chief systems engineer, he oversaw all technical aspects of the RCM Program, including the SR&ED activities that were carried out by MDA in areas where MDA had identified uncertainties, in order to resolve them. − According to him, none of the SR&ED projects were requested, controlled, or supervised by CSA or PWGSC, since SR&ED was carried out at MDA’s own instigation and for its benefit.

− He explained that the decision-making process for the SR&ED activities for Phases B, C, and D originates with the prime system engineering team, which is composed of 15 to 30 people under his personal direction. − Concerning the SR&ED claimed, he personally wrote the technical sections of the tax returns for years 2009 to 2014. − The RCM Program started with preliminary studies in 2003 and was divided into phases, namely Phases A, B, C, D, and E. − Phase A, which included phases A0, A1, and A2, comprised smaller contracts for concept study and research and included SR&ED designed to establish the feasibility of the RCM Program.

Phase A is not at issue in these appeals. − The Phases B/C Contract, at the outset and in all of the 41 amendments, required the delivery to the CSA, also known as the “Technical Authority”, of a precise and detailed list of deliverables, all of which are listed in the document entitled Radarsat Constellation (RC) Phases B and C Statement of Work (“SOW”). − The SOW is a 242-page technical document that describes the work to be carried out. − On January 9, 2013, MDA Richmond entered into a contract for Phases D and E1 (Phase D Contract), which required MDA to build and deliver three functioning satellites and operate them for the first year. − The Phase D Contract was initiated by PWGSC as a public contract with a Request For Proposal (RFP). − MDA knew before the beginning of the contract for each phase that SR&ED work had to be done in order to achieve the objectives of the RCM Program. − He confirmed that the SR&ED work was actually done in each of Phases A, B, C, and D of the RCM Program. − Ultimately, the Government of Canada had to obtain the right to use all of the SR&ED intellectual property, including the software source codes, since it had to be able to rebuild the satellites developed for the purpose of the RCM Program. − He admitted that MDA’s expenses for SR&ED work for Phases B, C, and D were invoiced directly to the Government of Canada or were included in the fixed price.

Mr. Arthur Baylis [ 49 ] Mr. Arthur Baylis (“Baylis”) is an engineer and MBA graduate and was the program manager in Montreal for the RCM Program for most of Phases B, C and D.

He has been working for MDA and its predecessors since 1983. [ 50 ] As a program manager for the RCM Program, Baylis was responsible for all of the program’s technical activities (cost, schedules, and technical aspects) and was involved in day-to-day operations. [ 51 ] Baylis testified on the activities that occurred in Montreal with respect to the payload, and that at one point 400 or 500 people were involved in the RCM Program at the Montreal facility, working on SR&ED and non-SR&ED activities. [ 52 ] He added that as part of the RCM Program, the parties expected SR&ED work to be carried out to reach the project objectives.

To that end, teams of CSA engineers were assigned to the RCM Program in order to support and supervise the progress of work on the project. He confirmed that CSA employees could move about the MDA premises, including the offices of MDA Corporation. Revenu Québec Witnesses Mr. Alain Carrier [ 53 ] Mr.

Alain Carrier (“Carrier”) was an engineer with CSA during the taxation years issue in this appeal. [ 54 ] Carrier began his career with CSA in 2004 as a satellite project manager, a position he held until 2008. [ 55 ] In 2008, Carrier held various director positions related to satellites, and held the position of director of engineering services and development until 2017. He left the CSA in 2017. [ 56 ] Carrier testified about the start of the RCM Program, its goal, purpose and mission, and on its different functions.

His testimony can be summarized as follows: − He was the Government of Canada’s “Technical Authority” for the Phases B/C Contract and for the Phase D Contract. − As such, he had daily interactions with the people at MDA and CSA to ensure that the RCM Program met the performance requirements identified in the SOW. − According to Carrier, CSA implemented the RCM Program to replace the Radarsat 2 satellite that was reaching the end of its useful life. − In general, satellite projects are divided into phases that start with the design, the preliminary and detailed definition, implementation, that is the construction of the satellite, and testing to ultimately use the product. − CSA and MDA worked together to prepare a draft statement of work for the RCM Program to ensure that CSA’s specifications were attainable by the aerospace industry.

− Contrary to other existing satellite technologies, the RCM Program presented technological challenges that required unique experimental development to meet its objectives. − Based on his understanding, the Government of Canada owned and could use the intellectual property rights in the RCM Program. − According to Carrier, CSA monitored the work accomplished in the RCM Program on a daily basis to ensure that performance objectives were met. − To that end, teams of CSA engineers were assigned to the RCM Program in order to support and supervise the progress of the work. − Last, CSA had to ensure that the pre-determined specifications were complied with since each system and sub-system had to meet established standards.

Mr. Roddy Tremblay [ 57 ] Mr. Roddy Tremblay (“Tremblay”) is an Air Force veteran who joined PWGSC as a contracting officer. [ 58 ] Tremblay was the “Contracting Authority” for Phases C and D. As the Contracting Authority, Tremblay was physically present at the CSA from October 2009 to March 2016. [ 59 ] Tremblay testified on PWGSC’s mission, the various phases of the RCM contract, the contractual negotiation of the phases and the amendments, the cost-reimbursable versus fixed-price contract, the negotiation of rates and type of rates, the payment process of each phase, the deliverables, and the IP licence.

