Click here for the updated version of the CRM.

 

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Note: The Claim Review Manual was updated on April 21, 2015. This page is out of date and  is provided for reference purposes only. 

SR&ED Program

The Claim Review Manual cancels and replaces The Guide to Conducting a Scientific Research and Experimental Development (SR&ED) Review and Directive 2004-03 SR&ED Reports and is effective June 1, 2010.

CRM Table of Contents

Chapter 1.0: Introduction

Chapter 2.0: Overview and General Information

Chapter 3.0: Guidelines for Coordinated Review

Chapter 4.0: Preparing and Planning for the Review

Chapter 5.0: Obtaining Information and Resolving Review Issues

Chapter 6.0: Documenting the Review Process

Chapter 7.0: Concluding the Review

Chapter 8.0: Glossary of Terms

APPENDICES

Chapter 1.0: Introduction

1.1.0 List of Acronyms

 

English AcronymsEnglish Acronyms Meaning
AAFAccepted as Filed
ADAssistant Director
AEAccount Executive
AIMSThe Audit Information Management System (AIMS) Online Guide discusses how to use it.
ASAAll or Substantially All
APApplication Policy
CCControl Centre
CICACanadian Institute of Chartered Accountants
CRACanada Revenue Agency
CRMClaim Review Manual
CTSOCoordinating Tax Services Office
FRFinancial Reviewer
FRMFinancial Review Manager
FTAFinancial Technical Advisor
FTCFirst Time Claimant
HQSR&ED Program Headquarters
ICInformation Circular
IFAInternational Fiscal Association
IPIntellectual Property
ITAIncome Tax Act
ITCInvestment Tax Credit
LFCMLarge File Case Manager
NOONotice of Objection
NTSSNational Technology Sector Specialist
OAGOffice of the Auditor General
OCOutside Consultant
PCPRPre-Claim Project Review
RFIRequest for Information
RTAResearch and Technology Advisor
RTMResearch and Technology Manager
RTOResearch and Technology Officer
S/TAScientific or Technological Advancement
S/TUScientific or Technological Uncertainty
SR&EDScientific Research and Experimental Development
SISSystematic Investigation or Search
SUEShared Use Equipment
TATechnological Advancement
TGDTechnical Guidance Division
TCTax Centre
TSOTax Services Office

1.2.0 Purpose and Scope of the Claim Review Manual (CRM)

The CRM provides a comprehensive set of procedures for the Canada Revenue Agency’s (CRA) Research and Technology Advisors (RTAs) to perform the technical review of Scientific Research and Experimental Development (SR&ED) claims. The CRM serves as a complete guide for the RTA in planning, coordinating (with Financial Reviewers), conducting and documenting the review of claims. These procedures will help enhance consistency and quality in the review of claims among RTAs nationally. Consistency in this context is defined as follows:

In similar circumstances, the RTA will follow the same or similar procedures to uncover the same facts on which to base a decision.

In addition, the CRM provides part of the basis for a quality assurance program that will ensure the proper application of the SR&ED legislation, policies and procedures, thereby contributing to maintain the fiscal integrity of the SR&ED program.

By providing the means for consistent and fair treatment of SR&ED claims nationally, the CRM will help ensure that claimants receive their full entitlement allowed under the Income Tax Act (ITA). To improve the level of service to claimants, these procedures emphasize working with, informing and educating claimants on the many aspects of the SR&ED program. For example, within each chapter of the CRM, some highlighted boxes draw attention to numerous proven approaches for working effectively with claimants at each stage of the review process, which is especially important for First Time Claimants. In addition, the CRM incorporates, where required, procedures for resolving claimants’ SR&ED concerns. These procedures help resolve disputes early in the review process and at the lowest level possible. All of these suggested approaches to help improve claimants’ compliance are based on best practices employed in various CTSOs. By working with claimants and objectively reviewing their claims, the RTA will be able to deliver SR&ED tax incentives in a more timely manner.

Although the CRM is primarily a guide for the RTA or anyone else conducting an eligibility review, information presented here can also be valuable for Assistant Directors (ADs), Research and Technology Managers (RTMs), Financial Review Managers (FRMs), Financial Reviewers (FRs), Research and Technology Officers (RTOs) and others who are involved in SR&ED claims.

The procedures in the CRM begin when the RTA is assigned the SR&ED claim and end with the completion of the TF98 file. The CRM briefly discusses the Control Centre (CC) and AIMS coding, but does not cover detailed procedures for these subjects. The CRM also does not cover procedures for Pre-Claim Project Reviews (PCPRs), Process Reviews, Account Executive (AE) Services, or the financial review. Refer to the relevant directives to learn more about the procedures for these topics. Refer to the CRA InfoZone for a list of publications.

The CRM does not provide comprehensive information on general CRA policy or non-CRA legislation such as those concerning security, confidentiality, health and safety. As a matter of convenience, the CRM does provide some summaries of and links to important policies. However, it is the responsibility of the RTA to know and follow current applicable policy and legislation regardless of what is summarized in the CRM.

The CRM assumes that the RTA is already familiar with the relevant SR&ED legislation and SR&ED publications, and CRA policy. Therefore, while the CRM discusses procedures concerning some review issues, it does not provide basic training on such matters as what constitutes SR&ED as defined in the ITA and explained by Information Circular (IC) 86-4R3 and other documents.

1.3.0 Authority of the CRM

The CRM identifies the procedures that RTAs follow when reviewing SR&ED claims. Chapter 1.6.0 outlines the minimum (high level) requirements for all reviews. The other chapters outline how these minimum requirements generally apply to the procedures described in each chapter. The RTA is responsible for deciding what procedures to apply, or how to apply them in a particular situation, in order to meet these minimum requirements.

1.4.0 Terminology Concerning Requirements

While the CRM does not generally identify a specific procedure as being necessary to meet one of the minimum review requirements, certain terms may be used to provide guidance to the RTA. The CRM uses certain terms to describe three levels of latitude or discretion:

Level of Latitude or Intended Meaning of the termTerm(s) used
Requirement: The procedure is a requirement and there are no exceptions unless otherwise indicated, or
  1. otherwise indicated, or
  2. specific facts of the case render it unnecessary or not applicable.
Must, Required
Recommendation: The procedure is likely the preferred or best choice among possible alternatives in order to meet the minimum requirements.Recommended, Should, Need
Possible Approach: The procedure is considered to be one possible practice or approach to meet the minimum requirements, and there are likely other practices that are equally valid or effective.Can, Could,
May, Might

1.5.0 Due Process / Taxpayer Bill of Rights

Due process is a fundamental principle in the review of claims and means that the review is fair and impartial. While not specifically mentioned there, the principles follow from the CRA’s Taxpayer Bill of Rights. This subject is mentioned in many other places in the CRM. The principles described in this chapter apply generally during all aspects of the review, particularly during “Conducting the Review” described in Chapter 5. Failure to give the claimant due process could result in the review process not being defensible, and thus the claimant could successfully challenge the CRA’s decisions at the Notice of Objection (NOO) stage (refer to Chapter 2.6.0). Refer to the following link for more information on the Taxpayer Bill of Rights.

A claimant can still be given due process even if some steps or procedures in the CRM are not followed or are followed in a different order than presented. For example, if the RTA did not review certain documents during the on-site visit, the review of them at the proposal stage would correct that situation. Therefore, it is the treatment of the claimant as a whole, during the entire review process, which determines whether due process is given. Mostly, due process means treating the claimant with courtesy, respect, and fairness while applying the legislation and CRA policies correctly. Doing all of the activities noted in this chapter will ensure that due process is given.

Eight principles of due process, and the particular taxpayer rights that they derive from, are as follows:

  1. Provide service in the official language of choice; (Taxpayer right #2)
  2. Explain the review process, issues and the planned approach to resolve them to the claimant; (Taxpayer rights #5,6,10)
  3. Communicate the options available to the claimant if they do not agree with us; (Taxpayer rights #4,9)
  4. Give the claimant information on the CRA requirements and explain what information the CRA needs to satisfy them; (Taxpayer rights #6)
  5. Give claimants the opportunity to present their position, ask questions, express their concerns and to provide further information with respect to their claim; (Taxpayer rights #1,5,15)
  6. Consider additional information provided in support of the claimant’s position before coming to a decision; (Taxpayer rights #1, 5, 15).
  7. Explain decisions and the rationale to the claimant; (Taxpayer rights #5,6,9,11)
  8. Make decisions that are fair and impartial and respect current legislation and policy; (Taxpayer rights #1,8)

Details of the above steps are discussed in the appropriate places in the CRM. As will be noted, the specific details of what needs to be done depend on the particulars of each case and what the claimant already knows about the SR&ED program.

1.6.0 Minimum Review Requirements for RTAs

This chapter outlines the minimum requirements for any review of an SR&ED claim. These headings do not correspond to individual chapters in the CRM. Many of these requirements apply generally or in more than one aspect of the review. The requirements, as they apply in each part of the review, will be described in more detail in each chapter of the CRM.

1. General requirements

1.1 Follow all CRA approved procedures concerning:

  • Communication of information to the claimant or their authorized representative;
  • Safety and security;
  • Information security; and
  • Service in the official languages.

1.2 Documentation requirements:

  • Document all relevant review work (working papers), as well as keep other relevant supporting documentation related to the claimed work.
  • Do not document irrelevant personal opinions or irrelevant information about other claimants.
  • Prepare an SR&ED review report using the described format, or other working papers that explain the decisions and the rationale.
  • Keep and organize working papers and supporting documentation in the TF98 file.

1.3 Consult the RTM, when required:

  • If there are contentious or problem situations;
  • If there are questions about the application of policies;
  • If referrals or outside consultation is needed;
  • If the review plan should be approved;
  • If a claim will be disallowed for lack of information;
  • If a claim will be disallowed without an on-site visit;
  • If penalties may apply;
  • If fraud is suspected;
  • If formal better books and records letters are needed;
  • If specified circumstances require acceptance of the Review Report; and
  • If waivers may need to be used.

2. Coordinating the Review

2.1 Coordinate the technical review with the FR assigned to the claim.

3. Planning the Review

3.1 Prepare a written review plan, which includes:

  • The scope of the review;
  • The major issues / concerns, and
  • The methodology or information required to resolve the issues / concerns.

4. Conducting the review

4.1 Explain to the claimant the review process, issues and the planned approach to resolve them;

4.2 Communicate the options available to the claimant for resolving any of the issues;

4.3 Give the claimant information on the CRA requirements, including documentation requirements, and explain what information the CRA needs to satisfy them;

4.4 Give claimants the opportunity to present their position, ask questions, express their concerns and to provide further information with respect to their position;

4.5 Consider additional information provided in support of the claimant’s position before coming to a decision;

4.6 Make decisions that are fair and impartial and respect current legislation and policy;

4.7 Document key activities and observations concerning the claim, supporting information and the identified claim issues;

4.8 Document communications and meetings with the claimant, managers, co-workers and others that are relevant to the eligibility determinations and other decisions;

4.9 Obtain any documentation from the claimant necessary to support the eligibility determinations and other decisions; and

4.10 Do not:

  • Negotiate eligibility or expenditures; or
  • Investigate fraud.

5. Concluding the Review

5.1 Assist the FR in preparing the contents of the proposal letter package by providing any needed explanation of the proposed changes with respect to eligibility and any other technical issues;

5.2 Explain the proposed decisions with respect to eligibility or other technical issues to the claimant; and

5.3 Respond to any claimant’s concerns, rebuttal or additional information relating to the RTA’s decisions, as reflected in the Proposal Package.

1.7.0 Reference to the Definition of SR&ED in the ITA

For the purposes of the CRM, where the context is clear, references to subsection 248(1) or paragraphs of subsection 248(1) of the ITA, without any other qualifier, mean references to the definition of SR&ED in subsection 248(1) of the ITA, or paragraphs of that definition.

1.8.0 Revisions of the CRM

The CRM will be updated and revised to ensure that it remains current. Feedback and suggestions from RTAs who see opportunities to improve the CRM are encouraged. Comments can be forwarded to a dedicated email account, CP-PO_SRED_CRM-RSDE_MED@cra-arc.gc.ca. The CRM will be posted as an on-line document on the SR&ED site in CRA’s InfoZone. Therefore, the RTA should consult the InfoZone regularly to ensure that the latest version is being used.

1.9.0 Release of the CRM

The CRM is an internal CRA document that contains some information that must not be shared, transmitted or communicated in whole or in part to non-CRA personnel. A summary of the review process will be posted and placed on CRA’s public SR&ED web site to assist claimants in understanding the process. The CRM becomes effective as of May 1, 2010. For reviews that are already in progress as of this date, the RTA should begin following the appropriate procedures in the CRM that correspond to the point at which the review is as of this date. The RTA is not expected to complete procedures in the CRM that would have been performed earlier in the review.

Chapter 2.0 Overview and General Information

2.1.0 Summary of Chapter

This chapter provides general information about the claim review process, including information that applies to all audit-type work in the Canada Revenue Agency (CRA), not just Scientific Research and Experimental Development (SR&ED) reviews. The main sections cover:

  1. An outline of the SR&ED claim review process;
  2. An outline of the CRA Information sources;
  3. Special SR&ED terminology;
  4. An introduction to dispute resolution in the CRA;
  5. The legislated authority of CRA officials;
  6. The legislated requirements for taxpayers;
  7. Procedures to follow when communicating with claimants;
  8. Safety, Security, and Health considerations during a review;
  9. Information Security requirements; and
  10. Service standards for the SR&ED claim review.

2.2.0 Requirements of Chapter

Following from Chapter 1.6.0, the research and technology advisor (RTA) must follow all CRA approved procedures and job requirements for:

  1. Communication of information to the claimant or their authorized representative;
  2. Safety and security;
  3. Information security;
  4. Service in the official languages; and
  5. Consultation with the research and technology manager (RTM) in certain specified circumstances involving safety, security or difficulties with the claimant.

2.3.0 Outline of the Review Process

The following chart outlines the main steps in the review process and provides references to the main sections of the CRM that discuss each step. Note that the chart is a general guide only and does not cover every possibility or exception encountered during a review. The RTA should consult the CRM for details. The chart generally follows the usual steps of a review, but this does not mean that these steps must always follow this sequence.

Outline of the Review Process

Main ReferenceReview StepOther References
Chapters 1 & 2Step 1: RTA receives claim from control centre.Chapters 4.3, 6.5 & 6.6
Chapter 4Step 2: Study information as received.Appendices 7 & 8
Chapter 3Step 3: Contact financial reviewer (FR) to initiate coordination.Chapter 2.9
Chapters 4 & 5Step 4: Begin planning the review:
  1. Identify issues;
  2. Obtain additional information.
Chapters 3.0 & 6.0
Appendix 7
Chapter 4Step 5: Assess risk and determine scope of review.Chapters 5.7 & 6.3
Appendices 4 & 5
Chapter 4Step 6: Develop review plan.Chapters 5.7 & 6.3
Appendices 4 & 5
Chapter 5Step 7: Communicate with claimant:
  1. Gather information by letter and/or telephone.
Chapters 2.7, 2.8 & 3
Appendices 1, 2, 3, 4, 9, 11, 12 & 13
Chapter 5Step 8: Visit claimant on-site.Chapters 2.7, 2.8 & 3
Appendices 1, 2, 3, 4, 9, 11, 12 & 13
Chapter 5Step 9: Analyze information and resolved issues.Chapters 4.7 & 6.7
Appendix 8
Chapter 5Step 10: Gather additional information by letter and/or telephone.Chapters 2.7 – 2.9, 3 & 5.7
Chapter 6Step 11: Prepare review report.Chapter 3
Appendix 6
Chapters 3 & 7Step 12: Communicate the review results to the FR.Chapters 3, 5.7, 6.7 & 6.8
Appendix 6
Chapter 7Step 13: Assist FR with proposal package.Chapters 3 & 6
Appendix 10
Chapter 7Step 14: Address any representation from claimant on review results.Chapters 3 & 6
Chapter 7Step 15: Conclude the review.Chapter 6
Appendix 10

2.4.0 CRA Information Sources

2.4.1 Publications

Understanding CRA’s SR&ED documents and using them effectively during the technical review is critical. Refer to the SR&ED Reference Guide for links to key CRA references. The following are the key reference materials needed to resolve review issues:

  • Definition of SR&ED in subsection 248(1) of the ITA;
  • Information Circular IC 86-4R3 – Scientific Research and Experimental Development; and
  • T4088 – Guide to the Form T661.

There are also many other links to relevant Application Policies, Directives and Guidelines in the CRM.

2.4.2 CRA Information Systems

Much information, including the tax centre (TC) risk assessment sheet, is only available from the internal CRA information systems referred to in the CRM. For tax years ending after 2008, claimants can file project information electronically, and the TC does not always print it. Therefore, the RTA may need to access the following systems, or have someone else access them, in order to review project information, verify authorized representatives, record delays, record the results of reviews and carry out other information management activities:

  • The Audit Information Management System (AIMS) has information on current and past reviews and audits;
  • CORTAX is the CRA system for accessing T2 (corporation) information as well as Form T661 prescribed information, including SR&ED project information (e.g., names of authorized representatives);
  • RAPID is the CRA system for accessing non-T2 and other information; and
  • SR&ED Risk Management Tool is the information system where the RTA can access the initial risk assessment provided by the TC.

The CRA has given RTAs a profile that identifies the particular information systems and levels that they can be authorized to access. Local offices manage access profiles.

2.5.0 Special Terminology

2.5.1 Control Centre

The Control Centre (CC) is the function in each coordinating tax services office (CTSO) that reviews SR&ED claims referred to them from the TC. The CC decides if the claim must be reviewed in more detail by the RTA or the FR, or both.

2.5.2 SR&ED Project

The CRM uses the word “project” frequently. Although the ITA does not define or use the term “project,” the CRA and claimants commonly use it. For the purposes of the CRM, the following definition will apply:

A SR&ED project is the set of interrelated activities that collectively are necessary to do the work described in subsection 248(1) of the ITA.

This definition is derived from the document “SR&ED Project Definition – Principles.” For more details, refer to the entire document posted on the CRA’s Web site.

2.5.3 “Eligible” and “Ineligible”

The terms “eligible” and “ineligible” (including the forms “eligibility” and “ineligibility”) are widely used in the SR&ED program, although the ITA does not define these terms. For the purposes of the CRM, “eligible”/ “ineligible,” without any other qualifier, means work which meets/ does not meet the definition of SR&ED in subsection 248(1) of the ITA.

2.5.4 The Three Criteria and the T661

Section 2.10 of IC 86-4R3 states:

Essential tests that must be met before any activity can be considered scientific research and experimental development include the criterion of scientific or technological advancement; the criterion of scientific or technological uncertainty; and the criterion of scientific and technical content.

These essential tests are commonly referred to as the three criteria. By applying these criteria to work that is claimed under paragraphs (a)-(c), and in considering work described in paragraphs (d)-(k) of subsection 248(1), an RTA can conclude if claimed work meets the requirements of subsection 248(1) of the ITA. Although all the three criteria are not specifically mentioned in the ITA, they are considered equivalent to the requirements of the ITA. That is, work that meets the requirements of the definition of SR&ED will also meet the three criteria and vice versa.

The Project Information required in Part 2 of the Form T661 is intended to help the RTA establish whether the work claimed meets the definition of SR&ED.

2.5.5 Desk, On-Site, Limited and Detailed Reviews

These terms are used when coding the RTA’s work in AIMS. Refer to Chapter 7.10.0.

2.6.0 Dispute Resolution, Notices of Objection and Appeals

2.6.1 Dispute Resolution

During the review process, the claimant may not agree with decisions made by the RTA. Because dispute resolution is important to the CRA and the SR&ED Program, a process for dealing with disagreements has been developed and described in Application Policy (AP) 2000-02R ” Guidelines for Resolving Claimant’s SR&ED Concerns ” and is applicable to RTAs when they conduct reviews. It describes a three step process whereby the claimant is encouraged to talk first with the RTA or FR to resolve disputes, second to talk with the RTM or FRM, and third to request an administrative second review. Other procedures and approaches recommended for the RTA for effectively resolving claimant concerns are presented in Chapter 5.

2.6.2 Notices of Objection and Appeals

At various places in the CRM, there are references to Notices of Objection (NOO) and Appeals to the Tax Court of Canada. Refer to the following web site for details on the CRA formal dispute resolution process: Complaints and Disputes.

Disputes that are not resolved to the satisfaction of the claimant during the review can be resolved via a more formal process that begins after a Notice of Assessment/ Reassessment is issued to the claimant. In the case of amended claims, sometimes a Reassessment is not issued and the process is different. Refer to Directive 1997-02 Scientific research and experimental development (SR&ED) – Requests for investment tax credit (ITC) refunds for details.

In most cases, a claimant must file a NOO within 90 days of the “Notice of Assessment/Reassessment.” Claimants can file an objection by using the My Account feature on the CRA Internet site or by writing to the Chief of Appeals at their Appeals Intake Centre. The file then becomes the responsibility of the CRA’s Appeals Division who does an impartial review. Sometimes the RTA is involved in this process. Refer to the Stakeholder Relation Division in SR&ED Headquarters (HQ) for a more detailed discussion of this review process. Refer to Appendix 8 for a discussion of some specific considerations for dealing with files where there is a NOO or Appeal, and when the RTA may be involved in the Appeals review process.

If the claimant still disagrees with the outcome of the Appeals decision, they have the right to file an Appeal to the Tax Court of Canada. The Tax Court of Canada publishes their decisions and they are available from a number of sources such as the Tax Court of Canada website and Knotia News. RTAs can subscribe to Knotia News using this link in order to receive copies of published judgments.

Since an RTA’s decision, if objected to by the claimant, can be reviewed by other branches of the CRA and by the Tax Court of Canada, it is important that the RTA follows the principles set out in the CRM so that the decisions are appropriately documented and defensible.

2.7.0 Legislated Authority of the RTA to Conduct Reviews

Subsection 231.1(1) of the ITA provides the legislated authority for authorized CRA staff to conduct reviews, and the RTA is an authorized person under this section of the ITA. The RTA is issued an RC121A authorization card indicating that they are so authorized. The following extract from the CRA Audit Manual section 4.5.1 states the following about the card:

Auditors are provided an RC121A authorization card that outlines that the person named on the card is authorized to carry out the following functions under the relevant provisions of the ITA and the ETA:

  • enter a place of business,
  • enter a personal residence where required with the occupant’s consent,
  • require persons on the premises to give assistance and to answer questions,
  • require a person to accompany them where legally provided,
  • examine and copy documents,
  • examine property.

Entering a personal dwelling without the occupant’s permission is expressly forbidden under the legislation unless a judge has issued a warrant that authorizes entering the dwelling.

The legal name as shown on the authorized person’s birth certificate or other official document (certificate of name change, marriage certificate, certificate of Canadian citizenship) should be shown on the RC121A authorization card. A new authorization card must be issued when a person legally changes their name.

The RC121A authorization card must not be used as a personal identification card or for any purposes for which it is not intended. It must be kept separate from the employee’s building identification and should never leave the employee’s possession. Any requests to photocopy it must be denied for security reasons but taxpayers/registrants may copy the wording by hand.

A lost or stolen card must be reported immediately as a security incident and a security incident report must be completed. For more information see http://infozone/english/r2822200/fab-dgfa/fam-mfa/siad-dsai/c15p-tl-e.asp.

The status of authorized person is not restricted to CRA employees. For example, an outside consultant (OC) can also be an authorized person, but the CRA normally gives this authorization on a file-by-file basis, and it is limited by the terms of the contract. Refer to Chapter 4.7.3.2 for more information on OCs.

Refer to chapter 5.11.0 for a discussion of procedures for dealing with problems concerning entering the claimant’s premises, conducting the review or obtaining information from the claimant.

2.8.0 Legislated Requirements for Taxpayers

2.8.1 Requirement to Provide Information

Section 231.1 of the ITA allows CRA officials to inspect, audit, review or examine the books and records of a taxpayer and any document of the taxpayer or of any other person (including third parties) that relates or may relate to a taxpayer’s books and records that may be relevant to the administration or enforcement of the ITA. Refer to Chapter 5.5.1 of the CRM and Chapter 10.6 of the Audit Manual.

Section 231.1 requires anyone (not just the taxpayer) to provide documents or information needed to administer the ITA, although, in practice, requests from third parties are not routinely made. Under the provisions of subsection 231.5(1) the RTA can require a taxpayer to make copies of documents.

Information requests made under Section 231.2 of the ITA are known as requirements. A requirement is a legal document issued by the CRA that compels a taxpayer/registrant or third party to provide information and/or documents under this section. See chapter 5.12.3. Requirements have a force of law equivalent to a court order but should be used only when necessary. Failure by the recipient to comply with a requirement could result in prosecution action.

Accountant’s and authorized representative’s working papers relate to a taxpayer’s books and records, and CRA officials have the legal authority to request such working papers at any time during an inspection, audit or examination for any purpose relating to the administration or enforcement of the ITA.

Provisions in the ITA provide the CRA with many legislated compliance tools that enable an official to request or require information for verification and administrative purposes.

Refer to Chapter 5.4.0 for a discussion of the procedures for acquiring information from claimants and third parties.

Refer to Chapter 5.11 and 5.12 for procedures for dealing with claimants who fail to provide information.

2.8.2 Requirement to Maintaining Records and Books

Subsection 230(1) of the ITA requires that taxpayers keep records and books

…in such form and containing such information as will enable the taxes payable under this Act or the taxes payable or the taxes or other amounts that should have been deducted, withheld or collected to be determined.

The ITA defines records as follows:

‘record’ includes an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form.

This definition is broad enough to include the kinds of supporting evidence claimants need to substantiate an SR&ED claim. Refer to Chapter 5.6.6 for more details.

Subsection 230(3) of the ITA allows the CRA to require a taxpayer to keep adequate records and books if they have failed to do so. Refer to chapter 5.12.0 for a discussion of procedures for dealing with problems of inadequate records and books.

2.9.0 Contact and Communications with the Claimant

2.9.1 General Considerations

All RTAs must know and follow the CRA policy on communications security as outlined in Chapter 23 of the Finance and Administration Manual. All forms of contact must adhere to CRA information security protocols. The summaries provided in this chapter and elsewhere in the CRM are not the complete policy. As noted in Chapter 1, these summaries do not eliminate the RTA’s requirement to follow all applicable legislation and current CRA policy.

Many steps of the review require the RTA to contact the claimant. The RTA must record details of all communication with the claimant on form T2020 Memo to File or a similar working paper. This is an important consideration for demonstrating the extent to which the issues were communicated to the claimant by the RTA, and the efforts to work with the claimant to resolve these issues. Refer to Chapter 6.6.4 for a discussion on documenting communications with claimants.

The key points of CRA’s policy are:

  • As noted in the Finance and Administration Manual (FAM) (paragraph 14 of Chapter 23), cell phone contact and email with the claimant are not considered secure and must be avoided when dealing with technical issues or other protected information. The RTA must advise claimants not to send information by email and that we cannot reply to their emails. It is possible to exchange emails with other CRA staff. However, these emails must respect the confidentiality provisions of section 241 of the ITA and CRA security policies. Protected information can be exchanged by email only within the CRA, and it must be encrypted by CRA approved means; and
  • Faxes are allowed to be sent to the claimant only if specifically requested by them in writing and then only if the fax number has been verified. Within the CRA, faxes containing protected information must be sent by secure fax.
2.9.2 Authorizations / Contact with the Claimant

While the RTA is authorized to speak to anyone in order to obtain information for purposes of reviewing a claim, the RTA has no authority to provide information about a claim to any individual who is not authorized by the claimant to receive that information.

When the RTA initially contacts the claimant, the first person to contact is the technical contact person listed in Box 115 of Form T661. This person may refer the RTA to other people within the company in order to answer questions or arrange meetings. If the contact person is not an employee, or refers the RTA to someone outside the company, the RTA must ensure that an authorization is on file before speaking to them. If there is no authorization on file, contact the company (the contact person or the person who signed the T661) to obtain a signed copy of the RC59 Business Consent Form (for corporate use) or Form T1013 Authorizing or cancelling a representative (for individual use). For authorization purposes, the CRA also accepts letters or other written communications that the claimant has signed and that clearly defines this authorization.

Alternatively, the RTA can check the Business Number System to identify the owner or authorized representative and the limits to the authority of the authorized representative (such as the years, time limits, and whether it applies to a firm or a single individual), but sometimes this is not up to date. The most recent communications from the company owner are the most accurate. If a new authorized is received, the RTA should put a copy in the files and send the original to the TC so that Business Number System may be updated.

The RTA must be vigilant when a third party is requesting or wishes to discuss confidential information. Even when the claimant makes a verbal request to authorize a third party, an authorization must be indicated in the CRA Business Number System or completed and signed by the claimant and in possession of the CRA before the third party request can be satisfied. The RTA may contact a person who is not the owner or an authorized representative to obtain information about a claim, but it does not mean that any information regarding the review or the claimant’s tax matters can be divulged to that person. It is important to remember to discuss confidential information only with the claimant or their authorized representative. Confidential information must not be disclosed to an unauthorized person according to the provisions of Section 241 of the ITA.

The RTA should work with the authorized representative to schedule interviews and meetings with the claimant’s personnel. However, at the beginning of every review, the RTA should confirm with the claimant the communication protocol preferred by them (such as information requests, scheduling of interviews, communication of results), and emphasize the importance of timely responses to queries made to both the claimant and the authorized representative. Discussing these expectations with the claimant at the outset of the review will help to avoid potential communication problems.

2.9.3 Official Languages

Communications with claimants must follow the provisions of the Official Languages Act.

2.9.4 Claimant’s Representatives

Claimants frequently use the services of tax professionals to prepare their tax returns and act on their behalf with the CRA. Claimants may also hire representatives to write the project descriptions as well as assist them during the claim review. The claimant’s representatives may be present during meetings and may answer questions on behalf of the claimant.

The choice to use a representative is a right, described in #15 of the Taxpayer Bill of Rights that must be respected. However, that right does not negate the RTA’s right to obtain information they need or the right to contact directly anyone they need about the claim, which includes the claimant or the scientists or engineers having responsibilities for the claimed work. For example, if the RTA cannot obtain needed information through a representative, the RTA can go directly to the claimant. A claimant representative does not have the right to restrict the RTA from access to information or people that the ITA permits. In fact, sections 231.1 and 231.2 of the ITA give the RTA the authority to require anyone to provide information or documentation. If problems arise with the representative, such as miscommunication or undue delays, and the claimant has asked that all communications be sent via the representative, the RTA must discuss this with the RTM and document the facts before contacting the claimant directly. When a claimant has an authorized representative, the RTA should discuss with the claimant whether they want verbal and written requests for information to be copied to the representative or not.

2.10.0 Safety, Security & Health Considerations

2.10.1 Introduction

As noted in Chapter 1, the CRA policy summaries in the following section do not eliminate the RTA’s responsibility to follow all applicable legislation and current CRA policy.

In any potentially dangerous situation, the RTA’s safety must be the first priority. CRA employees must remove themselves from any threatening situation. CRA employees must protect themselves at all times to ensure their own safety and that of their families, together with the safety of their fellow employees and the claimant. Such situations cannot be predicted but the RTA, along with their RTM, can use their experience and best judgement to identify potentially threatening situations when conducting reviews. To do this, the RTA must know and follow CRA work procedures, preventative measures, guidelines and the related reporting requirements. Currently these include:

  • Canada Labour Code, Part II;
  • CRA Occupational Health and Safety Policies; and
  • Policy and Guidelines on Abuse, Threats, Stalking and Assaults Against Employees (Chapter 26, Security Volume, FAM Policy).

In addition, the RTA must:

  • Request guidance and assistance from managers, if required, when it is necessary to call on and confront difficult individuals; and
  • Report any threats or abuse immediately to the managers, to Security and to the police.
2.10.2 Requests by a Claimant to Video or Audio Record

Although claimants and their representatives may take notes during a meeting, the RTA must not consent to being recorded by any video or audio recording equipment. If the RTA discovers that the claimant is recording a meeting, they must immediately terminate the meeting, and inform the claimant that CRA management will be in contact with them to discuss the issue and make other arrangements. The RTA must then immediately inform the RTM of the situation.

2.10.3 Offensive or Threatening Interviews

In later chapters, the CRM provides suggestions and best practices for managing reviews that are difficult. However, if during the course of the review, the claimant’s or their representative’s language or behaviour becomes offensive or intimidating, and the business purpose of the meeting cannot reasonably be achieved, the RTA must:

  • Calmly suspend or terminate the interview;
  • Consult the RTM to decide on appropriate measures to be taken; and
  • Prepare a written report of the incident for management, detailing all relevant facts.

