Similar to Q2, quarter three for the calendar year 2016 saw minor SR&ED updates to policies to ensure continuity with the 2012 federal budget changes, but the big news of the quarter is another program launch.
Like our previous quarterly updates, this post will limit itself to updates within the quarter (between July and September 2016). It will cover:
- The updates made to SR&ED policies regarding the 2012 federal budget
- Pre-Claim Review
CRA Policy and Administrative Updates
Ontario’s 2012 Budget Updates
On July 13th, the CRA updated the Provincial and Territorial tax credit list. Specifically, changes were made to the Ontario Innovation Tax Credit (OITC) and the Ontario Research and Development Tax Credit (ORDTC), which were both reduced in Ontario’s 2016 budget.
- OITC decreased from 10% to 8%
- ORDTC decreased from 4.5% to 3.5%
On July 19th, the CRA made updates to two policies: SR&ED While Developing an Asset and SR&ED During Production Runs. It became necessary to change the documents after the 2012 budget plan was set in place. Certain numbers for examples and calculations no longer applied under the new regulations.
The New Pre-Claim Review
Finally, on August 2nd, the CRA had its first launch of the Pre-Claim Review (not to be confused with the Pre-Claim Consultation, announced July 29th, 2016). The Pre-Claim Review is being released gradually throughout Canada and will allow claimants to submit a pre-claim to know ahead of time the amount of tax incentives they can expect to receive. It has officially been released in British Columbia, Alberta, Saskatchewan, Manitoba, Yukon, and the Northwest Territories, and will not be released to the rest of Canada until October or November. The slow release date has some worried about its success and wondering whether retiring the old pre-review programs was a wise decision. Read our full thoughts on the program here.
Relevant Judicial Proceedings
Paletta v. The Queen (2016-07-13)
The appellant requested that a question be determined before the hearing. The question: “Whether the reporting of Mr. Paletta’s income/loss from the Trading Transactions for the Taxation Years is attributable to neglect, carelessness, or willful default within the meaning of subparagraph 152(4)(a)(i) of the Income Tax Act.” Rule 58 allows for applicants to submit such a request if it deals with a question of law, facts, or a mix of law and facts. The judge ultimately rejected the appellant’s request on the grounds that it would be an unfair advantage.
Understanding the different rights and requests one can make before a hearing in front of the Tax Court of Canada and the rules that apply to them, such as Rule 58, can prove beneficial to the success of an appeal.
Oldcastle Building Products Canada Inc c. La Reine (2016-08-25)
This is an interesting case, dealing with fine divisions regarding what constitutes an eligible SR&ED expense. It is evidence to just how open to interpretation CRA policy can occasionally be, regardless of how clear it seems on paper. This case deals with the variable salary of a research centre director. The CRA argued that the director’s salary was ineligible for SR&ED because it was partially variable based on product sales. The judge disagreed on this point. According to the ruling, the method of calculation in this case did not prevent the payment from being classified as a salary. Also, the fact that its amount was a function of product sales was not relevant, because it was ultimately a salary paid for SR&ED work.
Prim8 Group Inc. v Tisi (2016-09-13)
The appellants accused the respondents of the following: breaching their employee contracts, converting company property, inducing breach of contract, conspiracy, and intentional interference with economic relations. One of the employees in question continued contacting an outside SR&ED consultant about the company’s tax incentives. The judge found the respondents liable on most accounts.
In order to protect all parties and property (including SR&ED tax credits and information), break partnerships completely and peacefully ensuring the least amount of damage.
Summary of Q3 Updates
The big news of Q3 is the first release of the Pre-Claim Review. With its gradual release across Canada, however, it might leave some claimants with little to no time before filing their tax returns.