His testimony can be summarized as follows: − Phase C required the delivery of critical designs (detailed plans) of the RCM Program, to CSA’s satisfaction. − The annual rates were negotiated within rigid guidelines: procurement contracts with PWGSC can either be based on standard rates or SR&ED rates.

According to him, the pricing for the Phases B/C contract was established pursuant to the standard rates, not the SR&ED rates. − The Phases B/C Contract and each amendment were subject to a limitation of expenditures clause pursuant to which any increase in the Government of Canada‘s total liability had to be approved in writing. − The Government of Canada had some concerns that a U.S. corporation would acquire MDA and the RCM Program technology would migrate to the United States. − The Government of Canada knew before the start of the contracts that SR&ED work needed to be carried out for each phase. − According to him, the Government of Canada’s General Conditions 9624 “General Conditions – Research and Development” was used in the contracts due to the risks involved in the project, its complexity, and the technological challenges that had to be overcome. − There was synergy between the CSA engineers, the MDA engineers, and the subcontractors’ engineers. − The Government of Canada could limit the expenses related to the project, for example, the Government of Canada could cancel the purchase of items or require MDA to procure different items at a better price. − In this case, the Government of Canada bore the risks of the RCM Program.

The risks were the additional costs of the RCM Program and the possibility that the technology developed for the purpose of the project did not function as expected. − If the satellites exploded when they were launched, Canada would lose its investment. − The contract for Phases B/C was a cost plus contract that had a ceiling price. When MDA expected to exceed the ceiling price of the work for any reason, it had to notify the Government of Canada and explain the situation.

The Government of Canada then found a solution, for example, by adding funds so that the project could continue. − The G&A negotiated costs component of every phase of the RCM Program included a percentage for research and development. − During the RCM Program, the intellectual property developed by MDA for the space segment of the project was transferred from MDA to the Government of Canada. − The Government of Canada did not find it necessary to obtain the intellectual property developed for the ground segment of the RCM Program because it essentially consisted of pre-existing intellectual property owned by MDA.

Ms. Thi Ngoc Bich Luong [ 60 ] Ms. Thi Ngoc Bich Luong (“Luong”) is a chief of service and the team leader of the main auditor in the file, Ms. Stancu. Luong has been employed by the Defendant since 1995. [ 61 ] Luong testified that she attended a meeting with Vézina and Mr. Jocelyn Hogue from Deloitte to discuss the issue of contract payments. [ 62 ] She was not involved in the decision with respect to Phase D.

[ 63 ] Luong did not meet anyone from MDA, CSA, or PWGSC. [ 64 ] Luong testified that some of the amounts requested by MDA for the R&D salary tax credit set out in s. 1029.7 of the Act were the same amounts used to justify MDA’s claims for progress payments to the Government of Canada. Mr. Mohamed Lachqar [ 65 ] Mr. Mohamed Lachqar (“Lachqar”) has worked for the Defendant since 2010, first as an auditor and currently as a quality control agent. [ 66 ] Lachqar carried out the Plaintiff’s audit for the taxation year 2012 with respect to the SR&ED and the issue of contract payments.

Lachqar did not review the scientific portion of the SR&ED claims. [ 67 ] Lachqar testified that he followed Ms. Sorana Patriciu Stancu’s report for taxation year 2011 and applied the same result. He therefore refused the Plaintiff’s QLTC based on the existence of the contract payments. He did not conduct an independent analysis of the issue of contract payments. [ 68 ] In the course of his audit, Lachqar did not meet with anyone from MDA or Deloitte. Ms. Sorana Patriciu Stancu [ 69 ] Ms. Sorana Patriciu Stancu (“Stancu”) has worked for the Defendant since 2009.

She was the auditor responsible for the Plaintiff’s file for taxation years 2009, 2010, 2011, 2013, and 2014. [ 70 ] Stancu testified on her audit, which included the review of the financial information, the Phases B/C Contract and the Phase D Contract, and the other relevant documents such as the SOWs.

She also testified on the elements supporting her conclusion that the sums received by MDA from the Government of Canada in the context of the RCM Program qualified as contract payments under the Taxation Act . [ 71 ] The conclusion of her audit for each taxation year at issue is that the Plaintiff received “contract payments”. According to her, there is no other basis for that conclusion. [ 72 ] Stancu did not review the technical portion of the SR&ED claims.

She relied on the Canada Revenue Agency’s conclusion that each of the SR&ED projects duly qualified as such. [ 73 ] Stancu focused on the financial reconciliation for each taxation year and on the contract payments issue. [ 74 ] Stancu admitted that her scientific knowledge and understanding of the projects and of the various technical aspects of the documents (contracts, SOW, etc.) was very limited. [ 75 ] Her conclusion that the Plaintiff carried out SR&ED for or on behalf of the Government of Canada is based on the following documents: (

a) CSA’s website; (

b) Progress payment forms; (

c) Description of projects in T-661 forms; (

d) The Government of Canada’s SR&ED policy; (

e) APFF’s meeting summaries and publications; (

f) The Phases B/C Contract and the Phase D Contract; (

g) The SOWs; (

h) The License Contract; (

i) The financial documents received from MDA. [ 76 ] The following facts mentioned by Stancu during her examination for discovery are not disputed, as the Plaintiff suggests: (

a) The master file is taxation year 2010; (

b) All of the assessments are consistent with an

interpretation letter issued by Revenu Québec, which is included in Volume 4, Tab 16 of the Compendium; (

