Claim Review Manual for Research and Technology Advisors

Chapter 5.0: Conducting the review

Table of contents


5.1.0 Summary of chapter

Steps taken to conduct the review, in order to resolve the issues identified in planning are discussed in this chapter. The main topics of this chapter are:

  1. adjusting the scope of the review;
  2. information required to support the review;
  3. obtaining information from claimants by telephone or written request;
  4. resolving the issues without an on-site visit;
  5. the types of circumstances under which an unfavourable decision can be issued without an on-site visit;
  6. the rationale and procedures for conducting an on-site visit;
  7. interviewing the claimant during an on-site visit;
  8. examining the claimant's supporting evidence and obtaining samples;
  9. how to deal with the issue of inadequate supporting evidence;
  10. why and how to prepare interview notes;
  11. the importance of and how to present decisions to the claimant;
  12. dispute resolution;
  13. special review situations and appropriate ways to deal with them;
  14. dealing with projects withdrawn by the claimant;
  15. dealing with unresponsive claimants;
  16. assisting first-time claimants;
  17. not negotiating with claimants; and
  18. penalties and leads.

5.2.0 Requirements of the chapter

Following from Chapter 1.6.0, the following minimum requirements are outlined in this Chapter. The research and technology advisor (RTA) must:

  1. explain to the claimant the review process, the issues and the planned approach to resolve them;
  2. communicate the options available to the claimant for resolving any of the issues;
  3. give the claimant information on Canada Revenue Agency (CRA) requirements, including documentation requirements, and explain what information the CRA needs to satisfy the requirements;
  4. give claimants the opportunity to present their position, ask questions, express their concerns and to provide further information with respect to their position;
  5. consider additional information provided in support of the claimant's position before coming to a decision;
  6. make decisions that are fair and impartial and respect current legislation and policy;
  7. document key activities and observations concerning the claim, supporting information and the identified claim issues;
  8. document communication and meetings with the claimant, managers, co-workers and others that are relevant to the decisions;
  9. obtain any documentation from claimant necessary to support the decisions;
  10. not negotiate eligibility or expenditures;
  11. consult the research and technology manager (RTM):
    1. if it is recommended that a claim should be disallowed for lack of information;
    2. if unfavourable decisions  will be made without an on-site visit;
    3. if penalties may apply;
    4. if fraud is suspected;
    5. if formal better books and records letters are needed;
    6. when there are significant changes to the approved review plan;
    7. if waivers are contemplated; and
    8. in difficult or problematic situations.

5.3.0 Adjustment of the scope of the review

The RTA can, based on information obtained during the review, add, remove or modify review issues that were identified during the initial planning stage, including reviewing more or less of the claimed projects than were originally selected for review. This is because, as the review progresses, the assessment of risk and hence the scope of the review, could change as some issues are resolved and others arise. Whenever the actual or contemplated work differs substantially from the review plan, the claimant must be advised that new issues/ more work will be reviewed, and the financial reviewer (FR) must be informed. It is also recommended that this be communicated to the RTM and, where the changes are material in nature, RTM approval of the amended review plan is required. The RTA must document significant changes to the scope of the review (that is, with a T2020 entry or in a revised plan as well as in the scientific research and experimental development (SR&ED) review report). This applies during the desk review, and subsequently, during the on-site visit (when required).

In fact, adjusting the scope of the review is a good review practice. The RTA should evaluate the risk with respect to each issue as well as to the entire claim. In this respect, the following points are noted:

  • All review work is designed to lower the risk associated with an identified issue.
  • If the risk is lower, the priority to review the issue is lower.
  • If the issue that was identified can be resolved or no longer exists (work done by the RTA has indicated that the issue is not relevant), this has to be documented, as well as the reasons for the decision.
  • If one of the issues identified as low risk now appears to be of higher risk or if new issues become apparent, based on what was seen or discussed, they should be reviewed in more detail.

5.3.1 Working with claimants to avoid common review problems

 

Helping claimants avoid common review problems

An effective way to work with claimants is to anticipate common problems that are either typical of first time claimants or are often encountered in the claimant's industry. Some examples are:

  • New claimants may not understand the terminology employed by the CRA, such as technological or scientific uncertainty, hypothesis or technological or scientific advancement. To avoid making the interview confusing for the claimant, explain how the business project may differ from the SR&ED project and question the claimant in a manner that allows them to first discuss their project (that is, the context in which the SR&ED fits) and to focus on the scientific or technological aspects of a project.
  • Explain eligibility in plain language and emphasize how focusing on the facts and the work done can provide insights as to how the work performed answers the five questions in the eligibility policy and establishes that the requirements of the SR&ED Program have been met.
  • Be aware that many claimants, particularly first time claimants unfamiliar with the process, can be easily intimidated by communications from and with the CRA.
  • Be aware that industries have their own definitions for things such as pilot plants and prototypes. Take some time at the beginning of each review involving issues in these areas to discuss the differences.
  • Be aware that important terms used in the SR&ED Program may have common or colloquial uses that could be very different from their SR&ED meaning. Claimants may assume that an SR&ED term is used the same way as they use it in their circumstances. For example, "SR&ED" may be taken to be "research and development (R&D)", "systematic investigation" may be taken to mean "systematic work", and "experiment" may not be used in the very specific way used in the SR&ED Program. Watch for signs of miscommunication like this.
  • Be aware that shop floor work is often not well documented, which could make it very difficult to determine if SR&ED was done. Refer to the blue box "Working With Claimants – Helping them Understand Documentation Requirements" in Chapter 5.11.0 for more details.
  • At some point during the interview or discussion of the results of the review, the RTA should spend time addressing the shortcomings, if any, of the claimant's project information submitted with the claim in Part 2 of Form T661. Typical problems include:
    • descriptions that focus on the business project rather than the SR&ED project;
    • descriptions that make it difficult to quantify how much SR&ED work was done in a particular project;
    • descriptions that emphasize the accomplishments rather than the process (the scientific method);
    • descriptions that are poor or inaccurate; and
    • claimants send the same description used in part 2, produced in previous years without an update. 

While the RTA makes a reasonable attempt to seek clarification and works with the claimant to help guide them to properly describe and document their work, the onus is still on the claimant to demonstrate that their work meets the requirements for SR&ED.

5.4.0 Communication with the claimant

5.4.1 Information requests

CRA policy concerning information requests is outlined in three Compliance Programs Branch Communiqués:

  • AD-10-01 – Acquiring Information from Taxpayers, Registrants and Third Parties
  • AD-10-02 – Use of Information Gathering Tools
  • AD-10-03 – Solicitor-Client Privilege

RTAs should read these Communiqués to understand the details and limitations of their powers and responsibilities in requesting information.

There are five (5) key principles that an RTA should consider when evaluating the need to request information from a claimant:

  • Legislative Authorities – The legislation provides a CRA official with the fundamental legal powers required to obtain the information needed to do their work. For the RTA the most relevant legislation is in the Act in section 231.1 (requesting information) and subsection 230(1) (keeping records and books);
  • Intent – The scope of a review may expand or diminish depending on what facts are determined and what information is provided during the review process. The ability to expand the scope of the review includes the ability to review additional projects or issues not identified in the review plan or in the initial communications to the claimant. The authority to expand a review as necessary has been confirmed by the Courts (David Ludmer, Brian Ludmer, Cindy Ludmer and Ludco Enterprises Ltd. v. Minister of National Revenue (MNR) (93 DTC 1351 at 1423). The RTA should communicate their intent to the claimant when requesting information. As an example, when requesting information from third parties, the claimant should be informed. All these communications should be documented in the file;
  • Relevance – It has to be clear to the RTA that the information sought is relevant to the review being conducted. The determination of what may be relevant is a matter for the RTA to decide based on the scope of the review. The relevance of documents requested by the RTA can often be difficult to determine until the RTA has had an opportunity to review them, and the Courts have recognized this (The Queen v. McKinley Transport Ltd. (90 DTC 6243), AGT Ltd. v. Canada (97 DTC 5189)); 
  • Transparency – How a review progresses can depend on the transparency of the review. Clear and open communication is beneficial to the compliance process. The sooner in the review process that the RTA can identify to the claimant the issue being reviewed the better. This provides transparency to the process and gives the RTA a good reason to expect timely production of relevant information and documents; and
  • Impartiality – RTAs should be objective when reviewing any information or documentation obtained during a review. They should not be influenced by any subjective analyses, comments or decisions in the information or documentation reviewed. The eventual resolution of the issue will be determined and supported by the facts of the situation and in accordance with the legislation.

Regardless of the nature of the information requests, the RTA coordinates them with the FR as described in Chapter 3.

Details of all communications with the claimant are recorded on a T2020 or an equivalent working paper. This would include location, time, date, parties involved and details of what was said. This documentation is placed in the TF98 file. Chapter 2.9.0 has detailed information on the security procedures for communications with the claimant.

5.4.1.1 Request for information by phone

As indicated in Chapter 4.7.1, it may be possible to resolve an issue with a phone call to the claimant (or authorized representative). It is important to plan the initial contact with the claimant or their representative, in order to ensure the highest degree of co-operation and to obtain as much useful information as possible. It is also important to avoid multiple requests or calls. In planning the questions for the claimant, they should be clear and specific, and structured in a way that the answers will lead to a resolution of the issue or indicate the kind of additional work needed (such as an on-site visit).

If appropriate, the RTA can explain by phone more about the review process and the review plan. However, details will be explained to the claimant in the Initial Claimant Contact Letter, which is referred to in Chapter 5.6.2.2.

If the needed information cannot be obtained during the phone call, the RTA should send a follow-up letter as a record and as a reminder to the claimant (refer to the next section). Alternatively, the claimant may request a second call to respond to questions once they have had a chance to consider the questions.

During the discussion, the claimant might ask the RTA their opinion about matters such as whether the work is eligible or not, or when they might receive the tax credits. While the RTA may be able to explain to the claimant whether they have any concerns with the eligibility of certain activities or projects, generally the RTA can only indicate that, at this point in the review, complete answers to these types of questions cannot be provided. However, the RTA can provide general information about the review process, review time frames and the reason for the information request. If the information provided by the claimant is insufficient to make a decision, the RTA can indicate to the claimant that a site visit will be necessary. 

5.4.1.2 Request for information by letter

In cases where clarification or specific or detailed information is required, a Request for Information (RFI) letter is sent to the claimant. All letters sent to the claimant are sent using standard CRA procedures, via the CRA mailroom, so that the mailing can be tracked. The letter serves as an official record and a reminder to the claimant. An RFI letter may be necessary after a discussion with the claimant following an on-site visit where additional information is needed. Questions should relate to specific issues raised during the on-site visit. The RTA should not ask general questions, and only request information that is needed. This enables the claimant to provide concise clarification quickly and makes the review process more efficient. If appropriate, this letter can also include details from the Initial Claimant Contact letter of Chapter 5.6.2.2.

RFI letters ask the claimant to provide the information by a specific date. The Act (231.2(1)) allows taxpayers reasonable time to comply with requests for information. Normal practice, as described in the CRA Audit Manual, is to allow a minimum of 30 days from the date of the letter, although the claimant can agree to less time, and should be advised that providing the information sooner may speed the review. The request should be as specific as possible so that the claimant understands what is required. It is not recommended that claimants be asked to revise and resubmit their project information. Poor project information suggests the need for working with claimants to better explain the Program requirements. A good practice is to follow up with the claimant if no response is received by the due date.

If the claimant requests an extension of time, an additional 15 days can be given to provide the information. If the response to the letter is unclear or incomplete, the RTA then contacts the claimant to explain what is outstanding and can provide 15 additional days to provide it. An unworkable response (for example, an unorganized or excessive amount of material that does not directly respond to the RTA’s questions) is treated as an incomplete response. The RTA should document why the response is unworkable and advise the claimant of this. If the claimant requests more time, even beyond the original 15 day extension, extra time (15 more days) can be allowed to supply the requested information.  Additional extensions beyond the second 15 days should be given only if the time is reasonable, the claimant has a good reason, and if approved by the RTM.

