Is the Pre-Claim Review service beneficial to companies trying to claim SR&ED?

In 2016 the Canada Revenue Agency (CRA) launched its Pre-Claim Review (PCR) service, which gives corporate participants “a determination on the eligibility of your R&D work, and [informs you about] how much of your work and associated expenditures qualify for the SR&ED tax incentives before submitting your claim.”1 

The PCR service was introduced for companies to determine if their work is eligible for the SR&ED tax credit, prior to the company filing a claim. SR&ED claims are reviewed upon the CRA’s receipt of a completed claim; however, this can take place up to 18 months after a company’s fiscal year-end, which can create a lag time between the work actually being performed and the CRA’s review of the SR&ED claim.

Pre-Claim Review vs. Preclaim Project Review Service 

The Pre-Claim Review (PCR) is different from the Preclaim Project Review Service (PCPR), which the federal government discontinued in June 2016. The PCPR gave business a non-binding opinion on the potential eligibility of their R&D work for the SR&ED tax credit before filing and, in some cases, before the work was even started.  

The table below highlights the differences between the PCR and the PCPR:

 Pre-Claim Review (PCR)Preclaim Project Review (PCPR)
Primary AudienceThis review tends to be targeted toward larger businesses who can meet all of the criteria listed in the following row. This review was more geared towards small businesses and first-time claimants who needed guidance with filing an SR&ED claim.
RestrictionsYou must meet the following criteria to participate in the Pre-Claim Review: 

  • Your business must be incorporated in Canada.

  • SR&ED work underway must not be linked to a formal objection or litigation.

  • You must not have more than one prior SR&ED claim under review at any point in the current year.

  • You must have previously participated in a Pre-Claim Consultation, a First-Time Claimant Advisory Service, or an SR&ED review.

  • You will not be claiming more than 20 projects for the current tax year.

  • You must provide a Self-Assessment Learning Tool (SALT) report (Step 1 and Step 2) for each project that you plan to claim for the current year.

  • You must be willing to participate in periodic review meetings with CRA reviewers.

According to an archived Canada Customs and Revenue Agency (CCRA) brochure on this service, it was "available to all companies." There appeared to be no restrictions.1
PurposeAccording to Patrick Samson, a CRA media spokesperson, "the PCR provides a business with certainty as to whether their entire claim (the extent of the eligible work in a project, as well as the allowable expenditures) will be accepted as filed when it is submitted to the CRA." 2The old CCRA brochure noted that, "The PCPR service is designed to help you in your planning and investment decisions. The service is available before SR&ED tax incentives are claimed, and can be provided before work is started." 3
1. Government of Canada. (n.d.) Canada Customs and Revenue Agency. Introducing the SR&ED Program's Preclaim Project Review Service. Retrieved October 25, 2017, from: https://www.cchwebsites.com/content/pdf/tax_forms/ca/en/rc4271_en.pdf. (PDF Document)
2. Samson, P. (October 17, 2017.) Re: Your Query. Message to SR&ED Education and Resources. E-mail.
3. Government of Canada. (n.d.) Canada Customs and Revenue Agency. Introducing the SR&ED Program's Preclaim Project Review Service. Retrieved October 25, 2017, from: https://www.cchwebsites.com/content/pdf/tax_forms/ca/en/rc4271_en.pdf.
4. Government of Canada. (August 2, 2016.) Canada Revenue Agency. Pre-Claim Review. Retrieved October 25, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/claim-review.html.  

What are the Benefits of the PCR? 

As the PCR is, effectively, a review in the middle of a project, its benefits (as it may disrupt work being performed) may not be obvious at first. Samson, a CRA spokesperson, highlighted the benefits in an e-mail to SR&ED Education and Resources, the details of which are shared below:

A business will gain knowledge and understanding of what R&D work and expenditures are eligible for the SR&ED tax credit. A business will receive ongoing assistance by the CRA reviewers assigned to their file (e.g. answering questions, clarifying the filing requirements) while they are undertaking their R&D work. A business will know before filing what their SR&ED tax credit will be. And when a business files their SR&ED claim, it will be quickly processed after a simple cursory review to make sure the claim submitted is consistent with the PCR results.2

The PCPR, on the other hand, was “an up-front review and a preliminary opinion on the eligibility of projects.”3 The PCPR was introduced to help companies make decisions around planning and investment, and could be done before work was even started. The benefits to the PCPR were numerous, including reducing the amount of paperwork needed for an SR&ED claim.4  

Why was the PCPR Program Eliminated?

The PCPR appears to have provided more benefits than the PCR, as it allowed businesses to know how much their SR&ED tax credit would be, well in advance of doing the work required to obtain it. This was particularly advantageous to smaller companies, who rely on the SR&ED tax credit as a source of income during the start-up phase.  

According to Samson, “businesses told the CRA that although the PCPR was a relatively good service, it could be improved by providing more certainty to them on the eligibility of their SR&ED claim before filing. […] The key feature of [the PCR] is that the CRA’s determinations are binding, and therefore, [this] provides more certainty to a business that their SR&ED claim will be eligible upon filing.”5

What if I Want to Appeal the PCR Decision? 