c) In the context of the audit, there were no meetings or discussions with the CSA and PWGSC; (

d) The audit regarding SR&ED was carried out by the Canada Revenue Agency and the Defendant’s conclusions are consistent for all six taxation years to the effect that the activities are eligible for a SR&ED tax credit; (

e) There was no claim for SR&ED for Phase A; (

f) The amounts indicated on MDA’s income tax returns and disallowed by the Defendant were not claimed by another entity within

the corporate group; such amounts were claimed with respect to Quebec employees only and by the right entity, that is, the Plaintiff; (

g) The basis of the assessments comprises the

interpretation letter dated July 11, 2013, the audit report, and the income tax returns that include Form T661; (

h) The contract is not a sham or a simulation and the parties’ common intention is correctly reflected in the RCM contract and related agreements contained in Volumes 1 and 2 of the Compendium; (

i) The auditor was not part of the contract negotiations; (

j) The auditor did not visit MDA’s premises during the audit; (

k) The auditor was not denied access to the premises; she simply did not request access; (

l) The Defendant’s position is that the contract encompasses only one project; (

m) The auditor is unable to say who took the initiative for research activities. [ 77 ] During her audit, Stancu looked for the Claim for Progress Payment forms on the PWGSC website. She also said that claims for progress payments for the phases of the RCM Program were made by MDA to PWGSC. [ 78 ] Finally, Stancu confirmed the following, which the Plaintiff considers admissions: (

a) The purpose of the Phases B/C Contract and the Phase D Contract was to build the satellites, not SR&ED; (

b) The SOWs contained the deliverables that MDA had to deliver in accordance with the contracts, which included both hardware deliverables, software deliverables and documentation deliverables; (

c) The contract was not entered into for the purpose of SR&ED; (

d) There is no specific reference in the Phases B/C Contract or the Phase D Contract that provides that the Government of Canada acquired SR&ED; (

e) There is no document on which the audit was based that refers to the Government of Canada acquiring SR&ED during the RCM Program; (

f) The expression R&D or SR&ED does not appear in the contracts; (

g) The Defendant does not know who initiates the SR&ED activities; (

h) No specific payment was made by PWGSC to MDA for SR&ED; (

i) MDA carried out SR&ED activities and PWGSC made payments thereafter. (

j) General Conditions 9624 and General Conditions 2040 are generic clauses and are not related to the RCM Program; (

k) SR&ED and IP are two different concepts; (

l) The IP licence does not make reference to the ownership of SR&ED; (

m) The SR&ED activities are incidental to the RCM Program; (

n) MDA did not claim SR&ED expenses in the Province of Quebec for the Phase A contracts.

ANALYSIS Burden of proof [ 79 ] Pursuant to s.1014 of the Taxation Act , the assessments under appeal are deemed valid, subject to variation or vacation as the result of an appeal before this Court. [ 80 ] The Supreme Court of Canada’s decision in Hickman Motors Ltd. , [4] a frequently cited case, is the leading case on the burden of proof in tax matters. [ 81 ] According to the Supreme Court, taxpayers meet their initial onus demolishing the exact assumptions in the assessment by adducing at least prima facie case. [ 82 ] However, the tax authorities’ factual assumptions must be distinguished from legal conclusions in their proceedings since only factual assumptions are presumed valid: [25] I agree that legal statements or conclusions have no place in the recitation of the Minister's factual assumptions.

The implication is that the taxpayer has the onus of demolishing the legal statement or conclusion and, of course, that is not correct. The legal test to be applied is not subject to proof by the parties as if it was a fact. The parties are to make their arguments as to the legal test, but it is the Court that has the ultimate obligation of ruling on questions of law. [5] [ 83 ] In the Court’s view, contrary to many tax files where the outcome of a dispute must be determined based on the credibility and

plausibility of the testimony, in this case it is more accurate to characterize the issue of the burden of proof, with respect to the issue in dispute, as a conclusion of mixed fact and law. [ 84 ] There is no dispute with respect to the quantum of SR&ED expenditures and QLTC, for any of the taxation years at issue. [ 85 ] In the present case, the Defendant has admitted that the RCM contract is not a sham and has not relied on any deeming provision of the Taxation Act that would have had the effect of recharacterizing the bona fide legal relationships. [ 86 ] Therefore, in this case, all that must be decided is the application of the law to the contractual relationship established by the RCM Program. [ 87 ] In other words, the Court’s decision to dismiss the appeals (as the Defendant requests) or refer the assessments to the Minister for reconsideration and reassessment (as the Plaintiff requests) is a determination of a question of mixed fact and law, and much less so the application of the reverse onus principal, which shifts the burden of rebutting the prima facie test to the Defendant. [ 88 ] In fact, although it is tailored to meet specific requirements, the current model of burden of proof in tax legislation is closely related to the civil litigation concepts of onus and standards of proof. [6] The SR&ED Regime [ 89 ] Pursuant to ss. 222(1) (

