SR&ED Update February 2007
February 15, 2007

SR&ED February 2007 Update

  1. Consultation Report & White Paper Intervention
  2. Department of Finance Response
  3. CRA Observations
  4. Next Steps in the SR&ED Campaign
    -Sign the Petition
    -CRA Management
  5. Policy Alert: Treatment of Outsourcing Contracts

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Ottawa, ON K1R 5B2

Note: Please circulate the CATA SR&ED Update internally. Items are linked to more detailed explanations. We welcome your views and participation in advancing Canada's high tech business growth.


1. Consultation Report & White Paper Interventions

Since the release of the Consultation Report and White Paper on CATA's recommendations for legislative improvements to the SR&ED Tax Credit Program, the CATA SR&ED Advocacy team has been engaged in a round of in-depth discussions with the staff of Jim Flaherty, the Minister of Finance, and the appropriate officials in the Department of Finance and Industry Canada. We have also met directly with the Minister to explain the origins and rationale for the SR&ED recommendations.

The briefings held with individuals from both the economic and tax policy sections of the Department of Finance focused on the detailed commentary on the program provided by the participants in the consultations. The participants in this effort should be complimented for taking the time to develop their thoughts so clearly.

The response is that the Consultation Report and White Paper are considered to be "substantive" contributions to not only understanding how to improve the current program but to the broader issue of how to promote the successful commercialization of technologies in Canada. We believe that the latter is the key to the retention of Canadian jobs threatened by the emergence of off-shore low cost centers of technology excellence.

The Consultation Report has been the subject of discussions with some key officials of CRA. The issues raised in the report were reviewed and we have been assured that the report will be brought to the attention of their colleagues.

2. Department of Finance Response

The Finance officials were cautiously receptive to the need for increased access to refundable tax credits. They did mention that the SR&ED program had now reached the $ 3 billion level and they were musing about where cuts could be made to accommodate broader access to the refundable credits. Finance officials clearly understood the need for broader access to the credits. However, they seemed to see it as a question of balance. In this respect we disagreed. We emphasized the net improvement in the tax base that would be achieved if a much broader base of firms were encouraged to perform R&D. There was considerable discussion about areas of legislation that is not working as originally conceived by Finance. We stressed that;

  • the policy on recognizing contracts for SR&ED simply does not reflect the realities of how contracts are written;
  • in spite of all the efforts to develop an effective policy on the treatment of materials used in SR&ED, CRA's response to any claiming model is unpredictable; and
  • some CRA reviewers simply do not follow the policy and guidance that exists.

In respect to the contract issue, we emphasized that a simple voluntary election identifying which parties would claim SR&ED associated with contracted work would be a viable solution. We emphasized that this solution is preferable to focusing on simply the performer, which Finance suggested.

As noted, the problems identified in the Consultation Report, resulted in a lengthy discussion. We emphasized that these problems challenged the integrity and effectiveness of the government's investment in the program. While emphasizing that they did not have control of the solution, the Finance officials recognized the importance of the commentary to the administration of the program. We have subsequently received a follow-up letter from the Deputy Minister of the Department of Finance emphasizing their commitment to the program and thanking CATA for their informative reports.

3. CRA Observations

CRA has not officially responded to the Consultation Report. As mentioned, some very constructive discussion about the content has occurred with CRA officials. They clearly recognize that policy consistency/clarity is essential and we understand that they recently indicated that they intend to "proactively investigate" instances of problems brought to their attention. The individuals we have spoken to clearly see the technical redress issue as important. Specifically, we contend that there is a lack of processes that provide truly independent, objective technical reviews of the correctness of decisions.

We have noted that simply having local assistant directors review the correctness of the process used in developing a technical review when requests are received for second opinions challenges the integrity of any redress system. One of the difficulties discussed is that most assistant directors and senior managers above them in CRA do not have the qualifications to do more than perform a simple review of process. Specifically, they generally do not have the qualifications to provide technical oversight, insight or redress on the correctness of technical decisions. Hence, they are extremely dependent on their reviewers and their immediate, daily managers whose independence is a concern of many of our members.

We have noted in our discussions with CRA that this is also a problem for the appeals process. Here again, we hear that the focus of the reviews by Appeals of the technical opinions is more on process rather than on the correctness of the opinions. Essentially, if this is the case, the expectations for independent, objective, sober second thought associated with the normal appeals redress process does not apply to the SR&ED program.

Of particular interest to our members will be CRA's announcement that they intend to revise their policies and guidance documents "for clarity". This was recently announced by Ms. Dompierre, the Director General responsible for the program, in a presentation in Quebec. We have little detail but subsequent information provided recently in a regional update to practitioners seems to make it clear that this is to be a CRA exercise and that it does not aim to achieve consensus across the private sector.

This approach to policy building is an issue we have raised with the Minister of Revenue (letter available upon request) given its implication for the integrity of the policy base and its support in jurisprudence. We intend to pursue this further.

We also understand from comments we have received from these public sessions of CRA to practitioners that other shifts in CRA's approach to the program may be occurring. This seems to include the loss of certainty around refundable assessments. Specifically, we hear that it was recently stressed in one of the updates that the Minister has 3 years to reassess a claim. The message appears to have been that the certainty around the refundable credits that has been the mainstay of the program since the mid-1980s can no longer be assumed. We will be seeking clarification of this important point for CATA's members.

As well, CRA apparently stressed in the same update that those who file near the 18 months deadline do so at their own risk for CRA does not have the time to provide advice. Another interesting comment by CRA was that technical reviewers cannot be expected to address policy issues, only their managers. Technical reviewers are to be focused on science - not on policy. Again, this is an interesting comment as the legislation and policies are attempting to define the envelope of science endeavors that are SR&ED. If technical reviewers do not address the policy and where it comes from, how can they assess the claims?

4. Next Steps in the Campaign:

Sign the Petition

We have developed an online petition to The Honourable James M. Flaherty, P.C., M.P., Minister of Finance, encouraging the government to introduce the critically needed improvements to the SR&ED program that are outlined in the CATA White Paper. Please see the attached link to sign the petition: .

CRA's Management of the program:

The CATAAlliance will be seeking clarification to determine what is actually happening. Particular attention will be applied to redress issues, certainty around assessments, and maintenance of the policy.

Please continue to keep us informed on your experiences with CRA. Send your comments to us at sredcomment@cata.caThey will be treated as confidential.

5. Policy Alert: Treatment of Outsourcing Contracts:

For CRA's latest and sometimes changing position on the treatment of outsourcing contracts, please request your briefing note from John Reid, CATAAlliance President, at

Russ Roberts
Senior Policy Director

John Reid