Financial Claim Review Manual – Review Procedures for Financial Reviewers

Chapter 2.0 Overview and general information

Table of contents


 

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2.1 Summary of chapter

This chapter provides general information about the review process, including information that applies to all audit-type work in the Canada Revenue Agency (CRA), not just to scientific research and experimental development (SR&ED) reviews. The main sections cover:

2.2 Requirements of chapter

2.3 Outline of the review process (chart)

2.4 CRA information sources

2.5 Special terminology

2.6 Dispute resolution, notices of objection and appeals

2.7 Legislated authority of the Financial Reviewer (FR) to conduct reviews

2.8 Legislated obligations of taxpayers (claimants)

2.9 Contact and communication with the claimants

2.10 Safety, security and health considerations

2.11 Information security

2.12 Service standards and delay codes

2.13 Roles and responsibilities

2.14 Process review

2.15 Coordinated reviews

2.16 Quality reviews and documentation

2.17 Legislation and Regulations

2.18 Case law

2.19 Knowledge of accounting and auditing principles

2.20 Penalties

2.21 Access to Information Act and Privacy Act

2.2 Requirements of chapter

Following from Chapter 1.6, the FR must follow all CRA approved procedures and general requirements for:

  1. communication of information to the claimant and / or their authorized representative;
  2. safety and security;
  3. information security;
  4. provision of service to the claimant in their official language of choice; and
  5. documentation of the review process.

2.3 Outline of the review process

The following chart outlines the main steps in the review process and provides references to the main sections of the Claim Review Manual (CRM) that discuss each step. Note that the chart is a general guide only and does not cover every possibility or exception that could be encountered during a review. The FR financial reviewer should consult the CRM Claim Review Manual for details. The chart generally follows the usual steps of a review, but this does not mean that these steps must always follow this sequence.

Reference Review Step

Coordinate this step with the assigned 
Research and technology advisor (RTA) (Chapter 3)?

Document this step?
Chapter 4 Step 1:  FR receives file from control function. Not applicable Not applicable
Chapter 4 Step 2: Perform search for an examination of, available information. Not applicable Yes
Chapter 4 Step 3: Contact RTA to initiate coordination. Yes Yes
Chapter 4 Step 4: Begin planning the review:
  1. Identify issues;
  2. Access risk and materiality.
Yes Yes
Chapter 4 Step 5: Determine scope of review and develop review plan. Yes Yes
Chapter 5 and Appendix 3 Step 6: Determine who to contact for information. Yes Yes
Chapter 5 and Appendix 3 Step 7: Communicate with claimant:
Gather additional information by letter or telephone, and / or claimant's premises.
Yes Yes
Chapter 5 and Appendix 3 Step 8: Analyse information and resolve issues. Yes Yes
Chapter 5 and Appendix 3 Step 9: Adjust review plan, if required. Go back to Step 7 if this is done, otherwise go to Step 10. Yes Yes
Chapter 5 and Appendix 3 Step 10: When all issues are addressed... Yes Yes
Chapter 5 and Appendix 3 Step 11: Prepare an issue proposal letter package. Provide claimant with options for dispute resolutions. Yes Yes
Chapter 5 and Appendix 3 Step 12: Consider rebuttals and additional representations, if received. Yes Yes
Chapter 6 and Appendix 4 Step 13: Issue final letter and finalize financial review report and processing documents. Yes Yes

2.4 CRA Information sources

2.4.1 Publications

Understanding CRA's SR&ED documents and using them effectively during the financial review is critical. Refer to the SR&ED Reference Material on InfoZone for links to key CRA references. The following are the key reference materials needed to resolve issues:

There are also many other links to relevant application policies, directives and guidelines in the CRM.

2.4.2 CRA information systems

Much information, including the tax centre (TC) risk grid, is only available from the internal CRA information systems referred to in the CRM. Therefore, the FR may need to access the following systems in order to review information filed as part of a claim, verify authorized representatives, record delays, record the results of reviews, and carry out other information management activities:

  • The Audit Information Management System (AIMS) has information on current and past reviews and audits.
  • Corporate Taxation System (CORTAX) is the CRA system for accessing T2 Corporation Income Tax Return (T2) information including Form T661, which shows SR&ED expenditures claimed, Schedule 60, which provides project information, and T2SCH31, Investment Tax Credit – Corporations, which is the SR&ED investment tax credit (ITC) claim schedule.
  • Online Taxpayer Information System (RAPID) is the CRA system for accessing non-T2 income tax returns and other information.
  • The business number (BN) system provides the FR with limited shareholder, officer, director, contact, authorized representative, and address information related to claimants. It can be accessed through either CORTAX or RAPID. Refer to Appendix 1, Glossary of Terms.
  • T2 Assessing Case Management (CSCOR) is the CRA system used by the TC to log actions taken on a file.
  •  SR&ED Risk Management Tool is the information system where the FR can access the initial risk scoring (risk grid) and other information provided by the TC.

The CRA has given FRs a profile that identifies the particular information systems and levels that they are authorized to access. Local offices manage access profiles. Where the FR cannot access a system, the Financial Review Manager (FRM) should be asked to obtain the needed information.

2.5 Special terminology

2.5.1 Control function

The control function is the person or group in each coordinating tax services office (CTSO) that reviews claims referred to them from the TC. The control function determines if the claim must be reviewed in more detail by the Research and Technology Advisor (RTA), the FR, or both.