When the potential for assault exists and the RTA’s safety appears to be at risk, the RTA must:

  • Not restrain or agitate the person or persons;
  • Vacate the premises immediately;
  • Use best judgement on how to secure personal safety and protection if unable to leave, such as calling for help using a cellular phone or attracting attention of other people nearby;
  • Call the police as soon as possible, if assaulted, follow their instructions, obtain a medical examination from a qualified physician, and alert the RTM and security as soon as possible (the threat reporting number is 1-866-362-0192); and
  • Prepare a written incident report (using Form RC166) for management of the incident, detailing all relevant facts.
2.10.4 Demands for Personal Information or Other Information

If requested by the claimant, the RTA must present their CRA RC121A authorization card and explain to the claimant the reason for, the nature of and legal authority for their review. However, the RTA must never provide any personal information such as a home phone number or address, or produce personal documents like a driver’s license. The RTA can also show the claimant their government identification card, but if this does not satisfy the claimant, the claimant can speak to the RTM. If the claimant continues to demand other irrelevant information, and those demands hinder the RTA from performing their duties, they must terminate the meeting. The incident must be reported immediately to the RTM. The RTA can submit to normal company security procedures (such as baggage searches and reasonable requests for information), if this is standard for all visitors. If there is any concern about the nature of the procedures, the RTA should contact the RTM.

2.10.5 Questionnaires, Forms and Non-disclosure Agreements

Claimants might ask the RTA to fill out questionnaires or forms before allowing them access to the records and premises. The RTA must not, under any circumstances, complete questionnaires, forms, or other non-CRA documents. The RTA must inform the RTM that the claimant made such a request. This restriction does not, however, prevent the RTA from such routine practices as signing the visitors’ log identifying their name and organization. If the RTA is not sure whether the information should be provided, they should contact their RTM.

Some claimants are concerned that their confidential information may be divulged inappropriately and may request that the RTA sign a non-disclosure agreement before allowing access to the records and premises. When faced with this concern, the RTA must not sign the agreement. Instead, the RTA must inform the claimant that section 241 of the ITA includes strict confidentiality provisions that, if breached, will result in fines and/or incarceration. In addition, the RTA must inform the claimant that all federal public servants, including them, have appropriate security clearance and have taken the Oath of Office and Secrecy and swore or affirmed that they would not disclose any information they may become aware in the course of the exercise of their duties.

A refusal by the claimant to allow the RTA to conduct a review because they have refused to sign a form will be dealt with by first informing the RTM of the situation. If the claimant continues to prevent the RTA from conducting a review, the RTA must communicate to the claimant in writing to explain that the claim will consequently be disallowed.

2.10.6 Health and Safety during On-site Visits

The CRA has developed a number of policies, standards, regulations and guidelines concerning employee safety and health to ensure protection from exposure to occupational hazards and environmental conditions and factors. As mentioned earlier in Chapter 1, the RTA must know and follow applicable legislation and CRA policies.

Some of the important points from these policies are:

  • Becoming aware of any potential health or safety risks prior to visiting the claimant’s premises is an essential part of planning an on-site visit. By asking for information from the claimant on necessary or advisable precautions, such as the need for a facemask, hearing protection or steel-toed boots, the RTA can assess their safety needs and act accordingly. The RTA should consult the RTM for more details.
  • Pay particular attention to plan for safety when preparing to travel to and from the claimant’s premises. Under no circumstances is it necessary to travel when unsafe or risky travel conditions (for example, icy roads, snowstorm, limited visibility) prevail along the travel route. When travelling by car, and road conditions are poor, the RTA must always try to find out if these conditions might remain poor or worsen.
  • If during an on-site visit the RTA believes that the working conditions or premises are not safe, they cannot access the site safely or that they cannot continue to conduct the review safely, they must terminate the on-site visit immediately. RTAs must not put themselves into a situation that they feel is unsafe and they must remove themselves from any unsafe situation that develops. The RTA must then contact the RTM to discuss their health and safety concerns, preferably prior to making a decision, where possible.
  • The RTA should discuss any other health and safety concerns with the RTM. The RTA can also consult the Treasury Board Guidelines on Occupation Health and Safety if they need further information.

2.11.0 Information Security

The RTA must know CRA security policies and must follow them when they receive, share, transport or transmit sensitive information. The FAM, Security Volume discusses CRA security policy. The policies described there are the CRA standard and take precedence over any other instructions or requirements in the CRM. Additionally, the RTA must follow the guidelines outlined in a memo published by the SR&ED Directorate concerning the transmittal of sensitive information: Security of Scientific and Technological Material. As mentioned in Chapter 1, the summaries provided in this chapter are not the complete policy. The summaries do not eliminate the RTA’s responsibility to know and follow all current CRA policy.

The following is a summary of the main points of the CRA policies:

  • The CRA considers most of the information used by the RTA to be sensitive and classifies it at the “Protected B” level. This includes all information that has the potential to identify a particular claimant, whether directly or indirectly;
  • Information security is vital in the CRA, and the RTA must, as a general rule, exercise good judgement and ensure that every reasonable effort has been made to safeguard protected information or assets at all times. If the RTA has any doubts about how to handle a situation or any concerns about security in general, they must consult the RTM for guidance;
  • As specified in Appendix A of Chapter 9 of the FAM, Security Volume, when in transit, employees must secure protected information and/or assets they are carrying in a locked briefcase or container. The RTA must tag the briefcase or container with forwarding or return address information and/or the phone number of the RTA’s office;
  • Paper files and assets are only to be in vehicles during the conveyance between the employee’s residence, place of work and claimant’s place of business. While travelling by vehicle, employees are to secure classified and/or protected information and/or assets in a locked briefcase. The briefcase must be of a type approved by the CRA for the type of information or assets, and the RTA must place it in a locked trunk or out of sight in a locked vehicle. Placement of the briefcase or container and / or the asset must occur at the time of departure from the employee’s residence, place of work or claimant’s place of business. The RTA must make every reasonable effort to plan the itinerary to eliminate or minimize stopovers before reaching a final destination. However, if brief unforeseen or planned stopovers are necessary (for example, lunch, convenience store, or daycare), the RTA must exercise good judgement and make every reasonable effort to minimize the risk to the protected information and/or assets;
  • Information classified at higher than Protected “B”: The RTA must never leave Classified and / or Protected C information in a vehicle unattended. The RTA who must store protected information and/or assets such as a laptop or notebook computer at a claimant’s residence or place of business must do so in an approved container, or in an approved filing cabinet provided by the claimant, on which they can fasten an approved Agency combination padlock. The RTA must also secure the container or filing cabinet in a locked room. The CRA does not consider a briefcase an approved container when left on claimant’s premises;
  • The RTA must adequately safeguard protected information during transmittal by mail. The key point of the policy is that the RTA must send all protected information and assets through a CRA mailroom. Mailrooms have established security-approved procedures for transmittal within and outside the CRA;
  • The FAM, Security Volume, Chapter 23, Appendix C (Communications Security) discusses transmission of protected information via fax. That Appendix indicates that Protected A and B information may be communicated to the claimant by fax (no encryption device required), but only upon verification of the claimant’s identity and only at the express written request of that claimant;
  • For tracking and security purposes, the RTA must, for internal transmission of TF98 files, use a T973 Routing Advice of Controlled Shipment Tracking form. This form tracks “controlled shipments” between CRA offices that contain protected material. Those forms are available through all CRA mailrooms.

2.12.0 Service Standards and the Complete Claim Date

The CRA is committed to certain service standards for the processing of SR&ED claims. The service standards were determined by calculating reasonable lengths of time to process SR&ED claims, based on the normal steps involved. The CRA has committed to achieving these standards 90% of the time.

The RTA must take into consideration the CRA service standards when planning and conducting a review. The four service standards are:

  • Current refundable claims (claim type 2337 for corporations, un-assessed returns with 35% ITC) , 120 days;
  • Claimant requested adjustments of refundable claims (claim type 0402 for corporations, assessed returns with 35% ITC) , 240 days;
  • Current non-refundable claims (claim type 0450 for corporations, assessed returns with 20% ITC) , 365 days; and
  • Claimant requested adjustments of non-refundable claims (claim type 0452 for corporations, assessed Returns with 20% ITC), 365 days.

Refer to the following web address for more information on service standards: Service Standards.

The CRA determines the number of days to process SR&ED claims from the date the Tax Centre (TC) considers the SR&ED claim complete until the date the claim is sent back to the TC for (re) assessment. Both of these dates are recorded in AIMS.

If the claimant’s actions or requests result in a delay of the review of the claim, the number of days available to review the claim is lengthened by the duration of the delay. These delays are entered in AIMS as “delay codes.”

The process to initiate and approve the use of a delay code is set by the individual CTSO and should be followed by the RTA. Refer to Directive 2003-03 Use of Delay Codes on AIMS for further information.

When planning the review, note that the time allotted is for the complete review, not just the technical review. The RTA should complete their work early enough to allow sufficient time for the FR to review the SR&ED Review Report, perform the financial review of expenditures claimed, prepare the Proposal Package, and for the TC to complete the (re)assessment.

If any RTA believes, for any reason, that the RTA cannot review the file within the applicable service standards time frame, the RTA should advise the responsible RTM.

Chapter 3.0 Guidelines for Coordinated Review

3.1.0 Summary of Chapter

This chapter introduces and discusses guidelines linked to a coordinated review between the research and technology advisor (RTA) and financial reviewer (FR). Specifically:

  1. A definition is provided;
  2. Its characteristics are discussed;
  3. Ways to coordinate are discussed; and
  4. The benefits for both the Canada Revenue Agency (CRA) and the claimant are discussed.

3.2.0 Requirements of Chapter

Following from Chapter 1.6.0, there are two requirements that apply equally to both the RTA and the FR:

  1. All Scientific Research and Experimental Development (SR&ED) reviews must be coordinated between the RTA and the FR; and
  2. Relevant interactions are documented.

3.3.0 Background

The underlying principles of coordination between the RTA(s) and the FR also apply to other situations where consultation and sharing of information leads to more effective and more efficient services, such as Process Review, Pre-Claim Project Review (PCPR), First Time Claimant Service, Account Executive Service, or Outreach Services.

In general, depending upon the specific issues identified in the Review Plan, a coordinated review may be done by applying the relevant guidelines outlined below. Most of the guidelines reinforce the need for discussion with the other reviewer (the RTA or FR) for the purposes of planning reviews, coordinating activities, and monitoring progress on the file. When appropriate, the research and technology manager (RTM) and / or financial review manager (FRM) may need to participate in the discussion and resolution of issues related to the claim.

It is preferable if the FR and the RTA can receive the file from the Control Centre at the same time to facilitate timely planning and coordination of efforts.

3.3.1 Definition of Coordinated Review

For some reviews, the FR and RTA can work in tandem, and all work on the file, including meetings with the claimant, planning and correspondence is conducted with the concurrent participation of both reviewers. This is called a joint review. Joint reviews are encouraged, especially with large files when possible, but are not required. The Claim Review Manual (CRM) does not discuss procedures for a joint review as they are considered part of the more general coordinated review.

A coordinated review allows more flexibility in how and when either reviewer performs his or her work. Coordinated reviews are required in all cases when both the RTA and the FR have their parts of the file at the same time.

A coordinated review is one which is undertaken using an approach whereby the RTA and FR and, when needed, their respective managers, discuss and determine the principal issues of the claim and arrange to coordinate their respective activities throughout the review. For example, when a review is coordinated, the RTA and FR will consult and communicate with each other on the following relevant items:

  • The scope of their reviews;
  • Joint / common issues in the claim that require the input of both reviewers to resolve, and the planned approach to resolve those issues;
  • Responsibilities for initiating contact with the claimant, and mechanisms for obtaining and then sharing pertinent information with the other reviewer;
  • Significant events (such as planned leave and changes to availability) or occurrences (new priorities and decisions to abandon the review) that may impact the work plan, or may provide milestone or status information on the review process;
  • Contemplated significant revisions to the Review Plans of the RTA or the FR. Note that there may also be a joint review plan and in the CRM the words “review plan” could be either possibility;
  • On-going findings of review work performed, especially as they impact common issues;
  • Adjustments each reviewer will be proposing and rebuttals / additional information received from the claimant;
  • Sources of delays that affect on-going work;
  • Content of communications with the claimant;
  • The SR&ED Review Report and Financial Proposal Letter so that feedback from the other reviewer can be solicited and provided prior to mailing to the claimant; and
  • Any other information that affects the work of the other reviewer, or that affects the completion of the file on a timely basis.

In summary, a coordinated review is a collaborative and supportive process using on-going communication as its primary tool, which resolves common or overlapping issues and assists each reviewer to manage and meet their own review objectives efficiently and effectively.

3.3.2 Characteristics of Coordinated Review

There are two objectives of performing a coordinated review:

  • To improve the efficiency and effectiveness of the claim review by encouraging improved communication between the RTA and FR; and
  • To reduce the administrative burden on the claimant and minimize the interruption to their business operations (for example, coordinating requests for information and a site visit).

Each reviewer should undertake to assist the other reviewer on common issues identified in the Review Plan, and to inform the other reviewer of all relevant developments that could affect the other reviewer’s work. These responsibilities to one another and ultimately to the overall review process would normally be evident in the file through documentation showing that sufficient relevant interactions occurred to meet the two stated objectives of a coordinated review.

Typical Interactions of a Coordinated Review:

  • Early in the review process, the FR and the RTA communicate the scope of their planned review to each other. They discuss and decide which common issues require coordination of review procedures;
  • Each reviewer shares relevant information they have concerning the claim or claimant with the other reviewer;
  • The reviewers discuss their information needs with respect to reviewing the claim. Opportunities for improving efficiency of the review may result where both reviewers would otherwise examine the same or similar information independently or seek different information from the same source. For example, both might want a cost breakdown by project;
  • The most appropriate and effective manner for obtaining information from the claimant is jointly decided. This avoids asking the claimant for the same information twice and may eliminate the need for a second visit;
  • The reviewers discuss and coordinate the need for an on-site visit to the claimant;
  • The reviewers update each other on the progress and status of their respective reviews. This could include updates concerning:
    • the scheduling of meetings with the claimant;
    • information requests issued;
    • interim findings by the RTA on project eligibility;
    • new issues uncovered during the review;
    • changes or modifications to the Review Plan or to the scope of the review;
    • the inadequacy of the claimant’s documentation or books and records;
    • anticipated internal delays (for example, leave plans); and
    • the time anticipated to complete their review.
  • Each reviewer communicates to the other reviewer in a timely manner any other information that is discovered which could have an impact on the other reviewer’s work. This would apply particularly for information of the sort discussed in the “technical-financial issues” sections of the CRM;
  • The RTA’s SR&ED Review Report is provided to the FR to facilitate their perusal and feedback. Any comments provided by the FR are addressed prior to sending it to the claimant. This ensures that nothing of importance to the financial review has been overlooked in the SR&ED Review Report. Within this context, the RTA ensures that the SR&ED Review Report does not include decisions on strictly financial issues. Nevertheless, the RTA still provides commentary on any potential financial issues when the RTA has concerns or reservations resulting from information received from the claimant or otherwise. This commentary only puts forward factual comments and relevant observations that will assist the FR in making decisions on their issues. For example, the RTA comments on the role of an employee performing SR&ED, or the time or period spent by that person on a project, but does not comment on whether that person is a “specified employee”. The RTA could, however, note in their report that the employee stated that they were a shareholder of the corporation;
  • If an OC is used for the review, the RTA responsible for the consultant regularly updates the FR on the OC’s progress on the review. A copy of the OC’s SR&ED Review Report is provided to the FR for perusal and feedback before it is sent to the claimant;
  • The FR may need to access information in the TF98 file for the current or prior filings and therefore needs access to any such information not keyed on CORTAX. How this is done is left to the CTSO management to determine and implement. It is recognized that geographical distances between CTSO and TSO may encumber movement of the TF98 file to the FR;
  • Delay codes set or removed in AIMS are communicated between the FR and the RTA on a timely basis;
  • The RTA and FR are encouraged to visit the claimant together to discuss contentious issues so that the claimant may better understand the potential negative impact of the result of the review on the Investment Tax Credits (ITC) claimed related to each issue;
  • The FR provides the Financial Proposal Letter to the RTA on request; and
  • The Proposal Package includes both the eligibility and the financial changes to avoid delays associated with multiple claimant responses. This would require the inclusion of the RTA’s SR&ED Review Report as part of the Proposal Package. However, it is understood that under certain circumstance it is preferable to send a preliminary Review Report to the claimant prior to the Proposal Package, such as when there is a significant delay between the completion of the technical and financial reviews. The decision to send a preliminary Review Report is at the discretion of the RTA and local management.

When an issue in the file is strictly financial or technical, the FR or RTA will resolve the issue without involving the other reviewer. However, there are a number of common issues and situations for which the coordination of reviews is particularly useful. Some of these issues are with respect to:

  • Work and Related Expenditures – to determine if expenditures are for SR&ED requires a decision by the RTA as to whether the time claimed is reasonable in light of the SR&ED work that was performed. It may also require the RTA to determine the context of the expenditure;
  • Salaries – to determine if expenditures are for SR&ED requires a decision by the RTA as to whether or not the employee was directly engaged in the identified SR&ED work or otherwise directly attributable;
  • Materials – to determine if expenditures are for SR&ED requires the RTA to decide if the materials claimed were “consumed” or “transformed” in the prosecution of SR&ED and whether all or substantially all of this amount of material was consumed;
  • SR&ED Contracts – to determine if contract expenditures are for SR&ED requires the RTA to decide whether the contractor or subcontractor (performer) has performed SR&ED on behalf of the claimant;
  • Equipment – to determine if expenditures are for SR&ED requires the RTA to decide whether the equipment was intended to be used for SR&ED and in what proportion;
  • Prototypes and Pilot Plants – to determine if expenditures are for SR&ED requires the RTA to decide the actual or intended purpose and use of the property by the claimant; and
  • Experimental Production versus Commercial Production with Experimental Development Contexts (EP vs. CP+ED) – to determine if expenditures are for SR&ED requires the RTA to decide the context of the production claimed.

Working With Claimants in the Coordinated Review

All of the coordinated review practices discussed in Chapter 3 act to benefit both the CRA and the claimant. From the claimant’s perspective, coordinated reviews are more coherent, timely and less burdensome. An integral part of ensuring that coordinated reviews work for both the CRA and the claimant is to solicit the claimant’s input to ensure that the review can be completed efficiently. This is even more important in situations requiring significant travel by the RTA, FR, or employees and representatives of the claimant.

A number of specific practices are noted below that will help to demonstrate the CRA’s commitment to working with the claimant in order to ensure that all parties benefit from a coordinated review.

If either the RTA or the FR is familiar with the claimant, either through previous reviews or preliminary research, they will share that information as it may affect the Review Plan or the quality of service to be provided. Sharing this information between the RRTA and FFR reduces the number of questions that the claimant is asked. Prior to the meeting, once the RTA and FR have agreed upon the Review Plan, they together can plan the initial contact with the claimant, either by phone or via the initial contact letter, to determine or confirm:

  • the timelines and anticipated on-site time requirements to complete the review;
  • the means (letter or telephone) by which the CRA will request information, and to whom in the claimant’s company the request will be sent;
  • time frames for responding to any CRA request or query, so that the timeline for completing the review can be met;
  • how and when updates on the progress and outstanding issues will be communicated between the CRA and the claimant; and
  • mechanisms for resolving any concerns of the claimant.

During the review, when deficiencies in documentation or understanding of eligibility of work are noted, the RTA and FR should offer the claimant suggestions for improvements to their documentation thus providing them with a consistent message on the expectations of the CRA. A consistent message will enhance the claimant’s understanding of the SR&ED program and improve their working relationship with the CRA.

Chapter 4.0 Preparing and Planning for the Review

4.1.0 Summary of Chapter

This chapter discusses how to plan for the review, and some special situations that might affect the review. This chapter covers the following activities:

  1. Risk Management;
  2. Special situations or circumstances that could affect the review;
  3. Developing a strategy to deal with claims that include a large number of projects;
  4. Planning Considerations for large claims;
  5. Studying and analyzing materials provided by the claimant and from other sources;
  6. Identifying and gathering missing or additional information;
  7. Identifying the important claim issues or concerns;
  8. Developing suitable methods to resolve review issues; and
  9. Preparing a written Review Plan.

4.2.0 Requirements of the Chapter

Following from Chapter 1.6.0, these requirements are discussed: The research and technology advisor (RTA):

1. Plans the technical review, and coordinates planning it with the financial reviewer (FR).

2. Makes a written Review Plan (with some exceptions) with the following key elements:

a. Identification of issues and / or applicable projects to be reviewed;

b. Scope of the review, based on the risk assessment and other factors; and

c. Proposed review strategy and methods for review.

3. Consults the research and technology manager (RTM):

a. For approval of the review plan;

b. If referrals or formal consultation are needed; and

c. If there are any concerns about the results of referrals.

4. Documents:

a. All relevant communications with respect to the review;

b. Revisions to the Review Plan; and

c. Referrals, their results, and what was done with the advice or guidance received.

5. Follows General Canada Revenue Agency (CRA) requirements for:

a. Communications and Information Security; and

b. Handling claimant information (do not write on or alter original documents from the claimant).

4.3.0 Risk Management

Risk management is an important aspect in all of the CRA’s operations. In the SR&ED Program, using risk assessment techniques is crucial to selecting claims for review and to determining the scope of review. Properly conducted risk assessment identifies files with the greatest potential of non-compliance and thus allows for efficient utilization of resources. It helps prevent doing unnecessary reviews of compliant claimants, thereby increasing the overall efficiency and effectiveness of the SR&ED Program.

The risk management policy of the SR&ED Program explains that reviews are conducted only to the extent necessary to obtain a reasonable level of confidence that there is a minimal risk of material error in the claim. Using risk management to select files and issues to review, in conjunction with claimant-centred services, provides a balance between fiscal integrity, delivering timely incentives to claimants, and minimization of the cost of compliance to the claimant and cost of administration to the SR&ED Program.

The process of risk management for SR&ED claims begins as soon as the CRA’s Taxation Centre (TC) receives a claim and it continues throughout the entire review process. Prior to the RTA receiving the file, both the TC and the Control Centre (CC) have done a preliminary review of the claim to identify possible areas of concern.

4.3.1 Risk Considerations and Determining the Scope of Review

Once the file is assigned to the RTA, it then becomes the RTA’s responsibility to review the file in order to assess the associated risk of non-compliance and determine a course of action appropriate to the circumstances. While the RTA looks at many of the same factors as the CC and the TC, the RTA looks at them with greater depth or with the perspective of their specialized knowledge. Risk assessment is ongoing throughout the entire review process. As the review progresses, the RTA learns more about a specific claim and is in a better position to assess the risk of non-compliance.

Risk assessment works most effectively when a standardized approach is used. Even so, risk assessment of the claimed work depends on the professional judgement and experience of the RTA and the RTM. A standardized approach is particularly important for assessing risk of the claims in the industry/technology sectors that the RTA reviews. This will help increase consistency and ensure that the RTA uses their time efficiently. A number of considerations are provided in the pages that follow. Chapter 4.6.0 indicates that the RTA does a preliminary identification of potential issues. For each issue and associated project, the RTA assesses the material risk of non-compliance and decides whether to review the file further or to accept the file without conducting further review. The RTA considers both the risk of non-compliance and the materiality of such non-compliance to efficiently plan and complete a review, and to determine the amount of effort and time to spend on any given issue.

The analysis of potential risk, carried out in consultation with the FR and other CRA staff if necessary, will form the basis for the Review Plan. In simple cases, the RTA can usually identify the issues of potential non-compliance and determine the scope of the review at the same time. For some claims, the RTA may need to review in detail all of the potential issues. However, for most claims, not all the potential issues will be of equal significance or importance in terms of non-compliance with the Income Tax Act (ITA) and policies of the CRA. In such cases, the RTA assesses the potential for significant non-compliance and the materiality associated with those issues of non-compliance.

The RTA uses this risk assessment to decide upon the scope of review when preparing the Review Plan. In making these decisions, the RTA should take into consideration their workload and the fact that not all files, projects or issues can be reviewed to the same extent.

4.3.1.1 Factors that Influence the Scope of Review

Factors that can influence the scope of review for the RTA include the:

  • filing history of the claimant;
  • claimant’s compliance history;
  • work described in the project descriptions;
  • sector-specific issues;
  • nature and extent of the non-compliance issue;
  • amount of ITC at risk;
  • opportunity to educate claimant on the requirements of the SR&ED Program and to inform claimant about available claimant services and literature;
  • opportunity to promote self-compliance and proper self-assessment by the claimant;
  • opportunity to obtain a better understanding of the claimant’s work; and
  • effect of either carrying out a review or not carrying out a review on future compliance.

The depth and scope of the Review Plan should be sufficient to deal with all significant non-compliance matters. Nevertheless, once the RTA starts to conduct the review, they still should continually re-evaluate the potential for non-compliance and adjust the review as needed. An estimate of the level of non-compliance will determine whether additional review is warranted or whether the review can be terminated earlier than initially planned. If the RTA discovers systemic non-compliance, the RTA should consider expanding the review of the file to include additional projects or issues. On the other hand, the RTA can terminate a review once the RTA has a reasonable level of confidence that there is minimal risk of material non-compliance in the claim.

Assessing risk and determining the scope of review depends on numerous factors and considerations. This is to be carried out on a case-by-case basis and within the context of the RTA’s workload. This list (some of it from page 11 of Directive 2003-01R) provides a partial list of factors or considerations that indicate a higher risk potential:

  • Large projects/claims in relation to the industry sector or the claimant’s norm or resources;
  • Projects that seem unusual for the claimant’s business line;
  • Project descriptions that strongly suggest that work is not SR&ED or where the descriptions make it difficult to determine what was done;
  • Indications of lack of separation of SR&ED and commercial activities, particularly where the claim may involve questions of Experimental Production (EP) or Commercial Production with Experimental Development (CP+ED);
  • Projects that are ongoing for many years with no clear end in sight;
  • Historically significant problems with the issue, with the claimant or with other claimants that had similar issues;
  • Issue could affect other issues or other companies with the same issue;
  • The materiality of the issue. (Refer to 4.3.2 for a discussion of factors to determine materiality.) ;
  • Work may have resulted in the creation of a significant commercial asset;
  • Known R&D centres outside Canada; and
  • Issue is material, typically the amount of ITC at risk relative to the total claim.

Decisions concerning the scope of the review are a matter of judgement and will need to be coordinated with the FR. The RTA can consult the RTM, if guidance is needed.

4.3.2 Materiality

Materiality is a major consideration in assessing risk. The CRA uses a concept of materiality similar to the one used in public accounting, in that it recognizes that some issues have a greater impact in a given situation and therefore warrant greater scrutiny. Materiality is normally related in terms of amount, either as a specific amount, as a range or as a percent of the total claim.

Like risk, there is no exact way to determine materiality. There is no fixed formula that the RTA can apply. Materiality should be determined on a case-by-case basis; it is a matter of professional judgement, and it may need to be discussed with the FR and / or the RTM.

The RTA should always be alert to circumstances that can change an apparently otherwise immaterial issue into a material one and vice versa. As the RTA discovers new information concerning the file, the RTA should be prepared to revise the scope and extent of the review at any point during the review process, and not just at the planning stage.

The following are some factors for consideration when determining materiality:

  • Size of Claim: When all other factors are equal, this approach results in higher materiality for larger claims. Materiality is often determined by relating the amount of ITC at risk to the size of the total claim. An amount considered material for one claimant may not be considered material for another. For example, a $20,000 project may be material where the total claim is $100,000 while the same amount is not likely considered material when the claim is $10,000,000 unless the issues are recurring, or could recur in later years for even larger amounts;
  • Cost versus Benefit of Carrying out the Review: Due to the cost involved in carrying out a review, it might not be economical to review issues and projects in cases where the ITC amount at issue is relatively small;
  • Consistency: For claimants whose research and development work is similar, materiality should be approached in a consistent manner;
  • Replication or Escalation: An issue may be material if there is a potential for the issue to be replicated in current or future claims, or if there is a potential for the issue to be escalated in future claims. Such is the case when an RTA receives the first year’s claim for a large project that will continue for years. Also, an issue may become material if there are large numbers of projects involving the same issue, even though, individually, each one is relatively small or immaterial;
  • Nature of the Non-compliance: A claim or an issue that may otherwise be immaterial is considered material if there is obvious or significant non-compliance. This would include claims where the claimed work is specifically excluded from the definition of SR&ED under the ITA, claims where all work is performed outside of Canada, and claims where the work has been previously found to be ineligible;
  • Other Non-monetary Factors: The effect of carrying out a review or not may affect the compliance of other claimants. If a number of claimants have similar or identical issues caused by a common or shared reason, an otherwise immaterial claim or issue may become material if there are large numbers of claims involving the same issue, even though, individually, each one is relatively small. Such might be the case when a claimant representative has a significantly different interpretation of the ITA than the CRA, or when there is a systemic or recurring issue specific to an industry sector.

4.4.0 Other Planning Considerations

Planning for some claims can involve additional procedural considerations or requirements. Some of these include:

  • Large Cases within the SR&ED program are the most complex and are those with T2 Gross Income > $450 million and ITC > $10 million. Each has a CRA large file case manager (LFCM) assigned to it as a special CRA contact or coordinator for tax issues.
  • The claimant is large or rapidly growing, and it is expected that future SR&ED claims of the claimant will emerge to be large and/or complex in nature;
  • The claimed ITC is high (for example, the largest claims in the CTSO);
  • The claim includes numerous individual projects (Refer to Chapter 4.5.0 for specific suggestions);
  • There are many obvious non-compliance issues in the claim as submitted;
  • The work reported as SR&ED in the claim or claims occurred in a number of different cities or provinces;
  • The claimant has more than one facility that should be visited.
  • The RTA should speak to many individuals at different working and/or management levels, in order to review the claimed projects;
  • More than one field of science or technology is involved in individual projects; or
  • The supporting evidence that should be examined is large in terms of volume and/or complexity.

The Review Plan should take into consideration the above characteristics. Additional information and help on how to work with large claims is discussed in Chapter 4.10.

4.5.0 Claims involving a Large Number of Projects

When a claim has a large number of projects, cost and time constraints will likely not permit the same degree of review for each of them. While individually each project might be immaterial, collectively the materiality of an issue (or issues) that spans many projects could be relatively high.

One review approach that is not supported by the CRA involves the random sampling of projects for review, with direct extrapolation of determinations from that limited sample to the rest of the claimed projects. This is not a defensible review approach because there is no defensible rationale that links the review determinations of the randomly selected projects to the determinations applied to the other projects (the sampling and subsequent extrapolation).

To illustrate this point, assume that a claim has 100 projects, the RTA takes a sample of 20 projects for a detailed review, and concludes that 12 of the 20 projects are not SR&ED. If the RTA then concludes that, on this basis, 60% of the 100 projects are ineligible, this determination would not be defensible. Except for the 12 projects that were reviewed, no rationale was provided for finding the remaining projects ineligible. There is no linkage between the ineligibility of one of the reviewed projects and the ineligibility of one of the non-reviewed projects. There should be a specific rationale for finding a project or project work activity ineligible.

However, there is a review strategy that allows the RTA to reach determinations for a larger number of projects while avoiding an in-depth examination of each project. This approach is not the only one possible; RTAs are free to use other methods.

The first step is to determine how the claimant defined the claimed SR&ED projects. Generally, it is preferred to use as a starting point the claimant’s own way of structuring their claims. However, if the claimant has misunderstood CRA’s concept of an SR&ED project, for example, if what is described is an incomplete set of routine activities with no clear SR&ED context, the number of projects claimed may be unnecessarily high. In this case, the RTA can work with the claimant to better define the projects and then proceed with the review.

The second step is taken if the claimant cannot or will not restructure the claim at an appropriate level. This step involves the categorization or classification of projects into “groups”, based on a common characteristic, or virtually identical attributes, such that each group can logically be reviewed as a whole. That is, the decision for one would be the same for all those in the group, for the same reasons. For example, groups could be projects with a common methodology, or a common field of science or technology.

For some of these groups, based on a risk assessment (refer to Chapter 4.3), the projects / work could be accepted as filed based on this limited review. For the other groups, the RTA can review the projects and make decisions on a group by group basis, including whether or not the work in a given group meets the definition of SR&ED. For example, if a common issue spans several projects, it may be possible to ask the claimant a common set of questions or ask for a common type of documentation for each of the projects in that group. When the RTA gathers information that pertains to groups of projects, or the RTA considers information to apply to all projects within each group, the defensibility of the review determinations depend on the RTA having verified that information they have obtained for each project in the group is sufficient to support any general (group-wide) or specific (single project) determinations reached. If the claimant does not provide sufficient information about projects for the RTA to make determinations, refer to Chapter 5.12.0.

The RTA should explain the review methodology to the claimant, with the rationale given for the ordering of the representative groupings, before the review is concluded. That way if the claimant disagrees with the RTA’s approach, they have an opportunity to provide an explanation of why the RTA’s analysis and the groupings are not valid, and possibly suggest a different one.

When the claimant does not wish to co-operate, the RTA should consult with the RTM before proceeding with their planned review strategy (that is, evaluating groups of projects together or individually as appropriate). As for all reviews, the RTA’s work, rationale and decisions should be documented. As in any other case, the claimant always has the opportunity to provide counterarguments or additional information, if they disagree with the RTA’s review decisions at the proposal stage.

