SR&ED Appeals – Be Prepared To Wait.
Attention: Policies May Have Been Updated *** Some of the policies referenced were updated 2021-08-13. We are working to update this article and others. *** |
On November 29th, 2016, the Auditor General of Canada tabled an audit regarding the processing and management of income tax objections. The audit was critical of long wait times for appeals, as well as the way the Canada Revenue Agency (CRA) measures its performance. As a taxpayer applying to SR&ED, what lessons can you take away from this report?
Your SR&ED application has been denied. What happens now?
The CRA has found your project to be ineligible for the SR&ED program. You’ve spoken with the Research Technology Advisor (RTA), and the Research Technology Manager (RTM). You have provided extra information, but their position has remained unchanged. You feel strongly that your project should be eligible, so you start the appeals process.
At this point, your objection joins 171,744 other outstanding objections 1 on the CRA’s to-do list. Note that this figures covers all tax objections, not specifically SR&ED appeals.
With such a large backlog of cases, it is not surprising that the Auditor-General concluded:
[T]he Canada Revenue Agency did not resolve income tax objections in a timely manner.
Report 2—Income Tax Objections—Canada Revenue Agency, Auditor-General of Canada
The appeals process can take years. In addition, the Auditor General’s report found that CRA’s methods for measuring the time an appeal will take does not adequately describe the actual time waited. They also found that the metrics in place for estimating the timeframe of the processing of an objection are inconsistent. In other words, not only is the wait long, but you won’t be told exactly how long it is.
A long wait time has financial costs. In addition to the costs of unusable assets, extra costs can be incurred from hiring professionals to help with the appeal, and–should the appeal be unsuccessful–possible court, lawyer, and expert witness costs.
The most important lesson is that the appeals process should be avoided as much as possible. Know the SR&ED program inside and out, and you can minimize the chances of a denied application and costly appeal.
Get your tax claim right, the first time.
There’s another interesting piece of information in the Auditor General’s report:
65% of objections were decided in favour of taxpayers.
Report 2—Income Tax Objections—Canada Revenue Agency, Auditor-General of Canada
In 65% of the appealed cases, taxpayers were actually adhering to the law, but were penalized anyway by the costly and drawn-out appeals process. Note that this statistic refers to all appeals, not only SR&ED ones.
You can say “it’s the CRA’s fault, I can’t help it if they’ve made a mistake,” but that wouldn’t be exactly true. In fact, you can help it, and there are steps you can take to reduce as much as possible the chance of needing an appeal.
Communicating with the Canada Revenue Agency
Such a high rate of successful objections raises the question: why weren’t these cases accepted as filed?
The CRA is only able to make decisions based on the information they have. This is why it is so important that you don’t give the CRA the wrong idea about your research. Get expert help at the outset, as an ounce of prevention is worth a pound of cure.
If you’re certain that your SR&ED project qualifies under the criteria for eligibility, make sure that your T661 expresses this in a way that allows the CRA to agree. Pay careful attention to difficult terminology, and make clear every piece of information the CRA needs to find your work eligible. This might help avoid a time-consuming and costly appeals process.