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Ottawa SR&ED Stakeholders Meeting Dec 13, 2011 Part 2: Commentary and Conclusions

The meeting continues – we shell out the details. SR&ED stakeholders meeting: Part 2.

Ottawa SR&ED Stakeholders Meeting Part 2

On Tuesday, December 13th, 2011, key stakeholders from the science and technology industries sat down for a meeting with the CRA to discuss the changes that have been taking place regarding SR&ED. It was – in a word – enlightening. This is the second post describing the SR&ED stakeholders meeting and the discussions that took place. The first part of the meeting was described here. This week’s post is a summary of the items discussed in the second half of the SR&ED stakeholders meeting. These items were described as being of less critical importance, as they were “still in the conceptual stage”. They included:

  • Sector Specific Information: Issues and Examples
  • Eligibility Self-Assessment Tool (ESAT)

Sector Background Information: Providing Context

After debating the sector-specific documents, the CRA has decided that they would like to remove them. The reason being that taxpayers are already familiar with their respective sectors. Note: As one retired high-level CRA manager pointed out, in the 1998 conference with industry, it was established that the majority of the information in these guidelines wasn’t necessarily for the external groups; sector-specific documents were for the visiting RTAs so that they didn’t have to be brought up to speed by the claimants when reviews were conducted. Documents were intended to be updated regularly, however, the current view is that as long as there are specialists on the CRA SR&ED review teams, updated documents are not critical.

Sector Specific Information: Issues and Examples

In this section, the CRA explains how they have chosen to review sector specific information. The overarching objective of consolidating the sector specific documents is to have a single document that covers the key concepts regarding eligibility. The CRA recognizes that engineers, scientists in different sectors work in different manners; however, they must ensure that the definition of SR&ED is met irrespective of their domain. They must follow certain parameters/principles, such as having a hypothesis, must carrying out tests, and must have conclusions – all with contemporaneous documentation as evidence.

The IC86-4R3 & IC 97-1: SR&ED Relics

When discussing in which direction SR&ED policy should be led it is imperative to look back at how the policies have developed over time. Two of the key historical SR&ED documents are IC86-4R3, which helped mold the definition of scientific research and experimental development, and IC 97-1, which provided some of the first SR&ED guidelines for software development.

The IC86-4R3 outlined specific tests for SR&ED eligibility, particularly concerning what constitutes scientific or technological advancement and uncertainty, and scientific or technical development. It was the primary guide to SR&ED eligibility until 1998 when Judge Bowman expanded on its eligibility tests in Northwest Hydraulic Consultants Limited v. The Queen.

The IC 97-1 defines software development in the context of SR&ED, allowing software developers to apply for the tax credit program. The policy states that “a scientific or technological uncertainty in software development arises when the solution (…) is not readily apparent to appropriately skilled and experienced software developers after they have analyzed the problem using generally known software development techniques…”. This policy was relevant as recently as 2015 in Emotion Picture Studios Inc. v. The Queen, where it was ruled that the software development performed utilized standard practices and was therefore ineligible for the SR&ED program. That being said, the sector-specific nature of IC 97-1 meant that it had to be regularly updated to keep up with the rapidly changing world of software development.

Quickly Outdated

One of the key issues identified with sector-specific documents is that the technology base is rapidly changing, particularly in the area of software. To put the age of the sector-specific documents in perspective: the oldest document was created in 1991, the newest is 2006. Much of the information from 1991 or even 2006 may no longer be relevant. This is important because technological advancements are determined by the establishment of the technology base. The CRA felt that “if the technology base is explained today, it may not be eligible in a few years.”  A senior CRA representative also stated the following during the presentation: “The CRA has no interest in telling scientists/technologists what is eligible, only what the eligibility criteria are that are used to assess the claim.”

Formatting & Consistency

Existing sector-specific documents were written by different individuals at different times and in different formats. Even though the documents theoretically address & discuss the same concepts, each can be interpreted in a slightly different way. The goal of this process is to have the consistency of format.

The trouble with examples…

Many taxpayers mistakenly assume that if their work is similar to an example provided in a sector-specific document, their work is indeed eligible (even if it doesn’t meet the current standards for technical eligibility). This is a recurring issue that can lead to complaints that the CRA has misrepresented eligibility. The problem is compounded by the fact that these documents often contain copious examples. Some are relevant across multiple industries, such as the “company project vs. SR&ED project” example which appeared in software-specific IC 97-1. Many of these sector-specific documents explore topics and concepts that are often not sector-specific – they can be applied in a broader context.

A question of numbers

A total of 129 examples are provided in the documents, encompassing 12 different sectors. Most often we see products from the chemicals, IT, and plastics industries. The extensive details provided in some of the examples can make interpretation difficult. As a result, claimants may have difficulty applying them to the exiting T661 questions (new  T661 form introduced in 2008).

Next steps

At the time of the meeting, the CRA indicated that they had analyzed the information, isolated key concepts, and were working toward updating the examples. The CRA intends to share these new examples with industry before they are finalized. Note: Examples were previously developed in conjunction with industry. 