If efforts to contact the claimant are unsuccessful, or no response is received by the requested deadlines, refer to Chapter 5.11.0. As noted in Chapter 6, a copy of all letters must be kept in the TF98 file, and the RTA must document all conversations with the claimant or their representative on a T2020 or similar document. In accordance with Directive 2003-03 Use of Delay Codes on AIMS, a delay code may be added to the file when an information request is sent to the claimant. Chapter 2.12.0 has more information on delays.

An example of an RFI Letter is provided in Appendix A.1. Appendix A.1 includes a paragraph promoting the Electronic Transfer of Accounting Data (ETAD) application that was launched by CRA on April 16, 2012. ETAD is a vehicle that allows taxpayers to transfer electronic documents related to books and records and other supporting information that CRA reviewers may need during the course of the SR&ED claim review.

Should you need to send an RFI letter to an individual (T1) claimant, please note that a new policy is in place to limit the display of the social insurance number (SIN) on all CRA outgoing general correspondence. The first six digits of the SIN should be replaced by X’s.

5.4.1.3 Working with claimants when requesting information

 

Considerations when requesting information

The following points are considerations that are important when dealing with all claimants, but particularly with a first-time claimant:

  • Explain the SR&ED Program review process, the various services that are available and the Dispute Resolution Policy.
  • Ask them if they have any questions or if they require additional information to understand the SR&ED Program. This assistance can be provided during an on-site visit.
  • Explain the relevance of the requested information in the RFI, such as why the information is needed with respect to either the eligibility of the project or the scope of the eligible work, or planning the review.
  • Be transparent and clear on issues identified that require resolutions in the review.

Be specific and relate the requested information to issues identified.

5.4.2 Information requests from third parties

CRA has the legal authority to request information from third parties. The legislative basis of this power is subsection 231.1(1) of the Act, in particular the phrase "…or of any other person that relates or may relate to…the books or records of the taxpayer…".  

Subsections 241(4) (a) and (b) of the Act allows an official to "provide to any person taxpayer information that can reasonably be regarded as necessary for the purposes of" "…the administration or enforcement of this Act…" (a) or "determining any tax, interest, penalty or other amount that is or may become payable by the person, or any refund or tax credit…" (b). In practice, when contacting third parties, the reviewer would reveal the minimum amount of information possible, such as the taxpayer’s name and the fact that an SR&ED review is underway. This does not violate subsection 241(1) of the Act, which prevents unauthorized disclosure of taxpayer information, because this disclosure is authorized.  Subsection 241(4) of the Act indicates generally the situations where taxpayer information may be disclosed, not just to third parties.

Information can even be requested from lawyers where that information is not subject to solicitor-client privilege. The CRA Audit Manual Chapter 10.6 and Communiqué AD 10-01 Acquiring Information from Taxpayers, Registrants and Third Parties discusses requests for information from third parties. 

One example of where this might be done is in the case of third party payments. As indicated in the documents noted above, RTAs must be careful when making requests from third parties. Such requests are not routinely done, as the onus is always on the claimant to supply needed information.

All information requests from third parties should be made in coordination with the FR

5.5.0 Review without an on-site visit

Under certain circumstances, implementation of the review plan and the steps needed to gather information from the claimant may be carried out without an on-site visit. Whether a detailed site-visit review or detailed desk review is chosen is a decision based on numerous considerations, including consultation with the RTM. These considerations include, but are not limited to, those outlined in Chapter 4.7.1.

5.5.1 Prior PCPR

Where a claimant has already been given a preliminary opinion on planned work, and the claim has now been received, the work of the RTA may be reduced. As noted in Directive 2001-02 "Directive on the Preclaim Project Review Service", this would involve verifying the facts and that the proposed work took place as stated. Depending on the status of the claimed work at the time of the PCPR, the RTA may have already been able to do most of what would have been done during a regular on-site visit including the review of required TF98 documentation. When the claim is submitted, the RTA would not be required to re-do any work previously done during the PCPR. Therefore, if the PCPR was sufficiently detailed, an on-site visit may not be required.

5.5.2 Unfavourable decision without an on-site visit

If a review decision concerning an issue is made that does not favour the claimant, the claimant must have an adequate opportunity to present their case, give their opinion and make representations. Usually, an on-site visit is preferable since it can be easier for the claimant to present their case and discuss the issues in a face-to-face meeting. However, there may be some circumstances where an on-site visit is not required. These situations must be discussed with the RTM and the RTM’s approval is required. The decision with the rationale for not going on-site must be documented and kept in the TF98 file. Some examples are:       

  • An on-site visit for the same claimant had already been made during the review of the prior year’s claim, and the same or a similar issue had already been discussed on-site for the prior year and the claimant agrees that there is nothing more for the RTA to see or discuss related to this issue. If this situation occurs, and before making any decision or determination, the RTA must communicate with the FR since gross negligence penalty could be considered.
  • The same or a similar issue was not resolved in the claimant’s favour in a prior year, there are no new facts or arguments, and the issue is now under objection. If the claimant agrees, the current file could be processed on the same basis as the prior year, in order to close it on a timely basis. It is understood by both parties that an objection will be filed and both years will ultimately be resolved at the same time.
  • The basis of the issue is a question of policy or legislative interpretation, and both parties need to wait for a third party to assess the issue. Similar to the above situation, the file could be processed solely as a convenience for the claimant so that that they may immediately receive tax credits for the undisputed issues. It is understood that an objection will be filed for the disputed issues.
  • An on-site visit is physically impossible, or is unnecessary because there is nothing additional to see on-site (refer to Special Situations and Alternative Review Approaches). This could be the case with Information Technology claims, where there is nothing on-site to see, and a mutually convenient alternative location to meet the claimant can be arranged.
  • An on-site visit is difficult due to its remoteness or other problems, and the claimant agrees that alternative arrangements can be made to conduct the review.
  • The claim appears not to be SR&ED (for example, it appears to describe work that is in paragraphs (e) to (k) of subsection 248(1) of the definition of SR&ED), the claimant agrees to the review process, and there is nothing the claimant can or needs to show the RTA on-site.If this situation occurs, before making any decision or determination, the RTA must communicate with the FR since gross negligence penalty could be considered.
  • Requested information is not provided or the claimant (or their representative) refuses to meet with the RTA (refer to Chapter 5.11.0, No or Inadequate Supporting Evidence).
  • Additional work is claimed after the 18-month deadline.

It should be clear to the claimant that they will receive a report and a proposal prior to the assessment, and they will have a chance to respond with additional information if they wish. Even if unfavourable decisions are made without an on-site visit, the claimant still has an opportunity to respond in the usual way after the Proposal Letter is sent. Depending on the response, an on-site visit may still be required. Chapter 7 has more details.

5.5.3 Concluding the review without an on-site visit

When the review can be concluded without an on-site visit (a Desk Review), the next stage is a joint proposal from the RTA and the FR. Chapter 7 has more details.

5.6.0 Conducting an on-site visit

5.6.1 Introduction

The primary purpose of the on-site visit is to work with the claimant in order to resolve the issues identified in the review plan. The resolution of these issues enables the RTA, among other things, to determine whether (or how much of) the claimed work meets the requirements of subsection 248(1) of the Act. Since the findings of the RTA during the on-site visit also help the FR to determine whether or how much of the costs associated with the claimed work are for SR&ED, coordination with the FR is essential.

The specific reasons for conducting the on-site visit will vary and will be reflected in the issues identified in the review plan. Other issues may emerge during the course of the review. In addition to dealing with issues, the on-site visit provides an opportunity to clarify SR&ED Program policies and address any questions or concerns the claimant may have.

The RTA has a great deal of flexibility in how to conduct an on-site visit. Much depends on the facts of the case, and even more depends on the facts and circumstances that are revealed during the visit. Therefore, the RTA's judgement is very important.

Working with the claimant includes not only finding out the details of the work that was done, but also discussing their work with them to understand what they are trying to do and why.

There are no specific requirements for the number and length of meetings with claimants. They need last only as long as necessary to resolve issues, to obtain or examine all the information needed to make decisions, or until the claimant has, in the opinion of the RTA, nothing further of relevance to add or show to address the issues identified by the RTA or to change the RTA's decisions. The length and number of meetings do not demonstrate due process; the content of the meetings is the only relevant concern. If at any time the RTA is satisfied that the issues can be resolved in the claimant's favour (for example, the work is SR&ED and there are no associated financial issues of concern), then the visit can be concluded early without necessarily following all of the steps of the review plan.

As noted in Chapter 5.6.2.2, the RTA informs the claimant of the main review issues identified in the review plan. As stated elsewhere, the RTA can expand or modify the scope of the review as new information becomes available. The RTA should inform the claimant when this happens.

The following is a brief overview of the usual major review elements for the RTA during the on-site visit as the RTA resolves issues identified in the review plan:

  • For First-Time Claimant (FTC), give an educational information session as described in Chapter 5.6.1.1.
  • Where there has been an FTCAS in a prior year, and a claim has been filed subsequent to the claimant receiving the FTCAS report, the RTA must determine if these recommendations have been addressed.
  • If required, explain and discuss with the claimant the SR&ED review process, purpose, the claimant's options if there are concerns, responsibilities, and timelines for information requests.
  • If required, give to or discuss with the claimant the document in Appendix A.8 (Mutual Expectations between the claimant and the RTA).
  • Explain the SR&ED program if required (such as for a first-time claimant or first visit to a claimant).
  • Tour the claimant's premises to become familiar with the work and capabilities of the claimant, make observations of the work performed, and explain the SR&ED requirements with reference to the type of work done by the claimant.
  • Conduct interviews with those supervising and performing the claimed work, typically at the claimant's manufacturing or business premises, in order to resolve the issues identified in the review plan.
  • Review documents, records and supporting evidence related to the claimed work.
  • Request additional information during the meeting, if needed.
  • Obtain copies of any documentation relevant to potentially contentious decisions.
  • Share the initial findings with the claimant in order to create an opportunity for dialogue and to eliminate any misunderstandings.
  • Outline the progress of the review and the next steps that are required.

5.6.1.1 The First-Time Claimant and follow-up to Previous FTCAS

The FTCAS is an in-person service offered to first-time claimants. However, as indicated in the FTCAS Guide, not every first-time claimant will be given an FTCAS; some will be accepted as filed (AFF) and some will be reviewed.   

For those first-time claimants that have been selected for a review, the RTA and FR must give an information session similar to that described in the FTCAS Guide. This section pertains to that situation, i.e. a first-time claimant selected for a review (not an FTCAS).   

The RTA will provide an information session tailored to the type of work claimed and answer any questions the claimant may have about the SR&ED Program. In particular, the RTA will explain the SR&ED Program requirements, familiarize the claimant with the SR&ED website and demonstrate the tools such as the Self-Assessment and Learning Tool (SALT) and policy documents relevant to the work claimed, to help the claimant get an understanding of:

  • how to identify potential eligible work;
  • the documentation and other evidence to support the claim; and
  • how to complete and file future SR&ED claims.

The use of SALT is particularly encouraged, as it is useful not just for the FTC, but any time a claimant is contemplating submitting a claim for a new project. Like the rest of the review, the claimant can decide to have a representative present during the information session. However, the claimant should be present.

The RTA should also set aside additional time in the on-site visit to give greater consideration in these areas, as required:

  • Explain the mutual expectations between the claimant and the RTA (Appendix A.8).
  • Explain the claimant’s rights and responsibilities.
  • Explain the review process.
  • Explain the avenues available for resolving claimant’s concerns and the appeals process.

Remember that the information session should be tailored to the claimant’s specific needs and what they know. Where it is clear that a claimant understands some aspect of the SR&ED Program and its requirements, the session does not need to discuss that item in detail. For example, a claimant may be a FTC, but the individual associated with the company may have considerable knowledge from past experience. Therefore while each of subjects should be discussed, the time spent can be short if a detailed discussion is not required.

5.6.2 Making appointments and scheduling meetings

5.6.2.1 Telephone Contact

Initial contact with the claimant (or their authorized representative) would normally be made via telephone. This person would be contacted to set up meetings and to identify the individuals who will be responsible for explaining the SR&ED projects. When setting up meetings, the claimant needs to be given enough time to prepare, including the scheduling of key personnel. The RTA documents all conversations with the claimant on a T2020 or similar document that is filed in the TF98 file. Chapter 5.6.7 discusses documenting conversations.

