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RDP Submission in Response to Joint Finance Canada Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:

November 29, 2007

Nancy Horsman and Peter C. Armstrong
Joint Finance Canada – Canada Revenue Agency SR&ED Consultations
140 O'Connor Street
L'Esplanade Laurier
Ottawa, Ontario
K1A 0G5

Re: SR&ED Program Improvements

Dear Nancy and Peter,

We are consultants who have been specializing in helping our clients prepare and claim SR&ED credits for over 20 years. While many of our clients are large corporations, most of our clients are small and medium sized businesses. We are also one of the first consultancies providing these same services to clients in the United Kingdom as well as the United States.

It is our experience with SR&ED claims in Canada, compared to the United Kingdom and the United States programs, that the SR&ED program in Canada is much more advanced, but there are some areas where we believe it can be improved.

1. Processing of SR&ED Claims


Many of our clients have complained of the length of time it takes to process SR&ED claims, especially to obtain cash refunds. In the majority of cases, this occurs where claims are subject to a review by CRA staff.


While the integrity of the program must be kept intact, CRA should revisit decreasing the number of reviews while maintaining an appropriate level of deterrent against abuse of the system. For example, the UK is striving to review 7% of all claims and they believe the system integrity is being kept intact.

Many onsite reviews consist of both a technical and financial CRA representative. Often the reviews by these individuals are not carried out at the same time. It has been our experience that the financial reviewer can carry out an onsite review alone, supported by a technical advisor (RTA) at CRA where appropriate. Again, we find that countries such as the U.K. and the U.S., who virtually have the same criteria as to what constitutes eligible R&D, use technical advisors as reference personnel to assist financial reviewers in carrying out onsite claims. Dealing with one person at CRA, rather than two, should speed up the onsite process.

Technical reviewers should be prevented from becoming involved in financial and administrative issues. We have found that, in many cases, technical reviewers are attempting to address issues that should be left to the financial reviewer. In many instances, the technical reviewer has only a cursory knowledge of the administrative rules in place, resulting in excessive delay and discussion.

2. Filing Deadlines


The tax rules now state that complete SR&ED claims must be filed within 12 months of the corporate tax filing due date, which is generally 18 months after the company's year-end. Our experience has been that CRA takes a very strict position as to what constitutes a complete claim. In one instance, a taxpayer was missing one page of its 30-page SR&ED project description. This one page resulted in the disallowance of approximately $400,000 of SR&ED tax credits.


While we strongly believe that complete claims should be filed within the deadline, exception should be provided for unusual and extenuating circumstances. CRA officials should be able to use their judgement as to what constitutes a complete claim or a Claims Completeness Checklist should be issued by CRA in order to verify what is required information in claim documentation and what is not. Currently, no process appears to exist to permit a taxpayer to rectify an incomplete claim, even where unusual, extraordinary and extenuating circumstances have transpired.

One way to ensure that taxpayers know that they have filed their SR&ED claims, on a timely basis, is to permit SRED claims to be e-filed. The e-filing of a claim should be accompanied with a confirmation of receipt.

3. Onsite Reviews & Partial Refunds


Many onsite reviews can result in differences of opinion with respect to only a portion of the SR&ED claim. In many circumstances, a small difference of opinion can hold up an entire SR&ED tax credit claim.


We believe where CRA and the taxpayer agree, that a portion of the SR&ED tax credit should be approved, and this portion should be processed without any undue delay. The remaining portion where there is a difference of opinion or dispute can be worked out separately, with an appropriate deadline.

4. Joint SR&ED Claims Made By Related or Associated Corporations


Where a company (payer) contracts with another company (performer), with which it does not deal at arms length, to carry out some SR&ED on its behalf, special rules exist to preclude the payer company from claiming the expenditure as SR&ED. Generally in these circumstances, the non-arms length company which performs the SR&ED will make an SR&ED claim on its own, with respect to the SR&ED project carried out by the payer.

Alternatively, the performer can transfer the expenditures to the payer; however this is a cumbersome process which requires significant administrative paperwork. Thus two companies are forced to claim SR&ED expenditures related to the same project.


The purpose of the non-arms length rules is to preclude companies, not dealing at arms length, from inflating SR&ED costs, by charging contract fees in excess of reasonable amounts. While we agree with this position, a rule can simply be instituted that any payer making an SR&ED expenditure claim, for payments made to a non-arms length company, be required to remove any profit contained in the contract, such that the payer company is basically claiming at cost of the performer. This rule currently exists in very narrow and specific situations in s.127(11.6), which we recommend be expanded to encompass this situation.

We believe a large number of claims are filed by two non-arms length companies for the same project. This creates excess time and processing costs on CRA's behalf. By having one company make the claim on behalf of the entire non-arms length group of companies, we expect the processing of claims can be expedited.

