On December 19, 2012 the CRA discreetly released the result of the multi-year Scientific Research and Experimental Development (SR&ED) Policy Review Project. As the SR&ED program provides over $3.5 billion [E1] a year to businesses, the resulting output of the Policy Review Project will have a significant impact on tens of thousands of companies that rely on the extra boost to help them develop new or improve existing products and services.
Over the last few years, the SR&ED program has been subject to considerable scrutiny, including criticism regarding its complexity. After the Government of Canada tasked the Canada Revenue Agency (CRA) with improving the administration of the SR&ED program in November 2010, the CRA was to consolidate and clarify the SR&ED policy and related guidance documents, as well as present the information in a user‑friendly way on the CRA website. For those unfamiliar with the program, prior to December 19, 2012 the policy documents were disjointed, archaic, occasionally outdated, and always difficult to locate—all factors that have led to a thriving consulting industry.
A Complete Reorganization of SR&ED Policy Documents
Let’s be honest—it’s not often we can definitively say that the CRA has gotten something right. Under the guidance of Director Helene Marquis, [E2] this project has come a long way since the stakeholder consultations began almost a year ago. When the draft documents were initially released, they were just that—rough drafts. In need of considerable revision and during a time when animosity between the CRA and consultants was at its peak, the release of the draft documents caused a considerable uproar. However, the final documents reflect the careful consideration of the department and consultations regarding alignment with current legislation and jurisprudence.
Highlights: Eligibility Document & SR&ED Glossary
Easily the two best links are Eligibility of Work for SR&ED Investment Tax Credits Policy and SR&ED Glossary. The two documents are interrelated; while reading through the eligibility document, it’s possible to click on any key term and read the CRA definition in the glossary. The glossary is clear and comprehensive and includes additional information on common exceptions (often leaning toward eligibility—a refreshing change).
It’s Different! But Wait…Is It?
While many will decry the new five-question method (as opposed to the three-question criteria), these five questions are not new. They have been in existence since the seminal 1998 case Northwest Hydraulic Consultants Ltd. vs. Her Majesty The Queen. Since that time, the list of questions developed by Judge Bowman has been quoted in many subsequent Tax Court of Canada rulings to help determine the technical eligibility of a project. The only major difference is that these questions are now much more visible and accessible earlier in the process, as they are now incorporated into the policy documents—which will, in turn, influence administration. This potential point of contention as well as many others are addressed in the SR&ED Policy Review Project – December 2012 Update on the CRA website.
A Great Start, But Is It Enough?
It remains to be seen whether the actual administration of the program ultimately reflects the outlook of headquarters, which is responsible for the SR&ED Policy Consolidation Project. The gap between politics, policy, and administration has widened over the last few years, and there have been an increasing number of complaints regarding inconsistencies in the application of eligibility criteria at the administrative level.
The CRA indicated at the latest stakeholders meeting that training is underway to help ensure better consistency and a smooth transition to using the five-question method as intended, but the current “push” model of education used by the CRA to educate its national team is as outdated as some of the policy documents that are being archived in 2013. If a truly efficient, consistently administered program is what is desired, it is now time for the training to approach the same level of excellence.
If a meaningful change that makes the SR&ED program more consistent and accessible—thereby reducing the reliance on consultants—is to occur, the CRA will need to be held accountable for training existing and new employees appropriately. For the $3.5 billion dollars at stake and thousands of Canadian R&D jobs, let’s hope they do.