a) and (

b) of the Taxation Act , a taxpayer who carries on a business in Canada in a taxation year may deduct, in computing the taxpayer’s income from the business for the year, an amount not exceeding the aggregate of all amounts, each of which is an SR&ED expenditure of a current nature made by the taxpayer and directly undertaken in Canada by the taxpayer or on behalf of the taxpayer. [ 90 ] Pursuant to s. 1029.7( a ), a taxpayer who carries on a business in Canada, who undertakes SR&ED related to a business of the taxpayer, in Quebec, or causes such research and development to be undertaken in Quebec, is deemed to have paid to the Minister, on account of the taxpayer’s tax payable for that year an amount equal, during the taxation years in dispute, to 17.5% of the aggregate of the wages paid by the taxpayer in respect of the research and development undertaken in the year to his employees of an establishment situated in Quebec. [ 91 ] It is undisputed that some of the work carried out under the RCM Program for which MDA claimed a R&D tax credit for salaries and wages can be characterized as scientific research and experimental development. [ 92 ] In this instance, the Plaintiff incurred expenses of a current nature for SR&ED, and neither the quantum of the expenses nor the quantum of the credits is disputed. [ 93 ] Furthermore, s. 1029.8.18(

a) of the Act essentially provides that the amount of the wages or, part of the consideration paid referred to in s. 1029.7 of the Act, must be reduced by the amount of any contract payment attributable to the wages or to part of the consideration paid that the taxpayer has received. [ 94 ] The term “contract payment” is defined in s. 1029.8.17(

c) of the Act. [ 95 ] Subparagraph 1029.8.17( c )(ii) defines “contract payment” as follows: [A]n amount in respect of an expenditure of a current nature … of a taxpayer … payable by the Government of Canada or a provincial government, a municipality or other public authority … for scientific research and experimental development to be performed for the authority or person, or on behalf of the authority or person.

Notion of contract payment [ 96 ] The Quebec legislature introduced the expression “contract payment” [7] in response to the Canadian Finance Minister’s announcements in the federal budget of May 23, 1985. [8] [ 97 ] Specifically, the Government of Canada stated in the 1985 Budget: The budget proposes that the investment tax credit be based on the cost of eligible investments net of any government assistance or reimbursement which the taxpayer has received or is entitled to receive. This will ensure that an investment tax credit will be based on the taxpayer’s actual costs .

It will avoid the undesirable stacking of benefits from grants and tax incentives that can result under the existing system. This change is consistent with the basic thrust of the November 1984 Economic Statement, and with the recommendations of the Ministerial Task Force on Program Review, chaired by the Deputy Prime Minister, which expressed concern over the undue stacking of benefits.

This change will also apply to any reimbursement or inducement payments with respect to the investment that the taxpayer receives from another taxpayer. (Emphasis added) [ 98 ] As explained by the Canada Revenue Agency (CRA), “[t]here is no unique test or jurisprudence that will determine if an amount paid is a contract payment.” [9] [ 99 ] The parties submit that the definition of contract payment for federal income tax purposes was judicially considered only once, in Com Dev Ltd. v.

The Queen . [10] [ 100 ] Com Dev Ltd. involved a contract between the Government of Canada and Spar Aerospace Limited for the construction of a Radarsat Satellite in the 1990s. However, the purported “contract payments” in that case were not payments made by the Government of Canada to Spar Aerospace, but rather payments made by Spar Aerospace to Com Dev Ltd. under a subcontract.

[ 101 ] Ultimately, the Tax Court of Canada determined that there was no contract payment between Com Dev Ltd. and Spar Aerospace in part because it involved a subcontractor and no payment was received from the government.

Therefore, the contractual nature of the relationship in that case is somewhat different from the one between MDA and the Government of Canada. [ 102 ] Based on a textual reading of s. 1029.8.17 of the Act, a “contract payment” has to satisfy three conditions: that the amount must be in respect of an expenditure (of a current nature), payable by the Government of Canada, for SR&ED to be performed for or on behalf of the Government of Canada. [ 103 ] In this case, it is undisputed that the amounts are of a current nature: they are wages. [ 104 ] It is also undisputed that the amounts were payable and have been paid by the Government of Canada. [ 105 ] As for the third condition, the Court must determine if the amounts were in respect of expenditure for SR&ED to be performed for or on behalf of the Government of Canada. [ 106 ] The Plaintiff submits that Com Dev Ltd is indicative in some regards of the terms of the contract, since in that case it was decided that the firm-fixed-price for the purchase of the components did not specifically include the purchase of SR&ED. [ 107 ] In the Court’s view , Com Dev Ltd is distinguishable from this case. [ 108 ] Indeed, the relationship at issue in this dispute concerns contracts entered into directly between MDA and the Government of Canada.

In addition, the evidence on the issue of SR& ED is different. [ 109 ] Furthermore, as author Lucie Bélanger wrote, [ translation ] “[t]he issue is not whether there were SR&ED activities, but whether the amounts were paid for SR&ED activities. In many agreements, this is a difficult issue to determine.

No criterion, test, or case law can be applied to determine whether an amount can be considered a contract payment.” [11] [ 110 ] To facilitate the analysis of the concept of contract payment, reference is made to the CRA’s “Assistance and Contract Payments Policy”, which lists useful factors. [12] The CRA indicates that an analysis is required of all circumstances relating to the payment to determine if the amount is to be treated as a contract payment and that none of the criteria are, in themselves, conclusive. [ 111 ] The four criteria are: (

a) Contractor performance requirements (

b) Pricing versus risks assumed (

c) Intellectual property (

d) Contract for services versus contract for the sale of goods [ 112 ] The Court will analyze these criteria in light of the evidence. Contractor performance requirements [ 113 ] In s. 5.5.1 of its policy, the CRA states the following with respect to this criterion: Does the contract state that the contractor was required to perform specific SR&ED work (for example, "The contractor shall design, integrate, test, and verify performance.")? The question is not whether SR&ED work was carried out, but whether SR&ED was carried out because it was required under the contract.