2.5.2 "Allowable" and "qualified" expenditures

The term "allowable" when used in the context of SR&ED expenditures is based on the concepts in subsection 37(1) of the Act. Allowable means that the expenditures may be deducted from taxable income. For additional clarity, allowable expenditures include all amounts comprising line 455 of Form T661. The term "qualified expenditures" relates to the definition found in subsection 127(9) of the Act. Qualified means the expenditures that are qualified for the purposes of the ITC calculation. On Form T661, the amount on line 559 represents the sum of qualified SR&ED expenditures.

2.5.3 Preliminary and detailed review stages

The preliminary review begins when the FR has received the file. It ends when either the initial review plan has been written, or the FR has determined that a detailed review is not required and recommends that the claim be accepted as filed. The detailed review begins when the FR contacts the claimant for the purposes of reviewing the claim. It ends when the review decisions have been settled and the FR and RTA are not examining any additional information from the claimant. At this point in time, the FR is ready to finalize the Financial Review Report (FRR) and issue a final letter to the claimant.

2.6 Dispute resolution, notices of objection and appeals

2.6.1 Dispute resolution

During the review process, the claimant may not agree with decisions made by the FR and / or the RTA. Because dispute resolution is important to the CRA and the SR&ED Program, a process for dealing with disagreements has been developed and described in Application Policy (APSR&ED 2000-02R, Guidelines for Resolving Claimant's SR&ED Concerns, and is applicable to both FRs and RTAs when they conduct reviews. It describes a three-step process whereby the claimant is encouraged to speak first with the FR or RTA to resolve disputes, second to speak with the FRM or RTM, and third to request an administrative second review.

2.6.2 Notices of objection and appeals

Disputes that are not resolved to the satisfaction of the claimant during the review can be resolved via a more formal process that begins after a notice of (re)assessment is issued to the claimant. The claimant may file a notice of objection (NOO) with the Chief of Appeals at the claimant's TSO or appeal directly to the Tax Court of Canada. Refer to the CRA Web site on Complaints and disputes.

An FR's decision, if objected to by the claimant, may be reviewed by other branches of the CRA and by the Tax Court of Canada. It is therefore important that the FR appropriately document and support all adjustments and decisions made.

2.7 Legislated authority of the FR to conduct reviews

Subsection 231.1(1) of the Act provides the legislated authority for an authorized person to inspect, audit, review or examine documents that may be relevant to the administration or enforcement of the Act. These include:

  • the books and records of a claimant;
  • any document of the claimant that relates or may relate to the information in the claimant's books and records; and
  • any document of any other person that relates or may relate to the information in the claimant's books and records.

The FR is an authorized person under this section of the Act and is issued an RC121A authorization card to that effect. The following extract from Chapter 4 of the Audit Manual states the following about the card:

"Auditors are provided an RC121A authorization card that outlines that the person named on the card is authorized to carry out the following functions under the relevant provisions of the Income Tax Act and the Excise Tax Act :

  • enter a place of business;
  • enter a personal residence where required with the occupant's consent;
  • require persons on the premises to give assistance and to answer questions;
  • require a person to accompany them where legally provided;
  • examine and copy documents; and
  • examine property.

Entering a personal dwelling without the occupant's permission is expressly forbidden under the legislation unless a judge has issued a warrant that authorizes entering the dwelling.

The legal name as shown on the authorized person's birth certificate or other official document (certificate of name change, marriage certificate, certificate of Canadian citizenship) should be shown on the RC121A authorization card. A new authorization card must be issued when a person legally changes their name.

The RC121A authorization card must not be used as a personal identification card or for any purposes for which it is not intended. It must be kept separate from the employee's building identification and should never leave the employee's possession. Any requests to photocopy it must be denied for security reasons but taxpayers / registrants may copy the wording by hand. A lost or stolen card must be reported immediately as a security incident and a security incident report must be completed."

For more information refer to the CRA Procedures for the Reporting of Security Incidents.

2.7.1 Requesting information

In order to effectively conduct a review of the claim, the FR must obtain information and documentation from the claimant or third parties.

Communiqué AD-10-01, Acquiring Information from Taxpayers, Registrants and Third Parties, describes an array of legislative compliance tools that the FR may use, among which are the following:

  • an inspection under section 231.1 of the Act, as described above;
  • a requirement issued to the claimant or a third party, under section 231.2 of the Act; and
  • a compliance order issued by a judge under section 231.7 of the Act.

The communiqué specifies that "any other person" (the third party) includes tax professionals and tax preparers, and "any document" includes accountants' and auditors' working papers. Information from third parties should only be sought when the claimant cannot or will not provide the information.

The communiqué also discusses the five key principles to consider when evaluating the need to request information. These principles are: legislative authorities, intent, relevance, transparency and impartiality.

Communiqué AD-10-02, Use of Information Gathering Tools, describes in some detail the conditions under which each tool may be used and the procedures to follow under various circumstances. The appendices include scenarios and sample requirement letters.

Communiqué AD-10-03, Solicitor-Client Privilege, explains what information is privileged.

Communiqué AD-10-04, Procedures for Requesting Information from Lawyers: Protection of Solicitor-Client Privilege, provides administrative procedures and guidelines for requesting information from a lawyer. It is important to note that not all information in the possession of a lawyer is privileged, and information in the possession of an accountant is generally not privileged.

