If you have a SR&ED process in place, sooner or later, somebody is going to tell you that a project is not eligible… purely because they don’t want to be burdened with supporting a claim. Hard as it may seem to believe… people will sometimes resist participating in the SR&ED program.
Commonly, these are people whose workload is already towering near the maximum, or well beyond it, in the metaphorical in-tray. In the back of their minds, a little voice recognizes the SR&ED assessment task as a source of potential additional work, and it chimes in with “ ohmigawd… really? I don’t think so…” even as the conscious mind latches on to a convenient rationale for dismissing the whole idea. You know… before this SR&ED silliness gets out of hand.
Any kind of a program involving compliance represents an additional burden of work at some point. Somehow the compliance work is almost always in addition to the regular workload, and there’s always somebody for whom this demand represents a threat, the final, wholly-inconvenient straw. Their thinking is natural: “If I don’t say that it’s eligible, I won’t have to work on it. Or commit staff and resources to it.”
This kind of gaming the system essentially deprives their employer of what could be an important benefit or source of funding – perhaps even the funding that might justify an extra headcount under tight budget conditions. Still, there are different ways in which the process might be sabotaged, and lots of individual reasons for doing so. Here are a few common types of “SR&ED Resisters”.
The Myth-Maker, aka The Wizard of Flaws: This person would have you believe that “all SR&ED is a scam or a fraud, perpetuated against taxpayers, with the connivance of weak-willed politicians… and so of course, we don’t do any of that here. Pay no attention to that man behind the curtain.”
The Near-Myth: This person will admit the possibility that SR&ED exists, but like the previous type, insists that it never happens “around here, on my project” or “not on this occasion” (or any other occasion you might choose to think of), though they may admit that a given project “comes close” to meeting the definitions. To this person, SR&ED work is just a theoretical possibility, you understand, in the current environment, and will only become a reality at some time after you have detected large flocks of flying swine.
Bruce Madole
Once a SR&ED team reaches a level of meaningful financial return, it becomes a pawn for the political games.
Be warned, however. There is one vital stakeholder that is almost always overlooked in these games-playing scenarios, because that stakeholder is external to every claimant: the Canada Revenue Agency (CRA), which is responsible for assessing every claim made. The CRA is very clear in its preferences – they want to see a claimant’s SR&ED function located within the technology area for any claimant. This is because the “science” aspects of the claim are required to drive every other aspect of it, and the determination of eligible activity needs to be led by the people who do the technical work, and who understand the nature of the technological uncertainties.
Any organization that does not locate SR&ED within its technical domains will be subject to higher levels of mistrust and scrutiny from CRA Science Reviewers, based on the CRA’s fundamental suspicion that financial or taxation teams leading a SR&ED effort will inevitably over-claim because they lack the foundational technical knowledge to discriminate between the eligible and ineligible.
It should be understood, therefore, that any move to reposition SR&ED outside the technical domains of a company is inherently risky, and potentially damaging to the perception and effectiveness of the program itself.
Will this knowledge alter the behaviour of the corporate games players? Probably not. But it may be food for thought.
So… let the games begin.
Bruce Madole
There’s nothing quite like the scent of money to bring out the corporate games players and political opportunists, but if a company isn’t careful, these games players can foul up a perfectly sound SR&ED program. Unfortunately, the very nature of the SR&ED program makes this scenario more possible.
One phenomenon that seems to be unique to large organizations is the person I like to call a “SR&ED Vulture”. (You could just as easily call them SR&ED Sharks, for that matter.) These are usually a highly-placed or highly-connected manager (Director, VP, …you name it) – who sees the evidence of real promise in the corporate SR&ED program, and proceeds to make a play for control of the program.
There’s nothing like controlling the cash cow to impart a little clout.
Now, making their play may be as overt as “muscling in” or playing “reorganization or re-alignment games”, and it can be surprisingly easy to accomplish. After all, these are people with friends and contacts in high places, so you can expect them to possess influence, already. Moreover, there are factors about any SR&ED program that make it more vulnerable to games playing.
SR&ED is a hybrid program in any large organization, requiring a complex cooperation and integration between the taxation team (that files the actual tax claims), the Finance and Accounting teams (which control all of the accounting and reporting functions), and the technology, systems, engineering and product development areas, for example, where all of the eligible technical work, and the assessment functions, properly reside. And then there’s the Human Resources area, which typically serves as a “gatekeeper” to preserve control of anything the HR folks see as belonging in their domain, such information about employee salaries, qualifications, privacy, etc. Locate the SR&ED program in any one of these domains, and a smart political operator can make some kind of a case for locating it elsewhere, under his or her own control. SR&ED is too frequently seen as an “orphan” within any of these specific domains (particularly in the immature stages) lacking a proper parent to say “this child is mine” – i.e., that there are good and sufficient strategic reasons to be involved in raising and nurturing it – which makes the SR&ED program surprisingly easy to uproot and relocate.