Are there specifications that the contractor had to comply with in performing the contractor's tasks? These two elements may indicate that the contractor had to perform SR&ED on behalf of the payer, meaning that the amount paid is a contract payment. [13] [ 114 ] Author Lucie Bélanger wrote the following about this criterion: [ translation ] In addition, if there are pre-determined characteristics or specifications that must be met by the contractor when performing the contract, this element may indicate that the contractor is doing SR&ED work on behalf of the payer.

Sometimes, it may be possible to infer from the terms of the contract itself that the work is being performed on behalf of the payer if the payer closely supervises or controls the work under the contract . [14] (Emphasis added) [ 115 ] The CSA implemented the RCM Program to replace the Radarsat 2 satellite that was reaching the end of its useful life. [15] The Program consists in the construction of three satellites that would be the property of the Government of Canada. [16] [ 116 ] Satellite projects are generally divided into phases that start with the design, preliminary and detailed plans, implementation, that is, building the satellite, and carrying out tests required to ultimately use the product. [17] [ 117 ] In the case of the RCM Program, the phases described above correspond to phases A,B,C,D, and E. [18]

[ 118 ] Before the contract for each phase began, the Government Canada [19] and MDA [20] knew that SR&ED work was required. [ 119 ] The RCM Program itself required a new series of activities to develop a vision for Canada’s satellite concept. [21] [ 120 ] At the outset of the RCM Program, it was clear that SR&ED would be carried out so that the program’s objectives could be met. [22] [ 121 ] In his testimony, the Plaintiff’s duly authorized representative Vézina stated that General Conditions 9624 “General conditions - Research and Development” apply to all federal procurement contracts. [23] [ 122 ] The Government of Canada’s General Conditions 9624 “General Conditions - Research and Development” was used in the contracts given the project’s risks, complexity, and technological challenges. [24] [ 123 ] Between February 20, 2009, and July 26, 2013, the parties amended the Phase B Contract 41 times through written amendments [25] to include the changes of scope requested by the CSA [26] and the development of Phase C (Phases B/C Contract). [ 124 ] Phase C required the delivery, to the CSA’s satisfaction, of critical designs (detailed plans) for the RCM Program. [27] [ 125 ] At its inception and in each of the 41 amendments, the Phases B/C Contract required the delivery of a precise and detailed list of deliverables [28] to the CSA, also known as the “Technical Authority”, all of which are listed in the document entitled Radarsat Constellation (RC) Phases B and C Statement of Work (SOW) . [ 126 ] As the chief systems engineer, Thompson oversaw all the technical aspects of the RCM Program, including the SR&ED activities undertaken by MDA in order to resolve uncertainties. [29] [ 127 ] Thompson explained that the decision-making process for the SR&ED activities for Phases B, C, and D originates with the prime system engineering team, [30] which is composed of 15 to 30 people under his personal direction. [31] [ 128 ] In this case, the scope of the Government of Canada’s RCM Program meant that it required several phases to complete and that it was the subject of several contracts. [ 129 ] Every phase of the RCM Program inevitably required SR&ED work to be carried out according to the contract requirements to meet the established specifications. [ 130 ] In fact, the parties expected that SR&ED work would have to be carried out for the purpose of the RCM Program in order to achieve the program’s objectives. [32] Moreover, as already noted, the Government of Canada’s General Conditions 9624 “General Conditions - Research and Development” and General Conditions 2040 “General Conditions - Research and Development” were used in the contracts given the project’s risks, complexity, and technological challenges. [33] [ 131 ] To carry out the RCM Program, MDA not only had to deliver plans and the three satellites, but all of the deliverables listed in the various “Statements of Work” as well. [34] In this regard, Makim told the Court: Statement of work, in layman's terms, is essentially what is it that we have to deliver.

So it will lay out the specifications of the final deliverables, so it's three satellites, it's not just three satellites, it's how do these satellites function, how do they transmit the data, what frequency do they transmit the data? Is it data that's being transmitted, encrypted, and if it's encrypted, to what level of encryption is put in place. So that will all be defined in the statement of work. Essentially it's the customer saying this is what we want, right, as the final deliverable. And the final deliverable must be able to do the following.

And that's what will be laid out in the statement of work. [35] [ 132 ] Last, the Government of Canada closely monitored the work performed by MDA for the RCM Program. [ 133 ] Indeed, the CSA monitored the work carried out for the purpose of the RCM Program daily to ensure that the performance objectives were met. [36] [ 134 ] Teams of CSA engineers were assigned to the RCM Program to support and supervise the progress of the work on the project. [37] [ 135 ] CSA employees could move about the MDA premises, including the offices of MDA Corporation. [38] [ 136 ] There was a synergy between the CSA engineers, the MDA engineers, and the subcontractors’ engineers. [39] [ 137 ] In addition, each subsystem and system had to meet established specifications. [40] CSA had to ensure that the pre-determined specifications were met. [41] [ 138 ] Although MDA had some latitude in the way it met RCM Program specifications and solved the various issues related to its implementation, MDA had to inform Government of Canada engineers of its solutions to the technical issues with the project specifications. [42] [ 139 ] The Government of Canada could limit the expenses related to the project, for example, the Government of Canada could cancel the purchase of items or require MDA to procure different items at a better price. [43] [ 140 ] MDA was to notify the Government of Canada when the budget for a deliverable reached 75% and was expected to overrun the budget.