2.8 Legislated obligations of taxpayers (claimants)

2.8.1 Obligation to maintain records and books

Subsection 230(1) of the Act obligates a taxpayer (claimant) to keep records and books

"…in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined."

Refer to Chapter 5.12.1 for more details.

"Record" is defined in subsection 248(1) of the Act as follows:

"'Record' includes an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form."

This definition is broad enough to include the kinds of supporting evidence a claimant needs to substantiate a claim. Refer to Chapter 5.4.3 for a discussion of books and records.

Subsection 230(3) of the Act allows the CRA to require a taxpayer / claimant to keep adequate records and books if they have failed to do so. Refer to Chapter 5.12.3 for a discussion of procedures for dealing with problems of inadequate records and books.

2.8.2 Obligation to provide information

While section 231.1 of the Act authorizes the FR to inspect, audit, review or examine the documents or information needed to administer the Act, it also obligates the taxpayer (claimant) and certain other persons to provide such documents or information.

If the taxpayer (claimant) or any other person referred to in section 231.1 fails to provide the documents or information requested, the CRA may consider using the additional information gathering tools described in communiqués AD-10-01, 10-02, 10-03, and 10-04, the links to which can be found in chapter 2.7.1 above. The FR must be reasonably certain that the document or the information requested exist and that the claimant or the third party has possession of the document or information or can obtain it.

2.9 Contact and communications with the claimant

2.9.1 General considerations

All FRs must know and follow the CRA policy on communications security as outlined in Chapter 23 of the Finance and Administration Manual (FAM). All forms of contact must adhere to CRA information security protocols. The summaries provided in this chapter and elsewhere in the CRM are not the complete policy. As noted in Chapter 1, these summaries do not eliminate the FR’s requirement to follow all applicable legislation and current CRA policy.

Many steps of the review require the FR to contact the claimant. The FR must record details of all communications with the claimant on Form T2020, Memo for File, or a similar working paper. This is an important consideration for demonstrating the extent to which the issues were communicated to the claimant by the FR, and the efforts to work with the claimant to resolve these issues.

The key points of the CRA’s policy are as follows:

  • As noted in the FAM (Chapter 23), cellular technology is not secure and is not to be used for the transmission of classified and / or protected information. Unprotected information may be transmitted as long as the security standards and the cell phone procedures are adhered to.
  • As noted in the FAM Communication Security Policy:

"As email received from taxpayers cannot be authenticated and can be intercepted and altered, individuals should remind taxpayers not to transmit their personal information to the Agency using unsecure email.

Communications with taxpayers is not to be conducted by email unless authorized and Agency-approved encryption and authentication methods are implemented."

  • It is possible to exchange emails with other CRA staff. However, these emails must respect the confidentiality provisions of section 241 of the Act and CRA security policies. Protected information can be exchanged by email only within the CRA, and it must be encrypted by CRAapproved means.
  • Faxes are allowed to be sent to the claimant only if specifically requested by them in writing, and then only if the fax number has been verified. Within the CRA, faxes containing protected information must be sent by secure fax.

Additional information relevant to maintaining secure communications with claimants and other internal and external parties can be found at the following InfoZone page: Finance and Administration Manual - Security Volume.

2.9.2 Authorizations and contact with the claimant

While the FR is authorized to speak to anyone in order to obtain information for purposes of reviewing a claim, the FR has no authority to provide information about a claim to any individual who is not authorized by the claimant to receive that information.

When the FR initially contacts the claimant, the first person to contact is the financial contact person listed in box 100 of Form T661. This person may refer the FR to other people within the company in order to answer questions or arrange meetings. If the contact person is not an employee, or refers the FR to someone outside the company, the FR must ensure that an authorization is on file before speaking with them. If there is no authorization on file, the FR should contact the company (the person who signed the Form T661) to obtain a signed copy of the Form RC59, Business consent for access by telephone and mail, (for corporate use) or Form T1013, Authorizing or cancelling a representative, (for individual use). For authorization purposes, the CRA also accepts letters or other written communications that the claimant has signed and that clearly defines this authorization.

Alternatively, the FR can check the BN system to identify the owner, the trustee or an authorized representative and the limits to the authority of the authorized representative (such as the years, time limits, and whether it applies to a firm or a single individual). If a new authorization is received, the FR should put a copy in the file and send the original to the TC so that the BN system may be updated. Form RC59 should be addressed to Business Number Services and Form T1013 to T1 Specialty Services. Additional information can be found on InfoZone at: Consent Forms and Letters of Consent.

Confidential information must not be disclosed to unauthorized persons according to the provisions of section 241 of the Act. The FR must be vigilant when a third party is requesting or wishes to discuss confidential information. Even when the claimant makes a verbal request to authorize a third party, an authorization must be completed by the claimant and submitted to the CRA. Only then can the third party obtain any protected information from the FR. The FR may contact a person who is not the owner or an authorized representative to obtain information about a claim, but it does not mean that any information regarding the review or the claimant’s tax matters can be shared with that person.

2.9.3 Claimant’s representatives

Claimants frequently use the services of tax professionals to prepare their tax returns and act on their behalf with the CRA. Claimants may also hire representatives or tax intermediaries to prepare the claim and assist them during the claim review. The claimant’s representatives may be present during meetings and may answer questions on behalf of the claimant.

