Posts Tagged ‘sred consultant’

When Is A Consultation? (continued)

If you think about it, though, despite all of the flurry of activity around claim review process, policy and guidance documents, and so on … I haven’t yet heard about anything that represents a substantive change to the Income Tax Act (or regulations) and the real bones of the SR&ED program. If anything, there appears to be a real, renewed determination on the part of the CRA to get more traction out of the content of the jurisprudence related to Northwest Hydraulic Consultants Ltd., and the definitions surrounding it.

Does all of this fuss amount to the equivalent of a new coat of paint and some new shutters, applied on top of an old house?

Probably not.  I think it’s more than that … but we’ll have to wait and see.

When is a consultation really a consultation?  When somebody’s actually listening, and paying attention. We won’t know for sure until the dust settles, though clearly current trends are not promising.  In the absence of constructive change, consultation may well be another political charade:  more smoke and mirrors.  That would be a shame.

Bruce Madole

When Is A Consultation?

The Canada Revenue Agency (CRA) has been releasing draft policy documents on the SR&ED Program for public comment over the past few months, as a part of an ongoing policy review exercise.  They have done so at a time when the SR&ED Program is under intense scrutiny, the subject of two separate review exercises (The Expert Panel, and a report expected (someday) from the Taxpayers Ombudsman.  Various deadlines for comments have come and gone, with individuals and industry groups responding.  Still, it remains to be proven whether this is really a consultation, or merely another preemptive exercise in political and public relations damage control, designed to deflect expected criticism.

If there’s one thing they understand perfectly well up there in Ottawa, it’s the art of the Cabinet shuffle. Politicians and bureaucrats have this down pat.  Just when the public and the press really begin to ratchet up the heat and to focus on the deficiencies of a situation – boom – everything’s been changed around.

Seldom does this exercise involve real, substantive change. It’s usually about “managing optics”.  However, the people who plan these things understand full well that they are at minimum buying themselves time.  They can say, as the questions, accusations, etc. pour in:  “See – we’re ahead of you… we’re already dealing with that. Change is already happening.”

Most of the time, it’s not.  But it also takes more time to confirm that.  And some of the time, change means making things worse (but different)… and it takes time to confirm that, too.

So the skeptic in me has always had doubts about the timing and purpose of this current convulsion of change.  CRA’s current policy consultation on SR&ED feels ominously like an optics exercise.

I ask myself, though, what would be the point?  Why go to all of this work, this turmoil, if there’s no intent to even attempt positive change?  (Even as a teenager, I learned that it’s more tiring and troublesome to pretend to be working than it is to, you know, work)

To be continued…

Bruce Madole

And So… To Court (continued)

The judgments in these cases are available to be read, via the websites for the respective Courts, and all of them are worthy of detailed study.  Of particular note, however, is the fact that the Federal Court of Appeal, in the decision re: CW Agencies v. Canada [paragraph 17], echoes the decision of the Court (from RIS Christie Ltd v. Canada) in articulating five (5) criteria:

1.         Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?

2.         Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?

3.         Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?

4.         Did the process result in a technological advancement?

5.         Was a detailed record of the hypotheses tested, and results kept as the work progressed?

[emphasis added]

What’s noteworthy about this, is that we have become so accustomed to talking about the three key criteria of SR&ED (Advancement, Uncertainty, Scientific or Technical Content (aka The Work Performed section) that we overlook the approach of the Courts, in which the Content section is broken down further into three distinct criteria, all having to do with: creation of hypotheses, the spirit of the scientific method, and the keeping of a detailed written history of the work – three out of five criteria, overall, have to do with the need for documentation and evidence.  (As an aside, perhaps we would do well to modify SR&ED training approaches that continue to speak of only three criteria?)

Detailed evidence of a systematic investigation is still preferred by CRA, and by the Courts. You may be able to defend your claims by pointing to the specific advancements achieved, or by producing oral testimony in support, but will most probably have to spend years in court to do so.  (Alright … maybe not years in court … but perhaps, years preparing for court, interviewing and preparing witnesses and experts, etc.  I’m exaggerating to make a point.)  You cannot achieve such results without going through lengthy processes for objection, administrative review, and legal actions, and so on. Lawyers are expensive.  (Don’t forget that, if you lose, you may end up paying for CRA’s legal costs as well as your own. And that’s gotta sting! ) Every year you spend fighting through this process is a year in which your claimed SR&ED benefits are not being received. Staff time is consumed in preparing for such proceedings.  The costs add up. But … why go through all that?