In that case, the parties were to agree on whether additional payments would be made for the overrun. [44]

[ 141 ] Although MDA had some latitude concerning the means to meet the RCM Program objectives, it constantly required the approval of the Government of Canada, which also supervised the budget and therefore the disbursements and payments to MDA. [ 142 ] In the Court’s view, all of the facts establish that the SR&ED work was carried out because of the requirements in the contracts between the Government of Canada and MDA. Pricing versus risks assumed [ 143 ] In s. 5.5.2 of its policy, the CRA noted the following for this criterion: Is there a ceiling price beyond which the contractor would not have been paid?

If yes, it may indicate that the contractor had to assume risks under the contract because the contractor would be responsible for costs above the ceiling price. A ceiling price clause may raise doubts as to whether the contractor had to perform SR&ED on behalf of the payer. If the contractor agreed to absorb extra costs related to the project, this may indicate that the SR&ED was being carried out by, and at the risk of, the contractor and not on behalf of the payer. Would the contractor have been entitled to payments if the work did not meet the requirements of work to be performed under the contract?

If yes, it may indicate that the risks taken by the contractor were limited, that is, risks rested with the payer, even if there was a ceiling price clause. This would support the position that the SR&ED work was carried out on behalf of the payer. [ 144 ] The financial terms of the Phases B/C Contract were established on a “hybrid” cost-reimbursable basis, [45] with annual rates negotiated with PWGSC. [46] MDA bore some financial risks, namely: [47]

a) If the annual rates to be paid by the Government of Canada were not properly negotiated, MDA could end up with an out-of-pocket expense at the end of the financial year in order to pay its employees; [48]

b) A fixed profit was negotiated in absolute dollars as opposed to a percentage. Such terms decrease MDA’s profitability margin when the costs escalate but no additional fee is paid out; [49]

c) The annual fee package rates submitted by MDA take into consideration their overall level of activity and financial forecast for other projects (not only the RCM Program), such that any shortfall or excess in those other projects is borne by MDA. [50] [ 145 ] The pricing for the Phases B/C Contract (and the amendments) was established pursuant to the standard rates, not the SR&ED rates. [51] [ 146 ] The difference between SR&ED rates and standard rates is the G&A rate. [52] In standard rates, part of the G&A includes some SR&ED inherent to any work to be carried out. [ 147 ] In this case, Revenu Québec argues that the Government of Canada assumed the risks of the RCM Program.

Indeed, Canada assumed both the risks related to the additional costs of the RCM Program and those related to the possibility that the technology developed for the purpose of the project would not perform as expected. [53] [ 148 ] In addition, Canada would lose its investment if the satellites exploded when they were launched. [54] [ 149 ] As the RCM Program progressed, there was a chance that a component that had been designed and developed could not be integrated into the project for technical reasons.

In that case, an amendment could be made to add an amount to be paid by the Government of Canada in order to modify the component accordingly. [55] [ 150 ] The contract for Phase B/C was a cost-plus contract that had a ceiling price. [56] When MDA expected to exceed the ceiling price of the work for any reason, it had to notify the Government of Canada and explain the situation.

The Government of Canada then found a solution, for example, by adding funds so that the project continued. [57] [ 151 ] Had there been insufficient funds, the contract would have ended and the RCM Program would not have been completed. [58] MDA would have been paid for the work undertaken up to the end of the contract for Phases B/C. [59] [ 152 ] Furthermore, although the contract for Phase D is different, the Government of Canada could agree to additional work if there were new requirements or if new parameters were established. [60] [ 153 ] MDA would have been paid had the Government of Canada terminated the contract for Phase D. [61] [ 154 ] In addition, MDA did not offer any warranty on the delivered satellites (“Space Segment”). [62] [ 155 ] The risks run by MDA were those related to its business in general, for example, the risk of not obtaining other contracts that would allow it to apportion its general costs. [63] [ 156 ] Furthermore, the G&A negotiated cost component included a percentage for research and development for each phase of the RCM Program. [64] [ 157 ] Last, the RCM Program must be considered a Government of Canada program that includes Phases A, B, C, D, and E rather than being split among various contracts. [65] [ 158 ] Based on the foregoing, the Court concludes that the Government of Canada bore the major risks of the RCM Program.

Intellectual property [ 159 ] Plaintiff submits that the fact the Government of Canada owns the RCM Program – related IP is meaningless in this case and does not support the existence of contract payment. [ 160 ] For this criterion,

Section 5.5.3 of the CRA’s policy indicates the following: If the rights to the intellectual property (IP) of the SR&ED work belong to the contractor, this may indicate that the contractor was not required to perform SR&ED for or on behalf of the payer since the results of the SR&ED remain with the contractor. The payer may have a conditional right to use the results of the SR&ED. However, the existence of a conditional right suggests that the SR&ED was not performed on behalf of the payer, since the payer is not permitted to use the results of the SR&ED as desired.

A distinction can be made in the case of a contract with the Crown. The fact that the IP rests with the contractor rather than the Crown does not necessarily have a notable effect on the qualification of a payment as a contract payment. As with the other criteria, the ownership of the IP is only one factor that will help in the global analysis of the payments. There are two particular situations requiring clarification with respect to the IP criteria: 1.