The choice to use a representative is a right, described in No.15 of the Taxpayer Bill of Rights, which must be respected. However, that right does not negate the FR’s right to obtain the information they need or to directly contact the claimant or anyone else about the claim. A claimant’s representative does not have the right to restrict the FR from access to information or people.

2.9.4 Official languages

Communications with claimants must follow the provisions of the Official Languages Act .

2.10 Safety, security and health considerations

2.10.1 Introduction

In any potentially dangerous situation, the FR’s safety must be the first priority. Such situations cannot be predicted but the FR, along with their FRM, can use their experience and best judgement to identify potentially threatening situations when conducting reviews. To do this, the FR must be familiar with CRA work procedures, preventative measures, guidelines and the related reporting requirements. Much of this can be found in the FAM, Security volume, Chapter 26. This policy outlines procedures for dealing with Abuse, threats, stalking and assaults against employees.

In addition, the FR must do the following:

  • request guidance and assistance from managers, if required, when it is necessary to call on and confront difficult individuals; and
  • report any threats or abuse immediately to the managers, to Security and to the police.

2.10.2 Requests by a claimant to video or audio record

Although claimants and their representatives may take notes during a meeting, the FR must not consent to being recorded by any video or audio recording equipment. If the FR discovers that the claimant is recording a meeting, they must immediately terminate the meeting, and inform the claimant that CRA management will be in contact with them to discuss the issue and make other arrangements. The FR must then immediately inform the FRM of the situation.

2.10.3 Offensive or threatening interviews

If during the course of the review, the claimant's or their representative's language or behaviour becomes offensive or intimidating, and the business purpose of the meeting cannot reasonably be achieved, the FR must:

  • calmly suspend or terminate the interview;
  • vacate the premises immediately if personal well-being is in question, or call for help if unable to do so;
  • consult the FRM to decide on appropriate measures to be taken; and
  • prepare a written report of the incident for management, detailing all relevant facts.

2.10.4 Demands for personal information or other information

If requested by the claimant, the FR must present their RC121A authorization card and explain to the claimant the reason for, the nature of, and legal authority for their review. However, the FR must never provide any personal information such as a home telephone number or address, or produce personal documents such as a driver's license. The FR can also show the claimant their government identification card, but if this does not satisfy the claimant, the claimant can speak to the FRM. If the claimant continues to demand other irrelevant information, and those demands hinder the FR from performing their duties, they should terminate the meeting. The incident must be reported immediately to the FRM. The FR can however comply with normal company security procedures (such as baggage screening and reasonable requests for information), if this is standard for all visitors. If there is any concern about the nature of the procedures, the FR should contact the FRM.

2.10.5 Questionnaires, Forms and Non-disclosure Agreements

Claimants might ask the FR to fill out questionnaires or forms before allowing them access to the records and premises. The FR must not, under any circumstances, complete questionnaires, forms, or other non-CRA documents. This restriction does not, however, prevent the FR from such routine practices as signing the visitors’ log.

Some claimants are concerned that their confidential information may be disclosed inappropriately and may request that the FR sign a non-disclosure agreement before allowing access to the records and premises. When faced with this concern, the FR must not sign the agreement under any circumstances. Instead, the FR should inform the claimant that the confidentiality provisions in section 241 of the Act protect confidential claimant information from unauthorized disclosure. The FR should then inform the claimant that the review will proceed as planned.

2.10.6 Health and Safety during On-site Visits

The CRA has developed a number of policies, standards, regulations and guidelines concerning employee safety and health to ensure protection from exposure to occupational hazards and environmental conditions and factors.

Some of the important points from these policies are as follows:

  • become aware of any potential health or safety risks prior to visiting the claimant;
  • travel only when safe road conditions exist;
  • remove themselves from any unsafe situation at the claimant’s premises; and
  • discuss these and any other health and safety concerns with the FRM.

2.11 Information Security

The FR must be aware of the CRA security policies and must follow them when they receive, share, transport or transmit sensitive information. The FAM, Security Volume, discusses CRA security policy. The policies described there are the CRA standards and take precedence over any other instructions or requirements in the CRM. Additionally, the FR must follow the guidelines outlined in a memo published by the SR&ED Directorate concerning the transmittal of sensitive information: Security of Scientific and Technological Material. As mentioned in Chapter 1, the summaries provided in this chapter are not the complete policy. The summaries do not eliminate the FR's responsibility to know and follow all current CRA policy.

The following is a summary of the main points of the CRA policies:

