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Bad Form

Some tax offices and Research and Technology Advisors (RTAs) of the Canada Revenue Agency (CRA) in the Greater Toronto Area are demanding that SR&ED Claimants fill out a non-prescribed (read, unauthorized and unofficial) form called a “Development Chronology” as a condition of their SR&ED review. “Fill it out,” the Claimants have effectively been told, “or get nothing.” It’s wrong. It’s bad process. It may even be illegal.

Tax Authorities like forms. They depend on them to maintain order in a process that is all about compliance. Forms flow out of, and into, processes, driven by the regulations that flow out of the Tax Act. In short, there’s a reason for everything. Official forms are controlled, they’re listed and disseminated through the CRA official website, and they’re extensively designed and tested: all this, because such forms are an instrument of a legal process. The official forms are used to enforce compliance with the law. Take the T661, the central prescribed form of the SR&ED program. When that T661 is going to be changed, there is a whole lot of communication about it. Even, publicity. You know … announcements.

This is because official prescribed forms do not creep out of the woodwork like cockroaches in a darkened kitchen. They do not emerge in contradictory shapes, inconsistent even with one another, to be used like a secret blackjack for an unofficial mugging of the taxpayer.

A development chronology is typically a request for a hyper-detailed timeline of the project work; it’s nothing that I would typically object to if it were prepared, say, as a pre-amble to the development of the actual T661 project narrative. Getting your details and your narrative chronology straight is a vital step to being able to properly answer the essential questions about the claim, within the limited confines of the shorter T661 form. (And it was the CRA that introduced the short form in the first place, so why would they circumvent that change by immediately insisting on receiving something that supplants it? But I digress.)

It’s absolutely dead wrong for an RTA to immediately demand that the Claimant re-develop and re-submit their claim, using the format of the cockroach form (sorry … the Development Chronology), when all too often it is transparently obvious to all concerned that the RTA did not even read the original (official) submission. When there are zero — as in none — questions concerning the actual narrative put forward as the official document describing the technology barriers and uncertainties, the experimental approaches, or the advancements sought, the process of reviewing a claim has already irretrievably broken down.

Now, the Development Cockroach (sorry … Development Chronology) is an instrument of “project deconstruction”. Officially, project deconstruction is an approach that attempts to reduce SR&ED activities to their lowest and most granular level, until the entire effort appears to be routine, ordinary and ineligible. Is there any comparable experience? Imagine for a minute that you’ve brought your computer into a repair shop. The repair person looks at it for a second, takes out a sledgehammer, and pounds the whole thing into dust. Then he says, I thought you were bringing me a Mac … that’s nothing like a Mac.

Well no, not now. It’s a horrible analogy, I know – but the experience of claimants is absolutely comparable. RTAs are doing such violence to legally submitted projects all the time, and the demand for the Development Chronology is often the first clue that it’s happening.

Previous guidance documents and case law (now hastily buried in a shallow grave outside Ottawa, if some RTAs are to be believed) actually warned vigorously against project deconstruction. Most of those documents have now been “officially retired”, which is the official story you may hear from CRA. However, the CRA’s current philosophy and approach to scientific eligibility and scientific method relies predominantly on one court case (Northwest Hydraulic Consultants v. The Queen), in which Justice Bowman, the author of the judgment, had a very great deal to say about the previously central policy guidance document, (Information Circular) IC86-4R3. I doubt greatly that the Tax Court of Canada would tie anyone’s hands that wanted to use case law and precedent to reference Justice Bowman’s expressed opinions, or the weight of legal precedent in an effort to properly argue the merits of their claim under the Tax Act.

Ahhh … but should a claimant have to resort to the Tax Court of Canada, incurring additional expense and great delay, merely to obtain a review of their claim under the actual principles and law that ought to govern the SRED program on a daily basis? Most claimants have little appetite for that kind of battle – a fight purely on principle that is forced upon them by abusive, extra-legal process.

Official forms and processes are there for a reason. The law requires you to comply, if you want to access the tax benefit program. Furthermore, there are penalties for filing false and fraudulent claims, or even for being negligent in the preparation of those forms. A taxpayer’s claim may entirely fail because the correct form was not filed, was incomplete, incorrect, or was not filed at the right time. It’s the law. It happens. That’s one of the reasons why taxpayers engage consultants: to help them “get the details right.” Once the guardians and enforcers of the law start working outside of the law, with demands to “comply or else”, how comfortable can the Taxpayer or the Tax Authority be that other breaches of process are not taking place? How does the Tax Authority (i.e. the CRA) persuade itself, or taxpayers, that these defined processes, and Taxpayers’ rights, are only being violated in minor ways, when established process and legal channels are being flouted so pervasively?

For that matter, how is it that the use of these forms has not been detected and flagged within CRA at any higher level? Any form that the taxpayer submits, any response, any phone call, any correspondence – all of it is supposed to reside in a comprehensive official file. It is an official record. Administrative reviews, notices of objection, appeals … all of these later stages in the SR&ED process involve the review of a taxpayer’s files, in support of the submission under review. Does anyone truly believe that nobody ever noticed? That none of these processes ever resulted in a moment when somebody knowledgeable looked at a Taxpayer’s file containing a submitted Development Cockroach (Chronology) (and associated correspondence) and asked, what in the flaming hell is this? (Or has the use of these documents been tacitly accepted at all levels?) Has nobody inside CRA ever questioned the legality of inventing and coercively enforcing an extra-legal and non-prescribed tax process? And if not, why not?

Such questions are long overdue.

-Bruce Madole

Oct 27, 2014 4:37 by
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