The panel of three justices ruled Wednesday there was no evidence the software, known as a "zapper" and created by InfoSpec Systems Inc., was ever used by two Winnipeg restaurants.
The Appeal court said the Crown couldn't prove the amount of the alleged fraud, which, according to the charge, was more than $5,000.
"I would allow the appeal, set aside the conviction for fraud and enter an acquittal," said Justice David Frankel, in a decision written on behalf of Justice Mary Newbury and Justice Risa Levine.
The case dates back to an eight-year period between Oct. 4, 2000 and Aug. 28, 2008.
The B.C. company created and marketed point-of-sale software, known as Profitek, allowing restaurants to keep track of sales, but it also made available to clients software known as a zapper.
The zapper allowed clients to delete selected cash transactions from sales records and as a result, under-report their income.
According to the court's ruling, InfoSpec Systems Inc.'s president Pius Chan sold zappers to two restaurants in Winnipeg, knowing the programs would be used to facilitate tax evasion.
There was no evidence, though, the restaurants installed the software.
InfoSpec Systems Inc. was initially charged with fraud over $5,000, four counts of evading income tax, and four counts of evading the GST, but was convicted only of fraud over $5,000.
InfoSpec Systems Inc. appealed the conviction, arguing the sale of software designed to help a third party commit fraud isn't fraud itself. It also argued the Crown failed to prove the software was actually sold.
The Crown, however, argued the sale of the software was fraud and asked the court to substitute a conviction for attempted fraud.
But Frankel said the zapper software is not illegal, noting he wasn't sure if reasonable people would even consider its sale to be dishonest.
He said Parliament can always consider a prohibition on zappers to thwart tax evasion.
Frankel also dismissed the Crown's bid to have the company convicted for attempted fraud because selling a zapper was not a dishonest act.