5. Canadian Taxpayer employee SRED activities outside of Canada


Presently a company cannot claim any Employee activity time working on SRED projects outside of Canada, even though the employee is performing qualifying SR&ED activities and working on qualified SR&ED projects. Also if the employee is seconded or is working part time outside of Canada, they are, in most cases, still being paid in Canada and are paying Canadian Taxes. In the case of some of our large clients they simply transfer the highly skilled individuals outside of Canada thus contributing to a "Brain drain" of highly skilled and talented people.


CRA should allow employee SR&ED activities outside of Canada to the extent that the employee salary is declared on a T4 and the employee is a resident of Canada.

6. SRED claimant must have formal contracts to claim Subcontractor costs


We find that CRA financial reviewers in a few regional tax centres (TSOs), believe that it is a requirement to have formal contracts in place with sub-contractors if sub-contractors are being claimed for SR&ED. This requirement does not reflect business realities. The great majority of our small- and medium-sized taxpayers do not have formal contracts with their sub-contractors since formal contracts are time consuming and costly. In all cases, though they have verbal contracts and invoices to prove the work was performed.


CRA should communicate to all TSOs that formal contracts are not a specified requirement when sub-contractors are being claimed. There are other documents such as invoices and planning documents which can be used by CRA to help verify the activities performed by sub-contractors.

7. SRED Project start time and activities


Some RTAs in the field consider the SRED project start date to be only after the first prototype is tested. This may be the case if the prototype is constructed in a routine way from the existing knowledge base of the developers, but in many cases, the development of the first prototype does not involve routine work. In these cases the project start time should be upon the initial evaluation of the technical issues which include planning, designing, constructing and testing of the initial prototype(s). This should be clarified to the RTAs in the field.


CRA should have a training and evaluation program for RTA and Financial Advisors so that interpretations are consistently applied in the field, as interpretive disagreements represent a large contribution to overall claim processing delays.

8. RTA interpretation and ruling consistency


There continues to be significant variation in the interpretation of documentation and what constitutes sufficient supporting documentation across RTAs. As well, RTAs are often unfamiliar with CRA's own guideline documents and policies resulting in incorrect information being relayed to claimants. The training of new RTAs appears to be insufficient, which is a major concern for claimants due to the high turnover of RTAs in certain areas (e.g. software specialists). Also, on a related note, the RTAs appear to have limited career potential in CRA. It is our understanding that unlike Financial Reviewers that can move into a variety of departments across pay levels, there is only one job function and pay level for RTAs. This situation limits CRA's ability to reward outstanding RTAs and provide job satisfaction, which is likely a key factor in the high turnover rates observed in competitive technology sectors.


It is recommended that CRA review their RTA training program and perhaps introduce a written exam to ensure that a minimum level of knowledge about the program is achieved and so that there is consistency in the level of knowledge about the program across all RTAs. It is also recommended that CRA review its classification scheme for RTAs.

9. Application of Non-refundable Tax Credits


Non-Refundable tax credits can only be applied against corporate income taxes owing. Taxpayers that are in a loss position or that do not generate significant revenues (e.g. multinational R&D centres located in Canada) cannot make use of the tax credit in the year they are earned and can only carry them forward. Given the very competitive global market and the high Canadian Dollar in relation to other world currencies, this is an additional disincentive for performing R&D or establishing R&D centres in Canada. This also contributes to the "Brain Drain" as companies transfer their personnel (usually the highly skilled and highly trained) to centres outside of Canada.


It is recommended CRA examine the application of non-refundable SR&ED tax credits to other corporate taxes.

10. Offset of SR&ED refunds against other taxes and non-income taxes owing


CRA will withhold an SR&ED refund if a taxpayer has an outstanding liability for non income taxes such as GST. In fact we have seen situations where SR&ED refunds are held if the taxpayer has been selected for a non income tax audit, or are late in filing these specific forms, even though an outstanding liability has not been established. Further, the taxpayer is not notified that the refund is being withheld. In many cases, the SR&ED refund far exceeds the outstanding non income tax liability. Finally, we find the process to offset the SR&ED refund with other tax liabilities, is slow and cumbersome.


We recommend the taxpayer be at least notified of the specific reason the SR&ED refund is being withheld, so the taxpayer can rectify the situation quickly. Further, we recommend CRA review its practices in this area and present a written policy so that taxpayers are aware of their rights and the appropriate action(s) they can or should take in order to rectify the situation quickly.

We hope you find these recommendations useful and hope that they can be implemented.

We give you permission to post our comments on your website.

Yours truly,

Brian Cookson, President
Arne Luik, Vice President