If initial contact cannot be made by telephone, the first contact can be a request for an on-site visit (RFO) letter. The RFO letter must be mailed using standard CRA procedures, through the CRA mailroom. If the claimant does not respond to this letter, the claim could be considered unsubstantiated (discussed in Chapter 5.10.0 and 5.11.1.4).

5.6.2.2 Initial claimant contact letter

Following telephone contact with the claimant and prior to visiting the claimant, the RTA should send a letter to confirm any details or expectations communicated to the claimant verbally (such as the issues to be resolved and the agenda). The letter can be faxed, if CRA security policies on faxing are followed. The RTA should tell the claimant that this letter will be sent to them and that it is only intended to confirm what has already been discussed. The RTA may be speaking to a person who does not have first-hand knowledge of the work done or claims, or someone other than with whom the RTA will be meeting to discuss the work done. If so, it may be helpful to mention that if any of the scientific or engineering people who will be interviewed have any questions, they can call the RTA.

This letter ensures that the claimant has the opportunity to gather all the information that the RTA requested and make available all the personnel with whom the RTA should discuss the work. It helps to ensure that expectations are understood by the claimant so that there will be no delay or time wasted in conducting the review. It is also a means of ensuring and documenting that the claimant has received this aspect of due process.

The letter should include the following items (unless they are not applicable or not appropriate to the specifics of the review, or if the claimant is experienced and does not need some information):

  • confirmation of the scheduled date(s) and places of any meetings, or the range of possible times and dates available to the RTA if the exact time(s) has not yet been agreed upon;
  • purpose of the visit;
  • names and/or titles of the key SR&ED performers whom the RTA wants to interview (if this information is available);
  • an outline of the meeting plan or agenda, which includes the main steps that will occur during the site visit, including (but not necessarily limited to) an identification of the main issues to be resolved with the associated projects. While there is no requirement to identify every review issue in advance, the more specific the RTA can be in identifying issues, the better. Any recommendations from a previous FTCAS report must be mentioned. The outline should also mention the general approach to be taken, such as a tour of the premises, an examination of the supporting documentation, and an opportunity to answer any questions about the SR&ED program;
  • identification of information needed by the RTA, such as samples of any relevant evidence needed to support their claim;
  • suggested types of supporting evidence that the claimant might have that would be useful towards resolving the identified issues (reference can be made to Appendix 2 of the T4088 – Guide to Form T661);
  • basic information about the review process (such as the Claim review process letter and the Guidelines for resolving claimants' SR&ED concerns);
  • an estimate of the time required to complete the interview or interviews, including the time needed to ask questions of the key SR&ED performers to be interviewed;
  • a statement indicating that the scope of the review might be revised, including reviewing additional projects or issues, depending on the discussions and the results of the meeting. If this occurs,  the claimant should be prepared to address other issues and discuss other projects if required. Note that if very significant changes occur to the original scope, a second meeting may be required and the claimant may be given additional time to prepare;
  • if required, a request for the claimant to send specific information to the RTA prior to the on-site visit. However, to speed up communications, such information may be requested separately (and earlier) by way of priority or express post, telephone, or other secure means;
  • a note advising the claimant to contact the RTA as soon as possible if circumstances, like key employees being absent, may require the meeting to be rescheduled; and
  • a contact number where the RTA can be reached, if any discussions are needed prior to the visit.

A sample Initial Claimant Contact Letter is included in Appendix A.2 and can be adapted by the RTA. A letter co-signed with the FR outlining the technical, financial and joint issues is recommended for claims where possible.

If the meeting is scheduled on short notice and there is insufficient time to send out a letter beforehand, the RTA can explain the CRA's expectations to the claimant over the telephone and document the conversation on a T2020 or similar form. At the meeting, or as soon as possible after, the RTA then gives the claimant any additional information that is still needed.

Prior to the on-site visit, the RTA should confirm that the claimant has put together all requested supporting evidence/information and that all technical and financial personnel that need to be interviewed will be available. If this is not the case, the RTA may need to postpone the visit. If undue delays result, such as multiple meetings being postponed, the RTA should consult the RTM to determine what action to take to complete the review and close the file.

5.6.2.3 Special considerations for large claims

The initial letter may need more details about the review activities planned at the multiple sites/plants/facilities to be toured and the names and roles of all CRA review team members. The RTA may also wish to have the claimant confirm the names and roles of all claimant personnel who will be involved in the review.

5.6.3 Making a referral and consulting others

The RTA may require assistance to complete a review or to resolve issues concerning specific eligibility issues. If the RTA wants to hire an outside consultant or to involve technical experts from the CRA (such as the National Technology Sector Specialist (NTSS)), they must consult and obtain the approval of the RTM. Chapter 4.7.3.1 has more details.

5.6.4 On-site interviews

Interviews conducted by the RTA are intended to:

  • obtain additional information to help resolve technical or joint technical-financial issues, and
  • allow the claimant opportunity to present additional information in support of their claim.

The RTA's questions in the interview help focus it and ensure that nothing of importance is omitted. Ideally, the questions are structured and worded in such a way to help the claimants better understand and help resolve the issues. The nature of the questions posed will allow the claimant to explain the objectives, challenges, plans and work details of the claimed SR&ED work, ideally beginning from the identification of the scientific or technological objectives down to specific work elements. Subsequent or follow-up questions could then progressively address details at the product, design, technical and project levels, and any joint technical-financial issues. The answer to any given question may lead to other questions or approaches or eliminate other possible questions. The interview process needs flexibility to add new elements or remove the original planned elements as information is uncovered. There is no set length of time for an interview; the interview continues until the RTA has all the information that they need or until the claimant has provided all the information they can.

This makes it especially important that the RTA contact the claimant prior to the on-site visit to ensure that they are prepared, that is, that both the people most familiar with the work done and documentation are available and that the issues are understood.

The RTA should encourage the claimant to speak in the technical language that they are familiar with and comfortable in using, while advising them that clarification may be needed from time to time for greater understanding.

The RTA should begin the interview by asking how the claim was put together, including how SR&ED was distinguished from non-SR&ED. The on-site interview generally provides an opportunity to meet with employees who were involved in the claimed SR&ED work. It is further recommended that the RTA indicate prior to or during the meeting if they wish to speak to those who were directly involved in that work and can speak about it based on their actual experience. This could better establish the nature and extent of their involvement in the work if this is an issue or if there are concerns about whether the work was SR&ED. The people who conducted the claimed work can often provide the facts necessary to establish whether the work is SR&ED.

If the RTA is planning to interview all of the employees directly involved in the project, the claimant should know this prior to the visit, usually in the initial contact letter, to give them time to schedule the interviews (discussed in Chapter 5.6.2.2). Remember that time spent by employees away from their regular duties is a cost to the claimant, and that scheduling may also be an issue. The RTA needs to take into consideration that not every person involved in the project can be made available (individuals may have retired or left). In the interest of time, the RTA could interview the project leaders first and then interview individual employees only as needed. By working together, the claimant and the RTA should be able to identify the best people to interview. However, the RTA can decide whom they want to interview without the approval of the claimant.

The following is typical information to obtain from either the employee, or the person directly responsible for the employee:

  • the usual or normal responsibilities of the position occupied by the employee (who was claimed as a directly engaged employee);
  • leadership role(s), if any, of the employee with respect to the project in question;
  • partners or co-workers with whom the employee worked on the project under review, and their role(s);
  • time frame(s) and work schedule for the employee's participation in the claimed work;
  • nature of the work they performed, in detail; and
  • technological problems or issues they had.

Ideally, the information necessary to resolve the issues identified in the review plan will be obtained during the on-site interviews. Before concluding the interviews, RTAs should allow themselves some time to examine the information obtained, and assess whether or not the information is sufficient. Possible items to consider during this quick examination are listed in Appendix A.7. Following this review, the RTA can either continue with additional questions or conclude.

The RTA should inform the claimant of any outstanding concerns, main findings and observations prior to concluding the visit, even though final decisions have not been made. Chapter 5.6.9 has more details. The claimant should also be given an indication of when they can expect the proposal.

In the CRA offices, following the on-site visit, the RTA analyses all of the information and makes determinations that will either be communicated to the claimant via a joint science-financial proposal or draft report. Chapter 7 discusses this in more detail. Either possibility allows the claimant to make additional representation.

5.6.4.1 Working with claimants during the on-site review

 

Involving the claimant during the on-site review

It is important for both the RTA and claimant to use time wisely during the on-site review. Most claimants understand the importance of reviews for the integrity of our self-assessment approach to tax administration. However, their patience can be tested if a review is poorly organized, coordinated or executed.

The review plan can be used to ensure that reviews are well-organized, coordinated and completed on a timely basis. By having a  plan, the RTA can explain the issues to the claimant, the proposed approach (such as the interview, review of evidence / documentation) for resolving issues, and the logical relationship of related issues, in order to:

  • identify what should be emphasized during the premises tour;
  • identify who would best be able to address the issues that the RTA has identified;
  • identify what kind of evidence or documentation the RTA has looked to in previous reviews to support claims; and
  • determine the order in which the issues/projects will be dealt with according to the RTA's understanding of any interdependencies.

By having a review plan and informing claimants of the key aspects of it, claimants will more naturally understand the overall goal of the review and each of the steps. This does not mean that the RTA is obliged to seek approval for changes, or to change their plan according to the wishes of the claimant. It simply emphasizes that there are potential benefits to realize by ensuring that claimants understand what the RTA is doing and why.

5.6.5 Tour of the claimant's premises

In many cases it is beneficial that the on-site visit includes a tour of the claimant's premises, where projects selected for the review were performed, and of other possible locations on the premises that might pertain to these projects (for example, a commercial production line). This tour is often helpful towards understanding, in concrete terms, the technical and cost-related aspects of the claimant's business and claim. If the FR is also at the meeting, the tour may be beneficial for them or could help avoid duplication of questions.

However, in some cases there is no benefit to a tour, such as when there is no plant or lab, or if the work is purely analysis. There is no requirement for a tour to satisfy due process requirements if there is no information to be gained from it. The RTA uses their judgement in these matters.

Plant tours can expose RTAs to hazards, hence, they should take all the necessary precautions to ensure their own safety throughout the plant visit. Chapter 2.10.0 has more details.

In certain cases, the SR&ED claim will relate to a manufacturing process of the claimant. It is important to understand the linkage between the process and the SR&ED work claimed. The claimant may need to explain and document the unit operations or steps in the manufacturing process to the RTA, as well as to identify the technical issues and challenges they faced at different steps.

The tour of the premises provides an excellent opportunity to visualize and contextualize the claimed SR&ED work in the claimant's commercial environment. Many questions intended for the interview, and additional ones that naturally arise based on what the claimant says and shows, may be asked at this time. Specific items that could be covered during the on-site tour include:

  • capital equipment claimed as all or Substantially all (ASA) for SR&ED: During the tour, the RTA should request to see equipment claimed as ASA;
  • capital equipment claimed as Shared-Use Equipment (SUE): Similarly, the RTA should request to see equipment and use logs if any is claimed as SUE;
  • materials consumed: Often, equipment or materials used in the SR&ED process will be relegated to the claimant's scrap yard. Scrap can be supporting evidence and provide an indication of the technical work done and the challenges that were encountered. Clues as to the technological problems and work done associated with the claimed SR&ED may be evident (such as breakage, excessive wear, remnants of special-purpose instrumentation). Notes of such observations during the premises tour should be made. This is especially important if the claimant has little written documentation. While the "scrap yard" can help to indicate what was done, it is of less value in determining when it was done;
  • prototypes, pilot plants, and custom products: the RTA should obtain information about any equipment that was claimed as a prototype, pilot plant or custom product. This subject is discussed in detail in SR&ED while Developing an Asset Policy; and
  • other specific requests made by the FR: This could include such items as identifying areas that may be allocated to SR&ED and employees claimed under proxy.