For contracts with the Crown, it is Treasury Board of Canada Secretariat policy* that IP developed by a contractor during the course of a crown procurement contract stay with the contractor. ... * Policy on title to intellectual property arising under crown procurement contracts [ 161 ] Author Lucie Bélanger commented the following on this criterion: [ translation ] This is another element to consider, although it is not determinative, contrary to what many might think… It should be noted that in an agreement with a Crown corporation, the contractor’s right to intellectual property is not in itself determinative.

If the intellectual property belongs to the payer, this suggests that the SR&ED work was done on behalf of the payer. [66] [ 162 ] Makim stated that in 2008, negotiations concerning the intellectual property of the RCM Program resulted in it being granted to the Government of Canada.

He acknowledged that intellectual property had been developed for the purpose of that project and that if MDA built a new satellite for the Government of Canada, it could not invoice the Government for previously developed technology. [67] [ 163 ] Furthermore, the Government of Canada stipulated special terms as well as amendments in the contracts for the application of General Conditions 9624 (2007-05-25) “General Conditions - Research and Development” and General Conditions 2040 (2012-07-16) “General Conditions - Research and Development” with respect to intellectual property, [68] although those clauses were difficult to amend. [69] [ 164 ] The contract for the implementation of Phases B/C provided as follows: 35.3 General Conditions 9624 (2007-05-25), Subsection 23.1, shall be amended by the addition of the following paragraphs after the existing paragraph: Notwithstanding the above, all the Intellectual Property Rights to the Space Segment Foreground Information, as defined, arising out of the performance of the Work by MDA Systems Ltd and by its Affiliates under the Contract shall immediately, as soon as they come into existence, vest in and remain the property of Canada and the Contractor and its Affiliates shall have no right or interest in them unless an Intellectual Property license is granted in writing by the Technical Authority. [70] (Emphasis added) [ 165 ] The contract for the implementation of Phases D and E1 provides as follows: 2.1 General Conditions 2040 (2012-07-16), General Conditions – Research & Development, apply to and form part of the Contract. … Sections 28, 29 30, 31, and 34 are deleted in their entirety and replaced by the followings: 28.

RCM Intellectual Property – General Principles 1. All Intellectual Property Rights in the Space Segment Foreground Information that is developed or created by the Contractor or any of its Afilliates in relation to the Work belong to Canada as soon as they come into existence. [71] [ 166 ] Makim explained how ownership of the intellectual property (“IP”) varied throughout the contractual phases. [ 167 ] Prior to May 2011, IP developed in the course of the RCM Program was owned by MDA. [72]

[ 168 ] At some point during the Phase C negotiations, [73] the Government of Canada requested the assignment of IP rights developed during the RCM Program. [ 169 ] The Government of Canada had some concerns that a U.S. corporation would acquire MDA and the RCM Program technology would migrate to the United States. [74] [ 170 ] The repatriation of the IP was also motivated by CSA’s international commitments to other countries. [75] [ 171 ] MDA did not want to part with the ownership of IP it developed in the RCM Program, so a compromise was reached [76] whereby MDA agreed to transfer the ownership of IP to the Government of Canada in return for an exclusive, worldwide, perpetual, fully paid, royalty-free, irrevocable licence. [77] [ 172 ] Therefore, the Phases B/C Contract were amended [78] so that existing and future IP would be transferred to the Government of Canada, and the licence agreement was entered into on May 18, 2011. [79] [ 173 ] Essentially, during the RCM Program, the intellectual property developed by MDA in the space component of this project was transferred from MDA to the Government of Canada. [80] [ 174 ] The Government of Canada did not feel it necessary to obtain the intellectual property developed for the ground segment of the RCM Program because it was pre-existing intellectual property that already belonged to MDA. [81] [ 175 ] The testimony of Tremblay [82] and of Makim [83] establishes that the Government of Canada would be allowed to build additional satellites or to have additional satellites built in the future. [ 176 ] Therefore, the Government of Canada had to be able to use the intellectual property it owned that had been developed during the RCM Program. [ 177 ] Last, and in light of the foregoing, the analysis of the contract terms tends to show that ultimately the RS&ED work was undertaken on behalf of the Government of Canada.

Contract for services versus contract for the sale of goods [ 178 ] With respect to the nature of the contract, the Plaintiff submits that the Government of Canada bought three (3) satellites and their components. [ 179 ] The Plaintiff submits that concluding that the RCM contract was a contract for SR&ED, as the Defendant contends, directly contradicts the bona fide legal relationship between the parties and is totally inconsistent with the facts. [ 180 ] The Civil Code of Quebec “ CCQ ” provides the following at sections 1708 , 2098 and 2103 : 1708.

Sale is a contract by which a person, the seller, transfers ownership of property to another person, the buyer, for a price in money which the latter obligates himself to pay. A dismemberment of the right of ownership, or any other right held by a person, may also be transferred by sale. 2098. A contract of enterprise or for services is a contract by which a person, the contractor or the provider of services, as the case may be, undertakes to another person, the client, to carry out physical or intellectual work or to supply a service, for a price which the client binds himself to pay to him. 2103.

The contractor or the provider of services supplies the property necessary for the performance of the contract, unless the parties have stipulated that only his work is required. He shall supply only property of good quality; he is bound by the same warranties with respect to the property as a seller.