4.6.0 Analysis of Information and Identification of Review Issues

This step is the heart of the review planning process. Generally, it involves an iterative process of gathering and analyzing technical information, identifying and requesting needed technical information, and identifying issues to be reviewed. For example, issues tentatively identified based on limited information may be resolved as new information is obtained, or the analysis may identify information gaps and new issues may arise when the information is obtained. Ultimately, issues must be resolved before a review is concluded. To “resolve” an issue in the context of the Claim Review Manual (CRM) means that the RTA has to make a decision on the outcome of the issue. It does not mean that the RTA and the claimant must agree.

Furthermore, this work is closely linked to the risk and complexity factors noted earlier in Chapter 4, which are considered during the entire planning process. At some point in the planning stage, prior to the completion of the Review Plan, the RTA contacts the FR to begin the review coordination process. It is recommended that first contact with the FR begin as early as possible. At this stage, it may also be useful to have informal consultations with the RTM and / or co-workers who may be familiar with the claimant or the field of science or technology related to the projects.

Typically, the process starts with a review and analysis of current and past TF98 files and the information received from the Control Centre. Some older TF98 files may be in the archives and the RTA will therefore need to request these. Where there has been a previous review, a review of the information should be included in preparing and planning the review. This also includes information from the Account Executive (AE) and any Pre-Claim Project Reviews (PCPR). The RTA often makes a tentative identification of potential review issues at this point. The RTA would then typically identify any relevant information missing or needed, and obtain it, which may include information requests to the claimant. This new information would likely lead to further analysis. The analysis may result in a modification of the review issues and may lead to further information gathering and analysis.

For convenience, Appendix 7 outlines typical information sources, their importance, and how they may be used in planning the review. As with all work, the analysis is also documented.

4.6.1 Review Issues

This section includes a list of 32 typical issues in four broad categories that the RTA may face during the technical review. Note that not all issues (such as issues pertaining to evidence) may be evident or relevant at the planning stage. Some of them may only become apparent later in the review. It is provided for the convenience of the RTA. It is not a comprehensive list of all potential review issues, nor does it reflect all the nuances or variations that may arise. This list does not restrict the RTA’s review. In fact, it is recommended that the RTA add to or modify the list during the review to reflect the particulars of each case. Note that while the observations and comments of the CC are a helpful first step in planning the review, they are only considered the starting point. More issues may exist than are identified by the CC.

It is recognized that many of these issues cannot always be identified at the initial stage of the review. For example, until the supporting evidence is examined, it cannot be determined if there are issues here. However, this may have been an issue identified in a previous review that needs investigation this year. This is why it is expected that these identified issues will be modified and perhaps expanded once the review proceeds further. Many issues may pertain to one project, or there may be one issue that applies broadly over many projects. Identifying common issues that clearly apply over many projects is important when establishing the scope of review, since it may be possible to resolve the issue while limiting the review to a carefully selected group of the projects which share that common issue (refer to Chapter 4.5.0).

Some review issues may extend generally over the entire claim. It is therefore not necessary that they be identified on a project by project basis. For example, the project descriptions may indicate that a claimant lacks a clear understanding of the difference between SR&ED and routine work. Therefore, the review effort, at least initially, may involve identifying the claimant’s rationale for putting the claim together. It may not be possible to identify other issues until this underlying one is resolved.

The following list, which includes issues common to both the FR and the RTA, can initially be used to identify possible issues.

Category 1: Issues Concerning the Eligibility of Work Claimed

Eligible work means that the work meets the requirements of SR&ED as defined in subsection 248(1) of the ITA . Ineligible work refers to work that does not meet the ITA’s definition of SR&ED or work that is specifically excluded by the definition. The issues in this list relate to particular aspects of the definition of eligibility.

1. The scientific or technological (S/T) objectives of the project are not clear.

2. The S/T uncertainties, challenges or obstacles are not clearly defined or explained.

3. The claimed technological advancements (TA) / obstacles may be standard practices within the Industry or in the context of claimant’s business.

4. The claimed scientific or technological advancement (attempted or achieved) is not clearly identified or explained.

5. The claimed technological advancements (attempted or achieved) may not be the CRA’s definition of a TA.

6. A systematic investigation or search through experimentation or analysis is not apparent.

7. It is not clear what experimentation or analysis was performed.

8. Some of the claimed work is in one of the excluded categories of paragraphs (e) to (k) of the definition of SR&ED subsection 248(1), or there is a mix of SR&ED with excluded activities.

9. It is not clear what work the claimant did in the year.

Category 2: Issues Concerning Evidence

By evidence, we mean items as noted in Appendix 2 in Guide to Form T661 that will substantiate that the claimant has done SR&ED work. Issues under this category relate to the existence, relevance or adequacy of evidence to support the claim that SR&ED was performed.

10. Evidence is missing or unavailable.

11. Evidence is available, but it may not support the work performed / claimed.

12. The evidence may indicate that non-SR&ED work was claimed.

13. The evidence provided consists of a large amount of unsorted information such as boxes of documents, or large number of documents on CD/DVD.

14. The claimant is reluctant to give access to information or access to scientific / technical personnel.

15. There is no evidence to support the following:

a. Materials consumed / transformed

b. Contracts were for SR&ED

c. Personnel were directly engaged

d. Equipment was all or substantially all (ASA)

e. Capital Property

Category 3: Issues Concerning Support Work

Support work is one of the eight types of work explicitly defined in paragraph (d) of subsection 248(1) of the ITA . The biggest concern is usually how to determine that the support work claimed is commensurate with the needs and directly in support of the SR&ED project.

16. It is not clear what the support work was.

17. It is not clear if the claimed support work is directly in support of the SR&ED that was performed.

18. It is not clear that the claimed support work is in support of SR&ED done in Canada.

19. It is not clear if the claimed support work in one of the eight categories described in the ITA .

20. It is not clear if the amount of support work claimed is commensurate with the needs of the SR&ED.

21. Some of the support work claimed may have been done after the SR&ED was completed.

Category 4: Joint Technical-Financial Issues

These are issues that require the input of the RTA and the FR to resolve. They may not arise until the later stages of the review. As indicated in Chapter 3, for each issue listed below, the RTA will need to consult the FR.

22. Claimed SR&ED was performed outside Canada. Is the amount in accordance with the rules?

23. Shared-use equipment is claimed. Is the claim correct?

24. Capital expenditures are claimed as ASA for SR&ED. Is the claim correct?

25. Assets were produced as a result of the claimed SR&ED. Was it a prototype, custom product, or commercial asset?

26. There were physical outputs of a process or production line used in the claimed SR&ED. If there is SR&ED, is the context of the work experimental product (EP) or Commercial Production with Experimental Development (CP+ED)?

27. Materials were claimed. How does their use / amount claimed relate to the claimed SR&ED?

28. It is not clear what all the people claimed were actually doing concerning the claimed SR&ED.

29. The work or output of the work was part of a contract, and it is not clear what was actually being done under the terms of the contract, including the ownership of any Intellectual Property.

30. Third-Party Payments were claimed, and it is not clear who performed the work and what the payments were for.

31. It is not clear at what point (in time or in a process) the SR&ED ended, or if the work was completed.

32. Overhead was claimed when traditional method is used. Did the overhead relate to the claimed SR&ED?

4.6.2 Basic Eligibility Issues

As noted in Chapter 2.5.3, eligibility means work which meets the definition of SR&ED in subsection 248(1) of the ITA , but Information Circular (IC) 86-4R3 uses the three criteria (refer to Chapter 2.5.4) to identify SR&ED. Although claimants may use these three criteria to help explain how their work meets the definition of SR&ED, the RTA must ultimately cite the relevant part of the ITA when explaining their decisions. Chapter 6.8.6.1 explains exactly how to document such determinations in the SR&ED Review Report.

Form T661 does not directly ask questions with respect to the definition in the ITA or the three criteria. The information received in the Form T661 is intended to enable the RTA to understand how the work meets or does not meet the definition in the ITA and the three criteria of IC 86-4R3. In identifying review issues, the RTA should be aware that the current Form T661 requests that claimants describe their work in terms of technological advancement, technological obstacles and work done (for Experimental Development) or scientific knowledge advancement and work done (for Scientific Research).

Chapter 4.6.1 notes nine issues under the broad category of “eligibility”. Where an issue directly concerns a question of basic eligibility, the review should first focus on those specific eligibility issue(s). For example, the substantive issue might be to establish the knowledge base level of the claimant prior to their claimed work, or it might be whether the claimed work was for the purpose of seeking a technological advancement beyond this level. Since the resolution of these issues directly affects the basic eligibility of a project, resolving these issues is usually the highest review priority.

4.6.3 Eligibility-Related Issues

The RTA should cond uct the technical review in such a way as to reduce or eliminate doubt as to whether or not the selected projects are SR&ED. However, the RTA will usually need to go beyond the question of basic project eligibility. This means that each project, where there is some SR&ED, should be well defined in terms of matters such as time frames, personnel, allocated labour, contracts, related commercial activities, related commercial relationships, research partnerships, equipment, materials and supporting documents. Any one of these matters, but probably not all, could be issues in a specific claim that the RTA should review. The RTA, possibly in coordination with the FR, then should resolve those issues most relevant from a risk assessment perspective. These are called “eligibility-related” issues, because they need to be resolved in addition to the basic eligibility issues in order for the RTA and the FR to complete the review. While many of these issues are covered under the categories concerning evidence, support work, and joint technical-financial issues listed in Chapter 4.6.1, the following illustrative examples indicate the importance of identifying the “eligibility-related issues”:

  • A project appears to be SR&ED but covers several years. The descriptions identify SR&ED but also describe the subsequent non-SR&ED work involving commercialization of the product. The issue to resolve is when did the SR&ED end because the SR&ED project has an unspecified time frame. That is, the RTA should verify if and when SR&ED work on the project was performed during the year;
  • In some cases, there is little doubt that if the claimed work were done as described in the project descriptions submitted with the claim, it would be SR&ED according to the ITA. The issue identified by the RTA is that they need to verify that the work was actually performed by examining the evidence listed to support the claim;
  • In a continuing project, SR&ED has already been established, and there is no apparent need to re-review the same basic eligibility issues of the previous year. The RTA identifies the primary issue to be uncertainty as to the end date of the project and the extent of support work required in the current year; and
  • In some cases, there is no doubt that some of the claimed work is SR&ED. The issue identified by the RTA is how much of the work claimed is work for excluded commercial production purposes, and how much was actually for SR&ED purposes.
4.6.4 The Appropriate Level of the SR&ED Project

The starting point for reviewing issues in projects is to consider that “projects” exist at the level as submitted by the claimant, as long as the work claimed under the project is directly in support and commensurate with the work required to meet the SR&ED definition. As a general rule, according to the Project Definition Paper, in order to resolve the identified issues, projects as claimed are assessed in their entirety, rather than broken down into their constituent parts. From a financial perspective, this would also require that the claimant’s internal controls and accounting methods are sufficient and appropriate in order to support the project cost allocations.

For example, the claimant may be claiming as a whole something which the RTA does not think is SR&ED in its entirety, such as the entire business project. In such a case, the RTA should be careful when looking at a project on a different level than what was claimed, because if a project is broken down into isolated disconnected pieces, it may be difficult to identify the SR&ED. If the claimed project does not appear to be SR&ED as a whole, then the RTA can look for SR&ED on a lower level, that is, look for parts of the claimed project that are SR&ED. Refer to “Detail Required to Support the RTA’s Decision” in Chapter 6.7.2 for a discussion of how to document these decisions.

A claimant often has a “business project” that is larger than the SR&ED project. In this context, for a claimant the “business project” is a logical grouping of activities that can generally be treated as whole. The “business project” in this case would be all the work required to achieve a particular business objective, for example, all the work to build and market a new product or product upgrade. Often each business project has a billing or an accounting code. For the RTA’s review, all of the activities in a project may be reviewed or treated as a whole, but only the SR&ED project is considered to be eligible. Claimants are advised that SR&ED work is to be reported in the Form T661 on a project-by-project basis. Since SR&ED is often carried out along with commercial activities, the SR&ED project is often a part of a business project. In this context, the RTA should determine whether only the SR&ED project or the entire business project is claimed.

4.6.5 Identification of a Systematic Investigation or Search

A Systematic Investigation or Search (SIS) implies, among other things: observing and deductive thinking; combining the knowledge gained through experimentation and analysis; and using a process of logical, rational and intuitive thinking to resolve or overcome an S/T uncertainty or obstacle. The preceding process describes the use of the scientific method. Prototyping, modeling and experimentation can be part of a SIS.

The Courts, specifically in Northwest Hydraulic Consultants Ltd. (TCC Docket No. 97-531-IT-G), have used a five-stage process as a test for SIS:

  • The observation of the subject matter of the problem;
  • The formulation of a clear objective;
  • The identification and articulation of the Scientific or Technological Uncertainty (S/TU);
  • The formulation of a hypothesis designed to reduce or eliminate the S/TU; and
  • The methodical and systematic testing of the hypotheses.

The Form T661 is designed in such a way to try to get claimants to provide information that demonstrates that they followed this five-stage process. Some companies follow this process in a disciplined, formal manner, which results in documentation that makes it easy for the RTA to understand the SR&ED work performed. However, other companies may be less disciplined and their approaches to performing SR&ED are more informal, thus, their documentation and evidence will be less organized.

For claims from these companies, it could take more of the RTA’s time working with the claimant to see and understand the SR&ED work. It may also take more time to ensure that the claimants understand the need and ways to improve their documentation.

A final determination regarding the existence or absence of systematic investigation will be made after examining the work performed, understanding the logic behind the approaches used and explanations provided by the claimant. The RTA should make an effort to understand and take into consideration the different investigative styles and approaches that can be adopted.

4.6.6 Other Factors

In identifying issues, the RTA should consider any prior difficulties encountered in dealings with the claimant and in particular, any outstanding issues from prior reviews, as these may need to be re-reviewed in the current year. Other factors to consider include whether the claim involves multiple year files, outstanding notices of objection or court cases, or partnerships.

It may be difficult to adequately identify issues due to lack of information. Therefore, in some cases a basic information request may need to precede the development of a Review Plan.

The RTA may find out about non-technical issues that could affect the review process, such as a claimant bankruptcy. If so, the RTA should consult the RTM and / or the FR. Refer to “Special Situations and Alternative Review Approaches” in Appendix 8 for a discussion of how to address these situations.

It is recommended that any notes made during the analysis process be made on a T2020 or similar working document and be kept in the TF98 file. Relevant factual observations that might eventually contribute to the resolution of the identified issues are to be itemized in a working paper and kept in the TF98 file. Refer to Chapter 6 for a more detailed discussion of requirements for file documentation.

The RTA must not write on or alter any original documents submitted by the claimant (refer to Chapter 6.5.0). If a document is given on-site and the RTA wants to make notes on it, a copy should be made on the claimant’s premises and notes should be made on the copy.

4.7.0 Methodology for Resolving Issues

The next step in the planning process is to identify the proposed method for resolving the issue(s). Note that the RTA is likely to have a good idea of how to resolve the issues even during the analysis stage of the planning. In the simplest situation, the RTA could propose the same methodology for each of the review issues, but each issue may need a different procedure. There are three basic methods of resolving issues:

  • Review without an on-site visit (includes accepting as filed);
  • Review with an on-site visit; and
  • Referrals or consultations.
4.7.1 Review Without an On-Site Visit

In some cases, the issues identified by the CC, in the view of the RTA, do not need further review and the RTA can resolve the claim without reviewing further.

In other cases, some issues may be resolved by contacting the claimant (by phone or by letter). Telephone contact is recommended for relatively simple issues, for straightforward questions of fact or clarity, or for simple information requests. Letters are recommended if the requests are larger or more complicated, or if there is a need to establish a written record of the request. Refer to Chapter 5.5.0 for more related information.

If the information received in response to the telephone call or letter is sufficient to resolve the issues, the review can be concluded, and the RTA then documents the decisions and the rationale. Refer to Chapter 6 for details on documenting decisions.

Usually, a review can be concluded without an on-site visit only if all the issues can be accepted in the claimant’s favour. Refer to Chapter 5.5.1 for a discussion of circumstances where a negative decision can be made without an on-site visit.

4.7.2 Review With an On-Site Visit

An on-site visit usually gives a claimant a greater opportunity to explain their work, and is especially important when it appears on initial examination that some of the issues of concern may not favour the claimant. There are a number of specific reasons for an on-site visit:

  • The RTA can better understand the claimant and their business and give them information or advice;
  • The issues cannot be resolved using the information submitted with the claim, nor by way of a telephone interview or written correspondence;
  • Work is not well-described and fails to adequately explain how it meets the requirements of SR&ED;
  • There is supporting evidence to inspect, and equipment or processes that can be demonstrated to the RTA, which relate to the claimed SR&ED;
  • It is easier to resolve issues on-site since more supporting evidence is on-site. The RTA may need to discuss certain issues with a group of key individuals involved in the project and the people who did the work are available on-site to explain their involvement in the claimed work;
  • It is easier for claimants to present information in a face-to-face meeting; and
  • It is easier to explain concerns or decisions.
4.7.3 Referrals and Consultations

Some issues may require a formal referral or consultation with program specialists (for example, the National Technology Sector Specialist (NTSS) or other Headquarters (HQ) staff) or the involvement of other RTAs, to resolve an issue, clarify a policy, or due to the size or complexity of a claim. Aside from informal consultation with co-workers, if a referral or formal consultation is thought necessary, the RTA should first discuss the situation with their RTM. The RTA must have specific authorization from the Coordinating Tax Services Office’s (CTSO) management before undertaking a formal referral or consultation of the types described below. The RTA follows local procedures for any consultations outside the immediate work group. Since referrals and consultations can take some time, the RTA should try to identify the need for consultation as early in the process as possible, preferably as part of the Review Plan.

Specific forms are used in some situations, but others may just need a memo or letter to provide the necessary details. Each group will have their own procedures for accepting referrals.

4.7.3.1 Typical Reasons for a Referral or Consultation
  • The claim meets one of the criteria outlined previously in Chapter 4.4.0;
  • The claim is multidisciplinary, involving more than one area of science and / or technology;
  • Special expertise is needed to resolve issues;
  • The on-site review process reaches an impasse due to differences in opinion between the claimant and the RTA and advice is needed; or
  • Certain specific issues may require similar treatment in order to ensure consistency, such as when these issues persist in many claims from the same or similar sectors (for example, experimental feed consumed in a commercial context over a wide range of animal science and aquaculture claims).
4.7.3.2 Types of Referrals or Consultation

There are three types of referrals:

  • Headquarters (HQ): The Technical Guidance Division (TGD) provides assistance to the field regarding financial, science and sector specific issues. This includes, but is not limited to, providing assistance and direction in identifying and resolving issues related to the eligibility of the projects and / or expenditures; and providing guidance to field staff on the application of the legislation, policies and procedures. To make a referral to the TGD,refer to the InfoZone websiteHQ Referrals;
  • Outside Consultants (OC) are experts, usually from outside the government who are contracted for their specific technical expertise. Procedures to engage an OC are described in Directive 2003-02 Managing Outside Consultants. The use of an OC incurs a cost and requires management approval; and
  • Referrals to or a request to involve other CTSOs: In some cases, it may be possible to transfer files to other regions. Refer to Directive 2008-01 for situations when claimants request a file transfer. In other cases, it may be possible to involve RTAs from other CTSOs. If the RTA is aware of another RTA in another office who can help, or if the RTA wishes to request help from another CTSO, the RTA should consult their RTM.

All referrals and consultations form an integral part of the review, and therefore their results are documented and kept in the TF98 file. If there is any divergence from the advice or opinion received, it should be explained or justified on a T2020 form and the RTM should be consulted.

4.8.0 Written Review Plan Preparation

A written Review Plan must be made for each review (with some exceptions noted below), whether the review is conducted only at the RTA’s office, or whether it involves a site visit and interview with the claimant. While the RTA is developing the Review Plan, they might contact the claimant for clarifications, in which case the RTA would document these conversations on a T2020 or equivalent note to file. As in the rest of the review, coordination with the FR is neededThe details required in the plan will vary depending on such factors as the size of the claimant, the complexity of the issues and the nature of the review. A Review Plan does not need to be long or complex. It can be as simple as a short list of issues, or even a single issue, a simple listing of the initial questions the RTA plans to ask, and a simple description of the planned review methodology. A more complex file might need a detailed procedure, a listing of meeting dates, topics the RTA plans to discuss, CRA and claimant personnel, site locations to visit, items to inspect, and so forth. A Review Plan is a tool to guide the RTA, but it does not bind them. It indicates the RTA’s intentions based on an examination of the available information from the claim and other possible sources including preliminary discussions with the claimant, if any are made.

As indicated in Chapter 5, it is common and in fact expected that the actual work performed during the review will differ from the planned work, because new information obtained during the review will often raise new issues, particularly those which cannot be easily identified in a desk review, or resolve the existing ones. Deviations from the original Review Plan, as they occur over the course of the review, are documented in the TF98 file by way of a T2020 or if done later, via the SR&ED Review Report. Normally there is only one Review Plan, and it is usually sufficient to document changes rather than re-writing the Review Plan after every revision. The RTA keeps the Review Plan and any revisions to it, if made, in the TF98 file.

A written Review Plan is not required when all the issues identified by the CC and any others identified by the RTA can be readily resolved without an on-site visit. In such cases, the RTA just documents their work and determinations. This can be done via a memo to file, or the RTA can optionally use a Short SR&ED Review Report to record the decision and the rationale. Refer to Chapter 6.9.0. A written Review Plan is also not needed at the initial stages of a review if the claim is so lacking in basic information that an initial information request is needed as the first step. When this information is obtained, a written Review Plan would then be developed.

There is no required format for the plan. The RTA may use the samples in Appendix 5. Appendix 5.1 has a sample Review Plan and Appendix 5.2 has a sample Review Plan for a large claim. The CC template can also be easily adapted and used by the RTA. The only requirement is that the written Review Plan includes the following elements:

  1. Identify the Claimant (name, year, business number);
  2. Identify the RTA’s name and date prepared;
  3. Identify the technical and joint technical-financial issues with the associated project(s). This includes issues previously identified by the Control Centre and by the TC’s screening;
  4. Outline the suggested scope of the review. This is applicable only if not all of the issues / projects will be reviewed in detail. Explain the basis for the scoping (some details of the risk analysis); and
  5. Outline the proposed methodology to resolve the issues. This could be some basic questions to ask, information to request and review at an on-site visit, or the need for consultation.

4.9.0 Review Plan Approval

The RTA should consult with the RTM to determine if their approval is required before commencing the review. The RTM may suggest additional review issues, want other elements in the Review Plan, or suggest that some issues do not need to be reviewed in detail. The intent of the approval is not to review all the details of the plan but to ensure the overall scope of the review is appropriate. The RTM may delegate this approval.

Working with Claimants During the Review Planning Process

A Review Plan benefits not only the RTA, but the claimant as well. It can be particularly helpful to first time claimants. It helps to:

  • establish the initial scope of the review;
  • ensure that the claimant is aware of concerns and understands the review process; and
  • ensure that the claimant is adequately prepared for the review and has every opportunity to address the concerns of the RTA.

As demonstrated in Chapter 4, planning for the review involves many challenging considerations, especially when dealing with large claims or a large number of projects. For that reason, the RTA should not hesitate to contact the claimant during the review planning process to clarify questions about the claim.

As noted in Chapter 5, once the issues and the need for an on-site visit have been established, the RTA would communicate to the claimant the issues and the proposed approach for resolving them. However, prior to this point, even before the review plan is complete, the claimant could be contacted if the RTA needs to ask a few questions or communicate some of their concerns and a general outline of the review process to the claimant. Sometimes the concerns that the RTA has can be resolved at an early stage by providing the following advice and guidance to claimants:

  • Ask the claimant to explain the work that was done and the reasons why it was done rather than trying to prove how each of the three eligibility criteria were met or how it meets the definition provided in subsection 248(1);
  • Explain how this approach can be broken down into the basic scientific method of hypothesis formulation, followed by experimentation, analysis of results and statement of decisions and how it provides insight into each of the three eligibility criteria and the requirements of subsection 248(1) of the ITA . For example, the hypothesis establishes whether a scientific or technological uncertainty exists, the experimentation or analysis defines the scientific or technological content, and the statement of decisions can show whether the claimant attempted to achieve a scientific or technological advancement;
  • If the claimant does not understand, provide an example that demonstrates your point;
  • Advise the claimant to use the documentation tool in Appendix 2 of the Guide to Form T661 to collect and organize the documentation that will show what work was done, how the work followed the basic scientific method, and supports the assertions made in Part 2 of Form T661; or
  • Ask the claimant to identify the people who are best able to describe the project and answer questions related to the issues and points raised above. Emphasize the importance of making these people available to the RTA during the site visit meeting. Ask the claimant to have these people contact the RTA prior to the meeting if they require any explanation of the eligibility criteria, SR&ED program policies, or the review process.

The fundamental premise of the review plan is that if the review is well organized, coordinated and focussed from the outset, the RTA can communicate issues to claimants ahead of time, work with them prior to the review to ensure they are prepared, and complete the review with a minimum number of site visits and rebuttal.

As part of this process, it is a good practice to contact the claimant shortly before the on-site review to confirm that they are prepared, and to address any questions they may have. Any communications of this sort should be documented.

Of course, working with claimants implies that claimants must also work with CRA. The mutual expectations of the review need to be clear. This means that RTAs explain their expectations to claimants, specifically that claimants are expected to be ready to address the issues raised prior to and during the site visit, with the appropriate personnel and supporting documentation on hand, and that they are expected to respect our review plan and implement our recommendations concerning issues raised, such as documentation shortcomings. Refer to Appendix 11 for an outline of these mutual expectations. This document can be given to claimants.

4.10.0 Review Planning for Large Claims

4.10.1 General Considerations

The material in the rest of Chapter 4 is generally applicable to large claims. However, additional considerations often apply for them. The comments in this section are suggestions only, as every large claim has distinctive aspects and the best approach can only be determined from the facts of each case.

It is very important that the RTA understand how the claim is structured. For example, the claim may include a project that is beyond the immediate or complete control of the particular claimant, since there may be more than one company or entity responsible for the SR&ED. This would be the case when companies become partners or form joint ventures or consortia, or possibly create multiple divisions or departments within the same company to deal with different aspects of high-level development, research projects or programs. In such cases, the RTA may need to contact several companies, company departments or divisions in a coordinated manner in order to complete the overall review. When making such contact, maintaining an appropriate level of confidentiality may require particular attention.

The RTA also should consider how to deal with situations where the year-ends for each claimant are not the same. That is, the review of the same project for multiple companies may not be dealing with the same year-end for each claimant, department, or division. In such a case, the RTA is advised to consult with the FR.

4.10.2 The Review Team

A large claim may involve a team of people including one or more FRs, other RTAs, NTSS, OC, the RTM, the FRM, the Large File Case Manager (LFCM) and other CTSOs, and all their activities will need to be coordinated.

4.10.3 Review of Technical Information Submitted with the Claim

It is recommended that an initial review of the claim be carried out; in most cases, this should be done on a project-by-project basis. The goal of this first step is to ensure that enough information is available for the RTA(s) to allow for a proper scoping of the claim. Coordination of review meetings and exchanges of relevant information between the RTA(s) and the FR(s) are particularly important at this stage. Usually everyone belonging to the review team would need a breakdown (on a project by project basis) of the history of each claim, when the project was last reviewed, and what the decision was, the expenditures for labour, materials, capital, contracts and overhead for each of the years under review.

4.10.4 Scope of Review and Project Selection

It is recommended that the following elements be considered while scoping a large file for a review:

  • Eligibility – a key consideration is the eligibility of each project, and secondarily, all of the eligibility related issues discussed elsewhere in the CRM;
  • Materiality – the RTA and the FR will need to agree on what will be reviewed and why;
  • Clarity – project descriptions need to be understood by the RTA, and if necessary, more information can be requested;
  • Third Parties – third parties may have been involved in the claimed work, and it may be appropriate to ask them questions;
  • Availability of the review team – The availability and schedules of more people will have to be considered;
  • Time and Budget – the time and resources available for the review need to be discussed with the RTM, and factored into the overall Review Plan;
  • Location of Supporting Evidence – throughout the review, the RTA should be aware of the whereabouts of supporting evidence for the claim, as well as the books and records needed by the FR;
  • Facilities – the number and location of the facilities that may need to be visited should be established when scoping the claim; and
  • OC Involvement – the claimant must be informed that an Outside Consultant will be employed in the review process to give them the opportunity to identify any potential conflict of interest.
4.10.5 Preparation of the Review Plan

Beyond those elements already discussed for regular reviews, the RTA may need to consider additional elements when preparing a Review Plan for a large claim.

It is recommended that there be a joint Review Plan for both the Technical and Financial reviews. The development of the Review Plan may need to involve all parties including appropriate RTAs, OCs, FRs, RTMs, FRMs, and the LFCM. It is particularly important that the LFCM, if one is assigned to the file, be contacted as a courtesy at an early stage to discuss such matters as contacting claimants and setting dates, and be kept informed of all activities involving the case. The Review Plan should be accepted by the FRM and the RTM. The necessity of multiple parties accepting the Review Plan may require several versions of that Review Plan. The review plan may need to identify issues that each RTA (if there is more than one) will handle. Extra care needs to be taken to ensure that the Review Plan is realistic and can be carried out within the service standard time frame with the resources available.

In scoping the review, there may need to be some discussion with the claimant in order to determine what will be practical or feasible. As such, it is important to communicate to the claimant early in the review the planned:

  • duration of the site visits;
  • projects to be reviewed;
  • personnel to be interviewed; and
  • sites to be visited.

Such discussions do not imply that the claimant’s permission is required. Ultimately it is the CRA that decides what to review. Appendix 5.2 provides a sample for a large SR&ED claim Review Plan.

The RTA may find it useful to have all the major aspects of the entire review outlined in a project planning tool (such as a Gantt chart) for each reviewer and for the review as a whole.

Chapter 5.0: Obtaining Information and Resolving Review Issues

5.1.0 Summary of Chapter

Steps taken to resolve the issues identified in planning are discussed in this Chapter. The main topics of this Chapter are:

  1. Adjusting the scope of the review;
  2. Identifying appropriate evidence to support review decisions;
  3. Obtaining information from claimants by telephone or written request;
  4. Resolving the issues without a site visit;
  5. The types of circumstances under which an unfavourable decision can be issued without a site visit;
  6. The rationale and procedures for conducting an on-site visit;
  7. Interviewing the claimant during an on-site visit;
  8. Examining the claimant’s supporting evidence and obtaining samples;
  9. How to deal with the issue of inadequate supporting evidence;
  10. Why and how to prepare interview notes;
  11. The importance of and how to present decisions to the claimant;
  12. Dispute resolution;
  13. Special review situations and appropriate ways to deal with them;
  14. Dealing with projects withdrawn by the claimant;
  15. Dealing with unresponsive claimants;
  16. Assisting first-time claimants;
  17. Avoiding negotiations with claimants;
  18. Penalties and leads; and
  19. Special considerations for large files.

5.2.0 Requirements of the Chapter

Following from Chapter 1.6.0, the following minimum requirements are outlined in this Chapter. The research and technology advisor (RTA) must:

  1. Explain to the claimant the review process, the issues and the planned approach to resolve them;
  2. Communicate the options available to the claimant for resolving any of the issues;
  3. Give the claimant information on the Canada Revenue Agency (CRA) requirements, including documentation requirements, and explain what information the CRA needs to satisfy the requirements;
  4. Give claimants the opportunity to present their position, ask questions, express their concerns and to provide further information with respect to their position;
  5. Consider additional information provided in support of the claimant’s position before coming to a decision;
  6. Make decisions that are fair and impartial and respect current legislation and policy;
  7. Document key activities and observations concerning the claim, supporting information and the identified claim issues;
  8. Document communications and meetings with the claimant, managers, co-workers and others that are relevant to the decisions;
  9. Obtain any documentation from claimant necessary to support the decisions;
  10. Not:
    1. Negotiate eligibility or expenditures; or
    2. Investigate fraud.
  11. Consult the research and technology manager (RTM):
    1. If a claim will be disallowed for lack of information;
    2. If a claim will be disallowed without an on-site visit;
    3. If penalties may apply;
    4. If fraud is suspected;
    5. If formal better books and records letters are needed
    6. If waivers are contemplated; and
    7. In difficult or problem situations.

5.3.0 Adjustment of the Scope of the Review

The RTA can, based on information obtained during the review, add, remove or modify review issues that were identified during the initial planning stage. This is because, as the review progresses, the assessment of risk and hence the scope of the review, could change as some issues are resolved and others arise. Whenever the actual or contemplated work differs substantially from the Review Plan, the claimant should be told and it is recommended that this be communicated to the RTM as well as to the financial reviewer (FR), particularly if it has a financial impact. The RTA can decide if the change is significant enough that this communication should take place before the work begins. The RTA should document significant changes to the scope of the review (that is, with a T2020 entry or preferably in the Review Report or in a revised plan). This applies during the desk review, and subsequently, during the on-site visit (when required).

