Scientific Research and Experimental Development (SR&ED) Tax Incentive Program Alert and Call to Action
Russ Roberts, CATAAlliance, Sr. VP, Tax & Finance
Note: Please circulate the CATA SR&ED Alert broadly. Items are linked to more detailed explanations. We welcome your views and participation in advancing Canada's high tech business growth.
Alert: CRA has issued new, stringent review protocols for SR&ED claims.
If you have claims currently under review or coming up for review, or if you are filing new claims, you should understand the implications of these changes. You cannot assume that you can rely on past experience as a predictor of how to support your claims or of the outcome of your claims, going forward.
Specifically, the CRA has released two new documents, both effective June 1, 2010:
The CRA’s website states that the Claim Review Manual for RTAs and the Technical Review Guide for claimants “cancel and replace the Guide to Conducting a Scientific Research and Experimental Development Review Part 1: The Technical Review dated January 14, 2000.”
- an internal procedural manual for its Research and Technology Advisors (RTAs), the Claim Review Manual for Research and Technology Advisors. The CRA has posted a public ("severed”) version of this manual on its website
- a guide that provides an overview of the claim review process for claimants to help them better prepare for technical reviews of their claims, The SR&ED Technical Review: A Guide for Claimants (draft). To see the guide, go to the CRA website at http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/tchrvw-cmmnt-eng.html. The CRA indicates that this guide is a concise version of the new, internal Claim Review Manual for RTAs.
Both the Claim Review Manual for RTAs and the Technical Review Guide for claimants are officially effective June 1, 2010. However, from what we understand, the CRA has been applying Claim Review Manual procedures even to some reviews that were started before June 1, 2010. Also, the Technical Review Guide for claimants has been posted as a “draft” for limited comment by August 1, 2010.
Those experiencing reviews under this new regime are finding:
We are hearing of companies that thought they knew what was expected and that had good claiming experiences now not being able to support their current claims to the satisfaction of reviewers when their claims are reviewed under these new protocols.
- the reviews much more rigid; and
- the positions being taken and the information requirements more oriented to dedicated research projects as opposed to projects where the R&D is highly integrated within the context of the need to develop advanced technologies required for improved commercial products, processes, and services.
Senior SR&ED practitioners are emphasizing similar concerns to us. Specifically, they are saying that the documentation standards being used are much more likely to be supportable in dedicated research environments, and that the eligibility model is much more oriented to supporting the development of core or enabling technologies than it is to supporting work on advancing existing technologies. There is a much greater emphasis on claimants providing documented, contemporaneous evidence that they used a "five-stage” research process in order to prove to reviewers that a systematic investigation / search was followed. However, the "five-stage” process is more common to academic research projects in a laboratory than it is to much of the R&D performed in engineering and software development settings in Canada oriented to getting products out the door.
The practitioners warn that if you are claiming the extension of technologies, they are finding that some CRA reviewers have a very narrow perspective on what constitutes a technological advancement and the scope of a project. For example, some reviewers are challenging:
as simply being normal trouble shooting associated with engineering or quality control.
- work associated with improving existing process technologies when it occurs in a production or operational setting, and
- work needed to advance technologies used to support business services
Now, support for a claim depends much less on the ability of a company’s personnel to provide oral evidence of what happened and why. Rather, companies are now expected to have retained project specific, contemporaneously produced and dated documents that provide this information. Retention of this information is currently not common to many development environments; in fact, in some environments, it is not approved practice.
The new review processes for the SR&ED Program focus much more on claimants being able to table contemporaneously produced documentation that:
- demonstrates the existence of planned R&D projects aimed at addressing specific advancements, and details of the uncertainties and how they were resolved;
- defines the course / sequence of the experimental, analytical processes that contributed to the SR&ED project. The CRA’s new "five-stage process” is being emphasized.
- shows that a technological advance was real and that the objective of the work and the resolution of technological uncertainties went beyond the normal uncertainties typical of any engineering or software project.
It is particularly important to understand the implications of Chapter 4, “Preparing and Planning for the Review”, of the Claim Review Manual for RTAs regarding what you claim and how you support your claims.
There no longer appears to be much latitude for claimants to explain and clarify their claims, and to sequentially work through issues with CRA reviewers. However, it is counterproductive to argue with reviewers that this curtailment in communication is inappropriate.
As quickly as possible in the review, it is very important to grasp reviewers’ concerns in terms of how they understand the facts and the way they look at eligibility in the context of the facts.
As mentioned, reviewers seem to be looking closely for hard, detailed support in the form of planning documents, etc. for:
Careful, hard, contemporaneous support around all of the key elements of eligibility assertions, the project model and work elements, and their contributions and timelines can be critical.
It is being reported that under the new regime, some reviewers are not taking into account oral support from companies’ technical experts involved with the development.
- the sequence of experiments and analytical work; and
- how the results contributed to the resolution of the technological uncertainties.
There is a change and it should be remembered that the reviewers are just the messengers.
CRA managers should be able to explain their positions in the context of the evolving policy. We suggest that you work with managers to understand what the new CRA policies mean to your firm. We suggest that you take your concerns and frustrations to them, but do not make it personal. Obtain clarification of what public policy was in place at the time that you filed your claim. You may also want to speak with your advisors who will be knowledgeable about how local offices are adjusting.
To the best of our knowledge, there has been no change in how the CRA deals with disputes associated with SR&ED claims. The Claim Review Manual for RTAs and the Technical Review Guide for claimants refer claimants to Application Policy SR&ED 2000-02R, "Guidelines for resolving claimants' SR&ED concerns", June 30, 2005.
