The CRA Reveals Review Guidelines
Claim Review Manual
R&D Tax Update, September 27, 2011 (11-4)
Early in 2010, the Canada Revenue Agency (CRA) issued a new internal directive for the Scientific Research & Experimental Development (SR&ED) program – the Claim Review Manual (CRM). The CRM sets out detailed instructions for CRA reviewers on every aspect of a technical review including joint financial/technical considerations. Its stated objectives include consistency of review procedures, the proper application of policy, improved claimant compliance, and audit process efficiency. A few weeks later a concise guide for claimants (SR&ED Technical Review: A Guide for Claimants) was placed on the CRA website, together with a version of the CRM edited for public viewing. An Access to Information and Privacy review has now been completed, and a revised version of the CRM that includes some previously blocked material has been posted.
The level of evidence required to support a SR&ED claim continues to be the critical issue. In addition, in the CRM there is also better visibility into the collaboration between technical and financial reviewers and clarification of the requirement to demonstrate “systematic investigation”.
The importance of contemporaneous documentary evidence is emphasized throughout the CRM. In support of this level of requirements, there are references to selected tax court cases, and the “books and records” provisions of the Income Tax Act are read as applying to non-financial records. The CRA’s position on evidence requirements, as set out in the CRM, is consistent with the papers on financial topics that have so far been released as part of the Policy Review Project. However, the only technical paper issued in the project, Policy on the Eligibility of Work for SR&ED Investment Tax Credits, seems to take the documentation requirement a step further by recommending that any eligibility consideration be postponed until the evidence records have been examined and determined to be complete. In contrast, the review process described in the CRM is the more familiar one where eligibility is the primary consideration.
Another distinction is that the CRM indicates that adequacy of the evidence is a matter for “the [research and technology advisor’s] professional judgement and interpretation” (Section 18.104.22.168), such that reviewers who choose to interpret the evidence requirements with some flexibility can do so. Since the Policy on Eligibility paper is a rather brief, high-level document, whereas the CRM comprises a detailed set of instructions for technical reviewers, it is likely that the process described in the CRM is the one that will be followed.
The CRM also emphasizes closer cooperation between financial and technical reviewers, including instructions for coordinated reviews (Chapter 3). One outcome of this is that, rather than a preliminary science report being issued in draft form while the review is still in progress, the science report will now generally be issued at the end of the review along with the financial assessment proposal. It’s important for claimants to be aware of this in order to manage the audit process effectively, including submitting rebuttal at the appropriate time.
An important section advises the reviewer on how to decide whether claimed work amounts to a “systematic investigation or search” (section 4.6.5). The preferred model is a five-step process involving observation, formulation of an objective, description of the uncertainty, and formulation and testing of hypotheses. Each of these elements must be supported by contemporaneous records, according to the CRM. It is unlikely that this standard could be adequately met without planning for claim support while the work is still in progress, including generation of the required records.
Technical reviewers are reminded that in certain circumstances a claim may be disallowed without a site visit or even a review if it “appears not to be SR&ED” (section 5.5.1), for instance on the grounds that it is excluded by a provision of the Income Tax Act. Such a decision must be approved by the CRA’s management. Any such proposal should be closely examined.
There is new material in the section on Risk Management and Materiality (section 4.3). It is reassuring to see that technical reviewers are being instructed to consider, for each issue and associated project, the risk that there is non-compliance, and then the materiality of any such non-compliance. Provided the appropriate standard is applied, i.e., the “balance of probabilities”, this should encourage a balanced, moderate review process.
Following the introduction of this directive there may be some unfamiliar aspects to audit processes, and claimants may need to modify their claim preparation processes to ensure compliance. It is important to recognize that while the SR&ED legislation has not changed, using the new review processes the CRA may reach a different conclusion than in the past.
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