5.6.6 Claimant's supporting evidence and oral information

It is essential that claimants have supporting evidence for their claim. This has a strong foundation in law and policy. The legal basis of the requirement for supporting evidence is in subsection 230(1) of the Act which requires taxpayers to keep (adequate) records and books of account. Subsection 248(1) of the Act defines the term record. It is discussed in Chapter 2.8.2.

This requirement in subsection 230(1) is confirmed in the eligibility policy, and is supported by the courts. Chapter 5.6.6.1 discusses some of these court cases, and Chapter 5.6.6.2 discusses another case, in the context of oral information.

However when a claimant’s supporting evidence is not adequate or incomplete, the RTA needs to determine, given the policy requirements, what and how much evidence is sufficient. This will be discussed in chapter 5.6.6.3.

Why evidence is required

According to the CRA Audit Manual Chapter 10.5.1:

"Evidence is anything that can be legally relied upon to bear witness to the facts of a case. The purpose or role of evidence is to substantiate the facts and to provide a basis for judgement."

RTAs are obligated to follow the law and CRA policy. It is therefore essential that in their reviews, RTAs look for and review supporting evidence. In the context of an SR&ED review, collectively, supporting evidence can substantiate different facts like the following:

  • the eligibility of claimed work (that is, whether any of the claimed work meets the definition of SR&ED in subsection 248(1) of the Act);
  • the work that was actually done in the tax year;
  • the start date and actual or expected completion date of each project;
  • the personnel directly engaged in the claimed SR&ED work and the number of hours each person was engaged;
  • details of the contractual agreement(s) between the claimant and the contractor(s) who performed SR&ED or SR&ED support work;
  • details of any direct financial contributions to a Third Party SR&ED Approved Institution;
  • details of partnership agreements between the claimant and other co-claimants in jointly submitted claims undertaken by a research consortium or the details of a collaborative research agreement;
  • details of how equipment was used for SR&ED; and
  • details of materials consumed or transformed in SR&ED.

The facts that need to be established, and hence the particular evidence needed to establish them, depend on the review issues. As explained in Chapter 5.6.6.3, the evidence needed also depends on other facts of the case and ties into the risk determination. Ultimately, the RTA’s responsibility is to verify the needed facts to the extent necessary to obtain a reasonable level of confidence that there is a minimal risk of material error.

5.6.6.1 Claimant's supporting evidence

Chapter 6.4.0 has definitions of evidence and documentation. Appendix 2 of the T4088 – Guide to Form T661 describes in detail how the claimant may support their claim by providing evidence that was generated as the SR&ED was being carried out. It is important that RTAs be aware that evidence can take many forms. Examples of supporting evidence that may be presented to and used by the RTA include, but are not limited to:

  • project planning documents;
  • records of resources allocated to the project, such as time sheets;
  • experimental design records;
  • design documents, CAD and technical drawings;
  • project records, laboratory notebooks;
  • design, system architecture, and source code (software development);
  • records of production runs;
  • project progress reports;
  • minutes of project meetings;
  • test protocols, test data, test results;
  • internal emails concerning the work;
  • analysis of test results, conclusions;
  • final project report or professional publications;
  • photographs and videos;
  • prototypes, samples;
  • scrap, scrap records;
  • contracts; and
  • invoices

The items in the list above are created or generated by the claimant. There are other sources of information that can be considered or used to establish facts such as what may be standard practice or public knowledge. Some examples are:

  • textbooks;
  • journals or trade publications,
  • information available from suppliers or manufacturers, and
  • information from Internet sources.

The supporting evidence reviewed and the documents obtained from the claimant are vital parts of the review process that will be used to bring resolution to the identified issues. This information will also form part of the overall record that will be included in the TF98 file to support the RTA’s decisions, and may be used later if the claimant challenges the CRA by way of notice of objection (NOO) or in the Tax Court. TF98 files are sometimes reviewed by other government parties such as the Auditor General, Quality Assurance, Appeals or Internal Audit. The RTA should document all supporting evidence seen as well as their findings and observations concerning it; the importance of this cannot be overemphasized, particularly when the RTA bases decisions on this evidence. Retained evidence (such as copies or duplicate material presented by the claimant), is kept in the TF98 file. This is discussed further in Documenting the Review Process in Chapter 6.

Although supporting evidence may be presented by the claimant, or may be available to the RTA through public sources, it is up to the RTA to determine its the relevance or significance. The CRA Audit Manual Chapter 10.5.2 discusses the principles of "weighing the evidence". As noted in Appendix 2 of the T4088 – Guide to Form T661, contemporaneous evidence, that is documents created at the time the work was done, and produced as a result of performing such work, is the most reliable kind of evidence. 

It is particularly important that copies of supporting evidence be made if an adjustment is anticipated or if the information supports a decision that is not in favour of the claimant. The RTA has the discretion to use their judgement about what should be copied or not. In some cases, it may be sufficient for the RTA to simply examine the supporting evidence on-site and make notes about what was seen.

In many cases, the relevance of information in the claimant’s supporting evidence may not be immediately clear.  Therefore, the context and significance of that information should be documented in the RTA’s working papers. For example, the importance of photocopies of isolated pages from a laboratory notebook may rest with the recorded dates on those pages that can be used to establish the timeframe of claimed SR&ED work. 

When a claimant does not maintain adequate evidence to support the claim, the RTA should inform the claimant that the supporting evidence is inadequate and that they need to correct the deficiencies for future claims. Chapter 5.11.3 discusses this procedure.

The same principle applies if the claimant has promised information but does not provide it all, or has prevented access to needed personnel or equipment. Assuming that the RTA’s requests are clear, the RTA is not obligated to make repeated visits because of the claimant’s omissions. It is recognized that misunderstandings and unexpected events such as illness can occur, but if the claimant has a doubtful or unsatisfactory explanation for their failure to provide information, and the behaviour is repeated, the RTA can conclude the review and base their decisions on the available information. The failure to provide some information does not mean that the whole claim is automatically unsubstantiated. It may be the case that the RTA could establish that some work is SR&ED.

In some situations, while there may be supporting evidence that some SR&ED was done, there may be no means of demonstrating exactly how much of the claimed work is SR&ED. This is particularly true if the claimant does possible SR&ED concurrently with excluded work such as commercial production. The RTA must never negotiate with the claimant to resolve this situation by determining eligibility on anything other than scientific or technological considerations. One possible solution is that the RTA can identify what they think may be SR&ED based on the evidence provided, and ask the claimant to reasonably quantify that work. The RTA can accept this quantification if it is consistent with all the available supporting evidence. It is important that the RTA inform the claimant that this procedure cannot be repeated in the future and that adequate evidence must be maintained for future claims.

One important point with respect to supporting evidence is that the RTA should be careful not to give claimants the expectation that providing supporting evidence will mean that their claimed work will be considered SR&ED. Substantiation of the work is not always the issue. Substantiation will not help a claimant if their work is not SR&ED. It is quite possible for work to be well-substantiated, in the sense that there is no doubt about what work was done, but the work done was not for SR&ED.

Here are some summaries of key court decisions that emphasize and support the requirement for supporting evidence: 

1. Sass Manufacturing – Tax Court of Canada – 88 DTC 1363

"Systematic investigation connotes the existence of controlled experiments and of highly accurate measurements and involves the testing of theories against empirical evidence. Scientific research means the enterprise of explaining and prediction and the gaining knowledge of whatever the subject matter of the hypothesis is. This includes repeatable experiments in which the steps, the various changes made and the results are carefully noted. The taxpayer was unable to provide overall descriptions or drawings for the project. There was no evidence of any hypothesis for research, and there were no test reports. The taxpayer must adduce cogent evidence of a systematic investigation or search, and the evidence fell far short of doing so."

2. Northwest Hydraulic Consultants – Tax Court of Canada – 98 DTC 1839

"Although the Income Tax Act and the Regulations do not say so explicitly, it seems self-evident that a detailed record of the hypotheses, tests and results be kept, and that it be kept as the work progresses."

3. C.W. Agencies – Tax Court of Canada 2000DTC 2372

"An odd feature of this case is that virtually all of the evidence relating to the detail of what was in fact done by the Appellant in the course of designing and writing the software was given, not by a person directly and personally involved in the process, but rather by the Appellant's expert, Dr. Slonim. As I appreciate the evidence, Dr. Slonim was compelled by the absence of a detailed project management plan to examine the results of the Appellant's work, next to examine the tools and technology used by the Appellant and, finally, to arrive at conclusions regarding the problems which he thought must have been faced by the Appellant and the steps taken to solve those problems. I note that the failure to call the project manager or some similarly placed person was never explained by counsel for the Appellant. In deciding what must in point of fact have happened, based on conjecture with regard to "the numerous uncertainties in this project", Dr. Slonim arrived at conclusions which in my view were not justified by the evidence."

4. Les Développements De Systèmes Spécialisés M.T.P.C. Inc. – Tax Court of Canada 99 DTC 826

"It is my opinion that there has been no proof of any systematic search, as required by subsection 2900(1) of the Regulations, in respect of the activities involved in this appeal.

As noted by the Minister’s scientific advisor at the appeal level, some of whose comments are set out in paragraph 10 of these reasons, in this case there was no formulation of hypotheses nor was there documentation describing studies or tests. The appellant’s documents describe a programming project that encountered problems, but they do not describe a systematic investigation or search carried out in a field of science or technology by means of experiment or analysis. The projects were business projects and not SR&ED projects."

During the on-site visit, if it is relevant to resolving the review issues, the RTA  can obtain copies or duplicates of key documentation pertaining to the claim. The RTA has the right under section 231.5(1) of the Act to make copies or require claimants to make copies of documents for their retention. These copies, when certified by the RTA, have the same value as the original. If the claimant cannot or will not make copies, the RTA can borrow the documents and make copies off-site. Chapter 5.10.0 discusses what to do if the claimant refuses to allow copies to be made or documents to be borrowed. 

Section 10.5.4 of the audit manual says the following about making copies:

"The following procedures apply when making photocopies:

  • Photocopies must be certified on the back as true copies. There should be a statement as to where the document came from, who copied it and that the copy was compared to the original. For more information, see 10.11.8 Referrals to Investigations.
  • Documents must be complete. Copies of a part of an agreement, regardless of how long or how meaningless the omitted portion, cannot be presented in court since they do not represent the agreement in whole.
  • Photocopies should have the auditor's initials on the bottom corner of the document. Ideally, the initials should appear on each page of the document. If the document is quite lengthy, the first and last page can be initialled with a notation on the back indicating the number of pages, e.g. "page 1 of 27".

The auditor must provide an accurate description of the evidence and indicate where it can be found if it is not practical or possible to obtain certified copies of the relevant documents."

It is important that the source document be properly identified, which can usually be done by copying its title page.

5.6.6.2 Oral information/ interviews with claimants

The CRA recognizes that, particularly among small companies, it is not always easy to maintain documentation. That is why Appendix 2 in the T4088 – Guide to Form T661 gives many examples of evidence that can support the SR&ED work claimed and can be used to ensure that claimants maintain adequate support for their SR&ED. This table indicates that paper documentation is not the only sort of evidence that can support an SR&ED claim.

The RTA, during the review of the SR&ED claim, works with the claimant by examining the evidence/documentation they have produced to determine its significance in supporting the SR&ED claim. 

However, the RTA doesn’t just look at the physical evidence provided, but also interviews personnel who did the claimed SR&ED work to obtain information about what was done and to help establish the claimant’s business context. 

Oral information is defined as any verbal statement made by the claimant, their representatives, or other sources related to the claim. Oral information is considered by RTAs during the review. 

As an example, when documentation is incomplete, oral information may be very useful in helping the RTA resolve specific issues such as the project start date.

Although oral information can be accepted as evidence in the courts, this is made after an oath and before a judge.  Therefore RTAs should not take only oral information as supporting evidence to substantiate the claim.     

RTAs should consider the oral information provided along with other evidence that the claimant provided.