All too often, those responsible for SR&ED don’t really know what to do with it, and feel uncomfortable about the alignment between a SR&ED team and their core mission.
That is, until the real money starts to flow.
To be continued...
Bruce Madole
Their learning goals were much more narrowly focused, and while nobody actually cried (that I saw), I suspect that I was boring many of them nearly to tears. Mostly, when this happens, people tune out more than the most boring bits – they start to totally lose their grip on the wet soap of learning. Minds drift, and the relevant bits that follow after are lost in the fog of “what am I doing here, really?” and “When will he shut the hell up?”
Net result, if you had asked someone what the session was about, they might have said, “It was something to do with SR&ED tax credits”. Hardly the kind of learning designed to transform and energize an organization in support of a SR&ED program.
Though I was passionate and persistent, over time I learned that SR&ED awareness training needs to be delivered frequently, in many different ways and in specifically focused, small packages of task-specific learning.
Mostly, people want to learn what it is I need them to do. To do… not to know. Therefore, while I do not neglect the “why” in the training sessions I deliver, I try to place a lot more emphasis on the what, the how, and the when of the SR&ED tasks that directly affect their working lives. These are busy, busy people. Vendor Managers have contracts and relationships to manage. Lawyers are lawyers, after all, and financial types have all of those numbers to deal with. Project Managers have projects to run, and engineers, well… you know: everybody has their own, very real, very demanding work to do. They might be willing to help support me in what I’m doing, but they’re definitely not signing up to do what I do.
This has meant, in effect, that the “Everything You Might Ever Want Know About SR&ED” approach was reduced to the “Only What You Need to Know About SR&ED Right Now” approach.
That helps. A lot.
Bruce Madole
There are plenty of good reasons to conduct regular SR&ED awareness training sessions. But everybody needs to know the same things.
It helps your SR&ED program if you teach the key stakeholders something about the information or response that you need, and why that information or that response matters. If you’re going to deliver such training effectively, though, you need to broaden the scope of who you’re training, and to narrow the scope of what each training set should include. There are specific things that it is vital for a Vendor Manager or a Project Manager to know, for instance. Their training should include those things. The same goes for Senior Leadership, or the financial folks, or Human Resources. Tailor the training to your stakeholders to get better results.
When I first started to develop and deliver SR&ED awareness training, I developed a one-size-fits-all training deck that included topics from both the technical and costing sides of the SR&ED program. I delivered that training to anyone and everyone who wanted a SR&ED briefing (or who was forced to sit through it). The problem was that, at any given session, approximately half of the content was irrelevant to some of my audience.
I could tell by the glazing of their eyes and their diminishing engagement when some of the participants began “tuning out”, because they had nothing to do with the issues I was discussing. This was due to my own flawed assumptions – I was assuming that the information was as necessary to them as it was to me. It wasn’t. Nobody in the room was seeking to become a SR&ED expert. They just wanted to learn how to recognize the kind of work that might qualify, and to understand what their obligations and tasks were should they find themselves in a project where a SR&ED claim was possible. (Just tell me what I need to DO, they were pleading silently … and I let them down.)
Bruce Madole
The CTO and/or CIO have vested interests in their future technical vision of the company. That’s what they are paid to do – to think ahead and make things happen. (Note: A SR&ED program may appear to be an unwelcome distraction, until it becomes clear that SR&ED is a strategy for mitigating technical risk and the costs of innovation.) No other single individual has as clear a view of the technology gaps and challenges that need to be overcome in the pursuit of a technical vision, so the CTO/CIO are vital allies (and critical sponsors) for the success of SR&ED. Also vitally important are the key technical primes who variously direct or manage the detailed execution of the technical vision -- to identify, train, (or even hire), one or more SR&ED Champions within the ranks of such individuals is to enforce both leadership and policy traction at a level where it can become immediately useful.
Leadership support from within the Program and/or Project Management Office is also vitally important, and the same is true of the official “process owners” for technical, product and service development processes -- all of these areas are often required to enforce some degree of change to support SR&ED, depending on the extent to which current processes actually generate useful technical and costing evidence. These are stakeholders whose support and engagement are essential for driving effective process change.