In fact adjusting the scope of the review is a good review practice. The RTA should evaluate the risk with respect to each issue as well as to the entire claim. In this respect, the following points are noted:

  • All review work is to be designed to lower the risk associated with an identified issue;
  • If the risk is lower, the priority to review the issue is lower;
  • If the issue that was identified can be resolved or no longer exists (work done by the RTA has indicated that the issue is not relevant), document this and the reasons for the decision; and
  • If one of the issues identified as low risk now appears to be of higher risk or if new issues become apparent, based on what was seen or discussed, these new issues can be reviewed in more detail.

Working With Claimants
Helping Claimants Avoid Common Review Problems

An effective way to work with claimants is to anticipate common problems that are either typical of first time claimants or are often encountered in the claimant’s industry. Some examples are:

  • New claimants may not understand the terminology employed by the CRA, such as eligibility criteria. To avoid making the interview confusing for the claimant, explain how the business project may differ from the Scientific Research and Experimental Development (SR&ED) project and question the claimant in a manner that allows them to first discuss their project (that is, the context in which the SR&ED fits) and to focus on the scientific or technological aspects of a project.
  • Explain eligibility in layman’s language and emphasize how focussing on the facts and the work done can provide insights as to how the work fulfilled the eligibility criteria and the requirements of the SR&ED Program.
  • Be aware that many claimants, particularly first time claimants unfamiliar with the process, can be easily intimidated by communications from the CRA.
  • Be aware that industries have their own definitions for things such as pilot plants and prototypes. Take some time at the beginning of each review involving issues in these areas to discuss the differences.
  • Be aware that shop floor work is often not well documented, which could make it very difficult to determine if SR&ED was done. Refer to the blue box “Working With Claimants – Helping them Understand Documentation Requirements” in Chapter 5.12.0 for more details.
  • At some point during the interview or discussion of the results of the review, the RTA should spend time addressing the shortcomings, if any, of the claimant’s project information submitted with the claim in Part 2 of Form T661. Typical problems include:
    • Descriptions that focus on the business project rather than the SR&ED project;
    • Descriptions that make it difficult to quantify how much SR&ED work was done in a particular project;
    • Descriptions that emphasize the accomplishments rather than the process (the scientific method);
    • Descriptions that are poor or inaccurate; and
    • Claimants send the same description in subsequent years without an update.

While the RTA makes a reasonable attempt to seek clarification and work with the claimant to help guide them to properly describe and document their work, the onus is still on the claimant to demonstrate that their work meets the requirements for SR&ED.

5.4.0 Communication with the Claimant

5.4.1 Information Requests

There are five key principles that an RTA should consider when evaluating the need to request information from a claimant:

  • Legislative Authorities: The legislation provides a CRA official with the fundamental legal powers required to obtain the information needed to do their work. For the RTA the most relevant legislation is in the Income Tax Act (ITA) in section 231.1 (requesting information) and subsection 230(1) (keeping records and books);
  • Intent: The scope of a review may expand or diminish depending on what facts are determined and what information is provided during the review process. The authority to expand a review as necessary has been confirmed by the Courts (David Ludmer, Brian Ludmer, Cindy Ludmer and Ludco Enterprises Ltd. v. Minister of National Revenue (MNR) (93 DTC 1351 at 1423). The RTA should communicate their intent to the claimant when requesting information. As an example, when requesting information from third parties, the claimant should be informed. The CRA Audit Manual Chapter 10.6 discusses requests for information from third parties. All these communications should be documented in the file;
  • Relevance: It has to be clear to the RTA conducting a review that the information sought may be relevant to the review being conducted. The determination of what may be relevant is a matter for the RTA to decide based on the scope of the review being conducted. The relevance of documents requested by the RTA can often be difficult to determine until the RTA has had an opportunity to review them, and the Courts have recognized this (The Queen v. McKinley Transport Ltd. (90 DTC 6243), AGT Ltd. v. Canada (97 DTC 5189));
  • Transparency: How a review progresses can depend on the transparency of the review. Clear and open communication is beneficial to the compliance process. The sooner in the review process that the RTA can identify to the claimant the issue being reviewed the better. This provides transparency to the process and gives the RTA a good reason to expect timely production of relevant information and documents; and
  • Impartiality: RTAs should be objective when reviewing any information or documentation obtained during a review. They should not be influenced by any subjective analyses, comments or decisions in the information or documentation reviewed. The eventual resolution of the issue will be determined and supported by the facts of the situation and in accordance with the legislation.

Regardless of the nature of the information requests, the RTA coordinates them with the FR as described in Chapter 3.

Details of all communications with the claimant are recorded on form T2020 or equivalent working paper. This would include location, time, date, parties involved and details of what was said. This documentation is placed in the TF98 file. Refer to Chapter 2.9.0 for detailed information on the security procedures for communications with the claimant.

5.4.1.1 Request For Information by Phone

As indicated in Chapter 4.7.1, it may be possible to resolve an issue with a phone call to the claimant (or authorized representative). It is important to plan the initial contact with the claimant or their representative, in order to ensure the highest degree of co-operation and to obtain as much useful information as possible. It is also important to avoid multiple requests or calls. In planning the questions for the claimant, they should be clear and specific, and structured in a way that the answers will lead to a resolution of the issue or indicate the kind of additional work needed (such as an on-site visit).

If appropriate, the RTA can explain by phone more about the review process and the Review Plan. However, details will be explained to the claimant in the Initial Claimant Contact Letter, which is referred to in Chapter 5.6.2.2.

If the needed information cannot be obtained during the phone call, the RTA should send a follow-up letter as a record and as a reminder to the claimant (refer to the next section). Alternatively, the claimant may request a second call to respond to questions once they have had a chance to consider the questions.

During the discussion, the claimant might ask the RTA their opinion about matters such as whether the work is eligible or not, or when they might receive the tax credits. While the RTA may be able to explain to the claimant whether they have any concerns with the eligibility of certain activities or projects, generally the RTA can only indicate that, at this point, in the review complete answers to these types of questions cannot be provided. However, the RTA can provide general information about the review process, review time frames and the reason for the information request. If the information provided by the claimant is insufficient to make a decision, the RTA can indicate to the claimant that a site visit will be necessary.

Working with Claimants
Considerations when requesting information

The following points are considerations that are important when dealing with all claimants, but particularly with a First-time Claimant:

  • Explain the SR&ED Program review process, the various services that are available and the Dispute Resolution Policy;
  • Ask them if they have any questions or require assistance with understanding the SR&ED Program. This assistance can be provided during an on-site visit;
  • Explain the relevance of the requested information, such as why the information is needed with respect to either the eligibility of the project or the scope of the eligible work, or planning the review;
  • Be transparent and clear on issues identified that require resolutions in the review; and
  • Be specific and relate the requested information to issues identified.
5.4.1.2 Request for Information by Letter

In cases where clarification or specific or detailed information is required, a Request for Information (RFI) letter is sent to the claimant. All letters sent to the claimant are sent using standard CRA procedures, via the CRA mailroom, so that the mailing can be tracked. The letter serves as an official record and a reminder to the claimant. An RFI letter may be necessary after a discussion with the claimant following an on-site visit where additional information is needed. Questions should relate to specific issues raised in the Review Plan. The RTA should avoid general questions, and only request information that is needed. This enables the claimant to provide concise clarification quickly and makes the review process more efficient. If appropriate, this letter can also include details from the Initial Claimant Contact letter of Chapter 5.6.2.2. The letter asks the claimant to provide the information by a specific date (normally 30 days from the date of the letter). The request should be as specific as possible so that the claimant understands what is required. A good practice is to follow up with the claimant if no response is received by the due date.

If the response to the letter is unclear or incomplete, the RTA then contacts the claimant to explain what is outstanding and can provide a specific time frame of 15 additional days to provide it. An unworkable response (for example, an unorganized or excessive amount of material that does not directly respond to the RTA’s questions) is treated as an incomplete response. As noted elsewhere, the RTA should document why the response is unworkable and advise the claimant of this. If the claimant requests more time, extra time (15 days) can be allowed to supply the requested information. Additional extensions beyond 15 days should be given only if the time is reasonable, the claimant has a good reason, and if approved by the RTM.

If efforts to contact the claimant are unsuccessful, or no response is received by the requested deadlines, refer to Chapter 5.11.0. As noted in Chapter 6, a copy of all letters must be kept in the TF98 file, and the RTA must document all conversations with the claimant or their representative on a T2020 or similar document. In accordance with Directive 2003-03 Use of Delay Codes on AIMS, a delay code may be added to the file when an information request is sent to the claimant. Refer to Chapter 2.12.0 for more information on delay codes. An example of an RFI Letter is provided in Appendix 1.

5.5.0 Review Without an On-Site Visit

Under certain circumstances, implementation of the Review Plan and the steps needed to gather information from the claimant may be carried out without a site visit. Whether a detailed site-visit review or detailed desk review is chosen is a decision based on numerous considerations, including consultation with the RTM. These considerations include, but are not limited to, those outlined in Chapters 4.7.1 and 4.7.2.

5.5.1 Disallowing Work without an On-site Visit

If a review decision concerning an issue is made that does not favour the claimant, an on-site visit is usually necessary in order to give the claimant adequate opportunity to present their case. However, there are a limited number of circumstances where it may be possible to make decisions that are not in the claimant’s favour without an on-site visit. If this is the case, the claimant should agree to the process, preferably in writing. Remember that it should be clear to the claimant that at this point they are not agreeing to the result of the review, but only as to how the review is conducted. This requires the approval of the RTM, and the decision with the rationale along with the claimant’s concurrence must be documented and kept in the TF98 file. Some examples are:

  • An on-site visit for the same claimant had already been made during the review of the prior year’s claim, and the same or a similar issue had already been discussed on-site for the prior year, the claimant agrees, and there is nothing more for the RTA to see or discuss about this issue;
  • The same or a similar issue was not resolved in the claimant’s favour in a prior year, and the issue is now under objection. If the claimant agrees, the current file could be processed on the same basis as the prior year, in order to close it on a timely basis. It is understood by both parties that an objection will be filed and both years will ultimately be resolved at the same time;
  • The basis of the issue is a question of policy or legislative interpretation, and both parties need to wait for a third party to assess the issue. Similar to the above situation, the file could be processed solely as a convenience for the claimant so that that they may immediately receive tax credits for the undisputed issues, where it is understood that an objection will be filed for the disputed issues;
  • A site visit is physically impossible, or is unnecessary because there is nothing additional to see on-site (refer to Special Situations and Alternative Review Approaches in Chapter 5.7.0 and Appendix 8);
  • The claim appears not to be SR&ED (for example, it describes work that is specifically not included in the definition of SR&ED as provided in paragraphs (e) to (k) of subsection 248(1)), the claimant agrees and there is nothing the claimant can show the RTA on-site;
  • Requested information is not provided or the claimant (or their representative) refuses to meet with the RTA (refer to Chapter 5.12.0, No or Inadequate Supporting Evidence); and
  • Additional work is claimed after the 18-month deadline.

Even if work is disallowed without an on-site visit, the claimant still has an opportunity to respond in the usual way when the Proposal Letter is sent. Depending on the response, an on-site visit may still be required. Refer to Chapter 7.

5.5.2 Concluding the Review without an On-site Visit

When the review can be concluded without an on-site visit (a Desk Review), the next stage is a joint proposal from the RTA and the FR. Refer to Chapter 7 for more details.

5.6.0 Conducting an On-Site Visit

5.6.1 Introduction

The primary purpose of the on-site visit is to work with the claimant in order to resolve the issues identified in the Review Plan. The resolution of these issues enables the RTA, among other things, to determine whether (or how much of) the claimed work meets the requirements of subsection 248(1) of the ITA. Since the findings of the RTA during the on-site visit also help the FR to determine whether or how much of the costs associated with the claimed work are for SR&ED, coordination with the FR is essential. For this reason it is recommended that if a cost breakdown by project / activity has not been provided by the claimant by this point, it should be obtained prior to the on-site visit.

The specific reasons for conducting the on-site visit will vary and will be reflected in the issues identified in the Review Plan. Other issues may emerge during the course of the review. In addition to dealing with issues, the on-site visit provides an opportunity to clarify SR&ED Program policies and address any questions or concerns the claimant may have.

The RTA has a great deal of flexibility in how to conduct an on-site visit. Much depends on the facts of the case, and even more depends on the facts and circumstances that are revealed during the visit. Therefore, the RTA’s judgement is very important.

There are no specific requirements for the number and length of meetings with claimants. They need last only as long as necessary to resolve issues, to obtain or examine all the information needed to make decisions, or until the claimant has, in the opinion of the RTA, nothing further of relevance to add or show to address the issues identified by the RTA or to change the RTA’s decisions. The length and number of meetings do not demonstrate due process; the content of the meetings is the only relevant concern. If at any time the RTA is satisfied that the issues can be resolved in the claimant’s favour (for example, the work is SR&ED and there are no associated financial issues of concern), then the visit can be concluded early without necessarily following all of the steps of the Review Plan.

On the other hand, the RTA can expand or modify the scope of the review as new information becomes available. In either case, the claimant should be informed when the actual review steps will differ from the planned review.

The following is a brief overview of the usual major review elements for the RTA during the on-site visit as the RTA resolves issues identified in the Review Plan:

  • If required, explain and discuss with the claimant the SR&ED review process, purpose, the claimant’s options if there are concerns, responsibilities, and timelines for information requests;
  • If required, give to or discuss with the claimant the document in Appendix 11 (Mutual Expectations between the claimant and the RTA);
  • Explain the SR&ED program if required (such as for a first-time claimant or first visit to a claimant);
  • Tour the claimant’s premises to become familiar with the work and capabilities of the claimant, make observations of the work performed, and explain the SR&ED requirements with reference to the type of work done by the claimant;
  • Conduct interviews with those supervising and performing the claimed work, typically at the claimant’s manufacturing or business premises, in order to resolve the issues identified in the Review Plan;
  • Review documents, records and supporting evidence related to the claimed work;
  • Request additional information during the meeting, if needed;
  • Obtain copies of any documentation relevant to potentially contentious decisions;
  • Where appropriate, share the initial findings with the claimant in order to create an opportunity for dialogue and to eliminate any misunderstandings; and
  • Outline the progress of the review and the next steps that are required.

Working With Claimants
Considerations for the First Time Claimant
During an On-Site Visit

When reviewing a first-time claimant or a claimant that has never had an on-site review before, the RTA should set aside additional time in the on-site visit to give greater consideration in these areas:

  • Make a presentation on the SR&ED program;
  • Explain the SR&ED program and its requirements in detail;
  • Explain the mutual expectations between the claimant and the RTA (Appendix 11);
  • Explain the claimant’s rights and responsibilities;
  • Explain the review process;
  • Explain the avenues available for resolving claimant’s concerns and the Appeals process;
  • Answer any questions on the SR&ED program.

These considerations apply to claimants who are using authorized representatives as well as those who are not. Often, conversations with the claimant prior to the on-site visit will help the RTA determine what to focus on and how much time to set aside.

5.6.2 Making Appointments and Scheduling Meetings
5.6.2.1 Telephone Contact

Initial contact with the claimant (or their authorized representative) would normally be made via telephone. This person would be contacted to set up meetings and to identify the individuals who will be responsible for explaining the SR&ED projects. The RTA documents all conversations with the claimant on a T2020 or similar document that is filed in the TF98 file. Refer to Chapter 5.6.7 for a discussion on documenting conversations.

5.6.2.2 Initial Claimant Contact Letter

Following the telephone contact with the claimant and prior to visiting the claimant, the RTA should send a letter to confirm any details or expectations communicated to the claimant verbally (such as the issues to be resolved and the agenda). The RTA may be speaking to a person who does not have first-hand knowledge of the work done or claims, or someone other than the one they will be meeting with to discuss the work done. If so, it may be helpful to mention that if any of the scientific or engineering people who will be interviewed have any questions, they can call the RTA. The letter can be faxed, if CRA security policies on faxing are followed. One exception to this general rule is noted at the end of this section. The RTA should tell the claimant that this letter will be sent to them and that it is only intended to confirm what has already been discussed.

This letter ensures that the claimant has the opportunity to gather all the information that the RTA requested and make available all the personnel with whom the RTA should discuss the work. It helps to ensure that expectations are understood by the claimant so that there will be no delay or time wasted in conducting the review. It is also a means of ensuring and documenting that the claimant has received this aspect of due process.

The letter should include the following items (unless they are not applicable or not appropriate to the specifics of the review, or if the claimant is experienced and does not need some information):

  • Confirmation of the scheduled date(s) and places of any meetings, or the range of possible times and dates available to the RTA if the exact time(s) has not yet been agreed upon;
  • Purpose of the visit;
  • Names and/or titles of the key SR&ED performers whom the RTA wants to interview (if this information is available);
  • An outline of the meeting plan or agenda, which includes the main steps that will occur during the site visit, including (but not necessarily limited to) an identification of the main issues to be resolved with the associated projects; the general approach to be taken, such as a tour of the premises, an examination of the supporting documentation; and an opportunity to answer any questions about the SR&ED program;
  • Identification of information needed by the RTA, such as samples of any relevant evidence needed to support their claim;
  • Suggested types of supporting evidence that the claimant might have that would be useful towards resolving the identified issues (reference can be made to Appendix 2 of the Guide to Form T661);
  • Basic information about the review process (such as the Claim review process letter and the Guidelines for resolving claimants’ SR&ED concerns);
  • An estimate of the time required to complete the interview or interviews, including the time needed to ask questions of the key SR&ED performers to be interviewed;
  • A statement indicating that the scope of the review might be revised depending on the discussions and the results of the meeting and that the claimant should be prepared to address other issues and discuss other projects if required. Note that if very significant changes occur to the original scope, a second meeting may be required and the claimant may be given additional time to prepare;
  • If required, a request for the claimant to send specific information to the RTA prior to the on-site visit. However, to speed up communications, such information may be requested separately (and earlier) by way of priority or express post, telephone, or other secure means; and
  • A contact number where the RTA can be reached, if any discussions are needed prior to the visit.

A sample Initial Claimant Contact Letter is included in Appendix 2 and can be adapted by the RTA. A letter co-signed with the FR outlining the technical, financial and joint issues is recommended for claims where possible.

If the meeting is scheduled on short notice and there is insufficient time to send out a letter beforehand, the RTA can explain the CRA’s expectations to the claimant over the telephone and document the conversation on a T2020 or similar form. At the meeting, or as soon as possible after, the RTA then gives the claimant any additional information that is still needed.

Prior to the on-site visit, the RTA should confirm that the claimant has put together all requested supporting evidence/information and that all technical and financial personnel that need to be interviewed will be available. If this is not the case, the RTA may need to postpone the visit. If undue delays result, such as multiple meetings being postponed, the RTA should consult the RTM to determine what action to take to complete the review and close the file.

5.6.2.3 Special Considerations for large claims

The initial letter may need more details about the review activities planned at the multiple sites/plants/facilities to be toured and the names and roles of all CRA review team members. RTA may also wish to have the claimant confirm the names and roles of all claimant personnel who will be involved in the review.

5.6.3 Making a Referral and Consulting Others

The RTA may require assistance to complete a review or to resolve issues concerning specific eligibility issues. If the RTA wants to hire an outside consultant or to involve technical experts from the CRA (such as the National Technology Sector Specialist (NTSS)), they must consult and obtain the approval of the RTM. Refer to Chapter 4.7.3.2 for more details.

5.6.4 On-Site Interviews

Interviews conducted by the RTA are intended to:

  • Obtain additional information to help resolve technical or joint financial issues, and
  • Allow the claimant opportunity to present additional information in support of their claim.

The RTA’s questions in the interview help focus it and ensure that nothing of importance is omitted. Ideally, the questions are structured and worded in such a way to help the claimants better understand the issues and help to resolve the issues. The nature of the questions posed will allow the claimant to explain the objectives, challenges, plans and work details of the claimed SR&ED work, ideally beginning from the identification of the scientific or technological objectives down to specific work elements. Subsequent or follow-up questions could then progressively address details at the product, design, technical and project levels, and any joint technical-financial issues. The answer to any given question may lead to other questions or approaches or eliminate other possible questions. The interview process needs flexibility to add new elements or remove the original planned elements as information is uncovered. There is no set length of time for an interview; the interview continues until the RTA has all the information that they need or until the claimant has provided all the information they can.

This makes it especially important that the RTA contact the claimant prior to the on-site visit to ensure that they are prepared, that is, that the people most familiar with the work done and documentation are available and that the issues are understood.

The RTA should encourage the claimant to speak in the technical language that they are familiar with and comfortable in using, while advising them that clarification may be needed from time to time for greater understanding.

The RTA should begin the interview by asking how the claim was put together, including how SR&ED was distinguished from non-SR&ED. The on-site interview generally provides an opportunity to meet with employees who were involved in the claimed SR&ED work. It is further recommended that the RTA indicate prior to or during the meeting if they wish to speak to those who were directly involved in that work and can speak about it based on their actual experience. This could better establish the nature and extent of their involvement in the work if this is an issue or if there are concerns about whether the work was SR&ED. The people who did the work claimed can often provide the facts necessary to establish whether the work met the eligibility criteria.

If the RTA is planning to interview all of the employees directly involved in the project, the claimant should know this prior to the visit, usually in the initial contact letter, to give them time to schedule the interviews (refer to Chapter 5.6.2.2). Remember that time spent by employees away from their regular duties is a cost to the claimant, and that scheduling may also be an issue. In the interest of time, the RTA could interview the project leaders first and then interview individual employees only as needed. By working together, the claimant and the RTA should be able to identify the best people to interview. However, the RTA can decide who they want to interview without the approval of the claimant.

The following is typical information to obtain from either the employee, or the person directly responsible for the employee:

  • The usual or normal responsibilities of the position occupied by the employee (who was claimed as a directly engaged employee);
  • Leadership role(s), if any, of the employee with respect to the project in question;
  • Partners or co-workers with whom the employee worked on the project under review, and their role(s);
  • Time frame(s) and work schedule for the employee’s participation in the claimed work;
  • Nature of the work they performed, in detail; and
  • Technological problems or issues they had.

Ideally, the information necessary to resolve the issues identified in the Review Plan will be obtained during the on-site interviews. Before concluding the interviews, RTAs should allow themselves some time to examine the information obtained, and assess whether or not sufficient information has been obtained. Possible items to consider during this quick examination are listed in Appendix 9. Following this break and review, the RTA can either continue with additional questions or conclude.

The RTA should inform the claimant of any outstanding concerns, main findings and observations prior to concluding the visit, even though final decisions have not been made. Refer to Chapter 5.6.9 for more details. The claimant should also be given an indication of when they can expect the proposal.

In the CRA offices, following the on-site visit, the RTA analyses all of the information and makes determinations that will either be communicated to the claimant via a joint science-financial proposal or draft report. See Chapter 7 for more details. Either possibility allows the claimant to make additional representation.

Working With Claimants
Involving the Claimant during the On-Site Review

It is important for both the RTA and claimant to use time wisely during the on-site review. Most claimants understand the importance of reviews for the integrity of our self-assessment approach to tax administration. However, that understanding can be tested if a review is poorly organized, coordinated or executed.

The Review Plan can be used to ensure that reviews are well-organized, coordinated and completed on a timely basis. By working from the plan, the RTA can explain the issues to the claimant, the proposed approach (such as the interview, review of evidence/documentation) for resolving issues, and the logical relationship of related issues, in order to:

  • Identify what should be emphasized during the premises tour;
  • Identify who would best be able to address the issues that the RTA has identified;
  • Identify what kind of evidence or documentation the RTA has looked to in previous reviews to support claims; and
  • Determine the order in which the issues/projects will be dealt with according to the RTA’s understanding of any interdependencies.

By reinforcing the logical nature of the Review Plan, claimants will more naturally understand the overall goal of the review and each of the steps. This does not mean that the RTA is obliged to seek approval for changes, or to change their plan according to the wishes of the claimant. It simply emphasizes that there are potential benefits to realize by ensuring that claimants understand what the RTA is doing and why.

5.6.5 Tour of the Claimant’s Premises

In many cases it is beneficial that the on-site visit includes a tour of the claimant’s premises, where projects selected for the review were performed, and of other possible locations on the premises that might pertain to these projects (for example, commercial production line). This tour is often helpful towards understanding, in concrete terms, the technical and cost-related aspects of the claimant’s business and claim. If the FR is also at the meeting, the tour may be beneficial for them or could help avoid duplication of questions.

However, in some cases there is no benefit to a tour, such as if there is no plant or lab, or if the work is purely analysis. There is no requirement for a tour to satisfy due process requirements if there is no information to be gained from it. The RTA uses their judgement in these matters.

Plant tours can expose RTAs to hazards, hence, they should take all the necessary precautions to ensure their own safety throughout the plant visit. Refer to Chapter 2.10.0.

In certain cases, the SR&ED claim will relate to a manufacturing process of the claimant. It is important to understand the linkage between the process and the SR&ED work claimed. The claimant may need to explain and document the unit operations or steps in the manufacturing process to the RTA, as well as to identify the technical issues and challenges they faced at different steps.

The tour of the premises provides an excellent opportunity to visualize and contextualize the claimed SR&ED work in the claimant’s commercial environment. Many questions intended for the interview, and additional ones that naturally arise based on what the claimant says and shows, may be asked at this time. Specific items that could be covered during the on-site tour include:

  • Capital Equipment claimed as All or Substantially All (ASA) for SR&ED: During the tour, the RTA should request to see equipment claimed as ASA;
  • Capital Equipment claimed as Shared-Use Equipment (SUE): Similarly, the RTA should request to see equipment and use logs if any is claimed as SUE;
  • Materials Consumed: Often, equipment or materials used in the SR&ED process will be relegated to the claimant’s scrap yard. Scrap can be supporting evidence and provide an indication of the technical work done and the challenges that were encountered. Clues as to the technological problems and work done associated with the claimed SR&ED may be evident (such as breakage, excessive wear, remnants of special-purpose instrumentation). Notes of such observations during the premises tour should be made. This is especially important if the claimant has little written documentation. While the “scrap yard” can help to indicate what was done, it is of less value in determining when it was done;
  • Prototypes, Pilot Plants, and Custom Products: The RTA should obtain information about any equipment that was claimed as a prototype, pilot plant or custom product. Refer to AP 04-03 – Prototypes, Pilot Plants/Commercial Plants, Custom Products and Commercial Assets; and
  • Other specific requests made by the FR: This could include such items as identifying areas that may be allocated to SR&ED and employees claimed under proxy.
5.6.6 Claimant’s Supporting Evidence

It is essential that claimants have supporting evidence for their claim. In addition to 116736 Ontario Limited, discussed in section 5.6.6.1, some other summaries of key court decisions that emphasize and support this requirement include the following:

1. Sass Manufacturing – Tax Court of Canada – 88 DTC 1363

Systematic investigation connotes the existence of controlled experiments and of highly accurate measurements and involves the testing of theories against empirical evidence. Scientific research means the enterprise of explaining and prediction and the gaining knowledge of whatever the subject-matter of the hypothesis is. This includes repeatable experiments in which the steps, the various changes made and the results are carefully noted. The taxpayer was unable to provide overall descriptions or drawings for the project. There was no evidence of any hypothesis for research, and there were no test reports. The taxpayer must adduce cogent evidence of a systematic investigation or search, and the evidence fell far short of doing so.

2. Northwest Hydraulics – Tax Court of Canada – 98 DTC 1839

Although the Income Tax Act and the Regulations do not say so explicitly, it seems self-evident that a detailed record of the hypotheses, tests and results be kept, and that it be kept as the work progresses.

3. C.W. Agencies – Tax Court of Canada 2000DTC 2372

An odd feature of this case is that virtually all of the evidence relating to the detail of what was in fact done by the Appellant in the course of designing and writing the software was given, not by a person directly and personally involved in the process, but rather by the Appellant’s expert, Dr. Slonim. As I appreciate the evidence, Dr. Slonim was compelled by the absence of a detailed project management plan to examine the results of the Appellant’s work, next to examine the tools and technology used by the Appellant and, finally, to arrive at conclusions regarding the problems which he thought must have been faced by the Appellant and the steps taken to solve those problems. I note that the failure to call the project manager or some similarly placed person was never explained by counsel for the Appellant. In deciding what must in point of fact have happened, based on conjecture with regard to “the numerous uncertainties in this project”, Dr. Slonim arrived at conclusions which in my view were not justified by the evidence.

4. Les Développements de Systèmes Spécialisés M.T.P.C. Inc. – Tax Court of Canada 99 DTC 826

It is my opinion that there has been no proof of any systematic search, as required by subsection 2900(1) of the Regulations, in respect of the activities involved in this appeal.

As noted by the Minister’s scientific advisor at the appeal level, some of whose comments are set out in paragraph 10 of these reasons, in this case there was no formulation of hypotheses nor was there documentation describing studies or tests. The appellant’s documents describe a programming project that encountered problems, but they do not describe a systematic investigation or search carried out in a field of science or technology by means of experiment or analysis. The projects were business projects and not SR&ED projects.

During the on-site visit, if it is relevant to resolving the review issues, the RTA reviews the supporting evidence and can obtain copies or duplicates of key documentation pertaining to the claim. The RTA has the right under section 231.5(2) of the ITA to require claimants to make copies of documents for their retention or allow the RTA to make copies, and these copies, when certified by the RTA, have the same value as the original. If the claimant cannot or will not make copies, the RTA can borrow the documents and make copies off-site. Refer to Appendix 12 for a discussion of the procedures for borrowed records. Refer to Chapter 5.11.0 if the claimant refuses to allow copies to be made or documents to be borrowed.

Section 10.5.4 of the Audit manual says the following about making copies:

The following procedures apply when making photocopies:

  • Photocopies must be certified on the back as true copies. There should be a statement as to where the document came from, who copied it and that the copy was compared to the original. For more information see 10.11.8 Referrals to Investigations.
  • Documents must be complete. Copies of a part of an agreement, regardless of how long or how meaningless the omitted portion, cannot be presented in court since they do not represent the agreement in whole.
  • Photocopies should have the auditor’s initials on the bottom corner of the document. Ideally, the initials should appear on each page of the document. If the document is quite lengthy, the first and last page can be initialled with a notation on the back indicating the number of pages, e.g. “page 1 of 27”.

The auditor must provide an accurate description of the evidence and indicate where it can be found if it is not practical or possible to obtain certified copies of the relevant documents.”

It is important that the source document be properly identified, which can usually be done by copying its title page. Evidence is anything that substantiates that SR&ED work was performed. It is important that RTAs be aware that evidence can take many forms. Appendix 2 of the T4088- Guide to Form T661 describes in detail how the claimant may support their claim by providing evidence that was generated as the SR&ED was being carried out. Examples of supporting evidence that may be presented to and used by the RTA include, but are not limited to:

  • Project planning documents;
  • Records of resources allocated to the project, time sheets;
  • Experimental design records;
  • Design documents, CAD and technical drawings;
  • Project records, laboratory notebooks;
  • Design, system architecture, and source code (software development);
  • Records of trial runs;
  • Project progress reports;
  • Minutes of project meetings;
  • Test protocols, test data, test results;
  • Internal emails concerning the work;
  • Analysis of test results, conclusions;
  • Final project report or professional publications;
  • Photographs and videos;
  • Prototypes, samples;
  • Scrap, scrap records;
  • Contracts; and
  • Invoices.

The supporting evidence reviewed and the documents obtained from the claimant are vital parts of the review process that will be used to bring resolution to the identified issues. This information will also form part of the overall record that will be included in the TF98 file to support the RTA’s decisions, and may be used later if the claimant challenges the CRA by way of Notice of Objection (NOO) or in the Tax Court. TF98 files are sometimes reviewed by other government parties such as the Auditor General, Quality Assurance, Appeals or Internal Audit/Quality Review. The RTA should document all supporting evidence seen as well as their findings and observations concerning it; the importance of this cannot be overemphasized, particularly when the RTA bases decisions on this evidence. Retained evidence (such as copies or duplicate material presented by the claimant), is kept in the TF98 file. Refer to Documenting the Review Process in Chapter 6.

Although evidence may be presented by the claimant, it is up to the RTA to determine the significance or importance of it. As noted in Appendix 2 of the T4088- Guide to Form T661, contemporaneous evidence, that is, documents created at the time the work was done, and produced as a result of performing such work, is the best kind of evidence.

It is particularly important that copies of supporting evidence be made if an adjustment is anticipated or if the information supports a decision that is not in favour of the claimant. The RTA has the discretion to use their judgement about what should be copied or not. In some cases it may be sufficient for the RTA to simply examine the supporting evidence on site and make notes about what was seen.

