Improving the SR&ED program
R&D Tax Update
November 10, 2009 (09-4)
2009 will be remembered for the economic crisis no doubt. For industry, the implications are substantial. The very existence of many companies is at stake. To ensure that Canadian companies remain competitive, making the Scientific Research and Experimental Development (SR&ED) program more accessible and making funding of the credits more available are crucial steps in this process.
Recent initiatives by the Canada Revenue Agency (CRA), the Export Development Corporation (EDC) and the Office of the Taxpayers' Ombudsman (the Ombudsman) hopefully will provide impetus and invigorate investment in innovation by Canadian industry.
Financing of Tax Credits
Financing of SR&ED tax credits has evolved over the years. While niche players have been involved in this market for a while, some banks have also made tax credit funding available to their clients. However, given the current economic crisis, funding has generally been more restricted and government financial sponsorship for innovating companies has become essential. Therefore, the EDC was recently mandated by the federal government to innovate and use its Export Guarantee Program to provide advances against SR&ED tax credits. Exporters should thereby be able to invest more money in research and development (R&D). Companies doing eligible work can now receive an advance against their SR&ED tax refund in a fraction of the time it normally takes, according to the EDC.
The EDC assistance comes in the form of a loan guarantee to the banks which have agreed to establish R&D operating facilities for companies doing work that is eligible for SR&ED tax credits. To qualify, the company must be an exporter which has claimed SR&ED tax credits for at least two years. At present, it seems that only companies expecting refunds of the credits can apply.
There are a number of considerations that should not be underestimated, and seeking assistance can save you headaches. This is a new program and it is expected that it will take some time to run efficiently, thus impacting a taxpayer’s cash flow. Furthermore, guarantee fees will apply. For these reasons, it would be important to determine whether conventional financing might be more readily available. Conventional financing may not take more time and may be cheaper. Bank reluctance, if any, can often be resolved by providing professional comfort relating to the SR&ED tax credits.
For a number of years now, efficient and effective delivery of the SR&ED program has been at the top of the priority list of the CRA. This is a complex program which is very subjective and, therefore, inconsistencies in the application of tax policy have been noted. Any and all endeavours to make the program more industry-centric must be supported and applauded.
One of the ways of ensuring that the CRA is indeed focused on client service is through its Service Complaints department, the declared purpose of which is to strengthen the ability to respond to service-related problems across the Agency.
Another way of ensuring that CRA services related to the SR&ED program are up to standards is through the Ombudsman, who is mandated to review service-related complaints and to identify and investigate systemic and emerging issues that can negatively affect taxpayers and benefit recipients. In fact, the Ombudsman is currently conducting a review of the SR&ED tax credit program. According to its website, the preliminary objectives of the enquiry are to determine whether the SR&ED program is being administered fairly with respect to recent changes to forms and procedures and whether the taxpayer or the taxpayer’s representative receives appropriate second review relating to the technical aspects of SR&ED submissions. Additional objectives and issues may be added in the course of the enquiry. The Ombudsman welcomes comments from taxpayers.
A policy is the vehicle through which the SR&ED rules dictated by the Income Tax Act and the relevant court cases are administered by the CRA. Taxpayers and their advisers consider the policies as important indicators of how the CRA interprets the law. One can understand how essential it is to develop policies in a very rigorous manner so as to ensure that they reflect the true substance of the law. It should be noted that the policies are just an interpretation of the law. The only real anchors are the Income Tax Act and case law related thereto.
The CRA has undertaken a process of reviewing its written policies regarding the SR&ED program with an objective of simplifying and clarifying them. It is an important and delicate undertaking. Indeed, it will be vital to ensure that no new policies are created in the process. On this point, the CRA has clearly stated that no changes to policies should result from this simplification process. Industry is involved in this process through round tables and similar discussion groups. Input from industry will be required before the new policy documents come into force. As a safety net to prevent the risk of modification to policies, reference to existing policies may be required in cases of interpretive disputes.
Some clarifications on new form T661
At the recent SR&ED Round Table at the October 2009 annual conference of the Association de planification fiscale et financière in Montreal, the CRA provided insight and an update on the new form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, relating to a number of important issues which impact claimants substantially.
- When new form T661 was introduced, it was announced that technical information for all projects were required to be filed with the prescribed form. This caused grave concern especially for the largest claimants, who previously had provided information in the prescribed form for the top 20 projects only. The concern related primarily to the investment required to provide this information in appropriate format. The CRA announced that this requirement will be delayed for one year. According to the CRA, this delay is a transitional measure and starting in 2010, the new requirement to file all projects will come into effect.
- Taxpayers have indicated that during the audit of a claim filed with the new form T661, research and technical advisers (RTAs) often require additional information in order to better understand the “project context”. The CRA indicated that it does not plan to modify the form to reflect this requirement for additional information. One of the objectives of question 242 in form T661 is to allow the RTA to understand the technological context of the business, and it is up to the claimant to clearly describe the technical problems. In the field, we note that it is still essential to keep good records which are readily available so that the RTA can undertake an effective audit. Otherwise, the challenge is that much greater.
- The CRA indicated that the word “obstacle” is used in the form, instead of “uncertainty”, in order to be more accurate and avoid misinterpretation. The CRA indicated that the word “uncertainty” is sometimes associated with “business or commercial uncertainty” by claimants.
- According to the CRA, the vast majority of claimants expressed that they were satisfied with the simplified form and have adapted well to it. The CRA indicated that minor changes may follow, once comments from industry have been collected.
We remind readers that form T661 is a prescribed form and all required information must be included. Otherwise, the claimant may be considered not to have met the filing requirements. If the form is reviewed by the CRA before the reporting deadline, the CRA will advise the claimant of any deficiencies and allow the claimant additional time, up to the reporting deadline, to provide any missing information. However, the onus is on the claimant to file the prescribed form containing all the prescribed information on or before the reporting deadline.
New form T661 was released in November 2008 as part of a tax filing process streamlining strategy. The new format allowed for information needed to claim SR&ED tax incentives to be captured electronically, which created the possibility of electronic filing. On October 6, 2009, the CRA announced that its Corporation Internet Filing capabilities were expanded. Corporations may now transmit their SR&ED claims with their corporate income tax returns electronically to the CRA, using CRA-certified software.
In addition, form T1145, Agreement to Allocate Assistance Between Persons Not Dealing at Arm's Length for Scientific Research and Experimental Development (SR&ED) and form T1146, Agreement to Transfer Between Persons Not Dealing at Arm's Length Qualified Expenditures Incurred in Respect of Scientific Research and Experimental Development (SR&ED) Contracts, have been revised and are also available for electronic filing.