New Head of SR&ED

Since the retirement of the SR&ED program’s Director-General last summer, the program has had a temporary “acting” head. This was unusual because CRA generally fills appointments at that level more quickly, but more significantly because the SR&ED Directorate was being headed by a scientist for the first time in fifteen years (the program’s Director of Science and Technology).

The new Director-General has now been appointed, and will take up her post in a few days. Looking forward to meeting her and wishing her every success. 

Pre-Claim Reviews and Consultations

With the announcement of Pre-Claim Review, CRA now has two services that appear broadly similar - Pre-Claim Review (PCR) and Pre-Claim Consultation (PCC). So what’s the difference? 

PCC will “let you know whether any of your work is SR&ED” before you submit your claim. The consultation will be about work in progress, and the reviewer will follow up with a written report on eligibility, but not on the extent of eligible work or allowable expenditures. It will provide “advice and recommendations”, including on the supporting documentation which is to be kept. Participation in this service is at CRA’s discretion. There has been criticism that the service offers little benefit to claimants, since a positive review is not binding on CRA, but a negative one would mean a claim would be unlikely to succeed. 

In contrast, PCR will provide “certainty that your claim will be accepted as filed when it is received by the CRA”. It appears that this will be esssentially a regular review, performed while the work is in progress. It is not available for first-time claimants, or for companies with a claim under objection or in litigation. Self-Assessment Learning Tool (SALT) reports must be provided for each project. 

PCR is currently a pilot program accepting a limited number of participants. It is to be rolled out across the country over the next few months.

More changes to SR&ED services

CRA have announced cancellation of both their Pre-Claim Project Review and Account Executive services, effective immediately. Process Review is also a thing of the past, although since it never officially existed there is no official announcement of its demise.

A new service is being launched - Pre-Claim Consultation, or PCC, described as “a free, on-demand service that tells businesses whether their work is eligible for SR&ED tax credits”. PCC is to be requested after the project has started but presumably while it is still in progress. There is an online consultation request form (just contact information). The RTA who provides the consultation will follow up with a written report on the project’s eligibility, but not on the extent of eligible work or allowable expenditures. It will include “advice and recommendations”, including instructions re the supporting documentation which is to be kept.

Changes to the Second Review process for SR&ED claims.

One option for claimants unhappy with the result of a SR&ED claim review is to request a second review. As of April 30th, CRA have made some changes. Requests are now to be made through SR&ED HQ, which will maintain a data bank of all such requests. There is now a request form, RC532, which requires an account of the claimant’s concerns and details of discussions of those concerns with the reviewer and his/her manager.  If a second review is granted it will be what used to be known as a “Second Administrative Review”, now renamed simply “Administrative Review”. This is a essentially a desk review, using CRA’s file on the claim as the main source of information. The original review will be overturned only if due process was not followed, or the reviewer's decision was not compatible with CRA’s guidelines.

There is no mention of “Second Technical Review”, which would be a complete new review conducted from scratch by an independent reviewer. Previously rare, it seems this option is now extinct.

Software/IT SR&ED Symposium

For several years, a joint CRA/industry task force held a workshop for software/IT SR&ED claims in the Ottawa area. The tradition is being revived, and the 2016 workshop will be on May 17th. Speakers will include leading SR&ED specialists from the private sector, from CRA HQ  and from the CRA field office. As well as presentations there will be a case study working session, a panel discussion, and several networking opportunities. 

There is a new location - the EY Centre, by the airport, and a modest registration fee to cover breakfast and lunch.

For details, and to register, please visit http://sredncr2016swit.eventbrite.ca/

Changes to SR&ED Claim Form

The first revised SR&ED Claim Form in two years has just been issued, and is required for claims filed after December 31st 2015. The changes to Part 2 are: 

(1) The reference to ‘standard practice’ has been removed from the question on Uncertainty (line 242). This doesn’t, though, indicate a policy change - distinguishing claimed work from ‘routine development’ is still key to a successful claim.

(2) In the question on Advancement(line 246), “what did you achieve” is now qualified by “or attempt to achieve”, restoring previous policy.

