When Is A Consultation?

This article is by Bruce Madole who kindly agreed to provide some interesting materials related to SR&ED.

The Canada Revenue Agency (CRA) has been releasing draft policy documents on the SR&ED Program for public comment over the past few months, as a part of an ongoing policy review exercise.  They have done so at a time when the SR&ED Program is under intense scrutiny, the subject of two separate review exercises (The Expert Panel, and a report expected (someday) from the Taxpayers Ombudsman.  Various deadlines for comments have come and gone, with individuals and industry groups responding.  Still, it remains to be proven whether this is really a consultation, or merely another preemptive exercise in political and public relations damage control, designed to deflect expected criticism.

If there’s one thing they understand perfectly well up there in Ottawa, it’s the art of the Cabinet shuffle. Politicians and bureaucrats have this down pat.  Just when the public and the press really begin to ratchet up the heat and to focus on the deficiencies of a situation – boom – everything’s been changed around.

And So… To Court

This article is by Bruce Madole who kindly agreed to provide some interesting materials related to SR&ED.

You are not legally required to produce detailed written records in support of a SR&ED claim.  However, if you don’t, you must be prepared to spend years before the courts in defense of your claim, and you must understand that you will most probably lose.  This sentence above is a loose paraphrase of the outcome of a Court decision (136736 Canada Inc. v. Her Majesty the Queen). I’ll write more about it later, another day.

To support a SR&ED claim, the tax authorities demand detailed, step-by-step records about the progress of the technical work.  They’re quite specific about what they want to see:  the technological uncertainty, barrier or gap, the hypothesis formed, the actions taken, and so on.  And then, eventually, they will want to see the documented linkages between those work steps that you documented, and the costs that you claimed. Needless to say, many if not most businesses fail to keep such levels of documentation, recorded in the way that the Canada Revenue Agency would like to see.

Anecdotally, some reviewers have been quite unreasonable or hard-line in their demands on these points, but it’s hardly surprising.  When they provide public training and information sessions for the SR&ED program, the CRA naturally insists on the need for detailed technical records, proof of experimental development, and proof of the associated costs. If you’re claiming it, they will demand evidence. No big surprise, this.

In fact, I’ve heard that increasingly, CRA reviewers are making the sufficiency of evidence their primary determining factor among the three key criteria, ruling out claims purely for failure to satisfy the requirements for evidence.

There have been a number of court cases along the way, in which the legal precedents have provided valuable guidance to the conduct of the SR&ED program.  Unsurprisingly, some of these cases have to do with the need for supporting evidence. (Well, probably all of them do, in one way or another.)

Three of the key cases are:

• RIS Christie Ltd v. Canada (Federal Court of Canada, Appeals Div.)
• CW Agencies Inc. v. Canada (Federal Court of Canada, Appeals Div.)
• Northwest Hydraulic Consultants Ltd. and Her Majesty The Queen (Tax Court of Canada)

Evidence, What Evidence?

This article is by Bruce Madole who kindly agreed to provide some interesting materials related to SR&ED.

Recent anecdotal evidence suggests that the Canada Revenue Agency (CRA) is becoming increasingly detailed (and according to some, who disagree with them, occasionally irrational and unreasonable), in its approach to supporting documentation.

This is news?

Certain newspapers or columnists continue to create stories about the fact that reports are going to be published, by various official bodies, about the state or the future of the SR&ED program, about the rampant unhappiness of consultants across the industry, and the rampant unhappiness of the CRA with many of those same consultants and their clients.  This is news? At best, it’s a teaser that someday soon, there may be news.

Let me recap – the government is giving away money to businesses, as a financial incentive to perform research, and some people are alleged to be acting unscrupulously to get their hands on some of it.  Is that news?

If I filed a news story that there are mosquitos in the woods north of Winnipeg, would that be news? I don’t think anyone would be a bit surprised.

A cynic might ask if this current fuss is a deliberate and somewhat cynical strategy by CRA to kick up dust and raise the debate about the necessary level of documentation.  What it seems to be doing, mainly, is stirring up old debates about whether CRA is an appropriate administrator for a tax incentive program… the idea being that providing incentives is a foreign and unfamiliar state of mind for a Crown agency that is historically more familiar with detection, collection and enforcement.  So, on balance… probably not.