In many cases the relevance of information in the claimant’s supporting evidence may not be immediately clear. Therefore, the context and significance of that information should be documented in the RTA’s working papers. For example, the importance of photocopies of isolated pages from a laboratory notebook may rest with the recorded dates on those pages that can be used to establish the time frame of claimed SR&ED work. Collectively, supporting evidence referred to or contained in the TF98 file can verify items like the following:

  • The eligibility of claimed work (that is, whether the work meets the definition of SR&ED in subsection 248(1) of the ITA);
  • The work that was actually done;
  • Start date and actual or expected completion date of each project;
  • The personnel directly engaged in the claimed SR&ED work and the number of hours each person was engaged;
  • Details of contract agreement(s) between the claimant and contractor(s) who performed SR&ED or SR&ED support work;
  • Details of any direct financial contributions to a Third Party SR&ED Approved Institution;
  • Details of partnership agreements between the claimant and other co-claimants in jointly submitted claims shared by a research consortium or collaborative research agreement;
  • Details of how equipment was used for SR&ED; and
  • Details of materials consumed or transformed in SR&ED.

When a claimant does not maintain adequate evidence to support the claim, the RTA should inform the claimant that the supporting evidence is inadequate and that they need to correct the deficiencies for future claims. Refer to Chapter 5.12.3 for a discussion of this procedure.

The same principle applies if the claimant has promised information but does not provide it all, or has prevented access to needed personnel or equipment. Assuming that the RTA’s requests are clear, the RTA is not obligated to make repeated visits because of the claimant’s omissions. It is recognized that misunderstandings and unexpected events such as illness can occur, but if the claimant has a doubtful or no satisfactory explanation for their failure to provide information, and the behaviour is repeated, the RTA can conclude the review and base their decisions on the available information. Refer to Chapter 5.11.0 for a discussion of this procedure.

In some situations, while there may be supporting evidence that some SR&ED was done, there is no means of demonstrating exactly how much of the claimed work was SR&ED. This is particularly true if the claimant does possible SR&ED concurrently with excluded work such as commercial production. The RTA must never negotiate with the claimant to resolve this situation by determining eligibility on anything other than scientific or technological considerations. One possible solution is that the RTA can identify what they think may be SR&ED based on the evidence provided, and ask the claimant to reasonably quantify that work. The RTA can accept this quantification if it is consistent with all the available supporting evidence. It is important that the RTA inform the claimant that this procedure cannot be repeated in the future and that adequate evidence must be maintained for future claims.

One important point with respect to supporting evidence is that the RTA should be careful not to give claimants the expectation that providing supporting evidence will mean that their claimed work will be considered SR&ED. Substantiation of the work is not always the issue. Substantiation will not help a claimant if their work is not SR&ED. It is quite possible for work to be well substantiated, in the sense that there is no doubt about what work was done, but the work done was not for SR&ED.

5.6.6.1 Interviews with Claimants

The CRA recognizes that, particularly among small companies, it is not always easy to maintain documentation. That is why the Guide to Form T661, Appendix 2, gives many examples of evidence that can support the SR&ED work claimed and can be used to ensure that claimants maintain adequate support for their SR&ED. This table indicates that paper documentation is not the only sort of evidence that can support an SR&ED claim.

The RTA, during the review of the SR&ED claim, works with the claimant by examining the evidence/documentation they have produced to determine its significance in supporting the SR&ED claim.

However, the RTA doesn’t just look at the physical evidence provided, but also interviews personnel who did the claimed SR&ED work to obtain information about what was done and to help establish the claimant’s business context. During a review, oral explanations provided by the claimant and other types of evidence are considered by the CRA and, when documentation is incomplete, may be very useful in helping the RTA make a decision regarding the eligibility of the work or other more specific issues such as the project start date.

That does not mean that interviews alone should be used to determine that SR&ED was done or that the statements made in the interview should be the only basis on which determinations are made. It simply means that information provided should be considered along with the other evidence that the claimant provides. An example of how the courts treated oral evidence is given in the case of 116736 Ontario Ltd. (references 96-2484-IT and 96-4372-IT). In this case, the claimant was unable to provide documentation as it was destroyed in a fire. This extract from the case highlights the judge’s reasoning:

However, I would add that it is not without hesitation that I come to this conclusion. It is surprising that the Appellant was not in a position to show to the Minister’s representative in the course of his audit the prototypes that had been built at the time of that audit. However, on the balance of probabilities, I am inclined to believe Mr. Nelson when he says that research and development (R&D) activities took place during the relevant period. The fact that he is an inventor and the fact that he was involved in projects of an R&D nature which resulted in the creation of new technologies that are being commercially marketed give the Appellant more credibility. However, just because he actually carried out R&D activities on behalf of one company it does not necessarily follow that he did so on behalf of the Appellant. As mentioned before, it boils down to a question of credibility. Having reviewed the April and the February Reports providing a detailed description of the work done during the relevant period and having heard Mr. Nelson’s oral testimony, I find that those activities constituted R&D. I observed Mr. Nelson during his testimony and he came across as an honest and credible witness.

Often only parts of this court case are cited. However, it is important to consider all of the key points made in this judgement as well as those in the Guide to Supporting the Technical Aspects of an SR&ED Claim. Some of the key points from this case are:

  • The judge said that it was not without hesitation that he accepted oral testimony. There were extenuating circumstances, specifically the fire;
  • The credibility of the person giving the testimony was critical;
  • There were other facts that gave credibility to the witness, specifically the past history of the witness and some documents;
  • The evidence was presented by the person who did the work;
  • In the judge’s view, “contemporary reports showing detailed records of each experiment attempted by a researcher could constitute evidence of a systematic investigation”, and
  • “Any taxpayer attempting to convince the Minister that he is entitled to deduct R&D expenditures without such evidence puts himself in a very precarious position.”

The RTA is not obligated to make a determination of eligibility solely on the basis of oral statements from the claimant. The RTA should also consider that:

  • oral statements are not a substitute for the claimant keeping adequate documentation or other evidence. The ITA requires that taxpayers keep books and records. SR&ED claimants are given further advice in the T4088, Guide to Form T661 and the Guide noted above;
  • only the person(s) who actually performed or saw the work can provide credible oral statements about what was done;
  • there should be other facts or circumstances that are consistent with the oral statements. Examples of supporting facts or circumstances include the background or experience of the person doing the work, and other documentation, which corroborates some of the facts claimed; and
  • there may be extenuating circumstances concerning the lack of supporting evidence, such as the fire in this case

To ensure that oral information is documented accurately, and that there is no misunderstanding about what was said, the RTA may wish to read the key information back to the claimant or have the claimant provide a signed statement.

5.6.7 Interview Notes

The comments here also apply generally to all oral communications, whether with claimants or others. Interview notes are vital parts of the working papers that the RTA will use to form decisions or to resolve the previously identified review issues. Notes taken by the RTA form part of the documentation that will be included in the TF98 file, and may be used at a later date to examine the file or re-evaluate the claim by such groups like the Appeals Division, the Tax Court of Canada or Quality Assurance. The importance of interview notes is well established in CRA audit practice and jurisprudence. There is no required format for the notes. Regardless of the medium employed, the rough notes of interviews should be identified, dated, initialled and kept in the TF98 file, available, if necessary, for reference or introduction in court. It is very important for potential court use that the notes cover the entire interview and not just selected portions, regardless of whether the content seems relevant to the review at the time. Therefore:

  • The interview notes should identify the project, work, or issue discussed, and the date(s), time(s), location(s) and names of all persons present during the review meetings;
  • The notes should record the names of personnel interviewed and those responsible for providing key information. In a group meeting or discussion, they would need to identify which party made the statement. This is important in case any follow-up inquiries are necessary to complete the review, to conduct a second review, or to examine the review process itself in the context of a dispute resolution, NOO or an appeal to the Tax Court of Canada;
  • As the interview notes will be in the TF98 file, the notes should be factual, reflecting what was said during the interview and what was seen. They should not contain any irrelevant personal opinions, assumptions or personal comments about any individuals associated with the claim, nor any criticism of the claimant’s business decisions or the quality of their work. This does not preclude a style of taking notes where the RTA notes their thoughts or questions that arise during the interview, for possible later discussion, as these are relevant to the review process;
  • The interview notes should reflect, as closely as possible, what the claimant said about their work and the SR&ED claim, not an interpretation of what the claimant meant;
  • The interview notes should have sufficient detail to indicate how the RTA’s questions were answered, and if anything obtained during the interview is relied upon in coming to the RTA’s decisions, this information must be reflected in the interview notes. Otherwise the RTA’s decisions might not be defensible;
  • It is understood that it is impossible for the RTA to write down every word said during an interview or conversation, nor is it expected. However, the more detailed the notes the more useful they will be if the issue is contentious. The RTA should try to record as much detail as possible, to summarize what was discussed and support the determinations made. This will depend upon the RTA’s note-taking abilities, how much is said and how quickly it is spoken;
  • If there is a lot of important detail discussed, the RTA may need to slow down the conversation in order to have sufficient time to record details. If necessary the RTA may need to pause and read back what was written in order to make sure that their understanding was correct;
  • It may be difficult or even impossible to take detailed notes during the interview process, especially during the actual site tour. If the RTA can only take sketch or rough notes during the actual interview, then as soon as possible the sketch notes need to be expanded based on the RTA’s recollections, and both the sketch notes and expanded ones are to be included in the TF98 file. Such notes should be explained and include the time and date that they were expanded. Another option is to write down the main points as soon as possible (for example, before driving off the premises) and expand them as soon as possible thereafter;
  • In cases when another CRA employee or consultant is present during the site visit or conversation with the claimant, any notes that person takes should also be included in the TF98 file as part of the overall record; and
  • Usually, the FR’s notes are kept in their own files. However, when relevant, the RTA should keep copies of these notes in the TF98 file.
5.6.8 Additional Information Requests

During the on-site visit, the RTA may realize that additional information is required that was not specifically requested. It is recommended that these additional requests be made verbally, and if the claimant cannot provide it at the time, then ask the claimant when it will be sent. If the information is not provided when indicated, then a follow-up request should be made in writing following the procedure of Chapter 5.4.1. An alternative method is to prepare a written request at the claimant’s premises, similar to that of the audit query sheet (Form T997), and give it to the claimant prior to leaving. The RTA should sign and date this document and make a copy. This form is in Appendix 13. The RTA may need to schedule additional meetings to review the information requested.

5.6.9 Communicating Decisions to the Claimant

RTAs cannot always make decisions regarding the issues until they have had a chance to review the interview notes, together with the original claim submission and any supporting evidence viewed or obtained during the on-site visit, as well as discuss them with the financial reviewer. However, when possible, it is preferable if the RTA can provide the claimant with a preliminary verbal indication of their decisions, while making it clear that further review and consultation may be needed, that the claimant will have the opportunity to address any concerns, and that the FR will still need to review the expenditures before the review is completed.

If there are gaps in the claimant’s information, the RTA may still be able to give preliminary decisions based on the information as presented by the claimant. It is important that the RTA avoid giving the impression that there are no problems or issues when there are some. When the RTA can indicate their preliminary decision at the claimant’ premises, the claimant may have a better opportunity to present their case while equipment and personnel are more readily available. Where possible, the RTA can invite the claimant to bring forward any further representation or information that might address these concerns.

However, the RTA is not required to give premature decisions. If the RTA cannot provide a decision at the end of the site visit, then they should at least give the claimant an outline of the next steps and the time frame within which a decision can be expected. The RTA may also remind the claimant that they will have an opportunity to address any concerns that arise because of the detailed analysis, or if anything arises because of the parallel financial review.

During the on-site visit, the claimant may request an additional meeting(s) to discuss the work when the RTA has some serious reservations, outstanding concerns, or if the claimant does not understand any decisions with respect to the claim. The RTA is not required to have any additional meetings unless it is clear that there is more or new information to see, or the RTA does not feel that there was sufficient time to work with the claimant to help them understand SR&ED program requirements or eligibility concerns. The RTA should make clear to the claimant that if there is more information to support the claim, to:

  • present it to the RTA during the meeting; or
  • make a written representation to the RTA.

Alternatively, if the claimant does not understand a decision, the claimant is expected to clearly identify what and why they do not understand so that the subsequent meeting will be productive. Before denying a request for an additional meeting, the RTA should discuss the situation with the RTM to ensure that the claimant has been treated fairly.

In either of the above cases, the RTA will consider the additional information prior to the completion of the review.

Following the meeting, taking into consideration any additional representations from the claimant, the RTA documents the details and decisions in the SR&ED Review Report (refer to Chapter 6.8.0), which is eventually presented to the claimant as part of the Proposal Package. If all the decisions are favourable to the claimant, it is recommended to document them via the Short SR&ED Review Report (refer to Chapter 6.9.1).

Decisions are preferably issued simultaneously by the RTA and the FR in the Proposal Package. However, it is possible to send out a draft SR&ED Review Report prior to the Proposal Package. For example, there may be an unavoidable delay between the completion of the technical and financial review. However, in all cases, the RTA must send the report to the FR before the claimant receives it. The decision to issue a draft report prior to the Proposal Package is at the discretion of the RTA and local management team, but it must be clearly labelled “draft”. However, for the reasons outlined in Chapter 3 the requirement for a coordinated review is better achieved with a joint proposal.

If a draft report is sent prior to the Proposal Package, the claimant should be informed that a draft report followed by a financial proposal is equivalent to a joint proposal where the report and the financial details are sent at the same time. It is important to emphasize that both approaches allow the claimant the same opportunities to make further representations. If a draft report is used, a final report must be issued whether or not any representations or changes are made to the draft.

If the draft report is sent to the claimant prior to the Proposal Package, and the claimant provides a response prior to the Proposal Package, the RTA can respond to it before or after the proposal, depending on the circumstances. For example, it may be possible for the RTA to resolve the technical issues prior to the proposal. However, joint issues could not be addressed until the FR has completed their work.

If the RTA responds to the claimant prior to the proposal, the claimant’s representation and the RTA’s response should be reflected in a revised SR&ED Review Report which would be included in the Proposal Package. Refer to “Proposal Package” in Chapter 7 for details of communicating decisions to claimants. Refer to Chapter 7.6.1 for a discussion of addressing claimant responses to the Proposal Package, or to the draft report.

Even if the RTA cannot give a preliminary decision at the end of the on-site visit, it is still recommended that the RTA indicate their concerns to the claimant and give a preliminary decision to the claimant as soon as possible. By doing so prior to the proposal, whether or not a draft report is sent, it will improve openness and transparency and reduce the potential for the claimant to be surprised.

Working With Claimants
Helping Claimants Understand the RTA’s Decisions

It is often helpful to take some time at the end of the meeting to go over the on-site review in relation to the original objectives that were communicated to the claimant. Communication is the key to ensuring that both parties are satisfied that everything necessary has been done (or will be done) to address the RTA’s concerns. This should involve:

  • An overview of the issues and the steps that were taken to resolve each issue;
  • If possible, a preliminary indication of whether or not the steps taken have satisfied the RTA’s concerns; and if not, to the extent possible;
    • An indication of why the RTA still has a concern;
    • Further discussions on what additional information the RTA may need (or what additional information the claimant possesses); and
    • The next steps in the review process and a time frame.

If there is insufficient time available during the meeting to help a claimant understand a decision, or for the RTA to consider additional information, the RTA should arrange to discuss these by telephone or in a follow-up meeting.

To ensure that these meetings are effective and efficient, the claimant should be asked to identify what needs to be clarified and why.

5.6.10 Dispute Resolution

Disputes that arise during or after the review are handled by following the procedures described in the AP 2000-02R, Guidelines for resolving claimants’ SR&ED concerns. If appropriate, the RTA can briefly describe the contents of this application policy (AP) to the claimant.

Working With Claimants
Resolving claimants’ concerns and avoiding disputes

The AP 2000-02R “Guidelines for resolving claimants’ SR&ED concerns” provides the fundamental procedures for resolving claimants’ concerns in a meaningful and productive manner.

However, resolving potential conflicts and disputes involves much more than following a procedure. It requires communication of the RTA’s desire for achieving a common understanding, respect for the claimant’s concerns and the patience to listen to concerns and reduce frustration. It also requires a similar commitment from the claimant to listen and try to understand the RTA.

When disputes arise, the RTA should explain the three steps to trying to resolve disputes and reinforce that the CRA is committed to doing everything it can to facilitate resolution of disputes as soon as possible and at the working level.

Ask the claimant to explain their concerns. If the claimant is upset, allow them to express themselves without arguing with them or raising your voice. Listen and calmly try to bring the discussion back to the facts at hand such as what was done rather than opinions. If the discussion becomes heated, suggest that a short break be taken so that the claimant’s concerns can be discussed in a productive manner.

When you speak, do so calmly and try to ensure that the discussion centres on facts rather than opinions. For example, explain what information you require to resolve issues as the first step and why.

One of the most effective ways of dealing with disputes is to engage in practices that prevent disputes from occurring in the first place.

According to the results of an internal national survey of RTAs, RTMs and Assistant Directors (ADs), there was an overwhelming consensus that open, early and effective communication was the key to preventing or resolving disputes.

One important technique is for the RTA to demonstrate through their actions and words that they have no stake in the outcome of the review. Another technique is to focus on facts to avoid giving the impression that they have a pre-determined decision about the work claimed. For example, the RTA should not indicate that a particular kind of work is rarely eligible without first hearing why the claimant feels that the work claimed is eligible, even though it may not be, based on the RTA’s experience. Instead, the RTA should focus on the facts of that particular claim and explain why the work claimed is not eligible based on those facts.

Another technique of open and effective communication is to ensure that potential issues are identified and explained to the claimant at the outset of the review or as soon as they are discovered.

When the RTA thinks that there is a good chance that a particular review may lead to a dispute (for example, based on previous experience with the claimant or significant work claimed is expected to be ineligible), some options for prevention include:

  • Discussing the file and issues with the RTM to consider the best approaches for communicating or validating concerns;
  • Discussion with peers to determine how they may have handled similar situations;
  • Discussion with an NTSS or other Headquarter (HQ) employee to determine if similar issues have arisen elsewhere, whether the RTA’s decision is in line with the decisions of colleagues in other regions, and how such issues have been resolved elsewhere; and
  • Considering to have a third party, such as the RTM, NTSS or a peer to accompany the RTA during the review. Often times, the opinion of another party such as an NTSS can make a difference in the claimant’s willingness to accept the RTA’s decision.

It is important to treat the claimant and their work with respect. Remember that most claimants are very proud of their work. Disputes often involve either the eligibility of work or issues concerning substantiating documentation. If the RTA does not believe that the work is SR&ED, explain why to the claimant. For example, if the work involved the application of known engineering practices, explain how that is the case. Show the claimant the definition of SR&ED as stated in subsection 248(1) and use the definition to explain why their work is ineligible. For example, if their work is specifically excluded, such as might be the case if commercial production were claimed, point out paragraph (i) in this subsection.

If the RTA is unable to determine if work is SR&ED, ask the claimant to consider what kind of documentation may help to demonstrate that a systematic search or investigation took place in order to resolve a scientific or technological uncertainty. Make use of the documentation tool in Appendix 2 of the Guide to Form T661 to illustrate the types of evidence the claimant can consider using.

If the claimant wishes to bring the discussion to the second or third steps, provide the claimant with suggestions that will help them best present their case and avoid common pitfalls. For example, it is recommended that the RTA advise claimants to focus on describing the work that was done, why it was done, rather than arguing how the final material, device, product or process represents a scientific or technological advancement. By focusing on the work that was done and providing substantiating documentation, the discussion is centred on facts rather than opinions. Avoid citing individual sentences within CRA APs, Guidance Documents and other publications. Often, such approaches fail to present concepts in their whole. As noted above, they also tend to focus discussions on opinions rather than facts. If it appears likely that the claimant wishes to take the discussion to the second and third steps, advise the RTM or AD to expect contact from the claimant and inform the FR of the potential for a delay.

5.7.0 Special Situations and Alternative Review Approaches

There are a number of situations that are not regularly encountered that require a different review approach. These situations, by themselves, do not lessen either the requirements of the claimant to support their claim or the CRA’s requirements to give the claimant due process. That is, CRA employees cannot alter the CRA requirements for any particular claimant nor give the claimant less than due process for our convenience. As with other reviews, the review work of the RTA must be documented. These situations are:

  1. Files with previous or outstanding Notices of Objection;
  2. Bankruptcies, Company Shut Down, or Facility Sold;
  3. Out-of-Country Equipment, Records or Personnel;
  4. No existing physical facility;
  5. Separation of Head Office from R&D Site;
  6. Borrowing Claimant’s records;
  7. Claimant’s documentation supplied as electronic media;
  8. Remote claimant location;
  9. Claims involving Classified information; and
  10. Second Technical Review by a new RTA.

Details of how to address them are given in Appendix 8

5.8.0 Claim modifications by the Claimants

5.8.1 Project Withdrawals by the Claimant

The claimant may voluntarily decide to withdraw some work based on discussions with, and information received from, the RTA. The RTA should be aware that the claimant could later decide to file a Notice of Objection (NOO) for such work. Therefore, the claimant must send their request in writing and the RTA should document all the discussions and findings in the TF98 file. The RTA should document the reasons why the claimant withdrew the work (if this is known) and if the RTA has reviewed this work, then they should still document their observations, if any are possible, in their report. It is recognized that there may be very little that could be documented if a project is withdrawn. Projects withdrawn should be characterized as unsubstantiated, not ineligible. The RTA must not encourage claimants to withdraw work as part of a negotiation in return for more favourable treatment (such as Accepted As Filed) on other projects. This subject is discussed in Chapter 5.10.0.

5.8.2 Unclaimed work/projects identified by the RTA

During the review, the RTA may happen to identify projects or work that have not been claimed but which may be SR&ED. Similarly, in discussing how the claim was prepared, the RTA may notice that a claimant did not fully understand what work could be claimed. The RTA should advise the claimant of their observations during the meeting, and could suggest to the claimant that they may want to consider revising their claim or claim this work in future years. If time permits, the RTA can discuss the work further and look at supporting evidence to help the claimant decide whether to make a revised claim. This could be done to avoid the need for an additional visit when the revised claim is submitted.

However, the claimant should also be reminded of the 18 month deadline for submitting revised claims, that decisions can only be made after the revised claim is submitted and that the expenditures would need to be reviewed by the FR.

5.8.3 Claimants who revise the claim and/or project descriptions

A claimant may want to amend their claim to add more work and / or expenditures. This can be done if the amendment is within the 18-month filing deadline and, if a claimant wants to, they should be advised to file an amended claim with their local Taxation Centre (TC). RTAs should not accept the claim on behalf of the TC. A less clear-cut situation is where the claimant revises an existing project description, sometimes significantly. In principle, if the description is so different that it seems to describe new work, then it would be treated as a new project and the revised claim would have to be filed with the TC within the 18-month filing deadline. For less clear-cut situations, the RTA would likely not be able to rely on either description as accurate, and would have to review the source documentation and speak to the people who did the claimed work in order to positively identify what was done, before they can determine whether that work was SR&ED. This would be similar to Issue 9 described in Chapter 4.6.1.

5.9.0 Working with First-Time Claimants

The CRA recognizes that first-time claimants may not be familiar with the SR&ED Program requirements. Therefore the CRA offers the First-Time Claimant Service which is designed to help businesses that are new to the SR&ED Program. The objectives of the service are to work closely with the claimant to provide them with the information, tools, and assistance that they need to better complete an SR&ED claim.

Refer to the CRA website at First Time Claimant Service for more information on this service. The First-Time Claimant Service is primarily educational. The RTA is expected, during a visit to a first-time claimant, to spend more time answering questions and explaining the review process, the SR&ED Program and its requirements in detail, if necessary. In some cases, a presentation on the SR&ED Program and its requirements may be useful. It is recommended that first-time claimants be encouraged to attend one of the local Public Information Sessions and to read the literature on our website.

In some cases, first-time claimants may choose to file a claim even if they did not maintain detailed records of all of their work. Refer to Chapter 5.12.0 for a discussion on dealing with limited or inadequate supporting evidence if necessary. It is important to note that SR&ED legislation and policies apply to all claimants equally. Being a first-time claimant does not reduce or eliminate the onus on the claimant to substantiate their claim and provide supporting evidence of the work performed. The RTA should use their judgement to decide if the first time claimant’s limited evidence supports their claim.

5.10.0 Negotiations with the Claimant

The RTA must not negotiate eligibility with the claimant under any circumstances. Review decisions must be based on the facts of the case and applicable legislation. The RTA must never:

  • propose to the claimant that a certain number of projects will be accepted as eligible if the claimant is prepared to accept that certain other projects are not SR&ED;
  • accept as eligible a portion or percentage of a project that is not supported by evidence or facts; or
  • allow an amount claimed for overhead or experimental production without some substantiation.

Negotiation creates several problems. The first is that it does not help the claimant to comply in future years since the decision is arbitrary. Secondly, the claimant can change their mind later and file an objection for the projects not considered SR&ED. If there were no rationale in the file for the work not considered SR&ED, the determination would not be defensible at the objection stage.

Working with the FR and the claimant to establish a reasonable basis for an estimate is acceptable in certain situations. Sometimes there is documentation or evidence that SR&ED was performed but it is limited and does not establish the precise boundaries of SR&ED. Sometimes it may be possible to use information like industry averages or standards, or past company practice. In these circumstances, the RTA works with the FR and the claimant to arrive at a reasonable estimate of the amount of labour, materials, or production that could be attributed to SR&ED. This process is not negotiation and is acceptable. However, there still must be some basis for the estimate and the rationale for the estimate should be documented.

CRA documents describe two methods of estimating SR&ED expenditures in the absence or lack of technical documentation. They are the:

  • Alternative Approach described in AP SR&ED 2002-02R2, Experimental Production and Commercial Production with Experimental Development Work – Allowable SR&ED Expenditures; and
  • Allocation Method described in the Guidance Document: Allocation of Labour Expenditures for SR&ED.
5.10.1 Waivers of the Right to Object

Waivers of this sort may be used by the FR in specific circumstances where it is difficult to come to an agreement with a claimant any other way. In this process the CRA and the claimant come to an agreement as to how the issues in dispute are to be handled and the claimant waives their right to file an objection to how these issues were resolved. The RTA must not suggest their use to the claimant, but they may be used by the FR if the claimant suggests it. If the subject comes up, advise the claimant that the request should be discussed with the FR.

These waivers are considered binding by Appeals provided that they are valid and used correctly. There are many factors and conditions that must exist before waivers can be used. Refer to the Compliance Programs Branch (CPB) Communiqué AD 05-02B dated Feb. 7, 2005, entitled The Audit Agreement and the Waiver of a Client’s Right to Object if more details are needed.

5.11.0 Uncooperative Claimants

Subsection 231.1(1) of the ITA gives the RTA broad authority to request information, inspect records and books for the purposes of the review, and to require the claimant to assist them. An SR&ED claim can be disallowed, in whole or in part, if the claimant will not allow the RTA to conduct the review in the manner needed. Situations that could result in such a disallowance include:

  • A repeated refusal or restriction of access to some or all of the facilities without reason, or refusal to allow an interview in a reasonable time or under reasonable conditions;
  • Refusal to answer CRA phone calls or letters, or failure to provide requested information in a timely manner or a usable form, prior to or after an on-site visit; and
  • The inability of the RTA to contact the claimant (for example, current address and phone numbers are not obtainable, mail returned).

If any of these situations arise, the RTA should consult with the RTM and the claim would be processed based on the information available to date. The RTA should advise the FR of the problems and the FR can then disallow the claim, in whole or in part, on the basis of the RTA’s recommendation. However, care should be taken before such a recommendation is made by the RTA. While the onus is on the claimant to supply what the CRA has requested, the RTA must be prepared to justify their requests in the case of Appeals or the Tax Court. In order to support disallowing a claim for this reason, the claimant must have been given opportunity to provide the information, the request itself has to be justifiable, and our efforts to communicate with the claimant or request information must be documented. Information requests must have been made by registered mail, and the RTA should confirm receipt of the request (unless the claimant cannot be contacted as noted above), and reasonable extensions of time given. The RTA must document all conversations with the claimant and all attempts to communicate with them in a memo to file (T2020 or equivalent). If information is requested but the response is inadequate, the specific deficiencies must be noted in a memo to file (T2020 or equivalent).

A somewhat different situation is where the claimant allows only partial access to information or facilities, or is uncooperative during the review. In this case, if the claimant has not cut off contact with the RTA, the claimant should be informed by letter of what is required and the consequences of not doing so, specifically that they will not be able to determine that the work is SR&ED without the information requested. If the claimant remains uncooperative, the specific problems should be documented and the RTA should consult the RTM and make their determination based on the information they have available. As above, while the RTA has the right to determine what information they need and to whom they need to speak, it is essential to document the facts in order to justify the position in case of a dispute.

5.12.0 No or Inadequate Supporting Evidence

5.12.1 Inadequate Supporting Evidence
5.12.1.1 Requirements of the ITA

Subsection 230(1) of the ITA requires the claimant to maintain records and books in order to determine the amount of tax credits claimable. Therefore, in order to claim SR&ED tax credits, the claimant must maintain supporting evidence to demonstrate that their claimed work met the definition of SR&ED in the ITA. Refer to Chapter 5.6.6 for examples of typical supporting evidence the claimant can supply.

However, in some cases, there is inadequate or no evidence presented to support the claimed SR&ED work. For example, the available evidence may not demonstrate that:

  • There was a systematic investigation or search (use of the scientific method);
  • The SR&ED work claimed was actually done, or that it was performed in the relevant fiscal period; or
  • The resources claimed (for example, hours or quantities of material consumed) were used in SR&ED.
5.12.1.2 Documenting Observations

The RTA should document relevant observations concerning supporting evidence presented by claimants, and requests for supporting evidence from the claimant. If there is actually no evidence presented, this should be indicated. In other cases, the RTA should document what was seen or presented as evidence and explain their decision. It is insufficient to simply state that the evidence is inadequate without providing some explanation. A clear distinction can be made between no supporting evidence, and supporting evidence presented by the claimant but not considered adequate or relevant.

If some evidence is presented by the claimant but it is not accurately described by the RTA in the files, there will be no way for other users of the file to determine the basis of the RTA’s decisions.

As indicated in Chapter 5.6.6, evidence is broader than paper documentation. The RTA cannot accept a claim that is totally unsupported by any evidence that SR&ED has taken place, even if the claimant agrees to maintain such evidence in the future.

However, it is open to the RTA’s professional judgement and interpretation to determine if the evidence provided is adequate to support the SR&ED claim.

The RTA can reject claimed evidence, but this position would need to be supported and documented. If the RTA thinks that it is not just a simple mistake or misunderstanding, refer to Chapters 5.14 and 5.15.

For example, the RTA may think that, for some evidence presented, the dates are wrong or the people claimed to have done the work did not do it. If that is so, the RTA could consider speaking to the person who wrote the document or was said to have done the work, to better establish the facts of what was done.

5.12.1.3 Format of Evidence

Evidence presented by the claimant must be “in such form…as will enable taxes payable to be determined” (Section 230(1) of the ITA). This implies that it has to be properly organized or in a usable form. Examples of evidence that can be rejected by the RTA (that is, the RTA declines to review it in detail) include the following:

  • A large amount of disorganized paper;
  • A digital versatile disc (DVD) containing thousands of documents, only a few of which may be relevant and which cannot be identified by title or located in the DVD without searching each document; or
  • Documents that are not in an official language.

The RTA should make a reasonable effort to work with the information as presented by the claimant. However, if evidence is presented in a format which cannot be used with a reasonable effort, it can be treated the same way as inadequate evidence, and the RTA should advise the claimant to present what the RTA has requested in an organized fashion. The RTA should document what they saw and explain the deficiencies to the claimant, indicating, for example, that they are unable to determine what was done based on what was presented. Under these circumstances, the RTA is not required to read or describe in detail every document or paper that is presented as evidence. A summary of the information received (for example; “3000 pages of unsorted papers from the production plant” or “a 10 Kg. box of unsorted papers”) would be adequate. If this situation arises, the RTA should consider consulting the RTM to get a second opinion on the correct approach.

5.12.1.4 Disallowing a Claim Due to Lack of Supporting Evidence

If a claimant has not submitted any or adequate SR&ED records or evidence, the RTA should inform the claimant in writing that they must submit evidence to support their claimed work or otherwise their claim will be disallowed. If the needed information is not supplied despite this, then the recommendation to disallow a claim due to lack of supporting evidence is documented. The claimant is informed via the Proposal Package and the SR&ED Review Report.

When recording or documenting a recommendation to disallow a claim due to lack of information, the RTA should be careful not to give a determination of eligibility. There is an important distinction between disallowing a claim for lack of supporting evidence, and giving an eligibility determination on an issue that is unfavourable to the claimant.

For example, if the issue was whether some work is SR&ED, to say “the claimant has not provided information that demonstrates that the claimed work was done” is quite different than saying “the claimant has not provided information that demonstrates that the claimed work was done, therefore the work is not SR&ED.” In the first case, if the missing information is obtained, there is no automatic assumption of eligibility, and eligibility would still need to be determined based on the nature of the information. In the second case, the words imply that if the missing information is obtained, the work is SR&ED because eligibility is implied and conditional only on the existence of documentation.

