CRA Announces Update on SR&ED Program, April 2024
Background
On March 28, CPA Canada posted a video to YouTube video of an interview and webinar they co-hosted with the CRA to review updates to the Scientific Research & Experimental Development (SR&ED) Tax Incentive Program. 1
This session covered an overview of the program results from 2023 and highlighted the upcoming initiatives that will be undertaken by the CRA to enhance program efficacy in 2024. The CRA representative also responds to some key questions heard from CPA Canada’s SR&ED Committee. The co-hosts are Susan Bishop (Chair of CPA Canada’s SR&ED Tax Advisory Committee, and member of CPA’s Tax Advisory Group), and Lorraine Redekop (Director General of the SR&ED program).
Of note, we recently added a note on our CRA Annual Reports to Parliament page that the Departmental Performance Reports, which the CRA gives annually, and which have historically provided statistics on SR&ED, have become increasingly sparse on data in the previous two years (2022, 2023). Given that the CRA announced in this video that they started collecting and producing more specific data as of last year, this is likely the reason for the former.
The data presented in this webinar is quite extensive, and we encourage you to follow the link above to view the presentation in its entirety. What follows here is a summary of the presentation, relevant questions, and answers provided, and does not in any way represent the official views, policy, or position of SREDucation or Ingenuity Group Solutions.
Presenting the 2022-2023 Fiscal Year Data
Ms. Redekop begins the presentation by stating that SR&ED continues to be a vital part of how the government is achieving its economic objective of promoting innovation in Canada. Around 80% of Canada’s support for research and development (R&D) is delivered in the form of tax incentives – and at the federal level, this is in the form of the SR&ED tax incentive program. 2
2020-2023 Averaged $3.4 billion in tax credits to 17,000 individual claimants annually through 20,000 claims.
On average, 2,500 of these 17,000 claimants are claiming SR&ED for the very first time and small businesses with gross annual income of less than $4 million submit more than 60% of claims annually. By sector, here is a breakdown of ITCs allowed:
| % of Total SR&ED Claims in 2022-2023 | Sector | |
|---|---|---|
| $1,272 million | 35.33% | Software |
| $766 million | 21.27% | Electrical |
| $495 million | 13.75% | Mechanical |
| $427 million | 11.86% | Medical |
| $228 million | 6.33% | Chemistry/Chemical Engineering |
| $171 million | 4.75% | Earth Sciences/Environmental |
| $139 million | 3.86% | Materials |
| $61 million | 1.69% | Agriculture |
| $52 million | 1.44% | Food Processing |
| $32 million | 0.88% | Civil |
| $2 million | 0.05% | Other or not available |
| *Related Field(s) of Science/Technology within each sector were not provided in the CPA Canada webinar/interview. Please see our article Fields of science or technology covered by SR&ED (Line 206) to see all fields of science and technology which are eligible for SR&ED ITCs. | ||
In the 2022-2023 fiscal year (FY), $3.6 billion was provided in tax credits, and non-compliance was $0.15 billion, down from $0.17 billion in 2021-2022 and $0.2 billion in 2020-2021.
Here are some raw statistics for the 2022-2023 FY, as presented in the webinar:
FY 2022-2023 SR&ED Statistics
| Total Number of Claims Processed: | 20,079 |
| Number of Claims Processed Without Review: | 17,709 |
| Number of Claims Reviewed: | 2,370 |
| Number of Distinct Claimants | 17,013 |
Overall, the number of reviews has gone up (by 25), the number of claims processed without review has gone down (by 263), and non-compliance has also decreased. 3
More Transparency About SR&ED Claimants
The webinar presents extensive data on claimant profiles, which promotes greater transparency and helps [the CRA] to have a better understanding of SR&ED claimants. The CRA collects and produces this data on an annual basis, as of last year. The following represents the type of data being collected and produced: 4
- ITCs allowed based on sector (as listed above)
- # of claimants based on type of work being conducted
- ITCs allowed based on claim refundability
- # of claims based on type of corporation
- # of claims based on gross income of business
- Investment tax ITC allowed based on grow income of business
One of the main discussion points brought up by Redekop is how anecdotal feedback is an issue and can negatively impact perceptions of SR&ED. In what appears to be an attempt to counter these misperceptions of SR&ED, Redekop cites the following success rates for SR&ED claims: 5
- 90% of SR&ED claims are accepted as filed
- 7% of SR&ED claims are accepted after some modification(s)
- 3% of SR&ED claims are denied
Of note, review rates are based on risk of potential for non-compliance, and around 2,300 claims are selected for review annually. Overall, Redekop noted a downward trend in adjustments from 2028 onward (with 2020/pandemic time being somewhat statistically anomalous). By region, the majority of claims still come from Ontario, followed by Western Canada (everything west of Ontario lumped into one), and then Atlantic Canada.
Service Standards
One of the stated goals of the SR&ED program is to process claims that are accepted as filed during workload selection within a 60-day window. This standard was met 94% of the time in the 2022-2023 FY. Another stated goal of the SR&ED program is to process refundable claims selected for review within a 180 window. This standard was met 95% of the time in the 2022-2023 FY. Overall, the CRA wants to meet these service goals 90%+ of the time and they exceeded their standard in the 2022-2023 FY.
SR&ED Transformation Update
Redekop announced SR&ED program improvements in the following four areas:
Clear eligibility guidelines: The definitions of SR&ED were updated in ss248(1) of the Income Tax Act (ITA) with an increased emphasis on the how and why. Impacts of this improvement are still being measured, and as soon as statistical data is available, it will be made public by the CRA.
