SR&ED program review
R&D tax update - 11 February, 2011 (11-1)
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A number of initiatives are placing more focus on the federal government‘s Scientific Research and Experimental Development (SR&ED) program. Simply looking at the volume of initiatives, one may infer some malaise with the program’s effectiveness. Below we summarize the scope and significance of these undertakings, recognizing that there are more to come.
Formed in October 2010, the Federal R&D Review Panel (the “Jenkins panel”) has been asked to make recommendations to the government on the effectiveness of existing federal programs, including the SR&ED program. This independent expert panel under the chairmanship of Thomas Jenkins, Executive Chairman of OpenText, will consider which federal initiatives are most effective in increasing business research and development (R&D). It will also look at the appropriateness of the current mix of tax incentives and direct support and consider whether there are gaps in the current programs, for instance as they relate to the commercialization of R&D. The panel’s website contains information about its make-up and mandate, in addition to background documents and a consultation paper. This paper includes a set of questions for stakeholders who wish to contribute to the panel; responses are invited until February 18, 2011. The panel’s recommendations are due in October 2011.
Another independent panel, the Coalition for Action on Innovation in Canada, chaired by John Manley, recently released a report setting out 10 steps toward a more innovative Canada. Its first step calls for reform of the SR&ED program, both in scope and administration.
The Taxpayers’ Ombudsman has issued a report on the appeals process for SR&ED claims, and a review of systemic issues in the SR&ED program is in progress. A substantial number of comments from stakeholders has been received, particularly on issues related to the administration of the program. This report has been delayed due to the volume of comments from stakeholders and follow-up consultations with the Canada Revenue Agency (CRA).
SR&ED Policy Review Project
The CRA is in the process of rewriting the policy information provided to SR&ED program users. New publications are planned on a total of 21 topics in three groups: financial, scientific, and joint financial/scientific. Each publication is intended to consolidate the information on that topic in all of the current SR&ED policy and guidance documents. As each new document is completed it will be posted on the website for a period of 45 days, during which time feedback is invited on three aspects of the document: clarity, readability and completeness. The first two documents — on Filing Requirements and Third Party Payments — have already been posted and since removed. An approximate timetable for these consultation periods has been posted by the CRA.
Once all of the documents have been finalized they will be re-posted together; the target date for this is December 31, 2011. Current guidance documents will remain online for a further six months, after which they will be removed. As a result the current application policies and guides, including sector-specific guides and Information Circular 86-4R3, will effectively be withdrawn as of June 30, 2012.
CRA outreach and penalties
The CRA has been meeting with stakeholders throughout Canada over the last six months to promote its recent initiatives such as the new Claim Review Manual, covered in our previous newsletter. In these meetings, the CRA has expressed concerns over an increase in the number of claims considered to be of poor quality or unsupportable. The CRA has declared it will consider invoking subsection 163(2) of the Income Tax Act, which imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, makes or participates in or assents or acquiesces to a false statement in a return. The CRA is particularly concerned when a claimant attempts to withdraw a claim to avoid a review, indicating that the claimant is aware the claim is flawed.
Examples given by the CRA of negligent or misleading conduct with respect to SR&ED claims include failure to demonstrate a linkage between work done and expenditures claimed, and failure to produce supporting documents that had been represented as available on the T661 form.
In conclusion, the environment is certainly dynamic and we should expect major changes, if not in the policy and legislation, in the administration of the SR&ED program. 2011 may just be a turning point. With industrial R&D still weak in Canada relative to global benchmarks, we hope these initiatives will not cause the government to lose focus on its support of domestic innovation spending.
Deloitte R&D professionals are available to discuss how any of these initiatives are likely to affect you.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.