When the CRA traditionally takes on an adversarial role with claimants, it becomes easier for SR&ED consultants and their clients to feel encouraged when the Tax Court of Canada disagrees with a claim rejection, siding with the claimants who are making the appeal. However, we are still in the midst of an era where formal dated documentation reigns supreme during SR&ED audits.
It’s true that the CRA and the TCC seem to take different attitudes regarding what qualifies as proof, but there are a couple of points to consider when comparing and contrasting the two attitudes:
The Tax Court of Canada sometimes finds witness testimony both admissable and compelling in their court case findings. It’s worth noting that nothing makes or legally obligates the TCC to believe witnesses, and if a case comes down to that, their refusal to believe witnesses could sink a SR&ED rejection appeal. However, the fact that the TCC could uphold an appeal based on nothing other than witness testimony sets them apart from the CRA.
The Canada Revenue Agency and its SR&ED auditors want contemporaneous documentation. It’s not even a matter of whether they choose to believe witnesses, they want the testimony of cold hard tracking, preferably paper records written at the time of experimentation which are properly dated.
If one wants to go to the trouble of filing an appeal and trying their luck with the TCC, this is certainly encouraging. Does it change CRA policy, however?
The short answer is yes, but with an important caveat: the CRA is not guaranteed to change its policies in immediate response to such court rulings. One commonly cited case is Northwest Hydraulic Consultants Ltd.’s successful appeal in 1998, which established the validity of incremental discovery over time as SR&ED research, and also upheld the fact that a discovery made by others but kept secret is very different from general knowledge of the field. SR&ED claimants and their consultants take these facts into consideration when evaluating every potential claim, but the CRA did not formalize either point in its policies until 14 years after that ruling.
What do we know for sure? The policies of SR&ED may remain convoluted for years even after the TCC rules on its finer points. Also, it’s the CRA, not the TCC, that will evaluate, choose to audit, and choose to approve or disapprove of a company’s claim. It’s the CRA that will evaluate technological documentation with uncertain criteria.
We also know that well qualified SR&ED consultants with years of experience in the field is generally your best bet for navigating these murky waters. If you are interested in seeing what SRED Unlimited can do for your company, contact us at your convenience.