An example of how the courts treated oral evidence is given in the case of 116736 Ontario Ltd. (references 96-2484-IT and 96-4372-IT).  In this case, the claimant was unable to provide documentation as it was destroyed in a fire. This extract from the case highlights the judge’s reasoning:

"However, I would add that it is not without hesitation that I come to this conclusion. It is surprising that the Appellant was not in a position to show to the Minister's representative in the course of his audit the prototypes that had been built at the time of that audit. However, on the balance of probabilities, I am inclined to believe Mr. Nelson when he says that R&D activities took place during the relevant period. The fact that he is an inventor and the fact that he was involved in projects of an R&D nature which resulted in the creation of new technologies that are being commercially marketed give the Appellant more credibility. However, just because he actually carried out R&D activities on behalf of one company it does not necessarily follow that he did so on behalf of the Appellant. As mentioned before, it boils down to a question of credibility. Having reviewed the April and the February Reports providing a detailed description of the work done during the relevant period and having heard Mr. Nelson's oral testimony, I find that those activities constituted R&D. I observed Mr. Nelson during his testimony and he came across as an honest and credible witness."

Often only parts of this court case are cited. However, it is important to consider all of the key points made in this judgement as well as section 2.1.5 of the eligibility policy and T4088 – Guide to Form T661. Some of the key points from this case are:

  • The judge said that it was not without hesitation that he accepted oral testimony. There were extenuating circumstances, specifically the fire.
  • The credibility of the person giving the testimony was critical.
  • There were other facts that gave credibility to the witness, specifically the past history of the witness and some documents.
  • The evidence was presented by the person who did the work.
  • In the judge’s view, "contemporary reports showing detailed records of each experiment attempted by a researcher could constitute evidence of a systematic investigation".
  • "Any taxpayer attempting to convince the Minister that he is entitled to deduct R&D expenditures without such evidence puts himself in a very precarious position."

When considering oral information, the RTA should remember that:

  • Oral statements are not a substitute for the claimant keeping adequate documentation or other evidence.The Act requires that taxpayers keep books and records. SR&ED claimants are given further advice in the T4088 – Guide to Form T661 and the Guide noted above.
  • Only the person(s) who actually performed or saw the work can provide credible oral statements about what was done.
  • There should be other facts or circumstances that are consistent with the oral statements. Examples of supporting facts or circumstances include the background or experience of the person doing the work, and other documentation, which corroborates some of the facts claimed.
  • There may be extenuating circumstances concerning the lack of supporting evidence, such as the fire in this case.

To ensure that oral information is documented accurately, and that there is no misunderstanding about what was said, the RTA may wish to read the key information back to the claimant or have the claimant provide a signed statement.

5.6.6.3 Schematic diagram of risk and supporting evidence

As noted earlier, the challenge for RTAs is to determine how much supporting evidence is sufficient. There is also the challenge of how to consider the oral information provided. A recommended approach when requesting documentation and supporting evidence is to use the Risk Management Policy as a guide, in order to obtain a reasonable level of confidence that there is minimal risk of material error in a claim. This schematic is a simplified illustration of how to do this. A detailed discussion follows the schematic.

Schematic diagram of risk and supporting evidence

The schematic ties together a number of things such as:

  1. reducing risk of material error to a minimal level;
  2. the need to obtain oral information;
  3. the need to corroborate oral information;
  4. the use of direct evidence;
  5. the use of indirect evidence; and
  6. the expectations for a FTC vs. a long term claimant (LTC).

The schematic illustrates the stages of a review of the work claimed, in the context of the RTA requesting documentation and supporting evidence. It starts from the time the RTA does the initial risk assessment, and if a review is undertaken, to the determination of eligibility or the resolution of other review issues. It illustrates that risk assessment is on-going throughout the review and that risk can change as new information becomes available. It also illustrates the decisions to be taken after any new information is gathered and has been risk assessed. The decisions and actions are grouped under 5 column headings.

The following explains the approach illustrated by the schematic:

1. The first column indicates the first step, which is the risk assessment before the on-site visit (discussed in Chapter 4.3.1). In this step, all information gathered before an on-site visit, through the T661, prior years’ claims, RFIs, oral information obtained from the claimant by telephone, is risk assessed and if the risk is minimal, the work claimed is accepted as filed (AAF) without gathering any further documentation and supporting evidence. If the risk is not minimal, then the RTA proceeds to the next step.

2. The second column indicates the second step, which is to determine the review scope. In this step, the RTA identifies all the work and issues that are to be reviewed based on the initial risk assessment. The work and issues could be low risk or high risk. Low risk work means that the RTA’s initial assessment of the work is that some or all of the claimed work may be eligible. On the other hand, high risk work means that the RTA’s initial assessment of the work is that little or none of the claimed work is eligible. Issues may include joint technical-financial items such as materials. The RTA then develops a review plan (discussed in Chapter 4.8).

3. The third column indicates the third step, which is to review information gathered during the on-site visit(s). This includes oral information from interviews with personnel that did the work, direct evidence that proves SR&ED or resolves the identified issues, and indirect evidence which suggests that SR&ED was performed. If the claimant is a long term claimant the RTA should also look for any information requested in prior years, based on previously discussed record-keeping requirements.

4. The fourth column indicates the fourth step, which is to re-assess the risk based on the new information that was gathered in column three. The RTA needs to determine whether the new information provides a reasonable level of confidence that there is minimal risk of material error in the work claimed or issue identified, in other words to answer the question "Is there enough evidence to substantiate the work claimed and resolve the review issues?".

The starting point, after gathering the oral information, is to look for direct evidence to corroborate the oral information. If the direct evidence is missing or does not corroborate the oral information, the subsequent action depends on whether the initial risk assessment was low or high.

If the initial risk assessment was low, the RTA then considers the indirect evidence. Indirect evidence of SR&ED is evidence that suggests SR&ED but not actually proving it to be SR&ED. Some examples of indirect evidence of SR&ED (discussed in chapter 5.6.6.1) are invoices, emails, rough sketches, and scrapped materials.  If the indirect evidence is sufficient to reduce the risk of material error, the RTA proceeds to step five. This situation should not happen with long-term claimants, since a long-term claimant would have been advised in prior reviews of the supporting evidence requirements. Although the requirements on record keeping are the same for all claimants, the long-term claimant is also expected to comply with previously discussed records keeping requirements. Therefore, for the long-term claimant it is expected that there be direct evidence or the type of supporting evidence previously required to be kept for subsequent reviews. If the indirect evidence is insufficient, the risk has now become high, and the RTA proceeds to step five.

If the initial risk assessment was high, direct evidence is needed, and in the absence of direct evidence, the risk remains high, and the RTA then proceeds to step five. In exceptional circumstances, the RTA can still make a decision or an eligibility determination if there is an abundance of indirect evidence. The RTA can and should rely on their professional judgement and experience to arrive at a decision or determination in such cases.

A simple way to describe this is that a higher standard of evidence is required for higher risk.

One method to assess whether the new information has changed the initial risk is to evaluate the mitigating factors against the aggravating factors based on all the information gathered. Mitigating factors lower the risk; aggravating factors raise the risk. Here are some examples of mitigating and aggravating factors:

Factors
Mitigating factors Aggravating factors
Credible story/ people interviewed were directly involved in work Story not credible/ people were not directly involved in work
Indirect evidence consistent with story Indirect evidence not consistent with story or could support a different interpretation.
Story consistent with T661 Story differs from T661
Prior history of compliance No history, or a prior history of non-compliance
Business context: Normally little documentation is produced Business context: Normally would be well-documented
Other circumstances that caused or explain the lack of supporting evidence, such as records loss, claimant’s education and experience No reasonable explanation for lack of documentation

For all issues, if there is no or insufficient indirect evidence to corroborate the claimant’s oral information, then the RTA is led to a no work (NW) determination, unsubstantiated (UN) conclusion, or unfavourable decision, depending on the situation. Chapter 5.11.2 describes important considerations when deciding that claimed work is unsubstantiated or whether the evidence supplied supports a determination that there was no SR&ED.

If there is indirect evidence to corroborate the claimant’s oral information, then the RTA must re-assess the risk in light of this new information. The risk re-assessment would have to consider the mitigating factors and the aggravating factors.  Depending on the result of this re-assessment of risk, the RTA must then decide if there is a reasonable level of confidence that there is minimal risk of material error in the work claimed. Depending on the risk level, consideration should be given to factors such as relevance, reliability, and weight of the indirect evidence available. Ultimately, the RTAs may have to use their professional judgement and experience in answering that question.

A positive answer would lead the RTA to a determination of all work (AW) or some work (SW) or a favourable decision and a negative answer would lead to NW determination, UN conclusion, or unfavourable decision, depending on the situation. 

The above process, where under certain situations the expectations of long-term claimants and first-time claimants (or first science review) concerning supporting evidence requirements are different, illustrates the graduated approach to compliance.

5. The fifth column indicates the fifth step, which is to make a determination, conclusion, or decision. After considering the oral information, evidence (direct or indirect), and the mitigating and aggravating factors, the RTA proceeds to one of the actions in the fifth column. Where the risk of material error remains or becomes high, the RTA would determine that no work is SR&ED, conclude that the claim is unsubstantiated, or make an unfavourable decision, depending on the specific circumstances. Where the risk remains or becomes low, the RTA would determine that some or all of the work is SR&ED, decided to AAF the work, or make a favourable decision. Depending on the situation and as required, other decisive actions with respect to supporting evidence are also provided, such as cite improved record-keeping in the SR&ED review report, and sending a better books and records letter.

5.6.7 Interview notes

The comments here also apply generally to all oral communications, whether with claimants or others. Interview notes are vital parts of the working papers that the RTA will use to form decisions or to resolve the previously identified review issues. Notes taken by the RTA form part of the documentation that will be included in the TF98 file, and may be used at a later date to examine the file or re-evaluate the claim by such groups like the Appeals Division, the Tax Court of Canada or Quality Assurance. The importance of interview notes is well established in CRA audit practice and jurisprudence. There is no required format for the notes. Regardless of the medium employed, the rough notes of interviews should be identified, dated, initialed and kept in the TF98 file, available, if necessary, for reference or introduction in court. It is very important for potential court use that the notes cover the entire interview and not just selected portions, regardless of whether the content seems relevant to the review at the time.  Therefore:

  • The interview notes should identify the project, work, or issue discussed, and the date(s), time(s), location(s) and names of all persons present during the review meetings.
  • The notes should record the names of personnel interviewed and those responsible for providing key information. In a group meeting or discussion, they would need to identify which party made the statement. This is important in case any follow-up inquiries are necessary to complete the review, to conduct a second review, or to examine the review process itself in the context of a dispute resolution, NOO or an appeal to the Tax Court of Canada.
  • As the interview notes will be in the TF98 file, the notes should be factual, reflecting what was said during the interview and what was seen. They should not contain any irrelevant personal opinions, assumptions or personal comments about any individuals associated with the claim, nor any criticism of the claimant's business decisions or the quality of their work. This does not preclude a style of taking notes where the RTA notes their thoughts or questions that arise during the interview, for possible later discussion, as these are relevant to the review process.
  • The interview notes should reflect, as closely as possible, what the claimant said about their work and the SR&ED claim, not an interpretation of what the claimant meant.
  • The interview notes should have sufficient detail to indicate how the RTA's questions were answered, and if anything obtained during the interview is relied upon in coming to the RTA's decisions, this information must be reflected in the interview notes. Otherwise the RTA's decisions might not be supportable.
  • It is understood that it is impossible for the RTA to write down every word said during an interview or conversation, nor is it expected. However, the more detailed the notes the more useful they will be if the issue is contentious. The RTA should try to record as much detail as possible, to summarize what was discussed and support the determinations made. This will depend upon the RTA's note-taking abilities, how much is said and how quickly it is spoken.
  • If there is a lot of important detail discussed, the RTA may need to slow down the conversation in order to have sufficient time to record details. If necessary the RTA may need to pause and read back what was written in order to make sure that their understanding was correct.
  • It may be difficult or even impossible to take detailed notes during the interview process, especially during the actual site tour. If the RTA can only take sketch or rough notes during the actual interview, then as soon as possible the sketch notes need to be expanded based on the RTA's recollections, and both the sketch notes and expanded ones are to be included in the TF98 file. Such notes should be explained and include the time and date that they were expanded. Another option is to write down the main points as soon as possible (for example, before driving off the premises) and expand them as soon as possible thereafter.
  • In cases when another CRA employee or consultant is present during the site visit or conversation with the claimant, any notes that person takes should also be included in the TF98 file as part of the overall record.
  • Usually, the FR's notes are kept in their own files. However, when relevant, the RTA should keep copies of these notes in the TF98 file.