Accessible digital content and tools: Clearer info about eligible expenditures and compliance obligations. Step by step instructions to help claimants plan and prepare SR&ED claims from start to finish. Readily available info on processing times and what to expect after submitting a claim. Since the launch of these most recent improvements in June 2023, there has been a 56% increase in overall task success. 6 Redekop also indicated that the guide for claimants would be updated in the near future to ensure plain language and ease of understanding the policy for businesses. In 2022 the Self-Assessment and Learning Tool (SALT) was launched, which provides claimants with likelihood of eligibility and estimated SR&ED credit amounts in under 30 min. In the 2022-2023 FY, an average of 259 self-assessments were completed each month to determine eligibility, and an average of 118 were completed each month to determine eligibility including financial summary.
Improved consistency in claim treatment: Claims are now being assigned nationally for better alignment with SR&ED specialists based on their field of expertise and experience. From April 1, 2023 to October 11, 2023 1058 claims were assigned for review. Of those assigned for review, 68% were processed by one or both employees (technical and financial reviewers) working in a different region from where the claim originated. 817 services were assigned to employees, and a maximum 3 hour time zone difference between claimant and reviewer is maintained.
Increased measures to address willful non-compliance & strengthened integrity: There has been a recent uptick in claims containing false or non-compliant information. Review priority has shifted towards high-risk of non-compliance claims. There has been a re-emphasis placed on the serious consequences for willful non-compliance.
Common Issues with SR&ED Claims Observed by the CRA
- Incomplete/incorrectly filled out forms;
- Confusion about business type;
- Lack of supporting documentation;
- Ineligible expenses claimed;
- Lack of focus on technological advancement;
- Other financial assistance not disclosed;
- Claim includes inaccurate information; and
- Delays in providing information requested during review.
SR&ED Program Priorities
- Targeting outreach and services to the next generation of innovators who may be less aware of SR&ED tax incentives
- Promote SR&ED and increase visibility by attending more events
- Collaborating with partners (i.e. Department of Finance) on SR&ED review
- Strengthen integrity and address willful non-compliance
- Continue to improve operational efficiency
Summary of Relevant Questions from the CPA Committee
Question: There appears to be some confusion about the status of review for claimants, as businesses now receive only one letter stating something to the effect that they “may be reviewed within 60 days.”
Answer: CRA is willing to revisit a two-letter system to provide more surety for businesses. If businesses ever have questions about what their review status is, they are encouraged to call the SR&ED information line.
Question: You moved to the National Workload Management model a few years ago, why?
Answer: This change was made in response to feedback the CRA had received over many years about whether the correct technical expertise was associated with the right SR&ED files. Under the previous regional model, no guarantees could be made that the reviewer of a particular file would have the technical expertise necessary to fully understand the project.
Question How was this change received by field staff?
Answer: It was a massive change, but everyone understood the reasoning behind it and it has increased the collaboration between colleagues across the country.
Question: What about claimants who have built a relationship with their reviewers over the years? Has any consideration been given to the consistency of assigning the same people to the same files year after year?
Answer: Less so with smaller files, priority is currently given to matching technical expertise with files. Larger files provide more of an informal opportunity for reviewers to reach out across the country and collaborate with other (previous) reviewers and ask questions. This is encouraged. For really large claims, this will be a consideration on a more formal level.
Question: What about claimants who would like an in person review? We’ve heard of claimants requesting in person reviews and being denied.
Answer: COVID forced us into a virtual model where prior to COVID we had in person reviews almost by default. Yes, onsite reviews were reintroduced earlier in 2023 and this will continue to be expanded.
Question: What is CRA’s position on claimants using [generative] AI in preparing the SR&ED claims?
Answer: CRA has no formal position on that at this point. CRA cares more about the veracity of the claim and the extent to which the project description accurately outlines the work being done.
Question: Is the CRA using gen AI tools at all in terms of risk analysis or the reviews?
Answer: No comment on the specifics of risk analysis and reviews, but the CRA emphasized that they are careful to protect the information and work descriptions provided to them.
Question: You talked about common issues in claims and a majority of claimants get help from practitioners when putting claims together. Has there been any thought given to creating an approved designation or license for practitioners?
Answer: Yes, we’ve considered it, but are not pursuing it at this point. It would be too labour intensive and administratively complex.
[Note, we have posted previously about what questions to ask when hiring a SR&ED consultant, and we encourage our readers to do their due diligence.]
Question: Is the First Time Claim Advisory Service (FTCAS) available universally across the country?
Answer: No, we have reduced resources in this area and targeted those resources around claims that would benefit from that service. This service will continue to be made available where warranted, just not universally so. And SR&ED claims that warrant neither FTCAS nor review will be accepted automatically through the system.
Question: Any updates on the SR&ED consultation?
Answer: We are collaborating with the Department of Finance, and the focus is on cost-neutral modernization. CRA has already worked for a number of years to improve the administration of this program and tremendous steps have been taken internally to improve management as well as externally as described in the presentation. We are now eagerly anticipating feedback on any areas where the program may need to be adjusted.
[In other words, no update.]
Conclusion
In conclusion, the timing of this update is auspicious, given that the CRA is currently partnering with the Department of Finance to conduct a consultation on the SR&ED program. We would encourage our audience to listen to this full video update prior to submitting your responses. Don’t forget, responses are due to the CRA no later than April 15, 2024.