A contract is a contract of sale, and not a contract of enterprise or for services, where the work or service is merely an accessory in relation to the value of the property supplied. [ 181 ] Moreover, the CRA’s policy at s. 5.5.4 provides as follows: Where a definite conclusion cannot be made using the other criteria, determining whether a contract is a contract for service or a contract for the sale of a good (based on the substance of the contract) may provide some guidance. A contract for service may indicate that the SR&ED work was being performed on behalf of the payer.

However, a contract for the sale of a good does not necessarily mean that the SR&ED work was not being performed on behalf of the payer. (Emphasis added) [ 182 ] Author Lucie Bélanger wrote essentially the same thing with respect to that criterion. She noted the following however: [ translation ] When a contract is examined, the deliverable goods and services must be reviewed to determine whether it is a contract in which a person is performing the SR&ED for the benefit of the other.

When the payer claims that the SR&ED was carried out on their behalf, the contract provisions must set forth the specific SR&ED tasks to be performed. If this is not clearly stipulated, the contract must be

interpreted in order to determine whether the SR&ED was done because required by the contract. For example, when the agreement entered into requires the contractor to research, design, develop, integrate, test, and verify the performance of goods developed specifically for the payer, according to the payer’s specifications, it is an indication that the SR&ED was carried out on behalf of the payer.

The same conclusion applies in a contract for services in which SR&ED is carried out if, according to the agreement between the parties, all of the calculations, sketches, plans, solutions, and documentation are provided to, and discussed with, the payer. [84] (Emphasis added) [ 183 ] In this case, and as stated above, throughout the RCM Program, it was clear that the SR&ED work had to be carried out to reach the program objectives. Furthermore, it clearly cannot be said that “the work or services is merely an accessory in relation to the value of the property supplies”, as stated in

section 2103 CCQ. [ 184 ] In the circumstances, the evidence does not allow the Court to find that the RCM Program was a contract for the sale of goods; rather, it was a contract for services for the delivery of the RCM Program.

STANCU’S DEEMED ADMISSIONS [ 185 ] The Plaintiff submits that Stancu, the Defendant’s representative, made many admissions (described in paragraph 78 above). [ 186 ] It is apparent from all of Stancu’s testimony, however, that she never denied Revenu Québec’s position that the Government of Canada had made contract payments to MDA for the purpose of the RCM Program. [ 187 ] In this case, the Court finds that the facts disclosed in Stancu’s testimony cannot be characterized as admissions because they are obviously questions of mixed fact and law related to the

interpretation of a contractual relationship and the application of legislative provisions.

CONCLUSION [ 188 ] In the Court’s view, the evidence and the testimony establish that the RS&ED work was carried out for the purpose of the RCM Program on behalf of the Government of Canada. [ 189 ] In fact, s. 1029.8.17 ( c )(ii) of the Taxation Act applies, because amounts were paid “in respect of an expenditure of a current nature … for scientific research and experimental development to be performed for the authority or person, or on behalf of the authority or person.” [ 190 ] In the Supreme Court decision in Nowegijick v. the Queen , [85] Dickson J. stated the following: The words “ in respect of” are, in my opinion, words of the widest possible scope.

They import such meanings as “ in relation to ”, “ with reference to ” or “ in connection with ”.

The phrase “in respect of” is probably the widest of any expression intended to convey some connection between two related subject matters. (Emphasis added) [ 191 ] In this case, the evidence establishes that: − the Government of Canada initiated the RCM Program and established the project specifications; − MDA obtained a contract for Phase A, a contract for Phases B/C, and a contract for Phases D and E1, but it would have been possible for another person to have obtained those contracts; − MDA received over a billion dollars from the Government of Canada in this respect; − SR&ED work was carried out in each phase of the project; − the Government of Canada had to be able to use the intellectual property arising from the RCM Program and the contracts provided for the application of General Conditions 9624 “General Conditions - Research and Development” and General Conditions 2040 “General Conditions - Research and Development”, which had been adapted for the purpose of the contracts; − the Government of Canada supervised the performance of both the technical and budgetary aspects of the work in the RCM Program; − the Government of Canada assumed all of the risks related to the satellites of the RCM Program; − MDA claimed R&D tax credits for salaries and wages with respect to amounts for which a claim for progressive payments had already been made for the purpose of the RCM Program. [ 192 ] Although the contracts were not drafted specifically for doing SR&ED work, the evidence shows that SR&ED was required to be carried out under the RCM Program, on behalf of the Government of Canada. [ 193 ] In conclusion, the evidence presented at trial leads the Court to conclude that MDA received “contract payments” within the meaning of this expression in s. 1029.8.17 ( c )(ii) of the Taxation Act .

FOR THE ABOVE REASONS, THE COURT: DISMISSES the appeal in file numbers 500-80-031531-156, 500-80-031702-153, 500-80-031918-155, 500-80-033749-160, and 500-80-

035829-176; WITH COSTS , in favour of the Defendant. __________________________________ DANIEL BOURGEOIS, J.C.Q. Mtre Dominic C. Belley Mtre Jonathan Lafrance Mtre Catherine Dubé NORTON ROSE FULBRIGHT CANADA Counsel for the Plaintiff Mtre Marc Richard Lesage Mtre Normand Perreault Mtre Jean-Philippe Leroux LARIVIÈRE MEUNIER Counsel for the Defendant Dates of hearing: November 26, 27, and 30, 2018 December 4, 5, and 6, 2018 March 25 and 26, 2019