Other modifications to CRA’s technical information requirements are apparent only from the extended discussions in the revised guide to the form, T4088-15. There is some re-wording of explanations, intended as clarifications, that may indicate what CRA is currently looking for. Most notably, in the explanations for lines 242 (Uncertainty) and 246 (Advancement), the familiar “technology base” has been replaced by “technological knowledge base”.  There is also reference to generation of new knowledge as “important to describe”. It is clear that advancement of knowledge must now be treated as not only a requirement for scientific research, ITA 248 (a) and (b), but also for (c), experimental development.

The information to be provided re Work Done (Line 244) now specifically includes descriptions of “the hypotheses designed to reduce or eliminate the uncertainties”. 

In the definition of ‘SR&ED Project’, eligibility is no longer to be determined at the “highest possible level” but at “the level necessary to properly recognise . . “

On a positive note - “Appendix 1 is not an exhaustive list of all eligible fields of science or technology.”  This first appeared in 2014 and is still there. 

Program shrinkage, announced and unannounced.

The new “Guide to Form T661” (T4088 Rev.14) is unusual in that there’s no new version of Form T661 itself. The current form is still T661-13e.pdf, which was issued 15 months ago. The revisions to the Guide are largely those needed to accomodate the last of the financial changes that were announced for the program in 2012. The reductions in rates and the transition to eliminate capital expenditures are now complete. 

On the technical side, there are a few minor changes in wording which seem intended to improve clarity. But there’s also a small change that could affect eligibility - in the instructions regarding technology base, for line 242, the phrase “that was available to you” has been quietly dropped. It’s now simply “indicate the existing technology base or level, or the existing body of scientific knowledge”. It seems those long discussions about ’business context’ have just been declared moot.

Also significant is something that hasn’t been changed. The current Form T661 asks about advancements during the claim period, whereas previously advancement was a question for the project as a whole, not each individual year. CRA haven’t taken the opportunity, with this new Guide, to correct that impression, so it seems this is now an additional requirement. 

While the financial reductions to the program are clearly spelled out, these restrictions in the scope of eligibility have the potential for equally significant impact.

Burden of Proof

When a SR&ED claim goes to the Tax Court of Canada the standard of proof applied, as in all civil proceedings, is 'balance of probabilities'. This means the claimant only has to show that it's more likely than not that the claim meets the requirements. 

 A CRA review is not a legal proceeding, and is conducted according to each reviewer's understanding of the SR&ED Directorate's directives. Some RTAs take the view that every element of a claim requires proof 'beyond a reasonable doubt' (which is actually the standard in criminal cases). Others, like the justices in tax court, will accept oral information if the source seems reliable. RTAs are also influenced, some more than others, by reluctance to 'sign off' on any payout of government funds without complete supporting paperwork. Unfortunately, these differencies result in major discrepancies in the review process between one RTA and another. 

The standard for SR&ED claim review is supposed to be that the review should be conducted to the extent necessary to support a reasonable level of confidence that there is a minimal risk of material error .

Some encouraging signs

There are increasing indications that the current SR&ED Headquarters team is actually listening to program users’ concerns - a very welcome development. For instance; each year, CRA hosts a series of meetings across the country for local program stakeholders. In previous years these consisted of presentations by HQ staff, followed by a limited question period. Last year the meetings were less formal, and provided much more opportunity for interaction. This year, on an experimental basis, some of the discussions are being led by private-sector stakeholders. I welcomed this opportunity, and at the Toronto meeting, in October, I facilitated a session on program users’ concerns with the technical review process. Although there was criticism of some review practices and some provisions of the Claim Review Manual, the CRA people present participated fully and were ready to consider suggestions, including limiting discretion of individual reviewers in certain circumstances.

On several other occasions too, this Headquarters team has been willing to listen to specific concerns raised by program users and carefully consider whether they could be addressed by administrative changes. While we shouldn’t expect any changes in policy, anything that leads to more consistency in how claim reviews are conducted is a step forward. 

The deadline effect.