Wouldn’t it just be simpler – so much more incredibly simple  — to start keeping and maintaining the necessary technical and financial records, if you plan to claim SR&ED?

If you can’t produce evidence that will satisfy the CRA science reviewers, and financial reviewers, and if you keep insisting on your right to claim, then you will end up before the Courts. And when did you ever hear about a court case that did not demand the presentation and discussion of evidence?  If you’ve produced none, then that fact will become evidence… for the CRA.

Bruce Madole

And So… To Court

You are not legally required to produce detailed written records in support of a SR&ED claim.  However, if you don’t, you must be prepared to spend years before the courts in defense of your claim, and you must understand that you will most probably lose.  This sentence above is a loose paraphrase of the outcome of a Court decision (136736 Canada Inc. v. Her Majesty the Queen). I’ll write more about it later, another day.

To support a SR&ED claim, the tax authorities demand detailed, step-by-step records about the progress of the technical work.  They’re quite specific about what they want to see:  the technological uncertainty, barrier or gap, the hypothesis formed, the actions taken, and so on.  And then, eventually, they will want to see the documented linkages between those work steps that you documented, and the costs that you claimed. Needless to say, many if not most businesses fail to keep such levels of documentation, recorded in the way that the Canada Revenue Agency would like to see.

Anecdotally, some reviewers have been quite unreasonable or hard-line in their demands on these points, but it’s hardly surprising.  When they provide public training and information sessions for the SR&ED program, the CRA naturally insists on the need for detailed technical records, proof of experimental development, and proof of the associated costs. If you’re claiming it, they will demand evidence. No big surprise, this.

In fact, I’ve heard that increasingly, CRA reviewers are making the sufficiency of evidence their primary determining factor among the three key criteria, ruling out claims purely for failure to satisfy the requirements for evidence.

There have been a number of court cases along the way, in which the legal precedents have provided valuable guidance to the conduct of the SR&ED program.  Unsurprisingly, some of these cases have to do with the need for supporting evidence. (Well, probably all of them do, in one way or another.)

Three of the key cases are:

• RIS Christie Ltd v. Canada (Federal Court of Canada, Appeals Div.)
• CW Agencies Inc. v. Canada (Federal Court of Canada, Appeals Div.)
• Northwest Hydraulic Consultants Ltd. and Her Majesty The Queen (Tax Court of Canada)

To be continued…

Bruce Madole

Evidence, What Evidence? (continued)

Others within the industry have asked, though not necessarily in print, whether the situation within CRA is so toxic, adversarial and politicized that they are unable to sustain and present a consistent public policy in a program the growth of which has posed severe staffing and administrative challenges. But writing a story about political, budgetary and cultural challenges within a federal bureaucracy is like writing about the mosquitoes of northern Manitoba. Is this news?

Unquestionably, SR&ED claimants should keep detailed technical records about the work they are hoping to claim… assuming that they know in advance they will be wishing, someday, to claim it. However, I also understand why it doesn’t happen. And so does the CRA.

The CRA clearly understands that many first-time or early claimants may not have the processes in place to keep such records.  That’s why CRA has formal procedures, such as the “Letters and Records” memo, to remind claimants that adequate evidence is a condition of the right to recover SR&ED benefits from the Canadian government (and the taxpayers of Canada).

First time claimants, most of them small companies, are usually unfamiliar with the program requirements and usually are not included to such organized and methodical styles of record-keeping.  In most small companies, people tend to get together and talk about problems, technical or otherwise – they don’t tend to sit around in the lunchroom crafting careful technical lab or science reports with meticulously recorded hypotheses and painstaking test results.

