Updated CRM For RTAs Part Five: SR&ED Claim Review Process & Project Issues

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The most important work carried on by Research and Technology Advisors (RTAs) is determining the eligibility of Scientific Research & Experimental Development (SR&ED) work during a claim review. With the release of the updated Claim Review Manual (CRM), the Canada Revenue Agency (CRA) has given greater insight into the claim review process — specifically resolving eligibility issues for claimed SR&ED projects.

Previous articles in this series dealt with the CRM’s updated guidelines for communication between claimants and the CRA. This article, however, will address:

• the general method of identifying review issues by RTAs;
• the concerns of an RTA while reviewing SR&ED projects.

Read the other articles in this series: Part One: Clarified Definitions; Part Two: First Time Claimant (FTC) Review vs. FTCAS; Part Three: ATIP and Information Requests; and Part Four: Information Gathering by RTAs.

Identifying Claim Review Issues

Section 4.6.1 of the updated CRM clearly outlines the basic process followed by RTAs when beginning a review. In this context, “eligibility” refers to work that meets the definition of SR&ED in subsection 248(1) of the Income Tax Act. The Eligibility of Work for SR&ED Investment Tax Credit Policy uses the Five Questions to determine what (if any) of the work performed is SR&ED.

Here are some key bullet points from section 4.6.1 on this topic (emphasis added):

• Where an issue directly concerns a question of basic eligibility, the review should first focus on those specific eligibility issues.
• Since the resolution of these issues directly affects the basic eligibility of a project, resolving these issues is usually the highest review priority.
• The RTA should conduct the technical review in such a way as to reduce or eliminate doubt as to whether or not the selected projects are SR&ED (step 1 of the eligibility policy).
  
• Note that not all issues may be evident or relevant at the planning stage. Some of them may only become apparent later in the review. Also, note that while the observations and comments of the Control Function (CF) are a helpful first step in planning the review, they are only considered the starting point. More issues may exist than those identified by the CF.¹

Review Process Flowchart

This flowchart depicts the 2-step methodology used by RTAs to determine if the work under review meets the definition of SR&ED.

Note that we have addressed the “Five Questions” mentioned in the first step in a previous SREDucation post. Briefly, these questions deal with topics like formulating hypotheses, the presence of scientific or technological uncertainty, and so on (emphasis added):

First it has to be determined if there is SR&ED; this is step 1 and this step involves determining whether the answer to each of the 5 questions is “yes” or “no”. It is important for the RTA to understand how and why the SR&ED is performed by working with claimants to fully understand the work. Remember that the 5 questions are inter-related and need to be considered as a whole. Do the answers make sense when compared to the other answers? The RTA should also remember that all answers must be “yes” for there to be SR&ED before continuing to step 2 and that, if all answers are “yes”, they can identify the specific scientific or technological uncertainty (STU) and STA before considering step 2.

The second component of the schematic illustrates the various components of step 2: where the extent of eligible work is determined. Step 2 involves including support work, which is defined in 248(1)(d), as well as excluding any work defined in 248(1)(e-k). The key factor used to distinguish between support work and excluded work is purpose; why was the element done and how much is needed? Part of step 2 also involves identifying types of assets. This information assists the FR in determining how the costs are handled.² (April 20, 2015). Review Issues. In Claim Review Manual for Research and Technology Advisors (Chapter 4.6.1). Retrieved January 29, 2015, from http://www.cra-arc.gc.ca/txcrdt/sred-rsde/pblctns/clm-rvw-mnl-chptr4-eng.html#N10650]

Reviewing SR&ED Project Activities

The Eligibility of Work for SR&ED Investment Tax Credit Policy clearly stipulates that work must be claimed as SR&ED projects, with a project consisting of one or more inter-related activities. However, a claimant’s understanding of the SR&ED “project” distinction may differ from their RTA’s understanding.

Likely Issues During SR&ED Project Identifications in Claims

This makes section 4.6.2 in the updated CRM particularly important for claimants, where it is explained that isolating SR&ED activities within a project may actually make it harder or impossible for an RTA to identify SR&ED work (emphasis added):

[…] However, It is quite possible that the claimant has not correctly identified the SR&ED project or all the activities in it. Some likely possibilities include:

1. The claimant is claiming the entire “company project”, that is, the work needed to do a business activity such as developing a new product, not an SR&ED project. There is, however, some SR&ED. Some activities would not be SR&ED.
2. The projects as claimed are not SR&ED projects, but it appears that the company may have broken down an SR&ED project into activities which by themselves are ineligible. The entire claim may be a single SR&ED project.³

RTA’s Responsibilities During Project Identification Issues

In the event that a claimant has improperly identified SR&ED projects, section 4.6.2 of the CRM also offers up several courses of action that an RTA can take on alone or with the claimant (emphasis added):

1. identify parts of a claimed project that are not SR&ED, since although there is an SR&ED project, the claimant has not correctly identified all the components;
2. work with the claimant to identify the SR&ED project and determine what work is SR&ED, since the project as a whole is not; or
3. work with the claimant to identify an SR&ED project and try to determine, if possible, whether the claimed projects are part of this project or reflect work that is commensurate with the needs, and directly in support, of the SR&ED. […] ⁴

Methodology to Resolve Claim Review Issues

Section 4.7.0 of the CRM succinctly outlines the methodology to be followed after resolving the issues mentioned above. Although the methods include information that was publicly available in previous versions of the CRM, the additional link between risk and methodology discussed below is new (emphasis added):

The method to resolve the issues relates to the risk assessment, as noted in Chapter 4.3.1.1. A simple way to relate the risk assessment to the method is noted in this list:

1. low risk – desk review without claimant contact;
2. medium risk – desk review with claimant contact;
3. high risk – review with an on-site visit; or
4. unable to determine risk based on lack of knowledge / information-review with an on-site visit.⁵

Reviewing SR&ED Project & Claim Issues: Summary

Although section 4.6.1 of the updated CRM for RTAs is still too vague to provide significant new information, the review process flowchart and its explanation are crucial for claimants who want to understand the internal processes followed by RTAs during a review. Specifically, the identification of the key elements used to distinguish between support and excluded work is undeniably vital to claims.

The additional information provided under the revised section 4.6.2 points to the fact that even if claimants understand the eligibility processes required for SR&ED work, they do not always necessarily understand how to classify that work in projects to begin with. As such, RTAs cannot treat claimed SR&ED projects at face value, and often have to take a step back to double-check whether this basic tenet of organizing SR&ED work has been correctly employed by the claimants.

These revised sections in the Claim Review Manual are a boon for claimants — they clearly outline the extent of help and support available to claimants during all stages of a claim review while also managing a claimant’s expectations of the review process.

Again, we encourage you to read the other articles in this series for a complete overview of changes in the updated CRM for RTAs: Part One: Clarified Definitions; Part Two: First Time Claimant (FTC) Review vs. FTCAS; Part Three: ATIP and Information Requests; and Part Four: Information Gathering by RTAs.

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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