SR&ED Quarterly Updates: Q2 2015 (April to June)
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April 2015 was a busy month for Scientific Research & Experimental Development (SR&ED) policy-makers. With the release of the updated Claim Review Manual (CRM) for Research and Technology Advisors (RTAs) and shifting definitions for common SR&ED terms, Q2 of 2015 resulted in several major changes to the interpretation and administration of the SR&ED program.
Similar to our Q1 (January – March 2015) article on the subject, this post will limit itself to changes that occurred in Q2 between April and June 2015. It will address the following:
- Changes in common SR&ED term definitions, and
- Updated administrative documents used by Canada Revenue Agency (CRA) to enforce SR&ED policies.
Changes to the Eligibility of Work for SR&ED Investment Tax Credits Policy
On April 24th, the CRA released an updated version of the Eligibility of Work for SR&ED Investment Tax Credits Policy, including changes to the key questions used to assess SR&ED eligibility and changes to SR&ED terminology. A full explanation of the changes is available on the CRA website.
The Five Questions: Restructured
Most notably, the five questions used to determine SR&ED eligibility were now labelled as a “method” instead of an “approach”. This change was made to help differentiate the eligibility determinant “method” from references made to the “scientific method” within the five questions.
- Question 1: The phrase “An uncertainty that could not be removed by standard practice” was removed due to redundancy.
- Question 3: The term “scientific method” and references to modifying the hypothesis were removed for simplicity.
- Question 4: Altered to explicitly allow for SR&ED advancements that were not yet achieved.
Finally, section 2.1.5 was re-written to clarify differences between a) the records referred to in Question 5 and b) the supporting evidence for a SR&ED claim.1
We have also discussed and analyzed these changes in previous blog posts – 5 (Revised) Questions The CRA Uses To Determine SR&ED Eligibility and The Missing SR&ED Question (Five Questions + One More).
SR&ED Terminology
The changes released on April 24th also modified and removed key terms from SR&ED policy. As per the CRA’s explanations, these revisions were included to “provide clarification of concept in policy, based on feedback received from stakeholders.”
- Analysis: “Scientific method” was replaced with “systematic investigation or search”.
- Engineering: “Routine engineering” was removed, doing away with the previous distinction between “engineering” and “routine engineering”. A paragraph was added to clarify that engineers could still be eligible to perform basic or applied research or pursue experimental development.
- Social Sciences: “criminology”, “geography”, and “psychiatry” were removed from the definition, while “and sometimes” was added to display that education, law, philosophy, history etc. need not always be considered as social sciences.
- Standard Practice: The term “standard practice” was removed.
- Systematic Investigation or Search: “Scientific method” was removed since this term was no longer used in policy enactment.
- Technology base or level (changed to Scientific or Technological Knowledge Base): “Publications” were removed from the list of sources included in as publicly available, while “consultants” were added to the list of expertise available to an SR&ED claimant.2
Changes to CRA SR&ED Service Standards
Aside from the changes to SR&ED policy “lingo” discussed above, Q2 2015 also saw the unveiling of the new CRA service standards, in April. These new standards were put in place to provide a structured time-frame to SR&ED-related services, and to ensure that CRA employees administered the tax credit in a “timely, consistent, and predictable manner, while encouraging research and development (R&D) performers to prepare their claims in compliance with tax laws, policies, and procedures.” 3
The service standards and success rates differed based on the complexity of the claim, whether the claim was refundable, or whether it was a non-refundable claim with claimant-requested adjustments. The processing times (from receipt of a complete claim) were 120 calendar days for refundable claims and 365 calendar days for non-refundable claims.
Along with the expected standards for a claim, the CRA also released a list of circumstances typically viewed as “outside CRA’s control”, and hence irrelevant to the calculation of service standard time-periods.
These changes are outlined in more detail in our CRA Policy Update: SR&ED Program Service Standards (April 2015) post.
Updated CRM for RTAs
The updated Claim Review Manual for Research & Technology Advisors was released on April 21, 2015. Although detailed discussions of these changes can be followed in our “Updated CRM For RTAs” series (linked below), a brief list of these revisions is provided below.
- Chapters 1 and 2 have been revised to clarify Agency guidelines regarding compliance approaches, email communications and Access to Information and Privacy (ATIP) in addition to clarifying definitions for “determination”, “conclusion” and “decision”.
- Chapter 3 has been revised to include information on joint technical-financial issues.
- Chapter 4 has been revised to include information on risk assessment and review issues in addition to clarifying procedures regarding review plan requirements and approval. The section on “claims involving a large number of projects” was clarified. The section on “consideration for large claims” was deleted. The first-time claimant advisory service (FTCAS) service is also included.
- Chapter 5 has been revised to clarify procedures regarding requests for information (RFI), reviews with or without onsite visits, and communicating decisions to the claimant to improve transparency and consistency. In addition, new sections describing FTCAS and claimant’s supporting evidence and oral information have been added.4
While the Financial CRM was revised to reflect changes in accordance with the Access to Information Act, no specific explanation of accompanying changes was provided by the CRA.
Read our Updated CRM for RTAs series here:
- Part One: Clarified Definitions
- Part Two: First-Time Claimant (FTC) Reviews vs FTCAS
- Part Three: ATIP & Information Requests
- Part Four: Information Gathering By RTAs
Relevant Judicial Proceedings: Highweb & Page Group Inc. v. The Queen [April 01, 2015]
HPGI v. The Queen underscored the importance of contemporaneous documentation as evidence for a SR&ED claim. While this is reasonably common knowledge, the court ruling drove home one crucial point. In the words of the Hon. Randall S. Bocock:
[…] it may well be that some incremental technological uncertainty and technological advancement occurred within additional components of Phase II and within any of the Phase I work. However, the precise nature of the technological uncertainty, hypotheses or experiments on how these challenges would be solved and the advancement of knowledge gained through the research cannot be identified from HPGI’s evidence of undertaken work. 5
Q2 2015: Summary Of Changes
As compared to Q1, the second quarter of 2015 saw significantly more activity from the CRA with respect to changes in the policy and practice of SR&ED. Among these, the allowance of SR&ED advancements not yet achieved came as a relief scientific practitioners, since this revision better reflected the realities of scientific pursuit.
Among the SR&ED terms, the removal of “standard practice” is a source of great debate. However, it remains to be seen how this change will affect the work of genuine SR&ED practitioners in the long run. Although the impact of the updated CRM requires far too detailed a discussion to be fleshed out in this article, the changes have vastly improved transparency into the functions of an RTA and have provided greater detail into claimant-CRA communications as well. (Read our series on the Updated CRM for RTAs: Part One, Part Two, Part Three, and Part Four).
This article is based on CRA policy documents available at the date of publication. Please consult the CRA website for the most recent versions of these documents.
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