Today the Office of the Taxpayers’ Ombudsman (OTO) released the long awaited report on the administration of the SR&ED program by the Canada Revenue Agency (CRA). Unfortunately the OTO report falls short on all counts. Apparently the Ombudsman lacked formal complaints about the SR&ED program. They were looking for complaints that fell within the definition of their mandate to uphold the Taxpayer Bill of Rights and to promote professional service and fair treatment by the CRA. Apparently complaints of this nature were hard to come about. Yes, I know what you are all thinking and we are thinking the same.
“Nevertheless, as a result of complaints filed by claimants, the concerns raised by stakeholders, and the program’s national scope and potential impact on a significant part of the SR&ED community, we launched a systemic investigation. The investigation focused on questions of service, such as the sufficiency and timeliness of the CRA’s communication to claimants, as well as issues of administrative fairness: essentially, whether the CRA is administering the SR&ED program in a manner consistent with the service rights specified in the Taxpayer Bill of Rights.” stated the Ombudsman’s report.
The report goes on to say “Our Office heard numerous anecdotes and allegations about the SR&ED program from claimants who did not wish to file a formal complaint with our Office or who wished to remain anonymous. Many representatives, claimants, and interest groups… were quite vocal in their criticisms of the way the SR&ED program was being administered. Yet despite our best efforts to encourage… representatives to file complaints… most did not do so.”
It’s not hard to see why SR&ED claimants didn’t want to go on record and file formal complaints. All claimants want to have a good cordial relationship with the CRA and especially the CRA SR&ED reviewers. The success of many R&D projects depends on the claimants receiving SR&ED grant tax incentives (Investment Tax Credits or ITC’s).
Despite the lack of formal complaints the OTO focused on the following main areas of the SR&ED program administration:
- Regional Comparisons – are all regions applying the SR&ED Income Tax Act legislation in a predictable and timely manner?
- Preliminary Eligibility Discussion – Is the preliminary service useful?
- Rationale Provided for Ineligible Claims – this is a question of fairness and transparency.
- Administrative Second Review – is the taxpayer given the required due process?
- Appeals Process – focused on the due process and timeliness.
Here are the findings… or lack of… “…many claimants feel that the CRA does not always administer the SR&ED program in a predictable and timely manner. When credits or refunds are not delivered promptly, when decisions about ineligibility are not explained adequately or in a timely fashion, or when the appeals process is confusing, claimants may perceive that the program is not being administered fairly.” No offence Mr. Ombudsman, but did you really need a lengthy study to figure this out?
And the other side of the equation: “On the other hand, making predictable and timely decisions while administering such a complex program is a formidable challenge… It is a considerable challenge to be consistent, or even appear to be consistent…. The eligibility of those claims that are reviewed rests on whether the claimant can demonstrate that the criteria of the Income Tax Act and the Regulations have been met.” So really what the OTO is saying is that the CRA should be assessing SR&ED claim eligibility based on the Income Tax Act and not the narrow definitions and documentation requirements, which have been recently imposed on claimants. We agree, however this is not the reality of today’s SR&ED reviews performed by the CRA. More often than not the CRA will take a stand on required documentation and linear/waterfall type experimentation that is out of touch with today’s high tech R&D environments especially in software or high-tech experimentation.
The OTO summed this study best: “It is hoped that our observations will raise awareness of issues that impact claimants and the CRA.” On the other hand, the Jenkins report was a lot more detailed in its recommendations on the administration of the SR&ED program. This report is just another sign of the times where innovation funding and government funding in general is under government scrutiny. Specialized knowledge and expertise surrounding government innovation funding and having up to date information will continue to add value to potential claimants.
Download the entire Office of the Taxpayers’ Ombudsman (OTO) report here.