5.6.8 Additional information requests 

During the on-site visit, the RTA may realize that additional information is required that was not specifically requested. It is recommended that these additional requests be made verbally, and if the claimant cannot provide it at the time, then ask the claimant when it will be sent. A follow-up request should be made in writing following the procedure of Chapter 5.4.1, and sent to the claimant after the visit. An alternative method is to prepare a written request at the claimant’s premises, similar to that of the audit query sheet Form T997, and give it to the claimant prior to leaving. The RTA should sign and date this document and make a copy. The RTA may need to schedule additional meetings to review the information requested.

5.6.9 Communicating Decisions to the Claimant

RTAs cannot always make decisions regarding the issues until they have had a chance to review the interview notes, together with the original claim submission and any supporting evidence viewed or obtained during the on-site visit, as well as discuss them with the FR. However, if the RTA cannot provide their conclusions at the end of the on-site visit, the RTA must inform the claimant that there are outstanding issues, while making it clear that further review and consultation may be needed, that the claimant will have the opportunity to address any concerns, and that the FR will still need to review the expenditures before the review is completed. If the RTA does not provide their conclusions at the end of the onsite visit, the claimant should be made aware of the decision prior to sending the SR&ED review report. This can be done by telephone or through a draft report.

If there are gaps in the claimant's information, the RTA may still be able to give preliminary decisions based on the information as presented by the claimant. It is important that the RTA avoid giving the impression that there are no problems or issues when there are some. When the RTA can indicate their preliminary decision at the claimant' premises, the claimant may have a better opportunity to present their case while equipment and personnel are more readily available. Where possible, the RTA can invite the claimant to bring forward any further representation or information that might address these concerns.

During the on-site visit, the claimant may request an additional meeting(s) to discuss the work when the RTA has some serious reservations, outstanding concerns, or if the claimant does not understand any decisions with respect to the claim. The RTA is not required to have any additional meetings unless it is clear that there is more or new information to see, or the RTA does not feel that there was sufficient time to work with the claimant to help them understand SR&ED Program requirements or eligibility concerns. The RTA should make clear to the claimant that if there is more information to support the claim, the claimant should:

  • present it to the RTA during the meeting; or
  • make a written representation to the RTA.

Alternatively, if the claimant does not understand a decision, the claimant is expected to clearly identify what they do not understand (and why) so that the subsequent meeting will be productive. Before denying a request for an additional meeting, the RTA should discuss the situation with the RTM to ensure that the claimant has been treated fairly.

In either of the above cases, the RTA will consider the additional information prior to the completion of the review.

Following the meeting, taking into consideration any additional representations from the claimant, the RTA documents the details and decisions in the SR&ED Review Report (discussed in Chapter 6.8.0), which is eventually presented to the claimant as part of the Proposal Package.

Decisions are preferably issued simultaneously by the RTA and the FR in the Proposal Package. However, it is possible to send out a draft SR&ED Review Report prior to the Proposal Package. For example, there may be an unavoidable delay between the completion of the technical and financial review. However, in all cases, the RTA must send the report to the FR before the claimant receives it. The decision to issue a draft report prior to the Proposal Package is at the discretion of the RTA and local management team, but it must be clearly labelled "draft". However, for the reasons outlined in Chapter 3 the requirement for a coordinated review is better achieved with a joint proposal.

If a draft report is sent prior to the Proposal Package, the claimant should be informed that a draft report followed by a financial proposal is equivalent to a joint proposal where the report and the financial details are sent at the same time. It is important to emphasize that both approaches allow the claimant the same opportunities to make further representations. If a draft report is used, a final report must be issued whether or not any representations or changes are made to the draft.

If the draft report is sent to the claimant prior to the Proposal Package, and the claimant provides a response prior to the Proposal Package, the RTA can respond to it before or after the proposal, depending on the circumstances. For example, it may be possible for the RTA to resolve the technical issues prior to the proposal. However, joint issues could not be addressed until the FR has completed their work.

If the RTA responds to the claimant prior to the proposal, the claimant's representation and the RTA's response should be reflected in a revised SR&ED Review Report which would be included in the proposal package. "Proposal Package" in Chapter 7 has details concerning communicating decisions to claimants. Chapter 7.6.1 discusses addressing the claimant’s response to the proposal package, or to the draft report.

Even if the RTA cannot give a preliminary decision at the end of the on-site visit, it is still required that the RTA indicate their concerns to the claimant and give a preliminary decision to the claimant as soon as possible. By doing so prior to the proposal, whether or not a draft report is sent, it will improve openness and transparency and reduce the potential for the claimant to be surprised.

In all situations, if the RTA cannot send out a report within 30 days of the technical review (either as a draft or as part of the proposal package), then they should inform the claimant as to when it might be expected.

5.6.9.1 Working with claimants to help them understand the RTA’s decisions

 

Helping claimants understand the RTA’s decisions

It is often helpful to take some time at the end of the meeting to go over the on-site review in relation to the original objectives that were communicated to the claimant. Communication is the key to ensuring that both parties are satisfied that everything necessary has been done (or will be done) to address the RTA's concerns. This should involve:

  • an overview of the issues and the steps that were taken to resolve each issue;
  • if possible, a preliminary indication of whether or not the steps taken have satisfied the RTA's concerns; and if not, to the extent possible;
    • an indication of why the RTA still has a concern;
    • further discussions on what additional information the RTA may need (or what additional information the claimant possesses); and
    • the next steps in the review process and a time frame.

If there is insufficient time available during the meeting to help a claimant understand a decision, or for the RTA to consider additional information, the RTA should arrange to discuss these by telephone or in a follow-up meeting.

To ensure that these meetings are effective and efficient, the claimant should be asked to identify what needs to be clarified and why.

5.6.10 Dispute resolution

Disputes that arise during or after the review are handled by following the procedures described in the application policy 2000-02R, Guidelines for resolving claimants' SR&ED concerns. If appropriate, the RTA can briefly describe the contents of this application policy to the claimant.

5.6.10.1 Working with claimants to resolve concerns and avoid disputes

 

Resolving claimants' concerns and avoiding disputes

The AP 2000-02R "Guidelines for resolving claimants' SR&ED concerns" provides the fundamental procedures for resolving claimants' concerns in a meaningful and productive manner. 

However, resolving potential conflicts and disputes involves much more than following a procedure. It requires communication of the RTA's desire for achieving a common understanding, respect for the claimant's concerns and the patience to listen to concerns and reduce frustration. It also requires a similar commitment from the claimant to listen and try to understand the RTA.

When disputes arise, the RTA should explain the three steps to trying to resolve disputes and reinforce that the CRA is committed to doing everything it can to facilitate resolution of disputes as soon as possible and at the working level.

Ask the claimant to explain their concerns. If the claimant is upset, allow them to express themselves without arguing with them or raising your voice. Listen and calmly try to bring the discussion back to the facts at hand such as what was done rather than opinions. If the discussion becomes heated, suggest that a short break be taken so that the claimant's concerns can be discussed in a productive manner.

When you speak, do so calmly and try to ensure that the discussion centres on facts rather than opinions. For example, explain what information you require to resolve issues as the first step and why.

One of the most effective ways of dealing with disputes is to engage in practices that prevent disputes from occurring in the first place.

According to the results of an internal national survey of RTAsRTMs and Assistant Directors (ADs), there was an overwhelming consensus that open, early and effective communication was the key to preventing or resolving disputes.

One important technique is for the RTA to demonstrate through their actions and words that they have no stake in the outcome of the review. Another technique is to focus on facts to avoid giving the impression that they have a pre-determined decision about the work claimed. For example, the RTA should not indicate that a particular kind of work is rarely eligible without first hearing why the claimant feels that the work claimed is eligible, even though it may not be, based on the RTA's experience. Instead, the RTA should focus on the facts of that particular claim and explain why the work claimed is not eligible based on those facts.

Another technique of open and effective communication is to ensure that potential issues are identified and explained to the claimant at the outset of the review or as soon as they are discovered. 

When the RTA thinks that there is a good chance that a particular review may lead to a dispute (for example, based on previous experience with the claimant or significant work claimed is expected to be ineligible), some options for prevention include:

  • discussing the file and issues with the RTM to consider the best approaches for communicating or validating concerns;
  • discussion with peers to determine how they may have handled similar situations;
  • discussion with an NTSS or other Headquarters (HQ) employee to determine if similar issues have arisen elsewhere, whether the RTA's decision is in line with the decisions of colleagues in other regions, and how such issues have been resolved elsewhere; and
  • considering to have a third party, such as the RTM, or a peer to accompany the RTA during the review. Often times, the opinion of another party such as a RTM can make a difference in the claimant's willingness to accept the RTA's decision.

It is important to treat the claimant and their work with respect. Remember that most claimants are very proud of their work. Disputes often involve either the eligibility of work or issues concerning substantiating documentation. If the RTA does not believe that the work is SR&ED, explain why to the claimant. For example, if the work involved the application of known engineering practices, explain how that is the case. Show the claimant the definition of SR&ED as stated in subsection 248(1) and use the definition to explain why their work is ineligible. For example, if their work is specifically excluded, such as might be the case if commercial production were claimed, point out paragraph (i) in this subsection. 

Sometimes disputes arise over interpretations of CRA policies. The RTA cannot change policy or its interpretation, so such disputes are not productive. However, while it is important to focus on facts during a review, at times it may be pertinent to discuss the application of policy. For example, the RTA could:

  1. explain the policy in more detail;
  2. explain how and why the policy or legislation applies in their situation; or
  3. discuss any policy application concerns they have in the context of their claim.

The RTA can also ask the RTM if there is any question about the interpretation or application of a particular policy in a given situation.

If the RTA is unable to determine if work is SR&ED, ask the claimant to consider what kind of documentation may help to demonstrate that a systematic search or investigation took place in order to resolve a scientific or technological uncertainty. Make use of the documentation tool in Appendix 2 of the T4088 – Guide to Form T661 to illustrate the types of evidence the claimant can consider using.

If the concerns remain, and the claimant wishes to bring the discussion to the second or third steps described in AP 2000-02R, advise the RTM or Assistant Director (AD) to expect contact from the claimant and inform the FR of the potential for a delay.  In this situation, provide the claimant with suggestions that will help them best present their case and avoid common pitfalls. For example, it is recommended that the RTA advise claimants to focus on describing the work that was done, why it was done, rather than arguing how the final material, device, product or process represents a scientific or technological advancement. By focusing on the work that was done and providing substantiating documentation, the discussion is centred on facts rather than opinions. Avoid citing isolated sentences within the eligibility policy and other publications. Often, such approaches fail to present concepts in their whole. As noted above, they also tend to focus discussions on opinions rather than facts. 

5.6.11 Claimants giving tax information during the on-site visit

Sometimes during the on-site visit, claimants may try to give RTAs tax returns or other required tax information, such as new or amended returns, or information about new projects. RTAs should tell these claimants that they cannot accept this information, but that it must be sent to the appropriate tax centre (TC), where the TC can process the information, and if necessary do timeliness and completeness checks. An RTA must not provide comments on timeliness or completeness or whether anything is missing from a tax submission.

5.7.0 Special situations and alternative review approaches

There are a number of situations that are not regularly encountered that require a different review approach. These situations, by themselves, do not lessen either the requirements of the claimant to support their claim or the CRA’s requirements to give due process to the claimant. That is, CRA employees cannot alter the CRA requirements for any particular claimant nor give the claimant less than due process for our convenience. As with other reviews, the review work of the RTA must be documented. These situations include:

  1. Files with previous or outstanding Notices of Objection;
  2. Bankruptcies, Company Shut Down, or Facility Sold;
  3. Out-of-Country Equipment, Records or Personnel;
  4. No existing physical facility;
  5. Separation of Head Office from R&D Site;
  6. Borrowing Claimant's records;
  7. Claimant's documentation supplied as electronic media;
  8. Remote claimant location;
  9. Claims involving Classified information; and
  10. Second Technical Review by a new RTA.