Wording in the SR&ED Review Report became a Tax Court issue (R.I.S Christie, Case# 91-2556(IT)G). The outcome of that case was that if the RTA concluded that a Technological Advancement had been achieved then they cannot ask the claimant for documentation to prove that it was achieved through a systematic investigation, nor subsequently disallow the claim for lack of documentation. According to this case, the RTA must not make statements that imply that there is a Technological Advancement or that other eligibility criteria are met if the claim is being disallowed for lack of supporting evidence.

When a RTA disallows a claim due to lack of supporting evidence, the RTA should indicate that the claimed work is unsubstantiated and that no eligibility determination is given.

5.12.2 Evidence of Non-SR&ED Work

The RTA should also consider the possibility that the evidence supplied may support the determination that non-SR&ED work was performed. That is, the claimant’s evidence may indicate, for example, that:

  • Only standard practice was used;
  • There was no scientific or technological uncertainty as to the outcome;
  • The work involved commercial production; or
  • The work involved other excluded work described in paragraphs (e) to (k) of subsection 248(1) of the ITA.

If this is the case, the RTA should provide rationale for why the documentation supports the determination that non-SR&ED work was performed.

In any case, whatever evidence is supplied, it is important that the RTA explain its significance when documenting their work.

Working with Claimants
Helping Them Understand the Importance of Documentation

Often disputes arise due to the difficulty of establishing that work is SR&ED because of a lack of supporting evidence. That is, in the absence of supporting evidence the RTA is unable to distinguish between SR&ED and non-SR&ED such as routine engineering or data collection. To deal with this effectively, it is important that the claimant understand that this is a review issue with their claim, and that the scientific process of hypothesis formulation, experimentation or testing, and the reaching of conclusions would be expected to produce documentation. The claimant also needs to know the general books and records requirement of the ITA (see 5.13.1.1) and the consequences of inadequate documentation.

A number of different approaches may help the claimant provide support or improve their systems for future claims:

  • Explain to the claimant your concerns and indicate that supporting evidence is needed to distinguish SR&ED from other non-SR&ED work.
  • Discuss the process by which the claimant does their work, in order to identify what evidence is produced during the normal work process. Possibly the claimant produces but does not retain evidence, or does not realize that this can be evidence.
  • Ask the claimant to consider what kind of records or notes they have that may help to demonstrate that a systematic search or investigation took place. Make use of the documentation tool in Appendix 2 of the Guide to Form T661 to assist the claimant to identify some, or provide some examples based on the RTA’s industry experience.

Nonetheless, it is important to avoid creating the impression that providing supporting evidence will automatically mean that their work is SR&ED. If work is not SR&ED, no supporting evidence can change this fact. It is also important to remind the claimant that they are responsible for ensuring that relevant and sufficient supporting evidence is maintained to support their claim.

5.12.3 Sending “Better Books and Records” Letters

If the claimant’s evidence is inadequate, the RTA should inform them and advise them to make improvements. Verbal requests are not always effective. One option to consider if the claimant is persistently ignoring CRA requests, such as advice in reports, is for them to be notified via a “better books and records” letter. This letter can be sent as soon as problems are noted, and does not necessarily need to be sent after the review is concluded. Appendix 4.1 contains a sample of a “better books and records” letter. This method takes more work and does require a follow-up with the claimant.

This letter is a written request to the claimant that lists the inadequacies and confirms the verbal request for corrective action, and is specific. Broad general requests to improve the documentation are not effective. If possible, it is recommended that the claimant be sent one letter that includes the concerns of both the RTA and the FR. The letter includes a reasonable deadline for implementation of the required improvements. This “informal” books and records letter is signed by the RTA.

If the claimant ignores this letter, there is an additional step possible, a formal notification signed by the Director of Taxation at the local Tax Service Office (TSO). This is a requirement under section 231.2 of the ITA, and, unlike the informal procedure, there are legal consequences if the claimant fails to respond. Refer to section 2.8.0 for a discussion of this. The RTA must consult the RTM if the claimant should be formally notified.

These letters include a letter of agreement that the claimant signs and returns, acknowledging that they will correct the inadequacies, that must be included with the letter requesting the improvements (Appendix 4.2). If the claimant has not returned the agreement within 30 days, the RTA must contact them. If a claimant does not comply with the CRA’s request to maintain adequate supporting evidence, the RTA will base their decision in future claims on the information available and determine then if some or the entire claim will be disallowed for lack of evidence.

5.13.0 Leads to Other CRA Programs

A lead is information in any form that identifies potential non-compliance activities and indicates that an audit may be required. The RTA does not have a mandate to be familiar with or look for potential non-compliance activities in areas outside the SR&ED Program. However, if the RTA, incidentally to their work, identifies questionable items, inconsistencies or non-compliance outside the SR&ED Program, the RTA should inform the FR and RTM.

5.14.0 Penalties

The ITA allows the CRA to assess penalties, in addition to disallowing any claimed expenditures. This section is provided for information only, so that the RTA can be aware of the circumstances under which penalties could be assessed in certain situations that arise or are incidentally noticed during the course of regular work. Refer to the Audit Manual for more information about the details of obtaining necessary information and applying penalties. The actual process of assessing a penalty would be performed by the FR, not the RTA. If the RTA thinks that a penalty may be warranted, they must first consult their RTM and the FR before saying anything to the claimant or taking action. The types of penalties are:

5.14.1 False Statements or Omissions

Refer to AP SR&ED 96-05 “Penalties under Subsection 163(2)”, in which gross negligence is discussed:

In order to consider the application of a penalty under subsection 163(2) in respect of a SR&ED claim, the claimant must have knowingly or under circumstances amounting to gross negligence, been involved in filing an overstated SR&ED claim. The ITA clearly places the burden of proof on the Department for any subsection 163(2) penalty assessed by the Minister.

5.14.2 Third Party Civil Penalties

Third-party penalties (TTP) are provided for in section 163.2 of the ITA. This penalty is directed to persons, other than the claimant, who have made representations that result in false statements or omissions on the claimant’s return. Refer to IC 01-1 “Third Party Penalties.”

5.15.0 Fraud

Section 152(4) of the ITA allows a case to be reopened beyond the normal assessment and reassessment period in the case of fraud. Fraud involves an intent to deceive that is beyond negligence. Fraud is deliberate understatement of tax and always comprises three elements:

  • “Mens rea” which is criminal or guilty intent, because the person or representative failed to make a statement or knew that a statement was false;
  • A misrepresentation, such as material omission; and
  • Serious prejudicial impact on the CRA.

The RTA must be careful and make sure that they are not trying to investigate the fraud themselves. That is the sole responsibility of the Enforcement Division of the CRA. If an RTA suspects fraud, they must discuss the case with the FR and their RTM, who will decide on an appropriate course of action. If the RTA attempts to investigate fraud, it could have a harmful impact on any later work by Enforcement. The authority of an RTA or FR under the ITA is quite different from the authority of Enforcement to investigate fraud. Fraud is a criminal investigation, whereas audit and SR&ED reviews are not. Refer to the Jarvis and Ling cases (R.v. Jarvis, 2002 SCC 73, R. v. Ling, 2003 SCC 74) for more details on this subject.

Chapter 6.0 Documenting the Review Process

6.1.0 Summary of Chapter

Documenting the review process carried out by the research and technology advisor (RTA) is discussed in this Chapter. The main topics covered are:

  1. Who uses the RTA’s documents;
  2. Definition of working papers and supporting documentation;
  3. Importance of file documentation, and the basic principles of what to document and how to document;
  4. Types of working papers and supporting documentation;
  5. The various ways that the RTA can document their work along with the details required for different situations, which include memos, the Short Scientific Research and Experimental Development (SR&ED) Report and the SR&ED Review Report; and
  6. How to format and index the TF98 file.

6.2.0 Requirements of Chapter

Following from Chapter 1.6.0, the following requirements are outlined in this Chapter:

  1. Document all relevant review work (working papers), as well as keep other relevant supporting documentation for the work;
  2. Do not document irrelevant personal opinions or irrelevant information about other claimants;
  3. Prepare an SR&ED review report following the described format, or other working paper, explaining the work and the rationale;
  4. Keep and organize working papers and supporting documentation in the TF98 file; and
  5. Consult the research and technology manager (RTM) for acceptance of the review report in specified circumstances.

6.3.0 Users of the RTA’s Documents

Documentation supporting the RTA’s decisions provides relevant information to the following groups:

  • Claimants. The SR&ED Review Report explains Canda Revenue Agency’s (CRA) decision on the issues, allows the claimant to understand the reviewer’s rationale, and may provide guidance for improving compliance of future claims;
  • Financial Reviewers. The documented decisions of the RTA are needed by the financial reviewer (FR) to complete their work. These decisions advise the FR about possible issues and clarify which elements of the claimed work are SR&ED;
  • Management. The file documentation provides a record of the claimant’s compliance history and can also be used to monitor the quality of the CRA’s services;
  • Taxation Centre, Control Centre, and Research & Technology Officers. Information about prior years’ reviews is valuable in the screening and “limited review” of claims;
  • Research & Technology Advisors (RTAs). The documented review information and decisions provide background for future reviews or necessary educational services;
  • Appeals Division. The documentation will be used in resolving objections. It can demonstrate that the RTA has given the claimant due process, and that the review is defensible;
  • Department of Justice. The documentation may be used as evidence in tax court;
  • The Taxpayer’s Ombudsman. The documentation may be used to determine what was done with respect to service-related complaints; and
  • The Auditor General. The documentation may be used in the course of an audit or in a follow-up to a previous audit.

6.4.0 RTA’s Working Papers and Supporting Documentation

Documentation of the review process may be classified into two categories, both of which are essential records of the review:

  1. Working Papers – are documents created by the RTA during the review process; and
  2. Supporting Documentation – is any document obtained from the claimant, representative, or any third party and used in the review process to arrive at or justify the decision of the RTA.

Any supporting document, or copy of any original document submitted by the claimant and / or representative, becomes a working paper when the RTA adds pertinent notes or comments to it. All working papers and supporting documentation must be kept in the TF98 file.

6.4.1 Original Documentation

This chapter frequently refers to “original” documentation. This term is not defined in the Income Tax Act (ITA), so the standard English meaning is used. In the context of the CRA, an original document is the first instance of the reviewer obtaining it from whoever sent or provided it. As noted in chapter 5.6.6 the RTA may certify copies received from the claimant and these are considered the same as true copies of the original. There are designated individuals in the CRA who can print out and certify information in electronic databases.

6.5.0 Basic Principles

The basic principle of file documentation is that all work on the file is documented.

The Canadian Institute of Chartered Accountants (CICA) handbook includes the following:

While it is neither necessary nor practical for International Fiscal Association (IFA) practitioners to document in their working papers every observation, consideration or conclusion, practitioners need to document matters that, in their professional opinion, are important to support their work and / or were relevant in reaching their findings, opinions and / or conclusions.

While the CICA handbook is specifically written for accountants, these basic principles apply equally well to working papers prepared for SR&ED reviews by the RTA.

Working papers are essential in explaining decisions, the application of legislation and the rationale for review adjustments. They provide an explanation of the nature and extent of the review work performed, and document the review techniques and procedures followed during the course of the review.

A well-documented file is vital for both the RTA and the FR. Documenting occurs at all phases of the review, including planning, conducting and closing the file. The advantages of a well-documented file include:

  • Strengthening the defensibility of the decision by demonstrating that due process was provided to the claimant (refer to Chapter 1.5 for a discussion of due process);
  • Supporting review decisions;
  • Facilitating the review process for claims in subsequent years; and
  • Assisting in the efficient review of the file by RTMs, Appeals, Tax Court, and the Auditor General.

In carrying out this documentation function, working papers and supporting documentation should:

  • Provide explanations for issues that were identified at or subsequent to the planning stage, but were resolved without any adjustments or contact with the claimant;
  • Describe problems encountered during the course of the review;
  • Provide information about items that require follow-up in any subsequent review;
  • Provide evidence that areas of material risk have been addressed;
  • Support decisions and recommendations;
  • Relate only to the claims under review and not to other claimants unless this is relevant. For example, working papers could include information about a related company or a contractor that has claimed the same work or expense;
  • Provide a summary of communications with the claimant;
  • Provide details of all meetings and discussions with the claimant including who attended, the issues that were discussed and how these were resolved; and
  • Reference the source and location of working papers and supporting documentation kept in other CRA files that are relevant to the review, but these working papers do not need to be copied and put in the TF98 file. Examples are financial documents that are kept in the audit file. It is recommended that information from any pre-claim project review (PCPR) and account executive (AE) be kept in the TF98 file. However, if separate files are maintained in the tax services office (TSO), the information does not need to be duplicated and kept in the TF98 file.

Working papers and supporting documentation should not:

  • Contain any irrelevant opinions, assumptions or comments about any individuals associated with the claim, criticize the claimant’s business decisions or the quality of their work. Working papers must only show information or comments that are factual, unbiased and relevant to the case at hand. If a file goes to the objection or court stage, the claimant should understand the review process and the rationale behind the RTA’s decision. It is important to remember that information contained in the TF98 file may be disclosed to the claimant in the course of a court case;
  • Have markings of any kind such as highlighting, underlining or check marks on any original documents submitted by the claimant, including project descriptions and correspondence, aside from the identification and numbering noted in Chapter 6.10.0. As noted in the CRA Audit manual chapters 9.8.1 and 10.5.4, if such marks are made, the claimant may simply claim on appeal or at trial that the document in question is not the one provided to the RTA. If notations are made on a document or it is marked up in some manner, the question arises subsequently as to who made them and when. As well, highlighting of text or other material in a document often distorts or renders the highlighted part illegible in future photocopies of the document. If it is necessary to highlight certain statements, or to write comments in the margins, for purposes of discussion of a document, this must be done on a photocopy of the original and the clean copy must be filed separately with the working papers; or
  • Refer to documents or information not in the CRA files, as it may not be accessible later. Information that would always be available later are exceptions to this rule and would include:
    • Copies of CRA publications, such as information circulars, directives and application policies (AP), and court cases. These do not need to be in the file. It is sufficient to reference and / or quote these documents (including the version or publication date) since they will always be available for later reference
    • Records in CRA-wide electronic databases, like CORTAX, Audit Information Management System (AIMS), and the SR&ED Risk Management Tool. This exception would not apply to electronic applications restricted to the local office. It should be clear where the information has come from, however. If data from these electronic databases is later needed by someone outside of the CRA, such as for Tax Court, there are designated individuals within the CRA who can provide paper copies of this and a certification that it is a copy of electronic information contained in the database;
    • Documents like standard references or dictionaries that are reasonably expected to be readily available later;
    • Information in public databases like patents and court cases; and
    • Claimant documents reviewed on-site but not copied or retained, provided they are not needed to support an unfavourable determination. Refer to Chapter 5.6.6 for more discussion on retaining copies of claimant’s supporting information.

Note: Material not used or relevant to the review should not be kept in the file. However, all documentation provided by the claimant must be either returned or retained on file, even if considered irrelevant.

6.6.0 Types of Working Papers and Supporting Documentation

This section describes the major types of working papers and supporting documentation that must be kept in the TF98 file.

6.6.1 Documents Received from the Tax Centre

Any documents received from the tax centre (TC), such as correspondence, and information from CRA electronic databases, such as the TC Risk Assessment documents, are on-line and do not have to be printed.

6.6.2 Documents Received from the Control Centre

Any documents received from the Control Centre, like risk assessment documents, do not have to be printed.

6.6.3 Review Plan

The Review Plan, which includes the issues identified and the scope of the review, revisions made to the Review Plan if any are made, and any notes explaining revisions to the plan, are kept.

6.6.4 Records of Communications

Records of conversations (including transcribed voice mail), discussions and meetings that are relevant to the decisions or work done in the file. It is recommended that the T2020 form be used as a universal log or diary for this purpose, so that any subsequent reader / user has a single source to identify events that occurred during the review. Notes may also be taken using a laptop or similar means, but these would need to be dated, printed and signed by the RTA. It is acceptable to use an electronic T2020 or equivalent during the review process. Included under this general heading are:

  • Telephone conversations with claimants or their representatives;
  • Meetings and or on-site visits with claimants including any proposal meetings;
  • Meetings and discussions with RTMs, co-workers, Headquarters (HQ), other branches of the CRA;
  • Meetings and discussions with people outside the CRA; and
  • Briefings with outside consultants (OC) and team members.

Handwritten notes are preferable as they carry more weight in a court case. Record the name of the claimant, date, time, person(s) you communicated with, other persons present (even if not involved in the discussions) and details of the conversation. The RTA should ensure that records of communications in the TF98 are legible. If the RTA’s handwriting is difficult to read, the notes should be legibly rewritten and attached to the original. Both transcribed and original documents should be dated, signed, and inserted to the TF98 file.

6.6.5 Correspondence

Copies of correspondence sent or the original correspondence received that pertains to the file. Correspondence includes the original request as well as the response. If there is no response from the claimant, that fact should be indicated in the file. Major types of correspondence include:

  • All correspondence to or from the claimant or their representative;
  • Meeting agendas;
  • Written requests for information (refer to Chapter 5.4.1.2);
  • Relevant advice or opinions from the RTM, the Assistant Director (AD), co-workers, HQ, OCs or other branches of the CRA;
  • Relevant advice or opinions from outside the CRA;
  • Internal emails. Paper copies of emails (ingoing and outgoing) must be made and kept in the file. Refer to Chapter 2.9.0 for CRA’s policy on communication via email; and
  • Faxes. Copies of all incoming and outgoing faxes must be kept in the file. Refer to Chapter 2.9.0 for the CRA’s policy on communication via fax.
6.6.6 Documentation Related to Outside Consultants

Information produced for or by the OC, including briefing notes and correspondence with the OC, authorization letters, the OC Resume and documentation obtained or produced by the OC during their contract must be retained on file. Personal information such as their address and the details of their contracts with the CRA must not be kept in the TF98 file but in the contract file. Refer to Directive 2003-02 Managing Outside Consultants for details of this documentation.

6.6.7 Results of RTA’s Work

This includes the SR&ED Review Report, all versions sent to the claimant including any revisions subsequent to the proposal presentation if made, any notes describing how the issues were resolved and any documentation supporting the RTA’s decisions. Refer to Chapters 6.7.0 and 6.8.0 for guidelines concerning those documents.

6.6.8 Other Supporting Evidence

Included in this category are:

  • Form T661 (original and revised, if any); (Note: The RTA may only have the information from CORTAX as the originals, if filed on paper, are kept at the TC.);
  • Original project descriptions, revised project descriptions (if any);
  • Any additional information sent by the claimant or their representative or received at the site visit;
  • Copies of relevant books and records, invoices, etc;
  • Photographs (Note: This means photographs the claimant supplies. The RTA must not take photographs at a claimant’s premises due to security concerns);
  • Claimant authorization documents. If communications are made with any individual other than the claimant, authorization for any third-party representatives must be on file (Refer to Chapter 2.9.2);
  • Electronic media (such as diskettes, CDs, DVDs, or USB memory sticks), if provided by the claimant, although this is not encouraged due to storage and handling issues. Remember that CRA procedures for using electronic media from outside the CRA must be followed. The RTA should consult their local information technology (IT) services in order to view the documentation and extract relevant parts, if necessary, and make paper copies. The original media would then be returned to the claimant if no longer needed;
  • Physical samples provided by the claimant (if relevant to the decisions), although this is not encouraged due to security, storage and handling issues; and
  • Information from public sources that is relevant to the decisions (for example, information from the claimant’s web site, textbooks, and magazines). Copies should be made and placed in the TF98 file. This is especially true of information taken from web sites due to their changing nature. Where the source document cannot be placed in the TF98 file in its entirety, it is sufficient to copy the relevant extract from the document, identify the source and place it in the file.

6.7.0 Documents Supporting the RTA’s decisions

6.7.1 General Requirements

Documentation supporting the RTA’s decisions helps to demonstrate that due process has been given to the claimant. It also supports the defensibility of decisions. Documents generated by the RTA usually include the Review Plan, letters to the claimant, field notes and other information written on a memo to file (T2020 or equivalent), and the SR&ED Review Report.

The principles discussed in Chapter 6.5.0 also apply to these documents. These other points apply more specifically to documents supporting the RTA’s decisions. This documentation must:

  • Reflect the fact that the review of the file was conducted according to applicable CRA policies, directives and guides;
  • Give sufficient detail and clarity as to why and how the RTA’s decisions were reached; and
  • Address only matters within the responsibility of the RTA. While appropriate discussions of joint issues are required, memos and reports must not include any decisions concerning expenditures, which are the responsibility of the FR.
6.7.2 Detail Required to Support the RTA’s Decisions

The volume of supporting material and their details in the documentation depend on the scope of the technical review, the nature of the issues and the decisions. This section gives some general guidelines as to the nature of the documentation needed, depending on the review performed. The following list provides a summary of the documentation needed for four common review situations:

6.7.2.1 No technical issues, but the FR requires some assistance from the RTA

When there are no exclusively technical issues, but the FR requires the assistance of an RTA on some issues, the RTA simply should document their work (for example, if claimant is contacted), and send a memo to the FR who requested the assistance, which would give the RTA’s determination with a rationale. This also applies to the cases where the FR requests assistance subsequent to the RTA’s review. The memo is an internal document that will not be shared with the claimant. If necessary, the RTA may assist the FR with the appropriate text to include in the proposal letter.

6.7.2.2 All issues resolved in claimant’s favour, no on-site visit made

If the issue(s) can be resolved in the claimant’s favour without an on-site visit, the RTA must, at a minimum, document the work they did, the decision and the rationale in a memo to file (T2020 or equivalent). An SR&ED Review Report is not required but is an option (see the end of this section). Typically, all that is needed is a brief explanation of the rationale for this decision, with an indication as to what additional information was used, and any other work undertaken (such as discussions with the RTM, another RTA or a quick search of the claimant’s Website) to reach this decision.

Unsupported statements like “no problems seen” do not constitute adequate rationale. If an issue is resolved without further review, the RTA has essentially made a risk assessment and has concluded that there is a high probability that they would otherwise be resolved in the claimant’s favour. There is no requirement to repeat information already in the file or easily available elsewhere, but the source of the information must be indicated. If on the other hand the basis for the decision is difficult to understand, it is recommended that the information relied upon be included in the file (for example, a web or textbook reference). In simpler cases, the reasons a claim is accepted as filed could be documented in the form of a memo to file (T2020 or equivalent). In more complex cases, the RTA can present their findings in a “Short SR&ED Review Report,” a template for which is in Appendix 6.3.

6.7.2.3 All issues resolved in claimant’s favour, on-site visit made

In this situation, the RTA would document the work, the decision and the rationale. The work would typically be documented either in a short (recommended) or standard SR&ED Review Report. Details would be needed to describe the additional work done that involved claimant contact. This would take the form of notes of telephone conversations, letters, a discussion of the claimant’s response to our questions, observations during the on-site visit, observations concerning reviewing the books and records and so forth, depending on the specific details of the claimant contact. The RTA should take definite positions on the identified issues. It will be beneficial to the claimant if the CRA makes a definite determination of eligibility. The RTA’s determination may also assist the claimant in future compliance. Details of the work the RTA does are recorded with appropriate reference to other working papers or supporting documentation. The arguments should be presented with sufficient detail since the RTA is taking a position concerning a legislative or policy matter. The documents explain how and why the determination was reached, with reference to appropriate documentation, conversations or other working papers.

6.7.2.4 Not all issues resolved in claimant’s favour

If not all the issues can be resolved in the claimant’s favour, whether or not an on-site visit was involved, the RTA’s work must be documented primarily in the standard SR&ED Review Report, which is discussed in Chapter 6.8.0.

Documenting the rationale and the decisions reached by the RTA regarding the identified issues is required. The rationale must include appropriate references to CRA documents, other factual information and the claimant’s supporting evidence that was used to draw this decision. Note that the detail needed in the rationale is greater because the RTA must make a case that the work or part of the work claimed does not comply with SR&ED requirements.

6.8.0 The SR&ED Review Report

The SR&ED Review Report is the key document produced by the RTA during their review. It must be written using appropriate wording and explanation since it will be seen by the claimant. The SR&ED Review Report includes the following elements:

6.8.1 Cover Page

The header includes the claimant’s name, business number, tax year end, TSO, date prepared, the RTA’s name and optionally, other information needed locally (for example, expenditures, case selection reason, and Audit Information Management System (AIMS) Link Code).

6.8.2 Summary Results by Tax Year

This section provides a tabular summary of the results of the review, for quick reference and statistical capture in AIMS.

6.8.3 Review Issue(s) and Objective(s)

Each issue (or group of issues), including the project(s) it relates to, must be identified. These issues are the reasons or objectives of the review. These include each of the issues identified on the Review Plan and any issues subsequently identified during the review that were not part of the original plan. Linked financial-technical issues may also be identified here.

6.8.4 Review Methodology

This section describes the work done by the RTA to resolve the issues. That is, the review steps and procedures, such as information requested, information received, conversations, meetings, on-site visits made and questions asked are noted.

It is recommended that the steps and procedures be presented in chronological order and identify the source of the information reviewed, and as appropriate, the date and location, persons who were present, the purpose / agenda and duration of the visits. Information must demonstrate that due process was given to the claimant during the review of their claim.

6.8.5 Supporting Evidence Reviewed

Evidence from the claimant that supports the SR&ED claim includes any information, records and documentation submitted with the claim and provided by the claimant during the review. This type of claimant’s documentation is different from documentation generated by the RTA during the course of the review and documents published by the CRA.

In this section, the RTA should also include a brief description of the type of information reviewed prior to any site visit such as:

  • claims from previous years;
  • AE or PCPR information;
  • Form T661 project information;
  • claimant background; and
  • additional information submitted by the claimant (for example, a reply to a Request-for-Information letter from the CRA).

In addition, the RTA must identify all the claimant’s supporting evidence that was reviewed concerning the issues. This covers all items that were reviewed by the RTA including all items presented by the claimant to substantiate their claim. Appendix 2 in the “Guide to Form T661” provides guidance and examples of supporting evidence. Do not list any documentation published by the CRA, such as ICs or APs, even if they were used as references. ICs and APs are used and are relevant in the interpretation of the evidence, but they are not evidence.

The list of supporting evidence assists in the location of any material required for any other review processes, such as a review during dispute resolution, a Notice of Objection (NOO) or an Appeal to Tax Court. It also provides additional evidence of “due process” by indicating that all relevant information presented by the claimant was reviewed. Sufficient detail should be given to identify and, if necessary, locate supporting evidence for future use.

6.8.6 Review Observations, Determinations, and other Decisions

In this section, a description of the review observations should be presented in as much detail as necessary to explain, based on facts gathered during the course of the review, how the issues were resolved. This section would also describe information the claimant presented about their work and their responses to questions.

This section should include relevant observations from the on-site visits or other meetings with the claimant. It should describe the significant issues that were discussed and how these resulted in the review determinations and other decisions. It may also include a discussion or analysis of claimant responses to our questions, observations or preliminary determinations.

Additional issues of contention that may have arisen between the claimant and the RTA should be documented with background information (with reference to relevant documents) indicating how the disagreement developed and documenting the claimant’s representations during the review.

The status of the projects / issues reviewed at the end of the review period may be noted to assist in the review in subsequent years.

It is not necessary to repeat or paraphrase the claimant’s project descriptions if the description is consistent with the RTA’s observations. The RTA can refer to the Form T661 project information. However, if some aspects of the descriptions are at issue, the RTA should reference the relevant descriptions together with an explanation of the RTA’s determination and rationale. The RTA’s determinations, as noted earlier, must not contain determinations or decisions on purely financial issues. For joint issues, factual observations and determinations within the RTA’s mandate should be documented so that the FR can resolve the related financial issues.

6.8.6.1 Documenting Determinations Concerning Issues of Eligibility

Determinations of eligibility should be documented to avoid misunderstandings or ambiguity, and to demonstrate that they are based on the ITA and CRA policies.

A rationale supported by facts must be provided when making determinations. The rationale uses a combination of the facts, legislation and policy that are cited and discussed in order to come to a determination about the work. Care should be taken when characterizing the claimant’s work. Referring to elements of the work as “standard practice,” “knowledge commonly available to the industry,” “routine testing,” “routine engineering,” or making statements such as “the work does not contribute to an advancement in a field of science or technology” without justification are considered not defensible at the notice of objection stage. The SR&ED Review Report should cite the evidence or information that led the RTA to the determination that the work was “standard practice” or “routine”, or why “the work did not contribute to an advancement in a field of science or technology” if those are the issues. Taking into account the context of the claimant’s business environment within the analysis is usually a critical part of the eligibility analyses. The guide Recognizing Experimental Development provides further guidance on this topic. These explanations do not need to be long, but should be sufficient for the claimant and any other reader (such as a lawyer or judge) to understand the RTA’s thinking on the matter.

If the RTA determines that some work is not SR&ED, it is helpful if the RTA can think about potential weaknesses or counter-arguments to their explanations and attempt to address them in their rationale. It is often helpful to ask the RTM or a co-worker to review the report. For instance, a simple statement by the RTA that the claimed work was “routine engineering” is not a sufficient rationale without an explanation as to how or why that work represents “routine engineering.” This could be illustrated, for example, by referring to the claimant’s previous practice or to published information. As another example, if the issue is the lack of books and records or other supporting documentation, it is not adequate to state only that “the documentation provided was insufficient.” This statement would need to be supported by, for instance, a listing of what supporting documentation or evidence was seen, what was in the information that was seen, and why this was inadequate (that is, what was missing from them). In support of their position, the RTA should retain copies of the claimant’s documentation that is relevant to their position. The RTA should reference this supporting documentation and keep this in the TF98 file.

When there is a change in eligibility of on-going work (for example, if a project considered to be SR&ED in a previous tax year is no longer considered to meet the definition of SR&ED), the RTA should present a rationale that distinguishes the current work from that of the previous years. They should provide a rationale for their determination of when the SR&ED was finished. On the other hand, if the attempt to achieve the scientific or technological advancement is expected to continue into the next fiscal year, this should be documented in the SR&ED Review Report to guide future RTAs.

Non-SR&ED work must be identified in the case where only some of the work in a project meets the ITA definition of SR&ED. Where there is a project where only some work is considered SR&ED, it is not sufficient to only state that “some” or an unsubstantiated percentage of a project does not meet the definition of SR&ED. Determinations based on vague or unsubstantiated statements are not defensible. As precisely as possible, definite statements are to be used that establish limits of the non-SR&ED work or the SR&ED work and the rationale. These could be limits of time (the ending date of the SR&ED), scope (work not directly in support of SR&ED), quantity (work not commensurate with the needs of the SR&ED), personnel (what people were doing work not supporting the SR&ED) or other. The following are some examples of such precision:

  • “The data collected during the period (where the RTA provides specific dates or some other objective reference point) is not commensurate with the needs of the SR&ED because…”;
  • “process trials after…(where the RTA provides a specific date or some other objective reference point)…were not directly in support of the SR&ED because…”; or
  • “the work of…(where the RTA provides the names of employees)…was related to customer support because….”.

Once all of the facts and rationale have been presented, the report must have a formal statement of the determinations. Determinations in reports should be stated in a specific manner. Although the discussions and arguments in the report may use the language of the claimant or CRA publications (such as the three criteria of 86-4R3), determinations must always include a formal reference with respect to the definition of SR&ED in subsection 248(1) of the ITA, since that is the legal basis for the RTA’s determinations.

The formal statement with respect to subsection 248(1) is necessary but not always sufficient to summarize all of the RTA’s findings. The mandate of the RTA involves more than just determining if the claimed work meets the definition of SR&ED set out in subsection 248(1). Therefore, the RTA’s report must also indicate additional decisions that are necessary and relevant to the FR in making their determinations on expenditures, but do not relate directly to subsection 248(1). The formal statement should be understood in the context of the entire report.

In all cases, the formal statement in the RTA’s report must indicate how the work claimed meets or does not meet the definition of SR&ED in subsection 248(1) of the ITA. A statement with respect to subsection 248(1) must not refer to expenditures, relate to the administration of the SR&ED, or be worded for the convenience of the claimant. Furthermore, only words used in the definition can be in the summary. Since words such as “project,” “eligible” and “activities” are not used in the ITA ‘s definition, the RTA should be careful about the context of how these words are used. In addition, the RTA must not substitute apparently similar expressions, paraphrase or truncate the words of subsection 248(1) and use them in the formal statement. As an example, “commercial work” does not mean the same thing as “commercial production” or “commercial use.” Also, there should be no implication that any additional words are part of the ITA.

When the RTA determines that some of the claimed work within a project is not SR&ED, they must explain in the SR&ED Review Report why the work does not meet the definition of subsection 248(1) of the ITA, referencing the specific part of the ITA where the definition is not met.