The community and CATA have raised concerns about the objectivity and usefulness of these dispute resolution processes with the CRA, most recently in April 2009. To date, neither the community nor CATA has received a response from the CRA. Concerns include:
When a local tax services office cannot provide you with a detailed, written explanation of the CRA's publicly issued statement of the relevant policy and how their reviewers addressed the full set of facts, you would normally consider submitting your concerns about the way your file was handled to the Director of that local office, albeit this is not the prescribed course set out in CRA dispute resolution guidance for the SR&ED Program.
- the expertise in and amongst local tax services offices is so integrated that local offices cannot provide objective, independent second opinions on decisions; and
- the fact that beyond the dispute resolution process available at the local level, the next option is filing a Notice of Objection, which is handled by the Appeals Branch. The Notice of Objection option can be very time consuming and has generally not been seen to provide for an objective, independent opinion on whether decisions made by local offices on eligibility are correct. Historically, this option has resulted only in a review of process.
In many ways, the new regime seems to be aimed at permitting the reviewers to streamline reviews, close files, and get to (re)assessments as quickly as possible. The underlying assumption is that additional representation from the claimant can be dealt with in the Appeals Branch.
Observations and recent CATA advocacy
The new documents, the Claim Review Manual for RTAs and the Technical Review Guide for claimants, confirm a fundamental and dramatic shift in the administration of the SR&ED Program and its goals. The shift represents a very significant narrowing of what is supported in the settings where innovation is encouraged through the tax credits. This is particularly true where a project is closely integrated into the broader scope of the work of a business, as typically occurs throughout many parts of the ICT sector.
It can be argued that these changes officially bring the administration much more in line with the normal orientation of the CRA’s Compliance Programs Branch in which the SR&ED Program is housed. In this Branch, the focus is generally on compliance, and a key measure of performance is dollars of taxes recovered. The Compliance Programs Branch is responsible for audit, aggressive tax planning, enforcement and disclosures, and evasion and fraud programs, as well as for the SR&ED Program.
We have challenged these changes and their impacts on businesses and Canada's innovation environment in discussions with senior Government officials, including the Minister of National Revenue Keith Ashfield. Senior officials from some of the largest companies performing R&D in Canada are equally concerned and are discussing these issues with the Government as well. Your input to the Government on the consequences of the impact of these changes is important at this time.
Government officials have stressed to us that they are committed to seeing that the SR&ED Program functions effectively as the incentives for innovation that Parliament envisioned. We are being told that the CRA is not to make changes to existing public policy, and that they want CRA administrative policies to work effectively from the perspective of businesses’ needs, including the expectation that these policies mesh as effectively as possible with the way business carries out developments.
The CRA has invited your input on the new Technical Review Guide for Claimants http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/tchrvw-cmmnt-eng.html:
"To ensure the broadest possible consultation prior to finalizing The SR&ED Technical Review: A Guide for Claimants (Draft), we are inviting your comments on it. In particular, we would like to know:
You may send your comments to the CRA by August 1, 2010 at the following email address: email@example.com. "
- if the Guide is helpful for claimants who have to prepare for a technical review, or if not, what could be done to improve it; and
- if there are other best practices that can be included in the Guide so that RTAs and claimants can work together to make the technical review process more effective and efficient.
The CRA notes that:
“We will consider all suggestions, but we will not be responding to individual submissions. Please ensure that your comments are specific, pertinent to the document in question and concise.”
Action: What you can do
The CRA has not invited comment on:
We hear that some companies perceive that commenting to the CRA beyond what the CRA has asked about raises risks. Others in the community are coming to us with strong concerns about the validity of this "consultative” process as a mechanism for obtaining substantive comment. They point out that the policies in the Claim Review Manual for RTAs and the Technical Review Guide for claimants have already been in effect for some time, even though the CRA is consulting on the Technical Review Guide for claimants issued in the form of a "draft" for limited comment. However, the CRA is not consulting on its actual Manual. Some are saying that the process lacks transparency and credibility. Certainly, this process simply collects information and is biased to those who can afford to comment without risk to the outcome of their claims.
- whether these new policies are reasonable, appropriate, and consistent with historical public policy; or
- whether the new policies support the intent of the incentives and effectively mesh with current business practices (a commitment of the Government in the 2008 Budget).
CATA's members strongly support the SR&ED tax credits as one of the key tools for supporting business innovation, but they believe that the SR&ED Program must be delivered efficiently and effectively, and managed as the incentives envisaged by Parliament. The community is calling for a course correction. (See CATA's May 2010 Update and Observations at
CATA has tabled a backgrounder, “Key Elements for the Success of the Scientific Research and Experimental Development (SR&ED) Program as an Incentive”, to assist the dialogue. It examines the program in the context of what is needed to support Canada becoming an Innovative Nation. The document outlines the issues and the conditions for solutions. It is based on the commentary and insights of leading program experts and is being shared with Government officials and our associates.
Please download a PDF copy of this document as background and to facilitate dialogue
We would like to have your thoughts and input. You can help by sending your comments on:
- your experiences in the reviews. We are especially interested in the impact of CRA actions on your business’s ability to invest in innovation.
- the Claim Review Manual for RTAs and the Technical Review Guide for claimants. You may wish to focus particularly on Chapter 4, “Preparing and Planning for the Review”, of the Claim Review Manual.
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Please send your comments, feedback and guidance by email to firstname.lastname@example.org and include SR&ED in your subject line.
We will use your feedback in our ongoing discussions with Government officials and provide summaries in future updates. We will not release sources.
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You may also wish to communicate your concerns to your local MP and to the key Ministries and Agencies such as, Industry Canada, Finance, International Trade, CRA, and DFAIT. Please contact your local MP and provide him/her with a copy of the Legislative Alert as well as circulate the Alert to your network of business and media contacts as part of the industry’s awareness Campaign.
Addendum: Important recent CRA releases for the SR&ED Program