Even in much larger organizations, there tends to be a belief that formal and documentary processes tend to slow down the actual work, getting in the way of “productivity” – which by the way assumes that supporting a claim for a failed experiment or engineering approach does not provide critical financial support for the continued pursuit of new technology advancement.

“We just want to DO the work,” you might hear, “not spend all of our time writing about how we plan to do it.”
Documentation is not fun, but neither is it accidental.  Is this news?

Filing taxes is probably not on the list of favourite things either, but we all understand that the tax authorities continue to expect receipts for deductions claimed, and that sort of thing.  So the day is unlikely to come, any time soon, in which the tax authorities will say to a claimant, “Evidence?  What evidence?  You don’t need any evidence… just take the money.”

That would be news.

Bruce Madole

Evidence, What Evidence?

Recent anecdotal evidence suggests that the Canada Revenue Agency (CRA) is becoming increasingly detailed (and according to some, who disagree with them, occasionally irrational and unreasonable), in its approach to supporting documentation.

This is news?

Certain newspapers or columnists continue to create stories about the fact that reports are going to be published, by various official bodies, about the state or the future of the SR&ED program, about the rampant unhappiness of consultants across the industry, and the rampant unhappiness of the CRA with many of those same consultants and their clients.  This is news? At best, it’s a teaser that someday soon, there may be news.

Let me recap – the government is giving away money to businesses, as a financial incentive to perform research, and some people are alleged to be acting unscrupulously to get their hands on some of it.  Is that news?

If I filed a news story that there are mosquitos in the woods north of Winnipeg, would that be news? I don’t think anyone would be a bit surprised.

A cynic might ask if this current fuss is a deliberate and somewhat cynical strategy by CRA to kick up dust and raise the debate about the necessary level of documentation.  What it seems to be doing, mainly, is stirring up old debates about whether CRA is an appropriate administrator for a tax incentive program… the idea being that providing incentives is a foreign and unfamiliar state of mind for a Crown agency that is historically more familiar with detection, collection and enforcement.  So, on balance… probably not.

To be continued…

Bruce Madole

Prospecting, Mining, and Diamond-Cutting (continued)

Many SR&ED consultants have begun to present their clients with a “SR&ED Application” of some kind, intended to help them organize their SR&ED claims supporting evidence.  Competitive pressures drive this behavior, but I see these solutions presented too often as a one-size-fits-all overlay to existing systems and processes, unintelligently, and with no efforts made to understand the client environment, or to truly consult on the needs of the client. (And truly, isn’t there a risk that the consultant in that role has become a system salesman, primarily concerned with flogging the solution?

Objectivity, in such circumstances, may truly lie in recognizing that the customer may not need the solution being proposed, but could be better served by modifying existing services or processes… a consultant who tries only to “close the deal” on a system solution is not truly serving his client.)

I may digress, but it seems to me that the healthiest evolution of a process within a company is to use existing and available processes in as transparent and lightweight a fashion as possible.  Minimizing impact is a key to minimizing the resistance to organizational change, and process transformation or re-engineering is unquestionably “change”.

Making the shift from simple prospecting to more process-driven and systematic exploitation of SR&ED  opportunities – mining – implies some patient work in the level of organizational change, some negotiation, tweaking or transformation of complex sets of inter-related processes.

The indicator of successful “SR&ED Mining” is the consistent and wholesale delivery of SR&ED prospects from across an organization, together with a consistently sufficient set of supporting evidence, both the technical and financial.  (The SR&ED team, in this model, may be entirely in-house, or a combination of the in-house team and external consulting support.  In any configuration, broad transformations of process are required to reach this stage.)

The role of the SR&ED expert/team and their energies are thus shifted, eventually, from prospecting to polishing:  choosing the best and finest and most beneficial opportunities for claim, and ensuring that they are presented in their best light.

Bruce Madole

Technical vs. Technological: what the CRA is saying: Part 2

Part 1 of this article talked about some of the extra nuances and baggage that the Canada Revenue Agency (CRA) has recently begun adding to terminology that we use in the assessment and preparation of SR&ED claims, along with some of the implications (reduced claims).  In this part, I’m going to examine one of the CRA’s favourite policy documents to highlight and discuss some of the current differences.