  • The CRA considers most of the information used by the FR to be sensitive and classifies it at the Protected B level. This includes any information related to CRA risk determination processes and procedures and also all information that has the potential to identify a particular claimant, whether directly or indirectly.
  • Information security is vital in the CRA, and the FR must, as a general rule, exercise good judgement and ensure that every reasonable effort has been made to safeguard protected information or assets at all times. If the FR has any doubts about how to handle a situation or any concerns about security in general, they must consult the FRM for guidance.
  • When at a claimant's place of business, the FR must store protected information and / or assets such as a laptop or notebook computer in an approved container, or in an approved filing cabinet provided by the claimant, on which can be fastened an approved Agency combination padlock. The container or filing cabinet must also be secured in a locked room. A briefcase is not considered an approved container when left on claimant premises.
  • As specified in the FAM, Security Volume, Chapter 9, Appendix, Protection of Classified and Protected Information and Assets Outside the Workplace Policy, when in transit, employees must secure protected information and / or assets they are carrying in a locked briefcase or container. The FR must tag the briefcase or container with forwarding or return address information and / or the phone number of the FR's office.
  • Paper files and assets are only to be in vehicles during the conveyance between the employee's residence, place of work and claimant's place of business. While travelling by vehicle, employees are to secure classified and / or protected information and / or assets in a locked briefcase. The briefcase must be of a type approved by the CRA for the type of information or assets, and the FR must place it in a locked trunk or out of sight in a locked vehicle. Placement of the briefcase or container and / or the asset must occur at the time of departure from the employee's residence, place of work or claimant's place of business. The FR must make every reasonable effort to plan the itinerary to eliminate or minimize stopovers before reaching a final destination. However, if brief unforeseen or planned stopovers are necessary (for example, lunch, convenience store, or daycare), the FR must exercise good judgement and make every reasonable effort to minimize the risk to the protected information and / or assets.
  • For information classified at higher than Protected B, the FR must never leave Classified and / or Protected C information in a vehicle unattended. The FR who must store protected information and / or assets such as a laptop or notebook computer at a claimant's residence or place of business must do so in an approved container, or in an approved filing cabinet provided by the claimant, on which they can fasten an approved Agency combination padlock. The FR must also secure the container or filing cabinet in a locked room. The CRA does not consider a briefcase to be an approved container when left on claimant's premises.
  • The FR must adequately safeguard protected information during transmittal by mail. The key point of the policy is that the FR must send all protected information and assets through a CRA mailroom. Mailrooms have established security-approved procedures for transmittal within and outside the CRA. However, before sending the envelope to the mailroom, the FR must ensure that the address inserted on the document or the envelope corresponds to the mailing address recorded in the business number system. It may be useful to print the address screen to prove that the address was verified. If the claimant's address has changed, a change of address request should be obtained from the claimant and forwarded to the T2 Specialty Services Division.
  • The FAM, Security Volume, Chapter 23, Communications security policy, discusses transmission of protected information via fax. It indicates that Protected A and B information may be communicated to the claimant by fax (no encryption device required), but only upon verification of the claimant's identity and only at the express written request of that claimant.

2.12 Service standards and delay codes

The CRA is committed to certain Service Standards for the processing of claims. The service standards were determined by calculating reasonable lengths of time to process claims, based on the normal steps involved. The CRA has committed to achieving these standards 90% of the time.

The FR needs to take into consideration the CRA service standards when planning and conducting a review. The four service standards for corporations are:

  • Current refundable claims – 120 days (claim type 2337 for unassessed T2 returns with 35% and / or 20% ITC);
  • Claimant requested adjustments of refundable claims – 240 days (claim type 0402 for assessed T2 returns with 35% and / or 20% ITC);
  • Current non-refundable claims – 365 days (claim type 0450 for assessed T2 returns with 20% ITC); and
  • Claimant requested adjustments of non-refundable claims – 365 days (claim type 0452 for assessed T2 returns with 20% ITC).

Note: The risk assessment tool has been revised to assign codes 2337 or 0402 to 20% refundable ITC claims processed as of April 1, 2012. Claims processed prior to that date will be coded 0450 or 0452 and will require a correction upon referral to the coordinating tax services office (CTSO).

Although the vast majority of claims processed come from corporations, the service standards apply to all SR&ED performers. For example, the service standard for a current claim submitted by an individual or a trust entitled to a refundable ITC would be 120 days.

The CRA determines the number of days to process a claim from the complete claim date (02 date) until the date the case is closed in Audit Information Management System (AIMS). The "02 date" is determined at the TC and is viewable on the AIMS screen L, in the field "complete claim".

If the claimant's actions or requests result in a delay of the review of the claim, the number of days available to review the claim is extended by the duration of the delay. These delays are entered in AIMS as "delay codes". Likewise, if a current refundable claim is accompanied by an amended tax return with an SR&ED claim for a prior year, a delay may be entered in AIMS for the current refundable claim to reflect the receipt of multiple claims with differing applicable service standards. This effectively diminishes the priority of the current claim to that of the prior year's claim.

The process to initiate and approve the use of a delay code is set by the CTSO management and should be followed by both the FR and the RTA. Refer to Directive SR&ED 2003-03, Use of Delay Codes on AIMS, for further information.

2.13 Roles and responsibilities

To some extent, the success of the SR&ED Program depends on the parties involved in the process understanding and fulfilling their respective roles judiciously. All parties therefore need to understand the relevant legislation, their own responsibilities, and the roles or responsibilities that others have in the process. The two SR&ED Program commitments (Refer to Chapter 1.5.1) provide a general framework for the key roles of CRA personnel while CRA job descriptions generally provide the most detailed description of our responsibilities. The CRM will pare down the roles to those related to the review function only, and will include the role of the claimant (and their representative). Some of these are reflected in Appendix 3, Mutual Expectations.

2.13.1 Role of the claimant

The roles and responsibilities of the claimant include, but are not limited to, the following:

  • comply with the SR&ED Program's requirements, such as the filing requirements and eligibility criteria as outlined in the Canadian Income Tax Act and Regulations;
  • file the complete claim by the reporting deadline, and ensure that the tax return for the year has also been filed;
  • prepare and maintain proper technical and financial documentation to support the work and expenditures;
  • provide supporting documentation (source documents), as requested, for the SR&ED work and expenditures claimed;
  • provide the CRA staff or the CRA's outside consultant access to the appropriate personnel in the company;
  • respond in a timely manner to all CRA queries and requests for information;
  • advise the CRA staff of any concerns, as soon as possible.