Details of how to address them are given in Appendix A.6.

5.8.0 Claim modifications by the claimants

5.8.1 Amended claims-general principles

Just as any taxpayer can request that their tax return be amended, claimants can request to amend their SR&ED claims.  In fact, it is mentioned in Chapter 5.8.2 that if RTAs notice unclaimed work, which may be SR&ED, they should advise claimants of the possibility of amending their SR&ED claim and claiming additional work and expenditures. 

In almost all situations, if a claimant wants to amend their claim, they must file an amended return at the tax centre (TC).  An amended claim should not be accepted by the coordinating tax services office (CTSO) or the RTA at any time. If the claimant wants to submit an amended claim to the RTA or FR, they should be instructed to file the amended claim with the TC. Claimants should also be reminded that all new work or expenditures must be identified within the 18-month deadline.  

One exception to this rule is if the claimant is requesting a minor adjustment, such as an additional expenditure to work already claimed and identified, and it is within the 18-month deadline, the RTA should inform the FR. These adjustments do not necessarily require amended claims at the TC. A letter or verbal request can be sufficient. The other exception is requests to "withdraw" some or all of the claimed work. This is discussed in Chapter 5.8.1.1.

Amended claims, when received at the TC, are subject to a risk assessment and they may be downscreened or sent to the CTSO to be reviewed by the control function (CF). The CF in turn may decide to accept the claim as filed or refer it to the RTA and the FR. This discussion assumes that the claim has been referred to the RTA.

There are some general principles to consider in the review of amended claims:

1. The current administrative policy, as outlined in Directive 97-04, Guidelines for Processing SR&ED Claims, states that the same claim is not reviewed again, barring exceptional circumstances. Exceptional circumstances mentioned are taxpayer request adjustments (TPRs) (the same as amended tax returns), fraud, and misrepresentation. Fraud must not be investigated by RTAs or FRs (discussed in Chapter 5.14.0), but misrepresentation can be.       

2. The review of a project or claim is considered to have taken place when a determination of eligibility of work or expenses has been given. 

3. The RTA should not duplicate effort in the review of amended claims. That is, they should take into consideration all the facts from the previous review in doing the present one.

4.  The work reviewed in an amended claim, like any claim, is always determined based on a risk assessment, as discussed in Chapter 4.3.  

5. If work is now described differently, or if different facts are described, the RTA should consider obtaining supporting evidence to demonstrate what was done.

6. It is also a long-standing CRA policy that the same item or expense is not reviewed twice, except in exceptional circumstances, generally fraud or misrepresentation.

7. It is a long-standing CRA practice in regular audit that requested changes by a taxpayer to a tax return while an audit is in progress do not stop the audit. In particular, even if a tax return is amended, it is still possible to apply penalties based on the original return, for example, when the change is requested by the claimant under the voluntary disclosures program before the announcement of the review. The CRA Audit Manual Chapter 3.3.0 presents more details on this program. It is important to note that the voluntary disclosures program is not available anymore to a claimant as soon as the review has started.

5.8.1.1 Work requested to be withdrawn by the claimant

The claimant may voluntarily request to withdraw some work, projects, or the entire claim, based on discussions with, and information received from, the RTA, or even prior to the beginning of the review. 

The RTA must never accept such requests from the claimant. The RTA also must not encourage claimants to make such requests as part of a negotiation in return for more favourable treatment (such as Accepted As Filed) of other projects.  Negotiation is discussed in Chapter 5.9.0.

There is no concept of a "withdrawn" claim in the Act. SR&ED claims are part of an income tax return, which is not voluntary, and cannot be withdrawn.  A "withdrawn" claim is actually a type of amended claim where the claimant is requesting to reduce or eliminate their SR&ED claim. 

If a claimant makes a request to "withdraw" some or all of their SR&ED claim before the review has begun (before contact by the CTSO), the claimant should send their request to the TC, like any other amended claim.  

However, any requests to withdraw work after contact by the TSO, either by the Control Function, the RTA or FR, will not be accepted and the review should continue as originally planned. The case remains in Audit Information Management System  (AIMS). This is important because of the possibility of considering penalties. Also, "withdrawn" work potentially can be related to other work or future claimed work, and thus the results of the review may need to be recorded for future risk assessment. 

However, it is possible that the claimant may not want to supply information or discuss the "withdrawn" projects or claim. If the claimant does not allow an on-site visit or respond to information requests in such situations, the efforts to review the claim would be documented and work claimed would be considered unsubstantiated, not ineligible, and be recorded that way in AIMS.   

Another important consideration is that the claimant could later decide to file a Notice of Objection if a claim is disallowed as unsubstantiated. Therefore, the RTA should document all the discussions and findings in the TF98 file. The RTA should document the reasons why the claimant requested to withdraw the work (if this is known) and if the RTA has reviewed this work or some of it, then they should still document their observations, if any are possible, in their report. It is recognized that there may be very little that could be documented if the claimant does not cooperate.

5.8.2 Unclaimed work/projects identified by the RTA

During the review, the RTA may happen to identify projects or work that have not been claimed but which may be SR&ED. Similarly, in discussing how the claim was prepared, the RTA may notice that a claimant did not fully understand what work could be claimed. The RTA should advise the claimant of their observations during the meeting, and could suggest to the claimant that they may want to consider amending their claim or claim this work in future years. If time permits, the RTA can discuss the work further and look at supporting evidence to help the claimant decide whether to make an amended claim. This could be done to avoid the need for an additional visit when the amended claim is submitted. 

However, the claimant should also be reminded that:

  • there is an 18-month deadline (from the claimant’s year-end date) to submit amended claims with additional work or expenditures;
  • requests for amendments must be sent to the TC;
  • eligibility determinations can only be made after the revised claim is submitted; and
  • the expenditures would need to be reviewed by the FR.

5.9.0 Working with first-time claimants

The CRA recognizes that first-time claimants may not be familiar with the SR&ED Program requirements. Therefore the CRA provides the FTCAS service which is designed to help businesses that are new to the SR&ED Program. For first time claims that are being reviewed, the CRA gives an information session to the claimant similar to the FTCAS. Refer to Chapter 5.6.1.1, as well as the FTCAS Guide for more information on the service and the process.

The RTA is expected, during a visit to a first-time claimant, to spend more time answering questions and explaining the review process, the SR&ED Program and its requirements in detail, if necessary. In some cases, a presentation on the SR&ED Program and its requirements may be useful. It is recommended that first-time claimants be encouraged to attend one of the local public information sessions and to read the literature on our website.

In some cases, first-time claimants may choose to file a claim even if they did not maintain detailed records of all of their work. Chapter 5.11.0 discusses dealing with limited or inadequate supporting evidence. 

It is important to note that SR&ED legislation and policies apply to all claimants equally. Being a first-time claimant does not reduce or eliminate the onus on the claimant to substantiate their claim and provide supporting evidence of the work performed. 

However, as noted above, with first-time claimants, the RTA spends more time with them so that they can understand documentation and supporting evidence requirements and how they can be met.

With a long-term claimant, the RTA expects them to maintain appropriate  documentation and evidence to support the work claimed as advised by the CRA staff during previous reviews (including FTCAS).

5.10.0 No negotiations with the claimant

The RTA must not negotiate eligibility with the claimant under any circumstances. Review decisions must be based on the facts of the case and applicable legislation. The RTA must never:

  • propose to the claimant that a certain number of projects will be accepted as eligible if the claimant is prepared to accept that certain other projects are not SR&ED;
  • accept as eligible a portion or percentage of a project that is not supported by evidence or facts; or
  • allow an amount claimed for overhead or experimental production without some substantiation.

Negotiation creates several problems. The first is that it does not help the claimant to comply in future years since the decision is arbitrary. Secondly, the claimant can change their mind later and file an objection for the projects not considered SR&ED. If there were no rationale in the file for the work not considered SR&ED, the determination would not be defensible at the objection stage.

Working with the FR and the claimant to establish a reasonable basis for an estimate is acceptable in certain situations. Sometimes there is documentation or evidence that SR&ED was performed but it is limited and does not establish the precise boundaries of SR&ED. Sometimes it may be possible to use information like industry averages or standards, or past company practice. In these circumstances, the RTA works with the FR and the claimant to arrive at a reasonable estimate of the amount of labour, materials, or production that could be attributed to SR&ED. This process is not negotiation and is acceptable. However, there still must be some basis for the estimate and the rationale for the estimate should be documented.

CRA documents describe two methods of estimating SR&ED expenditures in the absence or lack of technical documentation. They are the:

5.10.1 Waivers of the right to object

Waivers of this sort may be used by the FR in specific circumstances where it is difficult to come to an agreement with a claimant any other way. In this process the CRA and the claimant come to an agreement as to how the issues in dispute are to be handled and the claimant waives their right to file an objection to how these issues were resolved. The RTA must not suggest their use to the claimant, but they may be used by the FR if the claimant suggests it. If the subject comes up, advise the claimant that the request should be discussed with the FR.

These waivers are considered binding by Appeals provided that they are valid and used correctly. There are many factors and conditions that must exist before waivers can be used. Refer to the Compliance Programs Branch (CPB) Communiqué AD 05-02B dated Feb. 7, 2005, entitled The Audit Agreement and the Waiver of a Client's Right to Object if more details are needed.

5.11.0 Uncooperative claimants

Subsection 231.1(1) of the Act gives the RTA broad authority to request information, inspect records and books for the purposes of the review, and to require the claimant to assist them. An SR&ED claim can be disallowed, in whole or in part, if the claimant will not allow the RTA to conduct the review in the manner needed. Situations that could result in such a disallowance include:

  • a repeated refusal or restriction of access to some or all of the facilities without reason, or refusal to allow an interview in a reasonable time or under reasonable conditions;
  • refusal to answer CRA phone calls or letters, or failure to provide requested information in a timely manner or in a usable form, prior to or after an on-site visit; and
  • the inability of the RTA to contact the claimant (for example, current address and phone numbers are not obtainable, mail returned).

If any of these situations arise, the RTA should consult with the RTM and the claim would be processed based on the information available to date. The RTA should advise the FR of the problems and the FR can then disallow the claim, in whole or in part, on the basis of the RTA's recommendation. However, care should be taken before such a recommendation is made by the RTA. While the onus is on the claimant to supply what the CRA has requested, the RTA must be prepared to justify their requests in the case of objections or an appeal to the Tax Court. In order to support disallowing a claim for this reason, the claimant must have been given opportunity to provide the information, the request itself has to be justifiable, and our efforts to communicate with the claimant or request information must be documented. Information requests must have been made by registered mail, and the RTA should confirm receipt of the request (unless the claimant cannot be contacted as noted above), and reasonable extensions of time given. The RTA must document all conversations with the claimant and all attempts to communicate with them in a memo to file (T2020 or equivalent). If information is requested but the response is inadequate, the specific deficiencies must be noted in a memo to file (T2020 or equivalent).

A somewhat different situation is where the claimant allows only partial access to information or facilities, or is uncooperative during the review. In this case, if the claimant has not cut off contact with the RTA, the claimant should be informed by letter of what is required and the consequences of not doing so, specifically that they will not be able to determine that the work is SR&ED without the information requested. If the claimant remains uncooperative, the specific problems should be documented and the RTA should consult the RTM and make their determination based on the information they have available. As above, while the RTA has the right to determine what information they need and to whom they need to speak, it is essential to document the facts in order to justify the position in case of a dispute.

5.12.0 Inadequate supporting evidence

5.12.1 Inadequate supporting evidence

5.12.1.1 Requirements of the Act

Subsection 230(1) of the Act requires the claimant to maintain records and books in order to determine the amount of tax credits claimable. Therefore, in order to claim SR&ED tax credits the claimant must maintain supporting evidence to demonstrate that their claimed work meets the definition of SR&ED in the Act. Chapter 5.6.6 has examples of typical supporting evidence the claimant can supply.

However, in some cases, there is inadequate or no evidence presented to support the claimed SR&ED work. For example, the available evidence may not demonstrate that:

  • there was a systematic investigation or search (use of the scientific method);
  • the SR&ED work claimed was actually done, or that it was performed in the relevant fiscal period; or
  • the resources claimed (for example, hours or quantities of material consumed) were used in SR&ED.