Therefore, the decisions include a summary and details, as described in the following:

  • Summary: A statement that [All of, some of, none of] the work described in [identify the project(s)] is [Identify the specific paragraphs of subsection 248(1) of the definition that apply] of the definition of SR&ED in subsection 248(1) of the ITA; and
  • Details (if required): A specific statement of what work [identify the project(s) and the work] does not meet the definition of SR&ED.

An example of the summary and details is:

Some of the work described in Projects A, B, and C is Experimental Development as defined in paragraph (c) of the definition of SR&ED in subsection 248(1) of the ITA.

Specifically, for Project A, the work of person A, claimed as support work under paragraph (d) of the definition of SR&ED in subsection 248(1) in the ITA, is not support work because it is not in direct support of the Experimental Development;

For Project B, all of the data collection described is routine data collection as described in paragraph (k) of the definition of SR&ED in subsection 248(1) of the ITA; and

For Project C, none of the work is Experimental Development because the work was not for the purpose of achieving a technological advancement as required by paragraph (c) of the definition of SR&ED in subsection 248(1) of the ITA.

The report would also identify any other compliance issues not directly related to the definition of SR&ED, but relevant to the work of the FR.

Two examples of how to word the summary of compliance issues not directly related to the definition of SR&ED:

For Project D, the work building the prototype was conducted outside Canada;

For Project E, the lathe was used less than 50% of the time for non-SR&ED work.

Finally, determinations about whether the work on a project is SR&ED should not be extrapolated to other projects or other tax years without a reason. SR&ED is determined by the facts of the case, such as determining whether the technological advancements have been achieved for continuing projects. When projects are considered identical in terms of the procedures followed or content, projects can be grouped for SR&ED review reporting purposes. This point was discussed in detail in Chapter 4.5.

6.8.7 Work with Claimants

This section describes how the RTA worked with the claimant during the review process. This would include all assistance provided to the claimant to explain the SR&ED Program, and the review process, how to identify SR&ED, and how to prepare their SR&ED claim. It would include any presentations, explanations of the meaning of SR&ED, advice on documentation to support an SR&ED claim or project description requirements, as well as time spent explaining review results, especially determinations that work does not meet the definition of SR&ED as described in subsection 248(1) of the ITA. If any observations of unclaimed work are made and discussed with the claimant, they should be mentioned here (refer to Chapter 5.8.2). Any work of the type suggested in the “working with claimants” boxes in the CRM would also be included here.

6.8.8 Claimant Concurrence

A brief statement indicating if the claimant was informed of the results of the review, and if the claimant indicated that they did or did not concur with them, should be given.

If there are any known outstanding areas of disagreement, descriptions of these specific areas of disagreement should be provided. If adequate details concerning these disagreements have already been provided in Section vi Review Observations, Findins, and Decisions, there is no need to repeat this information again. This section can refer the reader to Section vi for further information. Regardless of which section provides this information, the important underlying principle that the report should illustrate is that the claimant had opportunity to make representations. These representations should be documented along with the steps taken by the reviewer to resolve claimant concerns. The reviewer’s response to the representations should be documented. Application Policy 2000-02R, Guidelines for Resolving Claimant’s SR&ED Concerns – Revision should be the guiding document in these situations.

Note that this section does not always apply. For example, the concurrence may not be known until after the report is sent to the claimant and there is no revised report.

6.8.9 Recommendations or Requirements for Future Claims

This section serves as an additional reminder to the claimant and to future RTAs of any recommended improvements to future SR&ED claims from the claimant. As indicated in Chapter 5, if the claimant persistently ignores requests for supporting documents, an option is to send a better books and records letter via informal or formal requests (refer to Appendix 4). These letters can be sent to the claimant at any time during the review; the RTA does not need to wait until the review is complete. The RTA should avoid generic or vague statements and make sure that only pertinent recommendations are made.

It is preferable that any recommendations or requirements for future claims be formally indicated to the claimant in the Proposal Letter. Nevertheless, this section provides an additional opportunity to clarify areas of weakness in the original SR&ED claim and explain positive steps that can be taken in the future to avoid reoccurrences such as claiming work that is not SR&ED or not substantiated.

6.8.10 Financial Review Considerations

The RTA can use this section to document any aspects of the claim believed to require the attention of the Financial Reviewer but are not elsewhere indicated in the Review Report. Examples include equipment only partially used for SR&ED, use of non-taxable suppliers, separation of SR&ED and commercial / marketing work, and identification of work not in support of or commensurate with the needs of SR&ED.

6.8.11 Signatures / Report Review

The SR&ED Review Report must be signed by the RTA. There is also a place for the RTM to sign to indicate their acceptance of the report. The RTA must consult the RTM and obtain the RTM’s acceptance in review cases where any one of the following scenarios applies:

  • the claim is found completely ineligible or substantially ineligible;
  • there is a significant change in eligibility of claimed work from the prior year’s review;
  • the claimant does not concur with the RTA’s findings; or
  • the scope of the actual review is significantly different than what was planned based on the issues identified during screening and risk assessment.

The RTA is responsible for the quality of their work and reports. The RTM has additional responsibility for the quality of SR&ED reviews and SR&ED Review Reports delivered by their work unit. The RTA must therefore comply with any quality assurance procedures at a local, regional and national level.

Review of SR&ED Review Reports by the RTM is a key element in ensuring quality. The RTM’s signature indicates that the review and the SR&ED Review Report have been reviewed against the standards set out in the CRM and that they comply with the standards of the SR&ED Program.

RTAs may also have their reports reviewed by their co-workers (peer review) prior to the completion of the report.

6.9.0 Other Methods to Document the RTA’s Work

The Short SR&ED Review Report or Memo is the preferred method to report work when all the issues are resolved in the claimant’s favour, as noted in Chapter 6.7. These include review issues identified by the Control Centre that were resolved by the RTA.

6.9.1 Short SR&ED Review Report

A template is in Appendix 6.3. The Short SR&ED Review Report includes the following elements:

  • Identification section
  • The issue or issues that were identified (by the Control Centre, the FR and / or the RTA, which would include the corresponding project(s);
  • Documentation of the actual work done to resolve the issues identified in the Review Plan, such as:
    • Claimant contacts, telephone calls by the RTA, on-site visit;
    • Request for Information (RFI) – specify information required and its significance;
    • Consultation and the response;
    • Actions and responses; and
    • Information seen and relevance.
  • Decisions: A brief explanation of the rationale for the determination. Include the rationale if it is recommended that all the issues can be resolved in the claimant’s favour, with or without an on-site visit. That is, identify what is the rationale based on and how the issue was resolved; and
  • Financial review considerations, if any.
6.9.2 Memos

A Memo has no specific format. As noted in Chapter 6.7, it may be a memo to the FR or a memo to file and is not sent to the claimant. It would include all the above information that is relevant to the particular case.

6.10.0 Formatting and Indexing the TF98 file

When the review is concluded, the RTA should review the TF98 file to make sure that all needed information is present, and unnecessary information is either removed or sent to the appropriate location, and that the documents in the file are indexed and numbered.

It is recommended that the file be organized as follows:

  • The top page of the TF98 file is the Table of Contents / Index, which is a chronological list of every document in the file. Each document is identified by date and number of pages, a brief (one or two line) description and the source of the document;
  • Each working paper and supporting document is identified with the claimant’s name, Business number, period covered, a description of the contents, the preparer’s name and the preparation date, if any, of these are not clear from the document itself. Documents and working papers more than one page in length do not need to be identified on each page. They can be grouped appropriately and described as a group. In these cases, it would be sufficient to identify the first page and identify the number of pages in the document. Each page of the document would be numbered so that the original order can be reconstructed, if the file is removed from the folder and copied;
  • Documents are placed in the TF98 file in chronological order (oldest on the bottom);
  • T2020s or documents with more than one entry date are placed in the file in chronological order, using the last entry date as the representative date for the full document;
  • Undated documents are given a date of receipt, which is the date used for filing; and
  • Working papers and supporting documentation should be cross-referenced and numbered to make it easy for another person to follow the information trail that lead to the review decisions made.

The original SR&ED Review Report is kept in the TF98 file. Chapter 6.5.0 discusses the general principles of what must not be kept in the TF98 file. Generally, only documentation that is relevant to the case should be kept in the TF98 file.

Chapter 7.0 Concluding the Review

7.1.0 Summary of Chapter

This chapter discusses procedures for concluding the SR&ED Review. The main topics are:

  1. Content of the Proposal Package;
  2. Presenting the proposal to the claimant;
  3. Procedure for resolving claimant’s concerns with the proposal; and
  4. Concluding the review after resolving claimant’s representations.

7.2.0 Requirements of Chapter

Following from Chapter 1.6.0, the minimum requirements of the research and technology advisor (RTA) outlined in this chapter are as follows:

  1. Assist the financial reviewer (FR) in preparing the contents of the proposal letter package by providing any needed explanation of the proposed changes with respect to eligibility and any other technical issues;
  2. Explain the proposed decisions with respect to eligibility or other technical issues to the claimant;
  3. Respond to any claimant’s concerns, rebuttal or additional information relating to the RTA’s work, as reflected in the Proposal Package;
  4. Consult the research and technology manager (RTM) in contentious situations; and
  5. Document relevant review work.

7.3.0 Proposal Package Contents with Adjustments

Note that while joint proposals are strongly encouraged, there may be situations that warrant the issuing of a draft SR&ED Report prior to the financial reviewer’s proposal. An example is where the RTA completes their review well before the FR. The decision to issue a draft report is at the discretion of the RTA and is subject to local management preference.

While the proposal is the formal statement of Canada Revenue Agency’s (CRA) decision, as noted earlier it is preferable if the claimant has already been told the main points of the proposal, and both the RTA’s and the FR’s concerns, so that there will be few surprises in the letter. However, the claimant may not have the full picture or all the details. Therefore, while discussions with the claimant likely took place throughout the review process, the proposal (and if required, the meeting) is the opportunity to draw all issues to a resolution, and to ensure that the claimant is aware of the adjustments proposed, whether or not concurrence is reached.

The Proposal Package consists of the following:

  • The Proposal Letter: This letter summarizes the proposed adjustments on claimed expenditures. This letter describes all the financial adjustments based on the technical and financial reviews. It also includes a summary of the RTA’s decisions on eligibility and eligibility-related issues. The Proposal Letter is prepared by the FR. If possible, it is preferable that it be signed jointly by the FR and the RTA. Upon request, the FR provides a copy of the proposal letter to the RTA. The claimant is normally given 30 days from the date of the Proposal Letter to provide any response, rebuttal, explanation, further documentation relating to the proposed adjustments, or requests for an administrative second review. A reasonable extension of time can be allowed if such is requested by the claimant to consider the proposed adjustments and to prepare a response. It is recommended that the extension be confirmed in writing bearing in mind the possibility of periods under review becoming statute-barred;
  • Sample paragraphs relating to the RTA’s review: Refer to Appendix 10;
  • The RTA’s SR&ED Review Report: Refer to Chapter 6.8.0 for a description of how to prepare the report and its contents. As discussed in Chapter 5.6.9, it is preferable if the claimant would already have a good idea of the decisions prior to the Proposal Letter, and in some cases may already have received a copy of the draft report. Note that if a draft report is issued, it must be marked “draft” and a final report must also be issued even if the content has not changed. See Chapter 5.6.9 for a discussion of the procedures concerning the various communications and report scenarios. It is understood that the report can and will be amended, if new information that is provided after the proposal gives a reason to do so; and
  • Recommendations or requests to the claimant: This includes specific requests or recommendations to the claimant as required, such as improving books and records, improving project descriptions, identifying SR&ED, structuring their claim, and references to publications and seminars. When recommending improvements to project descriptions, the RTA should use the current problems as an illustration.

7.4.0 Proposal Package Contents without Adjustments

7.4.1 All work is SR&ED

If all issues have been resolved in the claimant’s favour, and if no financial adjustments are to be made, the claimant is informed that the file is being closed without any changes. If the RTA made an on-site visit and some issues have been discussed with the claimant, the RTA should write a short SR&ED Report with an explanation of the position taken with respect to the issue (for example, that the work is SR&ED). This is because the claimant has likely spent some time explaining and justifying their position to the CRA, and this would provide some assurance and guidance for them in future claims.

7.4.2 Work is SR&ED but there are technical-financial issues

Even if all the scientific issues have been resolved in the claimant’s favour, some financial adjustments may be proposed after the financial review. In this case, the FR will issue a Proposal Letter describing the proposed financial adjustments. The work done by the RTA may be documented the same way as described in Chapter 7.4.1 by means of a short SR&ED Report. If needed, the RTA could provide some input to the FR’s Proposal Letter where helpful advice to the claimant for future claims could be given.

7.5.0 Presentation of the Proposal

The specific details of this process depend on whether the proposal is presented jointly by the FR and the RTA or whether the financial and technical parts are discussed separately. However, the principles remain the same.

It is recommended that the proposal be presented jointly. To do this, the RTA and the FR have these options:

  • Present the proposal package to the claimant during a meeting held specifically to explain the proposed adjustments;
  • Discuss it over the phone; or
  • Send it to the claimant and discuss it afterwards, if requested by the claimant.

The presentation of the proposal is not intended to be a meeting to rebut the CRA’s position. It is intended to provide the claimant details of the rationale for the decisions and thus allow them to prepare a rebuttal or additional representation, if they intend to.

Sometimes it is easier to explain or discuss the adjustments in a meeting rather than over the phone or through written correspondence

Whatever the method, the claimant must receive a full explanation of the proposed adjustments and must be given adequate opportunity to respond to them. The FR would explain the financial adjustments and the RTA would explain how the eligibility and other technical issues were resolved.

7.6.0 Representations after the Proposal letter

7.6.1 Procedure for the CRA’s Response to Claimant

Note: these same principles apply if a draft SR&ED Review Report is sent to the claimant and the RTA responds to the representation prior to the proposal. If the claimant agrees with the proposal, or there is no written response to the proposal within the 30 days allowed, the FR processes the (re) assessment. Otherwise, the RTA must follow the following procedure:

1. If the claimant does not agree with the proposal, they must send their representations to the CRA in writing. If they do not reply in writing, they must be informed to do so prior to any additional meetings or responses and prior to the end of the 30-day deadline. Examples of claimant requests and representations are as follows:

a. Requests for additional explanation (the claimant did not understand our rationale);
b. New arguments that identify what the claimant perceives as specific flaws or errors in the CRA’s work;
c. Additional information in support of the claim, which the claimant hopes will result in a changed decision; and
d. A request for an administrative second review (following the procedures of Application Policy SR&ED 2000-02R Guidelines for Resolving Claimant’s SR&ED Concerns). If the claimant had already made this request prior to the proposal, the CRA would have already responded to it. Note that, in accordance with Application Policy SR&ED 2000-02R, the claimant is entitled to request for an Administrative Second Review anytime before the file is closed and processed.

2. When received, respond to representations and/ or submissions from the claimant. A detailed response is necessary only if the submission is relevant to the review issues and decisions. If the submission is not relevant, acknowledge its receipt and give the claimant a brief explanation of why the decision remains unchanged. Examples of non-relevant claimant submissions or representations include:

a. No new information or arguments are submitted by the claimant or the claimant resends information previously reviewed by the RTA;
b. Request for a meeting made, but with no new information given in writing;
c. Statements that only indicate a disagreement with the CRA, a general criticism of the CRA’s work with no specific flaws or errors indicated, but with no specific question or request for clarification;
d. Statements indicating a disagreement with the CRA’s policy or the CRA’s official interpretation of the legislation; and
e. Criticisms or comments that the CRA has already responded to.

3. The CRA’s response must address all the relevant issues raised by the claimant and explain why the CRA agrees or disagrees. It is not sufficient for the RTA to simply state that the CRA does not agree. The response should, to the extent possible, provide further explanation of the RTA’s decision, explain why the additional information did not change the decision, or indicate that the RTA has changed the decision as a result. The RTA can offer to meet with the claimant to present and explain the technical review results and then require the claimant to respond within a certain period.

4. If any of the representations change CRA’s decision, the proposal letter and the attachments, including the SR&ED Review report, will be modified and sent to the claimant.

5. If the claimant supplies further representation following the initial CRA response, follow the procedure described previously. For as long as the representations are relevant and reasonable, the RTA should accommodate the representations made by the claimant. However, when it is clear that no progress is being made or that the claimant is delaying the process by:

a. not giving all of the requested information at once,
b. requesting without reason additional time beyond the 30 days given to respond to the Proposal Letter,
c. requesting meetings without providing any additional information, or
d. being unwilling to meet to discuss the issues they raised,

then the RTA can give a final response to the claimant based on the information available. Before concluding that the claimant is delaying the process unreasonably, the RTA should inform the FR and the RTM of their intentions. If the FR and RTM agree with the RTA’s decision, then the RTA proceeds to inform the claimant of this decision, either by phone or letter, and the (re) assessment can be processed without delay.

6. Following the CRA’s response to the claimant’s representations, the (re) assessment can be processed by the FR according to the proposal (Refer to Chapter 7.9.0).

7.6.2 Documentation

The RTA should document all relevant discussions and meetings concerning the proposal or the representations, and add this documentation to the file. The documentation should include the date, place and time of meeting, persons present, details of proposed adjustments and the claimant’s representations and position on the proposed changes.

7.7.0 Considerations for Large Claims

In certain circumstances, it may be preferable if eligibility-related issues are resolved prior to issuing the Proposal Letter. If agreed by all the parties including local management and in consultation with the FR, the lead RTA can send a draft report to the claimant, and the claimant’s concerns or additional representations can be addressed in advance of the proposal. The procedure for resolving these concerns and responding to additional representations is discussed in Chapter 7.6.1 and applies to large files as well.

7.8.0 Statute-barred Dates and Waivers

If a tax year for which adjustments are proposed will become statute-barred shortly after the 30-day response period, the Proposal Letter must state that no extension of the 30-day period for representations will be provided without a signed waiver having been received prior to that time. If the claimant refuses to sign a waiver, the file will be processed without delay at the end of the representation period.

Where adjustments are being considered but the file will become statute-barred before the expiry of the 30-day representation period, the FR in consultation with the RTA should decide either to drop the proposed adjustment or to provide a representation period of less than 30 days. Caution should be exercised where representations are requested in less than 30 days. The adjustment should be considered material and approval should be obtained from the Assistant Director of SR&ED.

To avoid such situations, determine the status of the file when it is received from the control centre (CC) and before commencing on the review. Files close to the statute-barred date may need to be reviewed with a higher priority. If in doubt, the RTA should discuss with the RTM and the FR on how to proceed.

7.9.0 Concluding the Review for the RTA

After the period of response to the proposal is over and the RTA has made the final decisions, the FR processes the (re) assessment based on the work of both the RTA and the FR. The RTA can then complete the TF98 file (refer to Chapter 6.10.0). Local Coordinating Tax Services Office (CTSO) administrative procedures determine what is done afterwards.

7.10.0 AIMS Coding

This section is for information purposes only, and provides some details of the Audit Information Management System (AIMS) coding that should be done when a review is concluded. The CRM does not discuss in detail how to code in AIMS or how to classify a review or a result that does not obviously fit into one of the categories below. AIMS coding may be done by the RTA or other staff, depending on local practices. For more information on AIMS coding, consult the AIMS Online Guide. The Program Administration Division, Headquarters, is responsible for the SR&ED part of the AIMS Online Guide.

When the RTA concludes their review, their results are coded in AIMS. There are two fields that are coded in AIMS as a result of work done by the RTA: “Science Review Type” and “Activity Determination Code.”

7.10.1 “Science Review Type” (“Desk,” “On-Site,” “Limited” and “Detailed” Reviews)

For administrative AIMS coding or budget allocation purposes, the “Science Review Type” field is coded as one of three types (A, B, or C):

  • A “Limited Review” is coded in AIMS as “A” and is a review done by the CC. A referral to the RTA is automatically considered a “Detailed” review;
  • A “Detailed Desk Review” is coded in AIMS as “B” and is a review by the RTA where the decision is based only on existing information (such as project descriptions) and/or additional information (such as information requested from the claimant) that may be obtained without visiting the claimant’s place of business; or
  • A “Detailed On-site Review” is coded in AIMS as “C” and is a review by the RTA where making the decision requires a visit to the claimant’s place of business.
7.10.2 Activity Determination Code

This field is a one digit code (numbers 1-5) to classify the results of the RTA’s review, as follows:

  1. All work is SR&ED ;
  2. Some work is SR&ED ;
  3. No work is SR&ED ;
  4. Claim is disallowed for lack of information ; or
  5. Claim is accepted as filed.

Chapter 8.0 Glossary of Terms

Glossary TermTerm Explanation
Audit ManualThe Canada Revenue Agency's (CRA) guide for conducting audits.
Business Consent
form (RC59)
A form used by taxpayers to consent to the release of confidential information about the claimant's Business Number (BN) account(s) to the representative named on the consent form or to cancel consent for an existing representative.
Business Number SystemA CRA mainframe system to access claimant information like addresses and authorizations.
Claimant RepresentativeAn individual or firm who is legally authorized to represent the claimant. Often they assist the claimant in preparing their Scientific Research and Experimental Development (SR&ED) claim and in dealing with the CRA.
ClaimantA person, partnership, or corporation filing an SR&ED claim. In the claim review manual (CRM) this is used when we refer only to those filing an SR&ED claim.
Control CentreThe function in each Coordinating Tax Services Office (CTSO) that reviews SR&ED files referred from the tax centre (TC).
Coordinated ReviewA review where the Research and Technology Advisor (RTA) and the Financial Reviewer (FR) work together cooperatively to review an SR&ED claim.
CORTAXThe CRA Corporate Tax Assessing system. It is an information system for accessing T2 (corporation) tax information.
CTSOA Tax Services Office (TSO) that has some extra administrative responsibilities in the SR&ED Program, usually for one or more other TSOs in a region. There are 10 CTSOs for the SR&ED Program.
Decision / DeterminationIn the context of the CRM, the RTA makes a determination of whether work does or does not meet the definition of SR&ED in the Income Tax Act (ITA). RTAs may make other decisions that don't directly relate to the definition of SR&ED.
Eligible workWork that meets the definition of SR&ED in subsection 248(1) of the ITA.
Financial ReviewA review of an SR&ED claim by an FR to identify SR&ED expenditures.
IssueA matter or question whose outcome needs to be determined or answered.
Memo to FileA memo, not addressed to a particular person, that is put in the file.
NOONotice of objection. A formal disagreement filed by the claimant in response to a Notice of Assessment / Reassessment.
Notice of Assessment / Notice of ReassessmentThe latest assessment of tax for the year filed. The notice is mailed to the taxpayer and provides the taxpayer with the outcome of any review or audit affecting a tax return filed or simply acknowledges that a tax filing that has been accepted as filed.
Outside ConsultantA person hired by the CRA to provide an opinion to the Research and Technology Advisor.
Process review (for CRA internal
use only)
An alternate review technique that focuses on the claimant's process for identifying their SR&ED work (that is, their policies, procedures, organization and systems), rather than on individual projects.
RAPIDThe CRA tax assessment information system for accessing non-T2 tax information.
RelevantAnything supporting a claim or anything used to arrive at a decision.
ResolveTo resolve an issue in the context of the CRM means that the RTA has to make a decision on the outcome of the issue.
Statute barredThe normal reassessment period for a taxpayer is defined in section 152(3.1) of the ITA. Reassessments are "statute barred" (that is, not legally allowed) beyond this period. Some exceptions apply.
TaxpayerDefined in the ITA as "any person whether or not liable to pay tax". This term is used when the CRM refers to taxpayers in general, not just SR&ED claimants.
Technical reviewAn examination of an SR&ED claim by a Research and Technology Advisor.
T2020The form which is used as a general-purpose log or diary by all CRA staff to record all conversations, decisions and actions concerning the file.
TD1170-000The on-line training course for the SR&ED Program Staff.
TF98 fileA file folder for keeping all the information related to the Technical review.
WaiverThe act of a taxpayer who formally gives up certain rights under the ITA. It usually applies either to the right to the normal reassessment period or the right to appeal.

Appendices

Appendix 1 Request for Information Letter: Sample

Date

Coordinating Tax Services Office (CTSO) Address
Name and title of person
Company name and address

Dear Claimant:

Re: SR&ED Claim for the period(s) [insert period, yyyy-mm-dd to yyyy-mm-dd] BN:

As part of the administration of the Scientific Research and Experimental Development (SR&ED) Program by the Canada Revenue Agency (CRA), all SR&ED claims are subject to an initial technical and financial review when filed. During this initial review, we reviewed your project descriptions, but there was insufficient information available for us to answer all our questions concerning the claim.

Specifically, we have the following questions:

For Project A,

For Project B,

For Project C,

In order to facilitate the review, I request that you send me this information by [insert date]. After this information is received, I may still need to do an on-site visit to discuss the work further, but it may be sufficient to complete the review.

If this request needs further clarification, or you need more information about the SR&ED Program, please contact me at [insert your telephone number]. Further information about the SR&ED Program can also be obtained by visiting our SR&ED website at: www.cra-arc.gc.ca/txcrdt/sred-rsde/menu-eng.html.

Sincerely yours,
[Insert Name of RTA]
Research and Technology Advisor
SR&ED Division
[Insert name of your CTSO]

Enclosures

Appendix 2 Initial Claimant Contact Letter: Sample

Date

CTSO Address

Name and title of person

Company name and address

Dear Claimant:

Re: SR&ED Claim for the period(s) [insert period here, yyyy-mm-dd to yyyy-mm-dd]

Business number (BN):

As part of the administration of the Scientific Research and Experimental Development (SR&ED) Program by the Canada Revenue Agency (CRA), all SR&ED claims are subject to an initial technical and financial review when filed. During this initial review, it was determined that the above claim requires a more detailed review.

The detailed review will be conducted by a Research and Technology Advisor who will evaluate the work claimed to determine whether it meets the requirements of the Income Tax Act, and a Financial Reviewer who will determine whether the related expenditures are allowable.

As we discussed on [insert month, day, year], the Financial Reviewer, [insert FR name], and I will be visiting your place of business on [insert time, month, day, year] to conduct the detailed review. The proposed agenda is attached. [The agenda identifies the specific review issues to be discussed from the Review Plan, including the specific projects the issues relate to.] As I indicated to you, you should plan that the meeting would be from [insert start and end times], but it could end earlier. It is possible that this will not be enough time. If additional time is needed, we would arrange a subsequent meeting later.

During the meeting, we will need to review the supporting information for your SR&ED claims, specifically [insert a list of information needed].

During the meeting, we will be asking some questions to help determine whether the work claimed is SR&ED and the expenditures are allowable. In addition to questions that may arise during these discussions, please be prepared to respond to, and provide supporting documentation for, the following issues. [Insert a list of specific issues]. Our discussions during the review may possibly expand to include other issues or we may request documentation related to issues not on this list.

To facilitate the review, the people most familiar with the work done should attend the meeting. An information sheet about the claim review procedures, your rights and responsibilities is enclosed. Two useful links are as follows:

Taxpayer Bill of Rights: www.cra-arc.gc.ca/gncy/frnss/rights-eng.html and

Guidelines for resolving claimants’ SR&ED concerns:

www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/p2000-02r-eng.html.

If you would like a paper copy of any of these documents or if you have any questions, please contact [insert FR name and FR telephone number] or me at [insert your telephone number].

Sincerely yours,

[Insert Name of RTA and insert name of FR if a joint letter]

Research and Technology Advisor / Financial Reviewer

SR&ED Division

[Insert name of your CTSO]

Appendix 3 Agenda for an On-Site Visit: Sample

1. Introductions

CRA review team [By the CRA]

Claimant group including partners, contractors, and authorized representatives, if present [By the claimant]

2. Overview of claimant business and SR&ED projects [By the claimant]

Explanation of how the claim was put together, identifying documents and references used in preparing the claim [By the claimant’s representative, if any]

3. Introduction to the SR&ED Program, claimant services, and the review process; updates on policies, guidance documents, forms, and other publications; upcoming SR&ED public seminars; and hand-out of review-related communications, including the “Guidelines for Resolving Claimants’ SR&ED Concerns” and authorization letters for Outside Consultants, where applicable [By the CRA]

4. Tour of business premises and project sites including inspection of supporting evidence, laboratories, equipment, prototypes, scraps, etc. [Led by the claimant]

5. Review session on a project by project basis, on the projects identified for review in the initial claimant contact letter

Project 1

Project description, activities within fiscal year FY, and supporting documentation [Presentation by the claimant]

Eligibility and expenditure issues – discussion and resolution, covering the issues listed in the initial claimant contact letter, though this list may change as new information becomes available [Led by the CRA]

Issue 1….; Issue 2….

Interview of other project personnel, as needed [By the CRA]

Outstanding issues, if any – listing of additional documentation and evidence to be further provided by the claimant [Led by the CRA]

Project 2…; Project 3

6. Concluding the on-site visit

Status of projects and issues [Recapitulation by the CRA]

Action items and timetables [By the CRA, for the guidance of both claimant and CRA reviewers]

Appendix 4 Books and Records Letters: Samples

4.1 Informal Books and Records Letter

Date

CTSO Address

Name and title of person

Claimant name and address

Dear Claimant:

Re: SR&ED Claim for the period(s) [insert period here, yyyy-mm-dd to yyyy-mm-dd]

BN / Social Insurance Number (SIN):

During our recent review of your SR&ED claim for the period from [insert date] to [insert date] we determined that your records are not adequate for purposes of the Income Tax Act.

[Insert description of the specific deficiencies and what we require them to do in the future, such as how long to keep the documents.]

Copies of [insert appropriate documents, if required] are enclosed for your reference.

We trust this information and these explanations clearly outline the Canada Revenue Agency’s requirements on this matter and that you understand the importance of keeping documents that support the SR&ED tax credit claim. If you do not keep this documentation, future SR&ED tax credits may be disallowed.

To show that you will comply with this request, please sign and date the enclosed agreement and return it to our office within 30 days. A copy of Information Circular 78-10R4, Books and Records Retention / Destruction and a return envelope is enclosed for your convenience. If you require further assistance, please call me at the number listed below.

Yours truly,

Reviewer Name
SR&ED Division
Name of TSO
Telephone: [Insert local Phone Number]

Facsimile: [Insert local Fax Number] Address: [Insert TSO Address] Internet: www.cra.gc.ca

Enclosures

4.2 Informal Books and Records Agreement

Director Name

Name and Address of Tax Services Office

Attention: [insert reviewer name])

Re:

Name of claimant

BN / SIN:

Address

City / Town, Province Postal Code

Postal Code

In addition to the books and records I currently maintain, I will also keep the following records to comply with the requirements of the Income Tax Act in order to claim SR&ED Tax Credits:

[Insert books and records required]

I understand that I have to keep all the records and supporting documents for the time periods specified in Information Circular 78-10R4, Books and Records Retention / Destruction, and that I have received a copy of this circular.

Name and title: _____________________________________

Signature: _________________________________________

Date: ____________________________________________

Appendix 5 RTA Review Plan: Samples

5.1 Standard Review Plan: Sample

1. Identification Section

ABC Inc.

Taxation Year End (TYE): 05-31-2009

B.N.: 55555 5555 RC0001

2. Technical and Joint Technical-Financial Issues

Identify technical and joint technical-financial issues with the associated project(s), including issues previously identified by the Control Centre and in the tax centre (TC)’s screening.

Issue 1: __________

Issue 2: __________

3. Suggested Scope of the Review

Outline suggested scope of review if not all the projects / issues will be reviewed in detail. Explain the rationale for the scoping.

Project / Issue 1: __________

Project / Issue 2: __________

4. Plan and Steps to Resolve the Issues

Outline plans and steps to resolve the above issues, such as a list of questions to ask, information to look at, details concerning an on-site visit, consultation, etc.

Project / Issue 1: __________

Project / Issue 2: __________

5. RTM (or Delegate) approval – Signature & Date (if needed)

5.2 Review Plan for a Large Claim: Sample

1. Identification section

Companies involved: Name, TYE and BN for all companies involved

Relationships among the companies: __________

2. Technical Review Issues

Identify technical and joint technical-financial issues (with the associated project(s) / companies / facilities) with rationale for the selection, questions to ask the claimant, and claimant personnel needed to be interviewed.

Project / Issue 1: __________

Project / Issue 2: __________

3. Financial Review Issues

Identify financial issues (with details of the associated project(s) / companies / facilities) with rationale for the selection.

Project / Issue 1: __________

Project / Issue 2: __________

4. Identify Personnel

Identify personnel required for the review with their roles and reasons (if applicable):

  • RTA #1, projects / issues to review: __________
  • RTA #2, projects / issues to review: __________
  • OCs, projects / issues to review: __________
  • FR #1: __________
  • Other FRs needed: __________

5. Consultation needed

a. Name of Large file case manager (LFCM): __________

Results of consultation: __________

b. Other consultation needed and why: __________

Results of this consultation: __________

6. Outline Major Steps

Outline the major steps to resolve the issues (both technical and financial issues: __________

Initial meeting with claimant: __________ Estimated date: __________

Details of other meetings required (such as when, where, CRA and claimant personnel needed, estimated time required, issues to discuss).