SR&ED claims can either be filed along with the tax return for the claim period, or up to one year after the due date of that tax return. For companies with a Dec 31st year-end, the opportunity to claim tax credits for R&D work in 2012 expires in on June 30th. While many program users file their claims at this point in the cycle, there are plenty of reasons why it pays to prepare and file SR&ED claims well in advance:

• Deadlines in the SR&ED program are strictly enforced, so a last-minute delay or mis-direction can mean the claim is lost. At one time CRA had some discretion in this area, but that is now a thing of the past.
• Errors and omissions can also be fatal to the claim, and are more likely when rushing to meet a deadline. CRA will advise of any problems once they see them, but no extra time can be allowed. The agency recommends filing 90 days or more ahead of the deadline to allow for mistakes to be picked up while there is time to correct them.
• Companies that use professional claim preparers should be aware that this is by far their busiest time of year.
• Recently, revisions to the claim form have been made with very little lead-in time; a delayed claim may suddenly be subject to unanticipated filing requirements. The most recent update, for instance, sets out new requirements with respect to advancement and to scientific uncertainty, and these apply even to claims that could have been filed under the old rules.
• When a claim is prepared, or at least planned, while the work is still in progress, it’s possible to address problems such as lack of sufficient supporting evidence. Records have to be generated during the life of the project to qualify as ‘contemporaneous documentation’.
• CRA’s service standard for refundable claims filed along with the current tax return is 120 days. Claims filed later are classed as ‘taxpayer-requested-adjustments’, and the target processing time is extended to 240 days.

No unsuccessful projects?

It’s something of a concern that the current SR&ED claim form (T661-13, line 246) asks for a report of advancements achieved, without the usual reassurances that success is not a criterion for SR&ED. As well, the question is worded to ask only about advances made during the current claim period, whereas claimants used to be advised that for multi-year projects advancement is a characteristic of the project as a whole, and does not have to be shown in each individual year.

The current definition of advancement, in CRA’s Glossary and in the Eligibility paper (2.1.4), helps shed some light on CRA’s intentions here. It seems that knowledge generation is to be regarded as the primary purpose of technological as well as scientific advancement, with the old-fashioned notion of technological advance - actually getting some new piece of technology to work - now of secondary importance. With that interpretation, failure to make the technology work is just another learning opportunity (“rejection of the hypothesis”), so effectively there are no unsuccessful projects. This is an important indication of the information that needs to be provided at this point.

There’s also a caveat: it’s sad but true that interpretations of the rules by individual RTAs are not always those intended by SR&ED HQ. It will be unfortunate if some reviewers choose to make material success during the claim period a criterion for SR&ED.

Changes to R&D tax credit program welcomed, in the U.S.

The US Treasury Department is currently finalizing some new rules for their R&D tax credit program and, in contrast to the situation in Canada, the changes are being enthusiastically received. According to an article in the Washington Post, the new rules are the result of a decades-long battle waged by Dow Chemicals and others to broaden the standards used to decide what kind of work qualifies. The changes are to be retroactive.

The article mentions that Treasury Department at one time had a rule requiring companies to show they had produced information that “exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering”, a rule similar to Canada’s requirement that work be undertaken “for the purpose of achieving technological advancement”. The US rule no longer applies. 

It seems the new rules are to be more business-oriented, in line with the way R&D is defined by most OECD countries, following the model in the current edition of the Frascati Manual. In contrast, Canada’s definition of SR&ED was (and still is) based on the first edition of the Frascati Manual from 1963. That definition is considerably narrower and more academic. In combination with the "technological advancement" requirement, the effect is to reduce the level of private-sector development work that is recognised as R&D in Canada.

Guide to SR&ED now in hard copy!

The paperback version of “Guide to SR&ED for engineers” is now available. The guide covers the technical aspects of SR&ED, including eligibility, project description, documentation requirements, and the review process, and includes a line-by-line guide to the claim form. This is clear, specific information written for people who perform or manage R&D and are responsible for deciding what to claim, and ultimately for demonstrating eligibility to a reviewer. The guide is fully up-to-date and covers the recent changes for claims filed after December 31st 2013.

The guide is available from the University of Toronto Bookstore, price $45. To order, go to the BookPOD site - click here. You have the option of picking up your guide at the bookstore, or having it shipped directly to you.

There is also an iBook version, for Mac desktops or laptops running the Mavericks operating system, as well as iPads. It is available from the Apple iBookstore, price $34.99. For those who have the original version, an update is available for free download.

For more information, and access to an iBook sample, go to Guide to SR&ED.

