Posts Tagged ‘sr&ed refunds’

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 (continued)

Variance 3 – Acknowledging or adjusting for the business context of the taxpayer contrasts sharply with the current trend, in which CRA reviewers are holding out definitions of advancement at the industry or technology level, regardless of business context. (Note: This will heavily penalize smaller firms, and effectively eliminates the notion of considering business context from the application of the SR&ED program.)

You may notice that, although the phrase “technological uncertainty” is certainly dominant, Section 2.11 uses technical uncertainties as an equivalent wording, in the section about the application of the criteria.  That they do so calls into question the validity of the entire construct or distinction drawn between “technical” vs “technological” uncertainty.

The current policy review and consultation, with its consolidations of various documents, may enable the CRA to quietly replace IC86-4R3 with some other document that does not contain such contradictions.

Clearly, therefore, the CRA is narrowing its definitions and the claim assessment practices that derive from them.  These more restrictive definitions are now being taught, and applied during review, and to challenge these will probably require recourse to the secondary mechanisms, up to and including the Tax Court of Canada, or direct appeal to the Minister responsible.

Unfortunately, in Court, the taxpayer does not find it helpful to rely on interpretations of CRA circulars, policy documents, or guidance papers – although, neither does the CRA.  The Courts have made it clear that administrative policy is not the same as the Income Tax Act, and that Ministerial discretion extends only to the interpretation and application of the Act itself.  The Courts have been vigilant to preserve the right of the Courts, to interpret the law, and of Parliament, to change it.

This is one reason, I believe, why the CRA’s current Claim Review Manual instructs reviewers to refer only to the Income Tax Act when explaining their decisions to claimants. They’ll use their circulars and guidelines and interpretations bulletins, etc. to form an opinion, but they’re not allowed (by administrative policy) to explain to claimants why or how those documents shaped the outcome of their ruling, or which particular rule or paragraph or point they think you violated.

In the case of Kruco Inc v Her Majesty The Queen, Judge P.R. Dussault J.T.C.C., in paragraphs 111 to paragraph 117, clearly speaks against any tendency or attempt to raise administrative policy to law, including these words:  “the adoption of an administrative policy for the purpose of interpreting an ambiguous provision cannot be a substitute for a clarifying legislative amendment.”

I believe that, with the Courts insisting that the Income Tax Act (ITA) is the only enforceable standard, the tax authorities have mandated that the ITA must also be the only reference point provided to claimants when discussing their findings or opinion of the claim, purely to avoid being accused, in any subsequent legal proceedings, of having elevated administrative practices and policies to law.  Of course, the CRA will still do that, applying their policies as needed for their own convenience, but now, per the Claim Review Manual, they will hide the application of those policies behind the more general and unspecific language of the Income Tax Act when rendering their decisions.
What hope is there for a frustrated claimant seeking consistency or transparency of process from the CRA under such circumstances, where CRA apparently feels the need to withhold details, merely to avoid being punished for it later in the Courts?

Bruce Madole