The Information Circular IC86-4R3 Scientific Research and Experimental Development was published May 24, 1994 (approximately 17 years ago), and has served as CRA’s main reference document for SR&ED ever since, even among the proliferation of additional policy and application documents, and sometimes, it appeared, preferred over referencing the income tax act itself.

Bear with me as I’m going to quote a couple of sections from IC 86-4R3.  The definition of scientific or technological uncertainty as described in Section 2.10.2   (bolding/underlining is mine):

2.10.2 The criterion of scientific or technological uncertainty is as follows:

•    Whether or not a given result or objective can be achieved, and/or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience. This criterion implies that we cannot know the outcome of a project, or the route by which it will be carried out without removing the technological or scientific uncertainty through a program of scientific research or experimental development. Specifically, scientific or technological uncertainty may occur in either of two ways:

- it may be uncertain whether the goals can be achieved at all; or
- the taxpayer may be fairly confident that the goals can be achieved, but may be uncertain which of several alternatives (i.e., paths, routes, approaches, equipment configurations, system architectures, circuit techniques, etc.) will either work at all, or be feasible to meet the desired specifications or cost targets, or both of these.

•    The scientific or technological uncertainty, rather than the economic or financial risk, is important in characterizing scientific research and experimental development — and, hence, eligible activities.

•    Sometimes there is little doubt that a product or process can be produced to meet technological objectives when cost targets are no object. In commercial reality, however, a reasonable cost target is always an objective, and attempting to achieve a particular cost target can at times create a technological challenge which needs to be resolved. A technological uncertainty may thus arise that is imposed by economic considerations. Otherwise, the more general question of the commercial viability of the product or process is not relevant to whether or not a technological uncertainty is present and, hence, to whether a project is eligible or ineligible.

•    This criterion applies equally to work on new or existing processes or products. The description of technological uncertainty contained in this subsection applies wherever the text of this circular refers to the criterion.

And later in the same document:

2.11 Application of criteria

The three criteria of IC 86-4R3 must be applied within the context of the taxpayer’s business environment.

Scientific research and experimental development varies in content as well as in the complexity of the technology in a given field. The technical uncertainties encountered by one taxpayer may well be looked upon as facts easily obtained by another. The judgment as to eligibility should be made within the context and environment of a single company and its field of business. Specifically, the activities undertaken to resolve technical uncertainties are eligible if the taxpayer cannot obtain the solutions through commonly available sources of knowledge and experience in the business context of the firm. We expect that any firm claiming expenditures for scientific research and experimental development activities will have or will access the expertise necessary to carry out a viable program.

These sections contain a number of wordings or approaches that are quite foreign to the CRA’s current message.

Variance 1 – Uncertainty as Doubt. The notions of uncertainty expressed as to overall approach (Uncertainty Whether), or a doubt about potential success, or as to which of several approaches is best used, as in, “we didn’t know if this approach would work.” (Call this one: Uncertainty Which.) This allows considerably more latitude than the current definition (Uncertainty How) which expects the problem to be already clearly understood and the technology gap or barrier to be already precisely defined, thus leaving a lot of early exploratory work off the table.

Variance 2 – Uncertainty re Approach. Uncertainty whether a thing can be achieved, or uncertainty about which is the best of several alternatives, are both materially more inclusive, from an eligibility perspective, than uncertainty about how to overcome a more narrowly defined and specified problem.  Of these two variants (uncertainty whether, uncertainty which), it is the uncertainty whether, which I have also described as “uncertainty as doubt”, that is more inclusive and allows greater scope for eligible activity.  However, the uncertainty about which approach is best applies even in situations where CRA is insisting on it’s current, narrower definition – once the problem is totally and clearly defined and understood, there would still be a need to consider multiple experimental approaches. Otherwise, there would be no experimental development. But this uncertainty, when linked with the first, enables the claimant to include a whole range of explorative and analytical activity previously used to help in understanding and clarifying the nature of the technology barrier or gap.  This is work which, even if experimental in its nature, the CRA would currently seek to exclude, because the technology barrier or gap had not yet been narrowed to a single, clearly focused problem.

Bruce Madole