Finally, and not at all least, key financial and taxation leaders need to be willing to help you make the case that SR&ED is fundamentally worth building into the financial and taxation processes. Creating process-level support for such change is a lot of work, and they need to agree that it’s going to be “worth it” when done properly.
In all of the above areas, the opportunity exists to develop your SR&ED Champions internally, over time, by building on a foundation of successful claims and trying to persuade and “win” support from your internal SR&ED stakeholders. Internal training and awareness programs can help, as does a wide-ranging program of communication and long-term advocacy with those same key stakeholders.
Developing a SR&ED Champion requires that you have effectively listened to these critical stakeholders, that you have understood and addressed their concerns where possible and that you have enlisted their active participation and constructive “sponsorship” within the confines of their own reporting structures. It should also, ultimately, entail a transfer of the glory and the “ownership” of the program results to those same SR&ED Champions. Give them a “skin in the game”, and eventually, it’ll be their game: mission accomplished.
Bruce Madole
Incremental and gradual change always seems like the slowest way to effect change in a large company – until you’ve tried all the other ways. However, training and recruiting SR&ED Champions for key points in your organization is one approach that promises to accelerate effective change.
What do I mean by the phrase “SR&ED Champion”? I mean a person who:
- is both knowledgeable about and experienced with the program criteria and claims process,
- has embraced the strategic importance of the program, as it relates to their own technical or operational domain, and
- is able and willing to engage, persuade, and lead others toward the same conclusions.
How do you persuade an organization that, done properly, SR&ED is well worth the effort, if the organization is unfamiliar with (or effectively uncommitted to) the SR&ED program? Any organization can undermine an unfamiliar program by the simple expedient of doing a half-hearted job of its initial attempts to introduce it. Doing something badly is often the proxy for refusing to do it at all. Every new idea or thing is in a fight to the death with the old ways of working. It is infinitely easier to build a new SR&ED process into a small and growing company than it is to introduce the same changes to a large firm.
Organizations resist change exponentially, I think, in ways that somehow exceed the inertia or resistance of the individuals who make up the organization. Large organizations resist change on a grand, unimaginable scale – simple human resistance is augmented by technical, procedural and policy complexities, not to mention economic barriers, internal and external politics, and inter-personal, organizational and stakeholder issues. Almost any reason you can think of… and many that you can’t imagine … will stand in the way.
Even if, like the Pharaoh of Egypt in a certain Hollywood movie, one could decree, “So let it be written – so let it be done”, the real effective change would be a long time in coming. Compliance always lags behind policy, and achieving agreement on the best policy is usually an uphill struggle all its own.
This is where the SR&ED Champion idea comes into its own. (Of course, the very idea of pursuing and adopting such an approach assumes a level of leadership buy-in that is a-typical of many organizations.) The idea is that certain people, key stakeholders with the right skills, have the ability to really accelerate change. Among these people are: the Chief Technology Officer (CTO), key technical architecture or product development primes, key financial leadership, and key project/program planning and project management primes.
Even given a decree from Pharaoh (or the CEO), it’s hard to achieve effective compliance at any level without the engagement of such strategic champions – and you need them all for different reasons.
To be continued...
Bruce Madole
Satisfying the negative test of intention
You may well feel that it’s nearly impossible to try to prove that you did not intend to do a given thing at any point in time. However, this doesn’t have to be as tricky as it seems.
The reason for this question is that, under the SR&ED program, you cannot claim the costs of capital equipment used for “commercial production”. And the law goes further – even if you were buying the equipment for the initial purpose of doing SR&ED with it, the law then asks if you knew, at the time of the purchase, that you intended subsequently to redeploy that equipment into commercial production, once the SR&ED work was complete? If your intention at the time of purchase was to redeploy the equipment to production after the SR&ED was done, then you cannot claim the equipment costs.
However, I have emphasized the phrase “at the time of purchase” for good reason. Even if you did not initially intend to redeploy such equipment (and in the absence of any evidence demonstrating any different, earlier intent) you may subsequently change your mind about the disposition of the equipment. If you then chose to deploy the SR&ED equipment for commercial purposes, then existing rules apply for the “recapture” of some of the ITCs related to the equipment. The law allows you to change your mind. (Ask your accountant how this would work.) Recapture rules are generally not as punitive as totally disallowing the equipment cost.
So therefore, one of the keys to satisfying the test of negative intent is simply to avoid commenting at all on the ultimate or eventual disposition of the SR&ED equipment, at the time of purchase. That leaves you free to decide, once the SR&ED is finished, how the equipment should be disposed of or re-used. And if the equipment in question remains in a dedicated, captive facility -- such as a development or testing lab or other non-production environment -- then the questions about intent are fully satisfied.