The CRA’s PCR decision is binding and so, technically, cannot be appealed at this stage. If your company undergoes a PCR, and the CRA’s decision is that it is not eligible, but you still believe that the work is, you have to file a claim for SR&ED and then go through the formal process for the CRA to determine if it is eligible or not.

“Since a claim has not been filed,” says Samson, “there is no formal recourse option [during the PCR process]. However, when disagreements arise, CRA management can get involved during the PCR to help resolve the issues.”

“It is important to note that regardless […] of the outcomes of [using this service],” Samson continues, “the business can still file an SR&ED claim. The CRA will review the claim and may adjust it accordingly. The business then has the option to formally dispute the resulting reassessment through the CRA’s objection process.”6

It seems contradictory, and a potential waste of time and money, to undergo a PCR and then file a claim for SR&ED if you disagree with the decision of the PCR. The PCR is meant to be binding and so it seems strange that the SR&ED claim can then be “adjust[ed]” by the CRA after it has been formally filed.

The Alternative: First-Time Claimant Advisory Service 

The First-Time Claimant Advisory Service (FTCAS) is:

A free in-person service that provides first-time [… SR&ED] claimants with an opportunity to meet with local [… CRA SR&ED] staff, at their place of business, to gain a better understanding of the SR&ED Program.7

While this theoretically takes the place of the Preclaim Project Review by providing early-stage feedback, criticism of the FTCAS stems from two aspects of the program that may seem counter-productive. The first is that the assessment is carried out after a company has filed an SR&ED claim. The second is highlighted by the CRA’s quote below:

It is important to note that the FTCAS is not a review or an audit and the CRA staff will not make any determination of the eligibility of work or expenditures claimed. This service is provided to first-time claimants to ensure you have all the information necessary to successfully file your next SR&ED claim. [Emphasis added.]8

The FTCAS review can take up to half a day to complete; however, as it takes place after the claimant has filed their SR&ED claim, there is nothing the claimant can do to amend their claim to have a better chance of having their claim accepted. While its name suggests otherwise, it seems that the FTCAS is a service that has been initiated to help claimants claim for their second SR&ED claim. We believe it would be more beneficial to first-time claimants to have this assessment of their claim carried out before work has started, or at the very least before the claim is filed. (This is also why we created the Step-by-Step Application Guide for SR&ED, as it gives a point by point breakdown of the application form, and our Comprehensive Guide to SR&ED features more information on how to ensure you file your SR&ED application correctly.)

In this respect, PCPRs were also more valuable than the FTCAS as they allowed the reviewer to highlight areas of improvement in the claim for the company before it started work on the project or filed a claim. 

Conclusion 

It appears that the primary purpose of the PCR and the FTCAS is to push back the timelines in which the CRA will make a preliminary decision on whether or not a company’s work qualifies for SR&ED.

Under the PCPR, companies may have had a better understanding of whether or not their project would receive the SR&ED tax credit at the beginning of the process (not halfway through it or after the claim had been filed). Although there has been a push for more risk in Canadian innovation, performing the PCR and FTCAS prior to a company beginning work on a potential SR&ED project could provide multiple benefits to companies. It could ensure that companies do not risk their investment and spend time and money carrying out a project that would be determined ineligible for SR&ED, which can be devastating for small companies and start-up firms that rely on the SR&ED tax credit in their formative years. Performing the PCR and FTCAS before a company begins work could also ensure that companies have more time and money to invest in other research and development (R&D) projects that are eligible for SR&ED, and provide genuine advancements in knowledge, science or technology, as they will have a better understanding of the SR&ED program.

 

 

 

Have you used the First-Time Claimant Advisory Service or undergone a Pre-Claim Review?
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Show 8 footnotes

  1.  Government of Canada. (August 2, 2016.) Canada Revenue Agency. Pre-Claim Review. Retrieved October 25, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/claim-review.html.
  2. Samson, P. (October 17, 2017.) Re: Your Query. Message to SR&EDucation. E-mail.
  3.  Government of Canada. (n.d.) Canada Customs and Revenue Agency. Introducing the SR&ED Program’s Preclaim Project Review Service. Retrieved October 25, 2017, from: https://www.cchwebsites.com/content/pdf/tax_forms/ca/en/rc4271_en.pdf. (PDF Document.)
  4.  Government of Canada. (n.d.) Canada Customs and Revenue Agency. Introducing the SR&ED Program’s Preclaim Project Review Service. Retrieved October 25, 2017, from: https://www.cchwebsites.com/content/pdf/tax_forms/ca/en/rc4271_en.pdf. (PDF Document.)
  5. Samson, P. (October 17, 2017.) Re: Your Query. Message to SR&EDucation. E-mail.
  6. Samson, P. (October 17, 2017.) Re: Your Query. Message to SR&EDucation. E-mail.
  7. Government of Canada. (June 30, 2016.) First-Time Claimant Advisory Service. Canada Revenue Agency. Retrieved October 25, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/first-time-claimant-advisory-service.html.
  8. Government of Canada. (June 30, 2016.) First-Time Claimant Advisory Service. Canada Revenue Agency. Retrieved October 25, 2017, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/first-time-claimant-advisory-service.html.

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