Composed by an SR&ED Expert
Looking back over the past 10 years since I first started working on managing SR+ED programs , it strikes me how so many of the players, from both government and business, seem to miss the whole point of this program.
Granted, government and business have somewhat different objectives; one wants to stay in office, and the other one wants to sustain and grow its respective business interests. Canada spends a great deal of money on its SR+ED program to support innovation; so why is our program less successful than similar models in Europe and other industrialized nations?
I can remember several years back, one CEO telling me how he wished that there was no SR+ED program, but the competition was using it so therefore they had to as well, just to stay in the game.
Any organization that has undergone an SR+ED audit recently, or in the last 5 years, may have recognized that this process has become somewhat adversarial and with unpredictable results. Whatever the root cause of this disconnect, I believe it is essential that the process becomes more transparent and predictable to avoid increasing volumes of appeals and unresolved claims, in addition to the existing backlogs.
Ideally, SR+ED requirements should be interpreted by all CRA auditors in a manner that is consistent, accountable and rational in order to be in harmony with the taxpayer Bill of Rights. Businesses have the right to know what is expected of them in order to comply and achieve an acceptance. Now there’s a movement for mandatory second reviews, in case of denial, dispute or disagreement on eligibility. However, even if CRA does manage to implement a mechanism for a timely, independent second technical review, a more fundamental concern with the program is still is not being addressed.
The core issue pertains to how CRA is currently using their five key questions to determine eligibility of a claim. Specifically, the first eligibility question reads, "Was there a scientific or a technological uncertainty?" Although CRA has removed the controversial phrase, "....that could not be removed by standard practice" from this question, the meaning is still clear; there must be an uncertainty that cannot be solved in a predictable manner with methods that are known to qualified individuals in the public doman, in order to qualify for these tax credits.
So why is it that some technical auditors from are CRA misinterpreting this question? How is it that these auditors are also not inquiring as to whether there is any solution available in the public domain to resolve the technological or scientific barriers described by the claimant?
Based on large volumes of claimant testimonials and the large volume of SR&ED disputes registered with the Tax Court of Canada, it would appear the focus of many SR+ED technical audits is now directed to the assessment of support level activities, which by themselves are always routine, thereby providing the (inappropriate) rationale for disqualifying the claim.
SR+ED eligibility is not an opinion; eligibility is determined through the proper application of the Income Tax Act and SR&ED Policy guidelines. When claims are being denied based on opinions that do not take into account the most important criteria, ie. a problem that cannot be solved with a high level of predictability with the methods known in the industry, then we have a very serious problem indeed. Having a timely second opinion (a.k.a. technical review) is a moot point unless CRA resumes auditing claim eligibility taking into full account each of their five questions.
If the intent is to deny Experimental Development and only approve Scientific Research activities, then the tax law must be changed in legislature. At least that would be transparent.
However, if the actual objective of the program is to proactively support and encourage advancement in all fields of technology, then the existing system of accrediting and monitoring SR+ED auditors needs a serious review that looks beyond narrow interpretations. Innovation drives success and success should drive more innovation. Let’s take down the road blocks and get moving.
John Dewar has worked for many years as an SR+ED program manager for a paper & packaging manufacturer and is a certified lead auditor for the ISO9001, ISO14001 and FSC standards. He is currently working as an SR+ED Assessment Specialist with the Bond Consulting Group in Toronto.