There have been a number of significant developments recently within the SR&ED program. As a valued Empyrean client and a stakeholder in the program, one of our goals is to keep you well informed.
Normally, we would provide you with an informal update when we meet each year to kick-off a new SR&ED session. However, in our opinion, the scope of these developments has reached the point where a more urgent and direct update is warranted.
It is no secret that claimants, consultants and other SR&ED stakeholders have noticed a definite shift in the way CRA has administered the program over the past two years. In the mid-2000s, the atmosphere within the SR&ED program could generally be described as “claimant-friendly.” This was a far cry and a significant change from the much harsher climate of the mid-1990s.
Unfortunately, it is clearly apparent that the SR&ED pendulum has swung back towards a position more akin to CRA’s pre-1997 stance.
Although the actual legislation that defines the SR&ED program (the Income Tax Act) has not changed, the following developments signal a clear change in direction:
- Proposed new policy papers, including stricter guidelines for project eligibility
- Greater expectation for an academically-oriented “scientific method” approach
- Increased demand for detailed contemporaneous documentation and labour tracking
- Hiring of more Research and Technology Advisors (RTAs) by the CRA — i.e., technical auditors
- Release of a new, more rigid Audit Manual
- Increased frequency of technical and financial audits
- Less leeway for first-time claimants
What Has Prompted These Changes?
Apparently, these changes (at least in part) are CRA’s response to a recent flood of spurious claims made by less-scrupulous practitioners. By implementing these measures, CRA is effectively raising the bar for eligibility, thus “throttling back” the total number of claims. Unfortunately, this approach targets legitimate and illegitimate claims equally.
What Can Be Done?
There is a general consensus in the SR&ED community that CRA’s approach goes too far. Empyrean has advocated on behalf of its clients by sending a rebuttal to the draft “Eligibility” policy document. Many other stakeholders have taken similar steps. Public feedback is being compiled by The Taxpayers’ Ombudsman and the Federal R&D Review Panel, with reports due in the last quarter of 2011.
In the near term, however, CRA’s new direction is a fact of life that must be addressed. Below is a list of recommendations designed to help our clients adapt to this reality.
How Can We Help?
The key to making your claims more “bullet proof” under these circumstances is documentation. More specifically, you will need to tailor how you capture evidence to support your SR&ED projects by
- Adapting to CRA’s expectations for a “scientific method” approach
- Keeping detailed records as the project progresses
Empyrean can help you achieve these goals if you allow us to be involved in your R&D process throughout the year, not just at tax time.
Here are specific ways we can help:
- Ask us about a project’s eligibility when it starts. Don’t wait for the Technical Review after the end of the fiscal year. This way, you’ll have a better idea of where to focus your efforts.
- Allow us to assess your current R&D tracking systems and make recommendations on how you can improve.
- Let us help you create a project “birth certificate” that identifies key pieces of data (e.g., start date, objectives, uncertainties, hypotheses, experimental plan, technical staff, etc.).
- Ask us how to set up simple tracking templates in Word or Excel.
- Alternatively, bring us in on a monthly or quarterly basis to populate those templates for you.
In combination with our normal deliverables (project descriptions, cost summaries, T661 mock-ups), these items will create a formidable arsenal of information that will not only greatly strengthen your claims, but also serve as a great defence against CRA’s more stringent policies.
How Do We Get Started
If you would like to discuss any of these issues, or outline a plan for implementing some or all of our recommendations, please contact us at your earliest convenience for a no-obligation consultation.
As always, we have your best interests in mind.
– Frank Naccarato, President