Of course, if you fully intend to redeploy the equipment to production, afterward, then by all means say so, and “bite the bullet” – those costs will not be claimable. (Though in that situation, you might want to consider leasing the equipment in question, because then the lease costs of the SR&ED equipment would be claimable for the duration of the SR&ED work, assuming it is otherwise eligible. Again, check with your accountant.)
In conclusion, to satisfy the tests of intent, you need first to create positive evidence in support of the linkage between your capital equipment purchase and the SR&ED work, at the time of purchase. Secondly, you might want to consider what your intentions might be for the eventual disposition of the equipment – either to be clear about your intentions, or to consider the options and impacts of alternative approaches.
Bruce Madole
Claiming expensive capital purchases as a part of your SR&ED tax claim requires that you satisfy a test of your intent for the equipment at the time of purchase. Long before you get to any discussion about how the equipment was actually used, and the level of usage, you will have to defend an intention that you may not (or not yet) have documented (or even fully formed) when you were buying the equipment. The wrong answer can sink you … so read on.
The test of intent consists of two linked questions; the first seeks evidence of a positive intention, and the second seeks to demonstrate the absence of a different intention, which is trickier. These questions are:
- At the time of purchase, did you intend to use the equipment for the purposes of performing SR&ED, as opposed to any purely commercial purpose? (The positive intent for SR&ED)
- At the time of purchase, did you intend to redeploy the equipment to production purposes (i.e. commercial use), once the SR&ED work was complete? (The absence of intent re: commercial production)
Reviewers will seek answers and evidence related to both of these questions.
Satisfying the positive test of intent
You need to create a paper trail, at the time of purchase, which demonstrates your positive intent for that equipment to be used in the SR&ED work. This should be relatively easy, though it isn’t always, in practice.
Creating a positive paper trail in support of intent may be as simple as retaining and documenting the emails and internal correspondence which leads up to the approval and budget for actually buying the equipment in question. If you are buying the equipment because you need it for certain specific purposes within a technology project, state what those purposes are (e.g. development, testing), and document the name of that specific project for which it was purchased. You may have had correspondence with the equipment vendor that speaks to your intentions in buying the equipment, or which includes discussions of project-specific technical requirements. If you have included a project name (or even a code name) in the vendor correspondence, you can provide that correspondence as evidence that positively links the purchase to the project work.
If the equipment you are buying is destined to be used in some kind of dedicated development or testing facility, by all means, say so in your internal correspondence and the vendor correspondence: i.e. “We’re ordering the XYZ unit for the R&D Lab.” The importance of doing so is related to the second, negative test, discussed below.
To be continued...
Bruce Madole
The demands of consulting practice (and apparently, of claim review) frequently result in the use of technical interviewers or claim reviewers who have, ultimately, an area of specific technical competence and at the minimum, a strong awareness of “what SR&ED looks like” based on their own technical backgrounds and their growing experience (and exposure to specific industry groups) as SR&ED practitioners. So the requirement for specifically applicable skill-sets and qualifications rapidly morphs into a broader awareness of the SR&ED domain, in which experience and SR&ED knowledge supersede specific competencies. SR&ED “Scientists” are frequently cross-assigned to areas where their experience and detailed SR&ED knowledge is expected to carry them through.
The experienced practitioner, working away from his or her own preferred subject domain, will recognize the signs of SR&ED, and will ask the necessary questions from the SME they are interviewing, such as: “how does this problem go beyond the boundaries of standard practice?” and “Why was this an advancement?”. They will, in effect, supplement their own backgrounds with the voice and experience and judgment of the SME who did the work.
This doesn’t always work out well, but often enough, it works.
As discussed in my previous article, on Cognitive Interviewing, sometimes the “SR&ED Scientist” assigned to prepare or review a claim may “overlay” the interviewing or the review process with their own prior knowledge, experience and assumptions, to the extent that those experiences and assumptions are allowed to interfere with the interviewing or assessment processes. The very knowledge and experience that we demand of them may prevent them from understanding what they are being told, or indeed, from listening or perceiving with an open mind. It’s easy to rush to judgment, and there are strong pressures to do so.
However, given that the SRED Scientists do not always end up applying their skills in their precise areas of expertise, and given that SR&ED knowledge becomes increasingly vital, might there not be a place within the SR&ED practitioner team for an expert interviewer (whether or not that person was a SR&ED Scientist by training?) And conversely, might there not be some real gains to be made, in SR&ED practice, by ensuring that SR&ED practitioners receive some training in advanced interviewing techniques? That is, I hope, more food for thought.
Bruce Madole