2.13.2 Role of the financial reviewer

The roles and responsibilities of the FR include, but are not limited to, the following:

  • perform a preliminary review of the file for purposes of determining the scope of the review and setting a review plan;
  • coordinate and communicate with the RTA throughout the review process. Refer to Chapter 3;
  • provide requested assistance to the RTA on joint issues impacting the technical review;
  • explain the review process to the claimant;
  • provide information to the claimant regarding the financial aspects of the SR&ED program;
  • gain an understanding of how the claim was put together and examine the financial documentation and other relevant information to perform a review;
  • review the expenditures and ITC claimed by discussing with the claimant as well as examining financial and other information;
  • communicate any relevant findings and / or related concerns to the claimant on a timely basis;
  • document the work performed and the contacts with the claimant, RTA, etc;
  • request additional information in a clear manner, when that information is necessary to resolve issues;
  • provide the claimant, RTA, and FRM with regular updates on the progress of the review;
  • provide the claimant with a letter which summarizes the findings of the technical and financial reviews, including a clear explanation of any proposed adjustments (proposal letter package);
  • ensure that the claimant receives a copy of the RTA's SR&ED Review Report;
  • provide the claimant with adequate time for written representations (generally 30 days);
  • explain to the claimant the options for resolving concerns;
  • address the claimant's concerns as soon as possible, and respond to any written representations in a final letter;
  • work to meet the CRA's expectations of service delivery on every file.

2.13.3 Role of the Research and Technology Advisor

The roles and responsibilities of the RTA include, but are not limited to, the following:

  • coordinate the review with the FR;
  • provide requested assistance to the FR on technical and joint issues impacting the financial review;
  • conduct the interview jointly with the FR, if applicable;
  • assist in the preparation of the proposal letter package, if applicable;
  • with respect to the technical review:
    • work with the claimant regarding the technical aspects of the SR&ED Program;
    • keep the claimant informed of the progress of their review, including changes to the scope of the review;
    • provide the claimant with clear requests for information and allow sufficient time for the claimant to reply to those requests;
    • evaluate the SR&ED eligibility of the project(s) selected for detailed review;
    • review the appropriate information to evaluate the SR&ED eligibility; and
    • discuss with the claimant any concerns or questions.
  • provide claimant a reasonable time (generally 30 days) for representations.

2.13.4 Role of the financial review manager

The roles and responsibilities of the FRM include, but are not limited to, the following:

  • approve the review plan and any subsequent changes thereto, if required by local policy;
  • assist the FR to resolve any disputes and complaints resulting from the review process;
  • monitor the quality of the FR's review and take appropriate corrective action to help the FR improve weaknesses;
  • monitor delay codes set in AIMS to ensure that Directive SR&ED 2003-03 is followed;
  • provide appropriate assistance to the FR when requested to do so, such as attending meetings or a site visit, or providing guidance on an issue; and
  • involve the Financial Technical Advisor (FTA) in seeking assistance from Headquarters (HQ) when the legislation or policies are unclear with respect to an issue.

2.13.5 Role of the financial technical advisor

The roles and responsibilities of the FTA include, but are not limited to, the following:

  • discuss and research file issues with the FR or provide guidance to the FR to resolve issues;
  • draft requests for HQ assistance on complex issues that cannot be resolved locally or that have national implications;
  • provide assistance to less experienced FRs with identifying risk and developing review plans; and
  • provide assistance to the FR on complex issues.

2.13.6 Role of the control function

The roles and responsibilities of the control function include, but are not limited to, the following:

  • review the initial risk scoring (risk grid) from the TC;
  • determine file workability and contact claimant, if required, to obtain a workable claim;
  • assess and make a reasonably complete recommendation on file potential—both financial and scientific;
  • determine screener's comments;
  • manage workload distribution; and
  • assign files for detailed reviews (financial or technical) or close files as limited reviews.

2.13.7 Role of the research and technology manager

The role of the RTM is similar to that of the FRM, except that the focus is on the needs and review process of the RTA instead of the FR.

2.13.8 The SR&ED Management Framework and the functional model

The key points for the FR to understand in the SR&ED Management Framework document are the following:

  • HQ assumes primary responsibility for facilitating the development of SR&ED Program policies, procedures, and systems that support effective SR&ED Program delivery and national consistency.
  • Regional and field offices are responsible for delivering the services and benefits of the SR&ED Program to current and potential claimants in an effective and efficient manner stressing the (four) SR&ED Program priorities noted below.
  1. "Deliver SR&ED tax incentives in a timely, consistent and predictable manner.
  2. Encourage research and development (R&D) performers to assess their own claims in compliance with the tax law.
  3. Build awareness of the Program among SR&ED performers, particularly small and medium enterprises.
  4. Continually refine risk management practices to balance the need for fiscal integrity with the incentive nature of the Program."

In order to implement the Management Framework, the SR&ED Program has adopted a functional approach to distribute the HQ program responsibilities across four functional divisions.

