Anytime a SR&ED review occurs, it can be quite frustrating – particularly when what is said in person and what arrives in the final report differs significantly. How do you ensure that you are on the same page as your technical or financial reviewer? The simplest solution: knowing your rights and asking for all communications in writing.
First and Foremost – Know Your Rights
It would be wonderful to think that the Canada Revenue Agency (CRA) has our best interests in mind. While some reviewers are eager to help businesses succeed and provide education and guidance while ensuring the requirements are met (“incentive” approach), others focus more on rigid compliance with the regulations. These reviewers provide little guidance in meetings beyond the stated requirements of ‘informing’ the taxpayer of the services available (“compliance” approach). While the first group will help guide a First-Time Filer (FTF) through the application process, it the latter group (the numbers of which appear to be growing at the CRA) for which this article is intended to address.
The first step in ensuring fair treatment is knowing your rights as a taxpayer. The Taxpayers Bill of Rights was created to address concerns regarding unfair treatment and is still used to remind some that the CRA is not omnipotent.
Understand How Your Rights Work In A SR&ED Review
One of the major complaints that is regularly expressed in feedback online, in national surveys, etc. is that reviews are operated in an inconsistent manner. To help address this, the CRA created the SR&ED Claim Review Manual (CRM). There are actually two versions of the guide, one for Claimants and an internal CRA version, as explained in the article here. The Review Manual provides an outline of how a review should progress in order to provide consistency. One of the most relevant sections of the CRM refers to the Taxpayer Bill of Rights and how they are integrated into the review process:
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 Claim Review Manual (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.
– SR&ED Claim Review Manual, 1.5.0
For the purposes of this post, we will focus on:
- #2 Explain the review process, issues and the planned approach to resolve them to the claimant; (Taxpayer rights #5,6,10),
- #4 Give the claimant information on the CRA requirements and explain what information the CRA needs to satisfy them; (Taxpayer rights #6)
- #7: Explain decisions and the rationale to the claimant; (Taxpayer rights#5,6,9,11)
Setting the Stage for Effective Reviews
Explain the review process, issues and the planned approach to resolve them to the claimant; (Taxpayer rights #5,6,10)
The first contact that a taxpayer often has regarding a review is a phone call placed by your assigned Research & Technology Advisor (RTA), asking for a meeting. It is critical at that time to ask for a written agenda. Why? It’s important to know what to prepare, and it’s impossible to do so without that information. How can you resolve the issues without knowing what they are?
The usual response to a request for an agenda in writing is a template (see redacted samples, below) that in theory meets the above requirements. Some samples are below.
As demonstrated in the above examples, some RTAs provide a well-written agenda that clearly meets the requirements; others do not. In the latter case, it is critical that the taxpayer seeks clarification.
SOLUTION: Insist on knowing what points will be covered, so you have adequate time to prepare. Request it in writing, so there is no confusion. It’s your right.
Supplementary Information: Handling Requests for More Information Effectively
Give the claimant information on the CRA requirements and explain what information the CRA needs to satisfy them; (Taxpayer rights #6)
What often occurs at the end of the meeting is that the reviewer will request additional information. This request will be done verbally: “send me some supporting information” or a statement to that effect. If you comply with this verbal request, you will set yourself up for failure AND allow your rights to be violated. What information, exactly, is required? How can you ensure that you satisfy their requirements?
Combining imperfect language (English) with imperfect memories is a recipe for disaster. Ask for this in writing. We have seen too many groups spend countless hours and thousands of dollars on supplemental information, only to have it rejected because it “wasn’t what the reviewer wanted to see”.
SOLUTION: Ask for the request for supplementary information / documentation to be made in writing. What is required in order to meet the CRA requirements? What information does the CRA need to satisfy those requirements? Avoid having phone conversations on this topic – spoken language and memories are too fallible, and the CRA forbids conversations from being recorded. When it is in writing and there is confusion later, you will have a document to refer back upon.
What To Do If Your Work Is Assessed As Ineligible
#7: Explain decisions and the rationale to the claimant; (Taxpayer rights#5,6,9,11)
First, never accept this assessment over the phone. It is ridiculous to assume that a full explanation as to why your work has been deemed ineligible could be conveyed in a short conversation. This also ties back into the point above – have you been provided with the information regarding requirements and how to effectively provide information for the CRA so that your work can be fairly assessed?
Based on what has been described recently, there may be a misconception at the CRA regarding “explain decisions and rationale”. This has come up at the 15th Annual SR&ED Stakeholders meeting and at the Ottawa Stakeholders meeting, yet despite the assurances that RTAs are being encourage to explain their decisions, there is little evidence of this occurring. (Although you are welcome to reach out to the Taxpayers Ombudsman, their role in relation to SR&ED is limited – see their recent report.)
This leaves it up to you – as the taxpayer – to ensure your rights are being upheld.
SOLUTION: Ask for a clearly explained assessment in writing that cites the relevant regulations and the reasons for the work being deemed ineligible. Stating that it is “Routine development” is insufficient. Why? Because they haven’t defined what “routine development” means to them, or allowed you the opportunity to show that your work goes beyond routine development (or agree with them, as the case may be).
Bonus: The Other Points (In The Order They Should Appear)
Still struggling after the initial assessment? Here are the rest of the items outlined in the CRM, in the order in which they will likely apply:
- 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).
- This is critical – and often ignored. We recently encountered an RTA who issued their decision while still asking for supplementary information.
- 8) Make decisions that are fair and impartial and respect current legislation and policy; (Taxpayer rights #1,8)
- There are a number of important recent Tax Court of Canada rulings. It may be worth reviewing them. They are presented in chronological order here.
- 3) Communicate the options available to the claimant if they do not agree with us; ( Taxpayer rights #4,9)
Final Point On SR&ED Reviews
This was written with the “worst case” scenario in mind. There are some exceptional RTAs in the SR&ED program, with whom it is a pleasure debating eligibility criteria. These are the individuals that – should a claim ultimately be assessed as ineligible – will take the time to explain the situation and encourage you to keep looking for eligible activities in your R&D work. They are follow the spirit of the SR&ED claim review manual and treat claimants with “courtesy, respect, and fairness while applying the legislation and CRA policies correctly.” (SR&ED Claim Review Manual, 1.5.0)
Not every CRA technical reviewer will act with the same level of professionalism. Keep your frustration level to a minimum. Ensure that you have all communication in writing and insist that the review methodology by the CRA matches that outlined in the SR&ED Claim Review Manual. Just in case.