Uncertainty in scientific research

The subject of ‘uncertainty’ as an element of scientific research has come up for discussion several times over the years. Is scientific research, perhaps, just about discovering new scientific knowledge or principles, increasing the extent of knowledge through the application of sound scientific methodologies? Or is uncertainty a necessary element, as it clearly is in the case of  experimental development? Development in the absence of uncertainty would not be experimental. But work such as investigation of physical and chemical properties of nanoparticles, or space exploration, is certainly generally regarded as scientific research even when the tools and methodologies used are standard ones.

The Income Tax Act provides no guidance; uncertainty is not part of the definition of SR&ED. CRA’s published guidance material, including 86-4R3, has consistently included uncertainty as an element of scientific research. The Eligibility paper states unequivocally that “There is scientific uncertainty in basic research or applied research”. It’s in the succession of T661 forms and guides that the uncertainty regarding uncertainty has shown up.

Until 2008, the T661 form always asked for information on uncertainty, sometimes referred to as ‘problems or challenges’, for all projects. Then, with the re-design of the T661 form, a clear distinction was required to be made between projects for scientific research and for experimental development, with no question on uncertainty for scientific research projects. This lasted for five years, only to be abruptly reversed with the latest revision of the T661. Now, uncertainty is once more a required element of a scientific research project. (How will this be handled at review, for projects completed under the old rules? Will claimants now be expected to produce contemporaneous evidence of uncertainty?) 

This equivocation raises a question; How can CRA continue to treat as irrelevant to this type of discussion the opinions of program users who are engaged in scientific research or experimental development on a daily basis?

New SR&ED Claim Form

CRA have today posted the new T661 form, required as of January 1st 2014. There's also a revised Guide to Form T661 on the website. The main changes to the claim form are revision of the text-box questions in Part 2, and introduction of a new section on claim preparer information.

In Part 2, the old Sections B and C are now combined. There are three questions - Q1 is on uncertainty, for 350 words; Q2 is Work Done, in 700 words; and Q3 allows 350 words for an explanation of why the project would amount to an advancement in science or technology.   With these changes, the distinction between Scientific Research and Experimental Development loses the importance it has had for the last few years - the question is asked only "for statistical purposes" and wrt the claim in general, rather than individual projects. The emphasis now is on uncertainty and the work carried out to overcome it.

There is a new Part 9, for some quite detailed claim preparer information. There are four types of fee arrangement to choose from  - contingency, hourly rate, daily rate, and flat fee. "Other" arrangements have to be described in ten words or less. Rates and percentages are to be supplied. The dollar amount of total fee payable is also required, and from the example provided it is clear that, for contingency arrangements, this means the fee that would be charged if the claim is allowed in full. 

The new Form T661 is here.  

Illustrating key concepts in eligibility

CRA have posted ten examples intended to illustrate concepts from the Eligibility Policy paper. Comments on their “clarity, readability and completeness” are invited until November 18th. 

Some of the examples cover familiar aspects of uncertainty or advancement, explaining that - uncertainty may arise through limitations in the technology (example #2); constraints such as cost can give rise to technological uncertainty (#3); applying known techniques is standard practice (#4); design change is not advancement (#7). Example #10 describes a SR&ED project that is a subset of a company project.

Some of the examples clarify current CRA policy. Example #5 describes a scenario that naturally leads to a hypothesis being formed (although it doesn’t extend to why the natural next step would be to document it). Example #6 clarifies that work failing to demonstrate ‘scientific method’ risks being dismissed as ‘trial and error’. Example #1 endorses the practice, recently adopted by some RTAs, of using the term ‘technical problem’ when work is considered to be standard practice, and ‘technological challenge’ when work is accepted as SR&ED. (This is not so much an explanation, rather a statement of intent about how the terms are to be used.) 

Examples 8 and 9 are potentially confusing when looked at side by side. Example #8 describes how testing and data collection that is partly in support of SR&ED may be pro rated for a claim. In Example #9, case 1, there is again testing and data collection that is used in part for SR&ED, but in this case all of the routine work is disallowed. No distinction between these cases is made clear. 

This set of examples is presumably the first of many, since CRA’s response to requests for more detailed, sector-specific advice has been that additional guidance would be provided through examples.