Policy Development Division (PDD)

Technical Guidance Division (TGD)

Program Administration and Quality Assurance Division (PAD)

Stakeholder Relations Division (SRD)

These four divisions are responsible for the following:

  • delivering national policies and projects;
  • administering the Program at the national level;
  • providing program and corporate support to the regional offices and CTSOs, such as policy guidance and resource allocations;
  • representing the SR&ED Program at national associations, conferences, and committees;
  • advising and making recommendations to senior management, the Minister, and other government departments concerning the national program;
  • ensuring that the SR&ED Program is effectively and consistently delivered across Canada;
  • establishing directions, policies and procedures, and setting priorities for national SR&ED operations;
  • providing expertise, policy advice, technical guidance and training to ensure national uniformity in the treatment of claimants; and
  • reporting national program results at the corporate and public levels.

Thus, the regional offices are responsible for the following:

  • ensuring that program plans, operations and activities are executed by CTSOs in a manner consistent with national policies and procedures;
  • informing HQ of problems with program direction, policy and procedures, and training;
  • providing input into policy and program development;
  • contributing to the improvement of the overall performance of program functions; and
  • providing a link between the SR&ED Divisions in the CTSOs and the SR&ED Directorate in HQ.

2.14 Process Review

Process Review is an alternative method of verifying the compliance of a claimant's SR&ED work and qualified expenditures with the legislative requirements as the work is being carried out, that is, before the claim is filed. It is not a service that is available to claimants on demand, but one that is offered to large claimants who have demonstrated an understanding of the requirements of the SR&ED Program and have in place a process for authorizing, identifying, documenting and reviewing SR&ED work as well as related SR&ED expenditures. For additional information on this topic, please consult the document entitled, Technical Guidance Division – Process Review.

2.15 Coordinated Reviews

All reviews undertaken by claim reviewers must display an appropriate level of coordination between the FR and RTA. Chapter 3, common to both the technical and financial portions of the CRM, is dedicated to this topic and FRs must embrace the guidelines provided in that chapter.

Whenever actions are taken in a review, the FR should inform the RTA of any significant outcomes which may impact the review process of the RTA. It therefore goes without saying that whenever procedures or steps are contemplated or discussed in the CRM, the FR must decide whether, and to what extent, the RTA should be informed and, when appropriate, involved in the actions to be taken.

2.16 Quality Financial Review and Documentation

In the context of the review performed by an FR, a quality review is one that meets the minimum requirements in this manual. Primarily, this requires ensuring that the financial review process performed is adequately documented, follows established procedures, and decisions made are in keeping with SR&ED policies. Although the bulk of the responsibility for a quality review rests with the FR, the FRM and the FTA also have roles to ensure that the final product meets the standards.

2.16.1 Documentation

In brief, the FR must ensure that there is adequate documentation in the file to explain why actions were taken and how issues were resolved. In addition, the file must include support for any decisions made as a result of those actions.

Proper documentation requires an indexed table of contents. Also, review procedures undertaken, their outcomes, and the conclusions drawn must be clearly stated, usually on a working paper, in the file. All correspondence and any discussions of relevance to the review process must likewise be documented and included in the file. Discussions could include internal emails, telephone conversations and messages left or received, interviews, and other face-to-face conversations. Refer to Chapters 1.7.1, 4.3, 5.12.4, and 6.17 for more information.

2.16.2 Documenting the review and the logical process

A well-documented file will provide a clear picture of the actions taken by the FR and the motives for those actions. When taken as a whole, the documentation should support that due process was provided to the claimant.

A reader unfamiliar with the file should be able to gain an understanding of the logical process that lead to the conclusions and decisions reached by the FR. To this end, everything of relevance to decisions made by the FR should be kept in the file.

2.16.3 Form T2020 – Memo for File

As many of the FR’s key observations occur as a direct result of engaging in verbal communications with the claimant and other parties related to the claim, it is extremely important that the conversations be documented. Collectively, these observations, along with other information received, lead to decisions by the FR on which issues to examine or drop and what actions to take to draw the issue to a conclusion in an efficient manner. Form T2020, Memo for File, is normally used for the purpose of documenting conversations and often also used to document intervening actions such as messages left on the claimant’s voicemail or the mailing of a letter. Anything similar to form T2020, Memo for File, may be used for the same purpose. For simplicity, the CRM will refer to form T2020 in either case. Where notes are taken during conversations and meetings, the handwritten notes should be attached to the Form T2020.

All entries on form T2020 must indicate with whom the conversation was held, the date and time of the conversation, the nature of the discussion, and should also indicate any other individuals present at the interview and their role. Aids such as pre-prepared interview questionnaires or checklists may be used. However, these should be supplemented with a form T2020 entry when additional discussions take place at the same time. All entries on form T2020 must end with the date and time that the entry was actually keyed and the initials of the FR. The initials act as an attestation to the validity of the date and time entered.

2.17 Legislation and Regulations

Legislation in this CRM refers to the Canadian Income Tax Act. Regulations refer to the Income Tax Regulations. These terms are interchangeable in certain contexts with “law”. The Legislation and Regulations are the primary references for any dispute with respect to an issue under examination. That is, adjustments cannot be proposed unless specific provisions of the law apply to require the adjustment. The FR must ensure that, where the interpretation of the law may be at issue, they must determine if a national policy exists, for reasons of national consistency, to resolve the question.

If after consulting the law and any related policies, the issue is still unresolved for the specific situation, the CTSO should consider referring the question to the Technical Guidance Division in the SR&ED Directorate at HQ.