Meeting 1: __________

Meeting 2: __________

7. Approvals / signatures and dates

RTM (if needed): __________

Financial review manager (FRM) (if needed): __________

LFCM (if needed): __________

8. Work Schedule (Gantt chart; optional)

Appendix 6 SR&ED Review Reports

6.1 Standard Review Report Template

1) COVER PAGE

Cover page

NOTE:

This report gives the determination of the RTA concerning whether claimed work meets the definition of SR&ED in subsection 248(1) of the Income Tax Act, and decisions related to the scientific or technological aspects of the claimed work which help the Financial Reviewer to identify SR&ED expenditures. The determination of whether an expense is for SR&ED is made by the Financial Reviewer based on the determinations of the RTA as well as all the other requirements of the Income Tax Act.

2) SUMMARY RESULTS BY TAX YEAR

2 - Summary of

[Any additional details can be added if the tabular summary is insufficient]

3) REVIEW ISSUE(S) and OBJECTIVE(S)

[Joint financial-technical issues may also be identified here.]

4) REVIEW METHODOLOGY

[This includes the actions taken by the reviewer prior to, during and after the on-site visit (if made), as well as the identification of the claimant’s supporting evidence, if it was reviewed]

5) SUPPORTING EVIDENCE REVIEWED

[This includes a list of supporting evidence presented by the claimant and a discussion of the significance of it, relative to the review issues]

6) REVIEW OBSERVATIONS, FINDINGS, AND DETERMINATIONS

[If the work described in the Form T661 project information is accurate and sufficient, it is only necessary to refer to it. If not, include a description of the work reviewed. Include any observations, decisions on joint technical-financial issues and claimant responses to the preliminary determinations of eligibility, if any, and the status of the project at the end of the review period.]

The determination is a formal statement concerning the definition of SR&ED in subsection 248(1) of the ITA. This section also includes any decisions on any other relevant compliance issues not directly related to the definition of SR&ED in 248(1). It has three parts:

(1) Summary

[All of, some of, none of] the work described in [identify the project(s)] is [Identify the specific paragraphs of subsection 248(1) of the definition that apply] of the definition of SR&ED in subsection 248(1) of the ITA.

(2) Details (if required)

Specifically, the following work described in [identify the project(s) and the work] does not meet the definition of SR&ED, as follows:

(3) An identification of other compliance issues not directly related to the definition of SR&ED in subsection 248(1), which will be used by the FR.

7) WORKING WITH THE CLAIMANT

[In this section the RTA outlines how they worked with the claimant, such as all the assistance provided such as presentations, explanations about SR&ED and advice on improving documentation or project descriptions, indications of unclaimed work that may be SR&ED, and efforts made to explain why work is not SR&ED.]

8) CLAIMANT CONCURRENCE

[If the claimant does not respond to queries about concurrence, indicate this.]

9) RECOMMENDATIONS OR REQUIREMENTS FOR FUTURE CLAIMS

[Optional section. It is preferable that any recommendations or requirements be indicated to the claimant in the Proposal Letter or in informal / formal requests]

10) FINANCIAL REVIEW CONSIDERATIONS

[This section is used to document any aspects of the claim believed to require the attention of the Financial Reviewer but are not elsewhere indicated in the Review Report.]

11) SIGNATURES

Signed: ________________________________ Date: _____________

[Research & Technology Advisor]

Reviewed by: ___________________________ Date: _____________

[Signature of Research & Technology Manager]

6.2. Old versus New Report Formats – Summary
6.2. Old versus New Report Formats – Summary6.3 Short SR&ED Review Report Template

6.3 Short SR&ED Review Report Template

6.3 Short SR&ED Review Report Template-2

6.3 Short SR&ED Review Report Template-3

Appendix 7 Information Sources & their Importance

 

Source of InformationSignificance / value / comments
Control Centre’s commentsThe Control Centre's comments help to determine the scope of the review based on the reason for selection. They are used to communicate the areas of concern that require specific review and / or comment by the reviewer. The RTA uses this information to develop the Review Plan. As indicated in the CRM, the Control Centre’s comments should be addressed during the review.
Risk Grid and claimant history from the TCThis summarizes the claimant’s SR&ED history (for example, review results, claim growth, services) and basic financial information. This may be viewed via the SR&ED Risk management Tool.
CRA Information SystemsAIMS and CORTAX have the tax history of the company. In addition to SR&ED history, they contain corporate information like addresses, names of owners and so forth.
Current year TF98 fileThis may contain project information which provides the technical information on the work which the RTA will need to review to identify what the review issues are. Note that as of 2008, project information may only be available for viewing in CORTAX.
Prior years TF98 filesThey summarize the SR&ED claimant’s history in detail and include descriptions of prior year work (important for multi-year projects), the results of prior year reviews, communication and correspondence with the claimant or SR&ED services received (such as Preclaim Project Review (PCPR), Account Executive (AE)). Note that older TF98 files may be in archives.

In particular, they provide details of any issues or past problems and how they were resolved, areas that need to be followed up, and requests made (especially for improved documentation) to the claimant.

Prior review findings will help to develop the Review Plan. Information from prior reviews is retained either electronically or in the hard copy files. Of particular value are recommendations to the claimant (if any) requiring improved documentation.
PCPR & AE InformationIf the claimant has an AE or has received a PCPR, those files have relevant information not contained elsewhere.
Form T661 InformationThis financial information provides cost breakdowns per project, and is important in determining the focus and scope of the review. The nature of the expenditures claimed is important for identifying potential joint financial / technical issues.
Publicly
available
information
The claimant's web site may provide general information about the claimant, such as information on products, projects and R&D, their status, and future plans. Note: Some websites may be blocked by the CRA. RTAs may gain access to blocked sites that are necessary to do their job by applying online at this website: Enhanced Internet Access (for CRA internal use only).

For larger companies, annual reports and business news may provide useful information on the structure of the claimant and their major business projects.

Textbooks, handbooks, manuals, trade news and magazines may be helpful in establishing current practice or the technology base.

As indicated in the CRM, relevant information is printed and stored in the TF98 file.
Court RecordsThe Ministry of Justice website may provide details of court cases involving the claimant or similar issues.
Prior year FR reportsThese can provide insight into the resolution of issues identified in prior years, particularly concerning financial / technical issues. The FR involved may also be able to provide additional insights.

Appendix 8 Special Situations and Alternative Review Approaches

8.1.0 Files with Previous or Outstanding Notices of Objection

As discussed in Chapter 2, claimants have a right to file an Notice of Objection (NOO) if they disagree with their assessments. This means that RTAs may find themselves with claims where prior year reviews have been subsequently reviewed or are being reviewed by the Appeals Division. Additionally, claimants can take their objections to the Tax Court of Canada.

While the RTA is normally not involved in the review by Appeals unless new information is submitted, it is important to know if there are any prior year claims currently in Appeals and the outcome of any completed appeals.

1. Identifying Appeals Files with Notices of Objection

For completed objections with a technical issue, copies of the decisions are sent to the Assistant Director (AD) of the local CTSO from Headquarters (HQ), Stakeholder Relations Division. Copies of these decisions should be placed in the applicable TF98 file by the CTSO. For files currently under objection, there are two means of identifying them from the CRA information systems. First, all active objections have a notional RAP [N] in CORTAX showing for the year under objection. The second indicator is in the file charge-out system. The file would be charged out to Appeals. If the RTA does not have access to these systems, the RTM or FR or control centre (CC) could help.

If the RTA finds out that either indicator is in CORTAX, they could then contact Appeals to see if the objection was related to SR&ED and whether the decision might affect the year under review.

Sometimes appeals can inform the RTA when a decision on the active objection can be expected. Whether the decision is imminent or not could affect how the RTA proceeds with the review.

Normally, the T2 file will include the NOO and all of the Appeals reports. An exception occurs when Appeals anticipates a Court challenge by the claimant and keeps their package until the issue is settled.

2. Basic Principles

There are a few basic principles to consider when objections or court cases are involved:

  • It is recommended that the current year review not be delayed as a result of the objection, unless requested by the claimant;
  • Objections may result in additional information becoming available. This information should be considered during the “regular” review; and
  • Any deficiencies with respect to defensibility or due process noted during past Appeals reviews should be corrected by the RTA.

When the RTA knows of an outstanding or prior objection that relates to a previous technical decision, this should be taken into consideration in conducting the review for the current year’s claim. The RTA should consult the RTM as well as the FR in order to determine the best review strategy. Delays may need to be added to AIMS.

It is CRA policy that reviewers, whether financial or technical, must not try to interfere with the Appeals process, for example, to attempt to settle the issue for the Appeals Division, or to try to influence the decision of the Appeals reviewer. However, it is acceptable to contact Appeals in matters relating to the facts. It may be beneficial to inform Appeals of the outcome of the current year’s claim review as it may make it easier for them to resolve outstanding objections.

3. Completed Objections

There are two basic situations:

  • The prior years’ objections have been resolved, and the Appeals review supported the original decision. If this is the case, the RTA can proceed with the review without any special considerations.
  • The prior year objections have been resolved, but the Appeals review does not completely support the original decision, and the issues / projects continue into subsequent years. In this situation, the RTA should note why the original decision was not supported, and in subsequent reviews correct the weaknesses noted by the Appeals review.

If the RTA thinks that certain factors distinguish the current issues / projects from the prior Appeals review, the reasons should be documented and approved by the RTM before the review is concluded. If a decision contrary to Appeals is maintained, the reasons for the disagreement should be documented and supported by clear rationale.

If the CTSO accepts the claim in the current year as filed, this does not bind them to accept the claim in subsequent years as there is no decision on eligibility and each year’s claim is reviewed on its own merits. The letters sent to the claimant must make these points clear.

4. Active Objections

a. Objections for a Prior Year:

Depending on the nature of the issues under objection, one of the following three options may apply:

  • If no issues or projects relate to the objection, the review can proceed normally.
  • If some issues or projects relate to the objection, the claimant should be given these two options:
    • Delaying the entire review until the Appeals decision(s) are available. The RTA would inform the claimant of the estimated delays (as informed by Appeals) and how the prior year objection and issue(s) affects the current year claim. In this case, a delay code would be added, or
    • Review the issues and projects not affected by the objection and treat the affected issues the way they were earlier treated by the RTA. The claimant would be informed that after the assessment they could then file an objection for the disputed work.

If the claimant provided additional information to the Appeals Division that was not provided during the “regular” review, the Appeals Division sends it to the RTA who can consider whether they can change their original decision (resolve the issues in the claimant’s favour) on the basis of this new information. If this can be done, then the RTA with Appeals and the RTM can determine whether to proceed with the review. If a review is performed, the RTA must inform Appeals of the results; this may affect the results for the previous year.

b. Objections for the Current Year:

It is possible that there can be an outstanding objection for a current year claim. That is, a claim could be assessed, an objection filed, and the claimant later filed a requested adjustment for the same year within 18 months of the tax year end. In other words, there is an objection and an outstanding file for the same year. As for a prior year objection, normally the Appeals Branch would arrange contact with the RTA via the local AD, and the RTA must follow the instructions of the local Appeals Officer. The claimant must be informed that if they do not want to wait until the objection is resolved before the revised claim is processed, the reassessment for that year would cancel the objection, and a new objection would need to be made. These considerations apply:

  • The additional work claimed relates to the issues and / or projects under objection and the previous objection can be accepted on the strength of the new information. Consider the relevance of any new information supplied that could relate to the previous objection. If the RTA can accept the additional work as filed, the Appeals Officer must be notified.
  • The additional work claimed does not relate to the previous objection. The review can proceed normally, taking into consideration the administrative matters with the objection that are noted above.

5. RTA’s Involvement with Active Objections

In some circumstances, the RTA may be directly involved with outstanding objections.

Appeals may request that the year under objection be reviewed with the current year claim. Therefore, the RTA may be involved in the review of a file with an outstanding objection for a prior year. Such work is only done on request and under the direction of the Appeals Branch. Normally the Appeals Branch arranges the review via the local AD. The RTA must follow the instructions of the local Appeals Officer if this happens. This is possible when:

  • A determination on the work has not been previously given, as the claim was disallowed as incomplete or for lack of information. Thus, the RTA’s review essentially constitutes a first review. If the review by the RTA is unfavourable, Appeals will do another review without further involvement of the TSO or RTA; or
  • Appeals requests that the RTA review additional information received with the objection, with a view to determine whether they can accept the objection on the strength of the new information. If a favourable determination cannot be given, Appeals will then give the claim a second review; or
  • There is an objection for a current year claim. Refer to Appendix 8.1.

6. Court Cases

If the original decision by the RTA is appealed to the Tax Court and the original review is not supported by the court, subsequent reviews must correct the weaknesses of the original review. The RTA must discuss this with the RTM. In some cases, the result of the court decision may set a precedent and requires a change to the CRA administrative policy or interpretation of the legislation. If this happens, the RTA will receive instructions from management, and future reviews concerning this issue must be done according to the new policy.

8.2.0 Bankruptcies, Company Shut Down, or Facility Sold

In situations such as bankruptcies, company shut down, or facility being sold it may be difficult to obtain required information. A physical facility may no longer exist and personnel may no longer be available. Former R&D personnel may not be available to provide information. In the case of bankruptcy, the records and equipment may have been seized or dispersed. If the records and equipment still exist, it may be possible to arrange an inspection via the trustees or the new owners. In this situation, while the evidence may be limited, the onus is still on the claimant to support their position to the best of their ability. The RTA must rely on the available evidence and make an appropriate determination using professional judgement. On the other hand, sometimes if the facility is sold the work could continue under a new organization, so that a company bankruptcy does not necessarily mean that work on the project has ended. If it has ended, that is a factor in evaluating risk.

8.3.0 Out-of-Country Equipment, Records or Personnel

Sometimes the claimant is a multinational company and relevant records or personnel are outside of Canada. In other cases, the facility is sold and the operations are moved out of Canada. The claimant’s obligation to support their claim is not diminished by a move outside of the country, and the CRA is usually not obligated to pay for travel outside of the country (even though some exceptions exist). In such a case, the claimant has the option of bringing their books and records, and / or personnel to Canada, or the option of paying the CRA for any required travel to perform the review. Out-of-country travel is subject to certain administrative approval procedures or requirements, and if this is contemplated, it must be discussed with and approved by the RTM and then by the AD.

8.4.0 No Existing Physical Facility

Sometimes a physical facility does not exist or never existed. This can be the case with a small one-person operation, where the majority of the work was subcontracted or where the majority of the work was software development. The review will only consist of the inspection of books, records and supporting evidence, and interview(s) with the claimant. There may be no real benefit to visiting the place of business. In this situation, arrangements for the review can be made at an alternative location, including the CRA’s premises.

In this context when the work claimed by one party was done under contract for them by another party, such as a contract for SR&ED, or claimed as overhead under the traditional method, the RTA is allowed under the ITA to speak to the contractor or the contractor’s technical staff. However, the onus is on the claimant to obtain needed information on work done on their behalf.

8.5.0 Remote Claimant Location

In some situations, the claimant’s facility may be difficult and expensive to access, or for security and / or health concerns, it may be difficult to visit. In these situations, alternate means of resolving the issues can be arranged. For example, the claimant could bring books and records to the CRA’s premises or another location, or send videos or photos. It also may be possible to arrange a videoconference in one of the CRA videoconferencing or teleconferencing facilities.

8.6.0 Separation of Head Office from R&D Site

This may be the organizational structure of the company. Therefore, it may be possible to inspect the supporting evidence and talk to the necessary individuals without actually visiting the R&D site.

8.7.0 Borrowing Claimant’s Records

It may be necessary to borrow the claimant’s records to conduct a review, although this is infrequent. Refer to the CRA Audit Manual (Chapter 10.2.6) for details on the administrative procedures required if books and records are borrowed. This Chapter is included in Appendix 12 of the CRM. The most important consideration if this is done is that the books and records be identified in detail, the claimant is given a receipt indicating what was borrowed, and that the claimant signs off the receipt when the CRA returns the records. The usually security precautions for claimant information apply for these records, particularly since they are original records. If the claimant brings the books and records to the CRA offices, they can be inspected and discussed with the claimant and immediately returned.

8.8.0 Claimant’s Documentation supplied as electronic media

Electronic media from outside the CRA cannot be used in CRA systems without following CRA security procedures. Consult the local IT group if it is necessary to access this information.

8.9.0 Claims Involving Classified Information

In some cases, a review will require access to information that has a national security classification. In such situations, project descriptions are not sent to the CRA by the claimant, but the claimant notifies the CRA of the situation by letter. The RTA should refer these situations to the RTM. If the descriptions and the work are to be reviewed, an RTA with appropriate clearance must review them on the claimant’s secure premises. Documentation kept in the CRA files must not contain classified information.

8.10.0 Second Technical Review by a new RTA

Sometimes a second RTA is involved in the file. That might be because the AD has requested a second technical review, or the first RTA is unable to complete the work. The review by the second RTA, in principle, uses the same procedures described in the CRM. Where the second RTA is involved as part of an administrative second review procedure, the main consideration is that the second RTA to the extent possible is not influenced by the work of the first RTA; it should be an independent review as much as possible. The second RTA would be aware of the previous work and not request the same information from the claimant a second time. In other situations, the second RTA may be able to rely to some extent on the work of the first RTA. The RTA should discuss these situations with the RTM.

Appendix 9 Considerations During the On‑Site Visit

Following the interview with the claimant during the on-site visit, it is recommended to review the information obtained with the following questions in mind, before the visit is concluded:

  • Is any of the review information unclear or inconsistent with other information obtained before or during the interview?
  • Are the claimed labour, materials, capital equipment, supplies and other SR&ED costs realistic and reasonable for the activities claimed in the project?
  • For the type and scale of projects of this claim, what kind of evidence would be reasonably expected to be present and would be useful towards establishing the project eligibility and work undertaken by the claimant?
  • Can the information obtained by way of the interview(s) be substantiated by the actual evidence and supporting documentation provided by the claimant? Is the evidence consistent?
  • What assumptions, if any, might now be necessary to support the analyses, and do the assumptions need validation?
  • Did each of the individuals claimed as involved in each project make a direct contribution to the SR&ED? What was the nature and extent of their contributions (for example, directly engaged, technical support, service support, general labour, clerical)?
  • What factors and considerations need to be taken into account to establish the “business context” of the claimant in relation to their claimed SR&ED?
  • Has each project been claimed at the appropriate level? That is, does each project as claimed reasonably represent work required to resolve a clearly defined Scientific or Technological (S / T) uncertainty and to seek a related and clearly defined Scientific or Technological Advancement (S / TA) by way of a systematic experimental and / or analytical investigation?
  • What field of science or technology is the SR&ED claimed in? Is it a multi-disciplinary area of science or technology? Is it in an excluded field? Is the SR&ED in the identified field?
  • For work that is SR&ED, what is the best way to describe the actual (as identified by the RTA) S / T uncertainty or research question posed by the claimant for each project?
  • Does the RTA think that the Scientific or Technological Uncertainty (S / TU) provided by the claimant is correctly and accurately identified, rather than being a business or other uncertainty? If given as the latter, does the claimant’s stated uncertainty have a direct link to an apparent or identifiable underlying S / TU (that is, identifiable by the RTA)? If this is the case, did the interview bring out the important relationship(s) between the technological development goals and specific S / T research objectives? Note that there is a distinction between a technological uncertainty, which relates to a technological obstacle or barrier, and a technical uncertainty, which relates to questions as to the results or outcome of the work, such as the commercial objectives.
  • Does the RTA think that the S / TA provided by the claimant is correctly and accurately identified, and not a business or other goal, achievement or desired outcome? If given as the latter, does this goal or desired achievement have a direct link to an apparent or identifiable underlying S / TA (that is, identifiable by the RTA) in a field of science or technology which is not excluded by the definition of SR&ED? and
  • Is there a clear relationship between the claimed S / TU and the claimed S / TA? When the S / TU and the S / TA are about different issues or topics, it is possible that the project as claimed is too broad, or includes work that lies outside the goals of a specific SR&ED project.

Appendix 10 Sample Paragraphs for Proposal Letter

10.1 No Change Concerning the Work

1. All work is SR&ED

We have determined, based on the information reviewed, that the following work claimed meets the definition of SR&ED in subsection 248(1) in the Income Tax Act: (provide a list of projects / work). Details are given in the attached report. However, this does not imply that all the work claimed, for other or continuing projects, will meet that definition in future years. We remind you that determinations on claimed SR&ED work are made on a year-to-year basis and do not extend beyond the current period under review. Future claims may be subject to a review of the claimed SR&ED work and determinations will be determined solely because of that review.

2. Accepted without further review by the RTA

For the following projects, we give no determinations on whether the claimed work meets the definition of SR&ED in subsection 248(1) of the Income Tax Act: (provide a list). This determination does not imply that all the claimed work and expenditures are qualifying; nor does it imply that other projects, even related projects, for the same year will be treated the same way. It also does not imply that the same or similar projects will be treated the same way in subsequent years. We remind you that determinations on claimed SR&ED work are made on a year-to-year basis and do not extend beyond the current period under review. Future claims may be subject to a review of the claimed SR&ED work and determinations will be determined solely because of that review.

10.2 Some Work is Not SR&ED

We have reviewed the work claimed and determined that not all of the work claimed meets the definition of SR&ED given in subsection 248(1) of the Income Tax Act. Specifically, the work on the following projects does not meet the definition: [provide a list, identifying the ineligible projects or parts of projects]. Details, including the reasons, are provided in the attached SR&ED Review Report. We remind you that determinations on claimed SR&ED work are made on a year-to-year basis and do not extend beyond the current period under review. Future claims may be subject to a review of the claimed SR&ED work and determinations will be determined solely based on that review.

10.3 No Work is SR&ED

We have reviewed the work claimed and we have determined that none of the work claimed meets the definition of SR&ED given in subsection 248(1) of the Income Tax Act. Details, including the reasons, are provided in the attached SR&ED Review Report. We remind you that determinations on claimed SR&ED work are made on a year-to-year basis and do not extend beyond the current period under review. Future claims may be subject to a review of the claimed SR&ED work and determinations will be determined solely based on that review.

10.4 Work Meets the Definition, but with Financial-Technical Issues.

We have reviewed the work claimed and we have determined that the work claimed on the following projects meets the definition of SR&ED in subsection 248(1) of the Income Tax Act [provide a list]. However, our decision is that aspects of the claim are not correct, as follows: [provide a summary of the decision, such as not all of the claimed materials were used for SR&ED, the machinery was not used more than 50% for SR&ED]. Details are provided in the attached SR&ED Review Report.

Appendix 11 Mutual Expectations between the Claimant and the RTA during an SR&ED Review

Working with Claimants – Mutual Expectations between the Claimant and the Research and Technology Advisor during an SR&ED Review

The SR&ED Review will be more effective and efficient when both parties are clear about what they can expect from each other. The Research and Technology Advisor (RTA) is expected to work with claimants, and the claimant is also expected to work with the RTA. It is important that, at the start of a review, the RTA explain to and discuss with the claimant these mutual expectations.

During the SR&ED review, RTAs will work with the claimants to:

  • Explain the SR&ED program, its requirements, its services and policies to claimants who would like more information about the program, to encourage understanding of their entitlements and ensure compliance;
  • Identify, prior to the on-site visit, issues that they plan to address and their approach for addressing the issues;
  • Identify, prior to the on-site visit, what they need during the visit, whether it is information or supporting evidence to see or people to speak to, so that the claimant can be prepared for the review;
  • Identify, as early as possible, any new issues that arise during the review;
  • Identify ways to resolve review issues, such as questions to ask or supporting evidence to examine;
  • Provide an indication of any concerns that remain at the end of the on-site visit or, if unable to do so until the information gathered during the review is considered, indicate when they expect to be able to do so;
  • Give an explanation for decisions, with reasons, in writing, if any of the work is not considered to be SR&ED, or if any other decisions are unfavourable to the claimant. This will help to improve claimant’s understanding of program requirements and enable them to be better positioned to provide any factual information that had not been considered in the RTA’s decision;
  • Coordinate their review work, including information requests, with Financial Reviewers (FRs) to minimize the administrative burden, such as not repeatedly requesting the same information from the claimant;
  • Allow a claimant the opportunity to provide additional information or explanations in response to their decisions, and to respond to the claimant concerning this additional representation; and
  • Provide feedback, advice and guidance to claimants, as required, to explain any deficiencies in the documentation or project descriptions.

During the SR&ED review, the claimants and their representatives will be expected to:

  • Comply with the SR&ED Program requirements;
  • Prepare for on-site visits by having requested information, evidence or personnel available;
  • Prepare for the possibility of an expanded or shortened review by the RTA as different issues arise during the review or the original ones are resolved;
  • Provide, as early as possible in the review process, information or evidence relevant to supporting their position;
  • Answer questions and address the issues identified by the RTA during the review;
  • Ensure that the people who are best able to explain the work done are available to be interviewed by the RTA, should other issues arise during the review process;
  • Ensure that documentation created during the execution of the SR&ED work claimed is available and organized for review by the RTA and that someone is available to explain the significance of the documentation;
  • Prepare to explain how the claim was put together and what supporting evidence was used in the preparation of the claim;
  • Focus on the review issues identified by the RTA and facts related to the work done in order to address these issues;
  • Provide complete responses to questions asked by the RTA, whether in writing or not, within a reasonable time frame;
  • Expedite the review by providing any information, on a timely basis, that supports the claim;
  • Address any concerns raised by the RTA with respect to the quality of project descriptions, claim organization or maintaining supporting evidence for future claims; and
  • Advise the RTA of any concerns as early as possible.

Appendix 12 Chapter 10.2.6 of the CRA Audit Manual-Borrowing Records

(Note: The FR would do any AIMS coding that is necessary)

Borrowing Books and Records from a Taxpayer/Registrant

Circumstances where Borrowing Records is Necessary

It may be necessary to borrow a taxpayer / registrant’s records to conduct an audit in certain circumstances. Examples include:

  • the taxpayer / registrant has terminated operations and the records are in storage;
  • the taxpayer / registrant’s head office is outside Canada and the taxpayer / registrant chooses to deliver the records to the TSO;
  • for purposes of conducting an audit using computer-assisted audit techniques (CAAT); and
  • suitable space for the auditor to conduct the audit is not available at the taxpayer / registrant’s place of business.

Computer Records

Only copies of computer records are borrowed from the taxpayer / registrant. The copies are either destroyed or returned to the taxpayer / registrant at the end of the audit.

For more information see 13.1.0 Computer Assisted Audit Techniques.

AIMS – Record of borrowed Records

The Records field on AIMS screen 1 should be coded “7” when records are borrowed from a taxpayer / registrant. When the records are returned, one of the following codes must be entered:

CodeSituation
1Records are in a known non-resident country
2Records are in an unknown non-resident country
3Records are located both in Canada and outside Canada
4Records at one Canadian location
5Records at two Canadian locations
6Records at three or more Canadian locations
7Books and records borrowed from taxpayer / registrant
8Books and records returned to taxpayer / registrant

An entry of 1 through 6 also requires a valid entry in the “NR Country” AIMS field.

Control of Borrowed Records

Where records are borrowed, the auditor will prepare a receipt for the borrowed records: T2213 Receipt for Borrowed Books, Records and Documents. The receipt should provide a detailed description of the books and records received to preclude any future dispute over missing records. Copy 1 is given to the taxpayer / registrant.

A control register system should be maintained to ensure that the borrowing and return of records is properly documented and include a follow-up system to make sure borrowed records are returned on a timely basis. Copy 2 of Form T2213 is sent to the person responsible for maintaining the register.

Copy 3 should be kept with the records until they are returned. When the records are returned, the taxpayer / registrant should sign the copy to acknowledge receipt of the returned records. The auditor should then send a photocopy of Copy 3 to the control register clerk and attach the original to the audit report in case of future disputes over the completeness of the returned records.

The status of borrowed books and records can also be monitored by running Platinum reports for those cases where the Records field on AIMS screen 1 has been coded “7.”

The auditor must take extra care to safeguard the borrowed records. They are the property of the taxpayer / registrant and are to be returned in the same condition as when they were borrowed. The borrowed records and any boxes or other containers provided by the taxpayer / registrant should not be marked, altered, or damaged in any way.

The records should be clearly labelled with the name of the auditor and the taxpayer / registrant and kept in locked storage when not being used. When the auditor receives new records, the storage location should be included on Copies 2 and 3 of Form T2213 for reference to ensure that the records can be located when the auditor is unavailable.

Source documents such as invoices that have been sorted chronologically or alphabetically by the taxpayer / registrant should be returned as received. If the invoices were re-sorted, the auditor should put them back in the order received if the taxpayer / registrant so requests.

The security of taxpayer / registrant information is of primary importance and special care should be taken by auditors who are “teleworking” or while travelling. For more information see 3.4.0 Privacy and Confidentiality.

Returning Books and Records to the Taxpayer / Registrant

Borrowed books and records should be returned to the taxpayer / registrant as soon as possible. Mailing records to a taxpayer / registrant, preferably by priority post, should only be done where personal delivery or courier is not practical.

When returning books and records by mail or courier, the auditor should enclose Copy 3 of Form T2213 with a letter requesting that the taxpayer / registrant sign and return it to acknowledge receipt. If the taxpayer / registrant fails to return the receipted copy, the auditor should inform the control register clerk accordingly.

The auditor should inform the clerk of the date the records were returned and the method used. If priority post or a courier was used, the auditor may also obtain written confirmation of the delivery from the mailroom or courier company. Copies of these documents should be placed in the audit file.

Where all borrowed records are not returned at the same time, the taxpayer / registrant should initial and date each item returned on Copy 3. The auditor should keep Copy 3 until all the records have been returned.

The AIMS screen 1 “Records” field should be updated once the records have been returned. The coding is described in the section “Receipts for Borrowed Books and Records – Form T2213.”

If the taxpayer / registrant cannot be located to return the records, the records should be suitably labelled, packaged and kept in storage and a memo placed on the Goods and services tax (GST) / Harmonized sales tax (HST) and income tax permanent document files accordingly. An entry should also be made in the mainframe systems (GST mainframe RLOA screen, Business Number system diary, Système Universal Delpac System (SUDS) diary and / or Automated Collections and Source Deductions Enforcement System (ACSES) system diary) to advise that the borrowed records are in the CCRA’s possession.

It is recommended that unclaimed records be kept for at least six years. Destruction of unclaimed records should be authorized by the Assistant Director, Verification and Enforcement (ADVE).

Seizure of Borrowed Records from Audit by Investigations

Where Investigations starts an investigation while the auditor still has possession of the taxpayer / registrant’s books and records, Investigations will formally seize the books and records from the auditor under the authority of section 290 of the Excise Tax Act (ETA) or section 231.3 of the ITA. If the taxpayer / registrant enquires about the status of the audit or the return of the books and records, the auditor should refer the caller to Investigations as the taxpayer / registrant will have been, or will have to be advised of their rights. Accordingly, no further discussions are to take place between the auditor and the taxpayer / registrant.

Appendix 13 Audit Query Sheet T997

Appendix 13 Audit Query Sheet T997

Appendix 14 List of Websites

  • Audit Information Management System (AIMS): Aims Online
  • Claimant Services Standards (Taxation Operations Manual (TOM) 3980): Claimant Service Standards
  • CORTAX, the CRA system for accessing T2 (corporation) information:
  • CRA Occupational Health and Safety Policies
  • Dispute Resolution with the CRA: Resolving disputes
  • Finance and Administration Manual, Security Volume
  • Finance and Administration Manual, Security Volume Chapter 15 (Security Incidents)
  • Finance and Administration Manual, Security Volume, Chapter 23 (Communications Security)
  • Finance and Administration Manual, Security Volume, Chapter 23, Appendix C (Communications Security)
  • Finance and Administration Manual, Security Volume, Chapter 26 (Policy and Guidelines on Abuse, Threats,
  • Stalking and Assaults Against Employees)
  • Form RC59 “Business Consent Form”: RC59
  • Form T1013 “Authorizing or cancelling a representative”: T1013
  • Knotia: Knotia
  • Process Review
  • RAPID, the CRA system for accessing non-T2 and other information:
  • Security Incident report, Form RC 166
  • SR&ED Course 1170-000: 1170-000
  • SR&ED Project Definition Paper: Project Definition
  • SR&ED Reference Guide (for CRA internal use only): This includes a list of current publications, directives and Application Policies.
  • SR&ED Risk Management Tool, the information system where the initial risk assessment provided by TC may be accessed: SR&ED Risk Management Tool
  • SR&ED Service Standards
  • SR&ED Public Website: SR&ED
  • Stakeholder Relations Division of the SR&ED Directorate: Stakeholder Relation Division
  • Tax Court of Canada: Tax Court of Canada
  • Taxpayer Bill of Rights: Taxpayer Bill of Rights
  • Transmittal of sensitive information: Security of Scientific and Technological Material
  • Treasury Board Guidelines on Occupation Health and Safety: Treasury Board Guidelines

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