The completed policy documents are scheduled to be released in the 4th Quarter of 2012.

Eligibility Self-Assessment Tool (ESAT) V2.0

The existing Eligibility Self-Assessment Tool (ESAT) been on the web for quite some time now, in one form or another. In our previous post, we had discussed that the new tool was a good start, but that there was room for improvement. It turns out the CRA is listening, as they made reference to this in their discussion! In the future, the CRA will be adding a few more questions to the ESAT, but their ultimate goal is to keep it as simple and broad as possible. Another major change will be the addition of direct links to the summary paper and glossary. All SR&ED policy-related documents will have a single reference point (glossary) so that taxpayers can use this as a starting point in understanding key terms. A secondary goal of the ESAT is to provide tips on how to complete the T661 form (Schedule 60). They will be focusing on the three key questions from the T661, as they believe this is the most difficult part for most applicants, as well as providing additional tips on how to prepare for a detailed review (ex. what kind of questions to expect). One of the key points the CRA stressed was that the ESAT is NOT an advanced ruling. It is for education and self-assessment only, and is intended to help generate some confidence in eligibility. Moreover, it was not designed as a tool to discourage claimants. This questionnaire will not be monitored – the CRA is not tracking who is using the tool or the results. If a negative ruling is reached, a claimant can still ask for a Pre-Claim Project Review (PCPR).

Final Points: Will the CRA allow feedback in the future?

Anyone who has interacted with the CRA knows that it can be difficult to provide feedback. There is no dedicated method of providing suggestions, and contacts and phone numbers are not currently available on their website. At the meeting, the CRA said they were considering having a mailbox where feedback could be sent. A dedicated mailbox would be a big step in the right direction – improving the efficiency of communication considerably.

Q&As: Some Interesting Notes

Industry stakeholders were permitted to ask questions throughout the meeting. Some of the interesting Q&As were the following:

Q: When IC86-4R3 was written, there was a lot of input from inside/outside CRA, industry, and academia. Have you captured everything in this document? It is currently not clear whether this is “the” document or not for taxpayers to refer to.

A: Everything was included, it was just phrased differently.

Q: How will the new documents be phased in?

A: There will be a six month overlap – old vs. new documents.

Q: What happens to additional feedback that falls outside the scope of this policy review project?

A: Department of Finance is notified internally of different feedback.

Q: Who owns the forms that are currently on the website?

A: While forms such as the IT151 do not belong to the CRA, they will remain available – for now.

Q: The policies are now written quite broadly. In many ways, the CRA should take into consideration the many ways that it could be interpreted, not how they hope it will be interpreted.

A: To answer this indirect question, the CRA provided an indirect answer by describing how they had started working on this project, noting they have “experienced staff, working in the program a long time”, and that taxpayers should “be assured that they have been looking with their own set of words”. The CRA SR&ED reviewers have seen all types of review situations; they bring that experience into the mix. With regards to the different interpretations, the CRA said they “have taken all of this into account.”

SR&ED Stakeholders Meeting Summary

Though bringing stakeholders in to meet with them was well-intended, the CRA’s SR&ED stakeholders meeting did not quite progress as a discussion. Instead, stakeholders were informed of the proceedings at the CRA. The content was sound, though it took longer than expected to convey. Input from industry was only requested at the end of the meeting. The stakeholders’ questions followed key themes including the taxpayer’s desire for predictability, lack of clarity in the draft policy documents, and clarification of the “vision” for the project. Some of these issues were addressed, while others were not. At times the SR&ED stakeholders meeting lacked direction. Many people simultaneously attempted to make their voices heard, which often slowed the meeting’s progress. Questions were sometimes even dismissed: “We are getting away from the policy and getting into administration and I am from headquarters and I do not deal with specific files. We do have Assistant Directors who can deal with these issues.” (Stay tuned for our post on providing feedback to an Assistant Director.) At the end of the day, the details of sector-specific information are not a primary concern. Policy is used to interpret the law, but nothing is more important than understanding the relevant sections of the Income Tax Act and the related rulings. Policy documents should not be viewed as a substitute for the concise Tax Court rulings that address and clarify what is intended by the Minister of National Revenue. We can talk at length, argue until we’re blue – but ultimately, the final ruling rests with the knowledgeable and impartial judges at the Tax Court of Canada.

 

What are your thoughts on developing new policies vs. reviewing rulings?

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1 Comment

Sam Metalin · June 13, 2012 at 10:17 am

Very interesting and useful article. The CRA appears to be backing away from IT bulletins. They have said publicly at practitioner meetings that they do not like having sections of IT bulletins quoted back to them. Their general attitude appears to be that only they can interpret the IT’s within the proper context while consultants mostly take the sections quoted back to them “out of context”.

The biggest problem we are running into is the rejection of certain work because it uses “current” or “standard” methods, without explaining what are the methods to which they refer.

One good lesson learned from your article is that the identification of hypotheses on Line 244 will become increasingly important.

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