2.18 Case law

A claimant has the right to challenge CRA decisions by filing an appeal to the Tax Court of Canada. The Tax Court of Canada will independently assess the arguments put forward by the disagreeing parties and come to a decision on the contested issue after taking into account the relevant law and any prior cases which have examined the same issue. The CRA accepts that case law, especially new interpretations of the law, could act as a precedent and would be binding on the CRA for other claimants having the same issue in their claims and identical facts and circumstances.

When a judge rules against the CRA’s interpretation of the law, the CRA may either appeal to a higher court or adhere to that decision. When the CRA believes that an unintended judgement / outcome resulted from the claimant’s challenge in the courts, the CRA may petition the Ministry of Finance to amend the relevant legislation to correct the problem for the future. Often, the Appeals Directorate and the SR&ED Directorate at HQ will issue explicit instructions or guidance to the CTSOs related to the court decision, or for the interim, until the new legislation is drafted and proposed to Parliament.

2.19 Knowledge of accounting and auditing principles

It is a pre-requisite to performing a review that the FR has a general understanding of accounting and auditing principles. Accounting knowledge required to effectively review a claim includes an understanding of the following topics and concepts:

  • costing systems and costing principles;
  • Canadian Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), Accounting Standards for Private Enterprises (ASPE), and Canadian Auditing Standards (CanAS) including:
    • the various categories of assets, liabilities, equity, income, and expenses;
    • year end cut-off principles;
    • types of books and records maintained by claimants;
    • journal entries;
    • audit assertions;
    • use of analytical procedures;
    • other audit procedures and sufficiency of audit evidence; and
    • how to document the audit procedures and support the audit conclusions.

2.19.1 Hierarchy of audit evidence

The Canadian Institute of Chartered Accountants (CICA) Handbook for auditors recognizes that there is a hierarchy to the quality or reliability of audit evidence, and the FR should be aware of this hierarchy and how the quality of gathered information may impact their procedures or necessitate additional procedures.

Although there may be exceptions to the rule (which the FR needs to take into account), generally it is conceded that independent external sources provide more reliable audit evidence than internal sources. Thus a statement of work performed by an unrelated contractor with the applicable charges for that work is preferred as audit evidence over the same piece of evidence provided by the claimant. This is due to the fact that the claimant has a vested interest in the claim whereas the contractor normally has no interest.

Documentary evidence is generally more reliable than oral statements. Thus, the written contemporaneous lab notes of a researcher provide more conclusive evidence of the work performed and the timeframe of the work than the recollections of the researcher provided orally months later. This same principle holds for the FR’s documentation: the written documentation that’s created during the site visit is more reliable than that created several days later.

Original documents are more acceptable than photocopies and facsimile representations of those same documents simply because any alterations made to the original documents would be more difficult to detect in a copy.

Note: Tax intermediaries are not considered independent external sources.

2.20 Penalties

The Act provides for a number of penalties that may be applied to claimants or, in some cases, to tax preparers. Chapter 28 of the Audit Manual provides extensive information concerning the various penalties. It describes the penalties and the conditions under which they may be applied, and provides examples and case law references. Consideration of penalties must be discussed with the FRM in all cases. The discussion may also involve the RTA and the RTM.

2.20.1 False statements or omissions

Subsection 163(2) of the Act provides for a penalty for false statements or omissions. The preamble states that “every person who, knowingly, or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, …” is liable to a penalty. The subsection goes on to explain how the penalty is to be determined.

Chapter 28 of the Audit Manual deals with penalties under subsection 163(2). It defines “knowingly” and “gross negligence”, and describes the general rules and the factors to consider for applying the penalty to a taxpayer (claimant). It also indicates that the burden of proof is on the Minister to demonstrate that the taxpayer (claimant) either knew, or ought to have known of the false statement or omission.

AP SR&ED 96-05, Penalties under Subsection 163(2), describes the application of subsection 163(2) specifically to SR&ED claims. It also identifies the circumstances under which such a penalty should be considered.

In some cases the false statement or omission may be an indicator of fraud. Such cases should be referred to Enforcement. The FR should refer to the communiqué regarding the Jarvis / Ling decisions to obtain a better understanding of how to proceed with the review when fraud is suspected.

2.20.2 Third-Party Civil Penalties

Third-Party Civil Penalties (TPP) are provided for in section 163.2 of the Act. This penalty is directed to persons, other than the claimant, who have made representations that result in false statements or omissions on the claimant’s return.

Section 163.2 of the Act provides for two penalties, one (planner penalty) directed primarily at those who prepare (or participate in), sell or promote a tax shelter or tax shelter-like arrangement, and the other (preparer penalty) directed at those who provide tax-related services to a taxpayer (claimant).

The InfoZone Web page on Third-Party Civil Penalties provides the FR with links to all of the information that is available on this topic. Information Circular IC01-1, Third Party Civil Penalties, which is one of the links on the Web page, provides an extensive description of the legislation, its application and interpretation, as well as numerous examples of situations where the penalty would, or would not, apply.

2.21 Access to Information Act and Privacy Act

The FR needs to be aware that most of the documentation that is created during the review process may be requested by the claimant under the Access to Information Act and the Privacy Act. This potentially includes emails, Forms T2020, the FRR, and working papers. As a result, the FR should not make unsupported statements in the file or in communications with other CRA personnel.

The claimant may also, informally, request the documentation from the FR prior to the conclusion of the review; however, the information may only be disclosed after the proposal letter has been issued. Chapter 3 of the Audit Manual provides guidelines and examples of information that may or may not be released under an informal request.

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