Guide to SR&ED

My guide to the technical aspects of the SR&ED program - Guide to SR&ED for engineers - is written primarily for people who perform or manage R&D, who are responsible for identifying work that meets the criteria for SR&ED, and who may be called on to justify a SR&ED claim to CRA technical reviewers.

While a great deal of information is available on the financial aspects of the SR&ED program, both from CRA and from non-government sources, there is comparatively little guidance on technical matters. CRA’s 19 papers on financial and financial/technical topics are detailed and precise; in contrast the single 12-page paper on eligibility policy is a high-level document that covers the topic in much less detail than the 28 or so documents that it replaces. It does not provide what program users need - specific, detailed advice on what to claim and how to claim it

Guide to SR&ED for engineers fills this gap. In direct, informal language, it covers the technical aspects of the SR&ED program in detail, from identifying work that meets the criteria through the claiming and review processes. 

For more information go to Guide to SR&ED on this site, or click the button below to go directly to the Guide in the Apple iBookstore and download a free sample. Requires an Apple iPad. 

Fields and codes

One of the questions on the SR&ED claim form concerns the field of science or technology of the work being claimed. CRA provides a list of some 150 fields, from which claimants select the best match. This is a critical step; a poor choice at this point could badly affect the entire project description, and make eligibility more difficult to demonstrate.

Before the revision of the claim process in 2008, classification of the field of science or technology was left to CRA personnel. The list they used was more extensive, closer to 400 fields, which allowed for more detailed distinctions. For instance, IT, which accounts for perhaps 25% of claims, was differentiated into 11 distinct categories under the old system. It now has less than one code, as it shares code 1.02.02 with bioinformatics. Strangely, though, some fields that are much less frequently used are now classified in great detail. Oenology (wine-making) and viticulture (grape-growing), which used to share a code under the old system, are now coded separately. There are separate codes for biopharming (4.04.05) and genetically modified organism technology (4.04.02), altough both seem to be terms for ‘genetic engineering’ - in fact the whole area of biotechnology is very well represented. 

Despite these details, the areas covered in the current list are the same as under the old system - the natural, medical and agricultural sciences, plus engineering, with the social sciences and humanities excluded. There was an anomaly for a while when the first (2008) version of the new code listed Actuarial Science, a social science, as a claimable field (1.01.04).

Did anyone file a claim using that code? What happened?

Obituary for 86-4R3

The CRA Information Circular 86-4R3 was for many years the principal technical guidance document for the SR&ED program. The reference number indicates that it was originally published in 1986, was the fourth SR&ED document to be published that year, and had been revised three times. The third and final revision was published in 1994.

It held the distinction of being widely accepted by the courts and frequently referenced as an authority. The reason for this approval, as explained by Justice Bowman (in NWH, 1997), was the widespread consultations with stakeholders that went into its development: “It represents a broad consensus of persons in the public and private sector who are likely to be affected by or to have an interest in the interpretation of the SRED provisions of the Income Tax Act.”

In 1998, a fifth version of the IC, 86-4R4, was drafted by CRA and posted for comments. This new version was not well received by program users. It was criticised as more restrictive and less business-oriented than the older version, also as requiring a particular development model, and leaving too much to the discretion of individual reviewers. Due to public pressure 86-4R4 was cancelled later that year, and IC 86-4R3 continued to be the main technical reference document until its withdrawal in 2012. It is scheduled to be removed from the CRA website on June 28th, 2013.

Penalty phase

Coming in the next version of Form T661, mandatory from January 1, 2014; questions about the claim preparer. The business number of any practitioner or consultant who helped prepare a SR&ED claim, with details about the billing arrangements, including whether contingency fees were used and the amount payable, will become “prescribed information”. Taxpayers filing their own claims will be required to certify that no preparer assisted in any aspect of the preparation of the claim.

A penalty, $1,000 per claim, is to be imposed if prescribed information is “missing, incomplete or inaccurate”. The taxpayer and claim preparer will be jointly and severally liable, which means it’s left up to them to sort out who pays.

It appears that the penalty will apply only to prescribed information concerning the claim preparation, not all of the prescribed information submitted with the claim. 

No word yet on how complete and accurate information on the amount payable under a contingency arrangement can be provided at the time the claim is filed.