5.12.1.2 Documenting observations

The RTA should document relevant observations concerning supporting evidence presented by claimants and requests for supporting evidence from the claimant. If there is actually no evidence presented, this should be indicated. In other cases, the RTA should document what was seen or presented as evidence and explain their decision. It is insufficient to simply state that the evidence is inadequate without providing some explanation. A clear distinction can be made between no supporting evidence, and supporting evidence presented by the claimant but not considered adequate or relevant.

If some evidence is presented by the claimant but it is not accurately described by the RTA in the file, there will be no way for other users of the file to determine the basis of the RTA's decisions.

As indicated in Chapter 5.6.6, evidence is broader than paper documentation. The RTA cannot accept a claim that is totally unsupported by any evidence that SR&ED has taken place, even if the claimant agrees to maintain such evidence in the future.

However, it is open to the RTA's professional judgement and interpretation to determine if the evidence provided is adequate to support the SR&ED claim.

The RTA can reject claimed evidence, but this position would need to be supported and documented. If the RTA thinks that it is not just a simple mistake or misunderstanding, refer to Chapters 5.13 and 5.14.

For example, the RTA may think that, for some evidence presented, the dates are wrong or the people claimed to have done the work did not do it. If that is so, the RTA could consider speaking to the person who wrote the document or was said to have done the work, to better establish the facts of what was done.

5.12.1.3 Format of evidence

Evidence presented by the claimant must be "in such form…as will enable taxes payable to be determined" (Section 230(1) of the Act). This implies that it has to be properly organized or in a usable form. Examples of evidence that can be rejected by the RTA (that is, the RTA declines to review it in detail) include the following:

  • a large amount of disorganized paper;
  • a digital versatile disc (DVD) containing thousands of documents, only a few of which may be relevant and which cannot be identified by title or located in the DVD without searching each document; or
  • documents that are not in an official language.

The RTA should make a reasonable effort to work with the information as presented by the claimant. For example, if the RTA has a third language capability or can readily access it, claimants may not need to have the information translated. However, if evidence is presented in a format which cannot be used with a reasonable effort, it can be treated the same way as inadequate evidence, and the RTA should advise the claimant to present what the RTA has requested in an organized fashion. For example, if the information is presented in a third language which the RTA cannot easily work with, the claimant will need to have the relevant documents translated. The RTA should document what they saw and explain the deficiencies to the claimant, indicating, for example, that they are unable to determine what was done based on what was presented. Under these circumstances, the RTA is not required to read or describe in detail every document or paper that is presented as evidence. A summary of the information received (for example; "3000 pages of unsorted papers from the production plant" or "a 10 Kg. box of unsorted papers") would be adequate. If this situation arises, the RTA should consider consulting the RTM to get a second opinion on the correct approach.

5.12.1.4 Disallowing a claim due to lack of supporting evidence

If a claimant has not submitted any or adequate SR&ED records or evidence, the RTA should inform the claimant in writing that they must submit evidence to support their claimed work or otherwise their claim will be disallowed. If the needed information is not supplied despite this request, then a conclusion to disallow a claim/project due to lack of supporting evidence would have been documented. The claimant would be informed that their claim/project is unsubstantiated via the proposal package and the SR&ED review report.

When reporting a conclusion to disallow a claim due to lack of information, the RTA should be careful not to give a determination of eligibility. There is an important distinction between disallowing a claim for lack of supporting evidence and making a determination that the claim/project is ineligible.

For example, if the issue was whether some work is SR&ED, to say "the claimant has not provided information that demonstrates that the claimed work was done" is quite different than saying "the claimant has not provided information that demonstrates that the claimed work was done, therefore the work is not SR&ED." In the first case, if the missing information is obtained later, there would be no automatic assumption of eligibility. Eligibility would still need to be determined based on the nature of the information.  In the second case, if the missing information is obtained later, the work would automatically be SR&ED because eligibility had been implied and is conditional only on the submission of supporting evidence.

When an RTA concludes that a claim should be disallowed due to lack of supporting evidence, the RTA should indicate that the claimed work is unsubstantiated and that no eligibility determination is given.

A case in point is the Federal Court of Appeal decision on R I S - Christie Ltd. v. Canada, FCA Docket A-710-96, rendered on December 21, 1998.

At the Tax Court of Canada level, the judge concluded:

"(a) that research involving experimentation and testing had been undertaken resulting in a new product and a technological advance in the construction industry; but (b) that there had been "substantial shortcomings" in the taxpayer’s documentary evidence, since such evidence was incapable of making the tests in issue repeatable. As a result, the Tax Court of Canada denied the taxpayer the SRED treatment claimed by it in respect of its investment in the said project." (Source: 1999 CCH Canadian Limited)

At the Federal Court level, the judge reversed the Tax Court decision saying that:

"Once the Tax Court Judge had found that testing had taken place resulting in a technological advance, he erred in imposing the additional evidentiary burden of having to adduce documentary evidence relating to the repeatability of the testing data. Having reached the conclusion that a technological advance had taken place, there was a rebuttable inference that the testing in issue had been carried out in accordance with the SRED criteria in Regulation 2900."

Therefore, the RTA must not say that there is a technological advancement in the claimed work but that it is being disallowed for lack of supporting evidence.

5.12.2 Evidence of non-SR&ED work

The RTA should also consider the possibility that the evidence supplied may support the determination that non-SR&ED work was performed. That is, the claimant's evidence may indicate, for example, that:

  • only publically available knowledge was used;
  • there was no scientific or technological uncertainty as to the outcome;
  • the work involved commercial production; or
  • the work involved other excluded work described in paragraphs (e) to (k) of subsection 248(1) of the Act.

If this is the case, the RTA should provide rationale for why the documentation supports the determination that non-SR&ED work was performed.

In any case, whatever evidence is supplied, it is important that the RTA explain its significance when documenting their work.

5.12.2.1 Working with claimants: the importance of supporting evidence

 

Working with claimants to help them understand the importance of supporting evidence 

Often disputes arise due to the difficulty of establishing that work is SR&ED because of a lack of supporting evidence. That is, in the absence of supporting evidence the RTA is unable to distinguish between SR&ED and non-SR&ED such as routine engineering or routine data collection. To deal with this effectively, it is important that the claimant understand that this is a review issue with their claim, and that the scientific process of hypothesis formulation, experimentation or testing, and the reaching of conclusions would be expected to produce documentation. The claimant also needs to know the general books and records requirement of the Act (see 5.11.1.1) and the consequences of inadequate documentation.

A number of different approaches may help the claimant provide support or improve their systems for future claims:

  • Explain the concerns to the claimant and indicate that supporting evidence is needed to distinguish SR&ED from other non-SR&ED work.
  • Discuss the process by which the claimant does their work, in order to identify what evidence is produced during the normal work process. Possibly the claimant produces but does not retain evidence, or does not realize that this can be evidence.
  • Ask the claimant to consider what kind of records or notes they have that may help to demonstrate that a systematic search or investigation took place. Make use of the documentation tool in Appendix 2 of the T4088 – Guide to Form T661 to assist the claimant to identify some, or provide some examples based on the RTA's industry experience.
  • Demonstrate how to use SALT.

Some companies keep good documentation of their work, which makes it easy for the RTA to understand if they are performing SR&ED work.  However, other companies may be less disciplined and their approaches to performing SR&ED are more informal, thus, their documentation and evidence will be less organized.

For claims from these companies, it could take more of the RTA’s time working with the claimant to see and understand their work. It may also take more time to ensure that the claimants understand how to improve their documentation.

A final determination regarding the adequacy of the supporting evidence will be made after examining the work performed, understanding the logic behind the approaches used and explanations provided by the claimant. The RTA should make an effort to understand and take into consideration the different investigative  approaches that can be adopted.

Nonetheless, it is important to avoid creating the impression that providing supporting evidence will automatically mean that their work is SR&ED. If work is not SR&ED, no supporting evidence can change this fact. It is also important to remind the claimant that they are responsible for ensuring that relevant and sufficient supporting evidence is maintained to support their claim.

5.12.3 Sending "Better Books and Records" letters

If the claimant's evidence is inadequate, the RTA should inform them and advise them to make improvements. Verbal requests are not always effective. One option to consider if the claimant is persistently ignoring CRA requests, such as advice in reports, is for them to be notified via a "better books and records" letter. This letter can be sent as soon as problems are noted, and does not necessarily need to be sent after the review is concluded. Appendix A3.1 contains a sample of a "better books and records" letter.

This letter is a written request to the claimant that lists the inadequacies and confirms the verbal request for corrective action, and is specific. If possible, it is recommended that the claimant be sent one letter that includes the concerns of both the RTA and the FR. The letter includes a reasonable deadline for implementation of the required improvements. This "better books and records letter" is signed by the RTA and the FR, if needed.

The letter also includes a letter of agreement that the claimant signs and returns, acknowledging that they will correct the inadequacies (see Appendix A.3.2). If the claimant has not returned the agreement within 30 days, the RTA must contact them to ensure that the letter was received. If it was not, a follow-up letter with another copy of the undertaking should be sent. A copy of all of these letters, including any returned undertaking, should be placed in the TF-98, and the originals should be given to the FR. The FR would then place copies in the working paper file, and the originals in the permanent document (PD) file. In some cases, a follow-up visit is recommended after a minimum of 60 days to ensure that the improvements have been implemented and that they meet the needs of the review process.

If a claimant does not comply with the CRA’s request to maintain adequate supporting evidence, the RTA will base their decision in future claims on the information available.

5.13.0 Leads to other CRA programs

A lead is information in any form that identifies potential non-compliance activities and indicates that an audit may be required. The RTA does not have a mandate to be familiar with or look for potential non-compliance activities in areas outside the SR&ED Program. However, if the RTA, incidentally to their work, identifies questionable items, inconsistencies or non-compliance outside the SR&ED Program, the RTA should inform the FR and RTM.

5.14.0 Penalties

The Act allows the CRA to assess penalties, in addition to disallowing any claimed expenditures. The FR and FRM would generally take the lead on considering and proposing penalties given that penalties do not appear in 248(1). This section is provided to RTAs for information only, so that the RTA can be aware of the circumstances under which penalties could be assessed in certain situations that arise or are incidentally noticed during the course of regular work. Refer to the Audit Manual or to the Gross Negligence Penalty Manual to be released in 2015 for more information about the details of obtaining necessary information and applying gross negligence penalties. The actual process of assessing a penalty would be performed by the FR, not the RTA. If the RTA thinks that a penalty may be warranted, they must first consult their RTM, the FR, and the FRM before saying anything to the claimant or taking action. The types of penalties are:

5.14.1 False statements or omissions

Refer to AP SR&ED 96-05 "Penalties under Subsection 163(2)", in which gross negligence is discussed:

"In order to consider the application of a penalty under subsection 163(2) in respect of a SR&ED claim, the claimant must have knowingly or under circumstances amounting to gross negligence, been involved in filing an overstated SR&ED claim. The Act clearly places the burden of proof on the Department for any subsection 163(2) penalty assessed by the Minister."

In situations where they believe that a significant false statement or omission has been made, the primary responsibility of the RTA is to communicate with the FR, RTM and FRM. As mentioned above, the process of assessing a penalty would be performed by the FR and the FRM. However, the RTA may be required to support the process by highlighting the false statement (if it relates to the technical review) and providing documentary evidence and facts that support the possibility of imposing a penalty.

5.14.2 Third party civil penalties

Third-party civil penalties are provided for in section 163.2 of the Act. This penalty is directed to persons, other than the claimant, who have made false statements or omissions in relation to income tax or goods and services tax/harmonized sales tax (GST/HST) matters. IC 01-1 "Third Party Civil Penalties" has more details.

5.15.0 Fraud

During the normal course of a review, it is possible that information indicating a potential fraud is brought to the attention of the RTA. If this happens, they must discuss the case with the FR, the RTM, the FRM and the AD to decide on an appropriate course of action. If appropriate, such cases can be referred to HQ Criminal Investigations by the FR.

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