Financial Claim Review Manual – Review procedures for financial reviewers

Chapter 6.0 Finalizing the Review

Table of contents


 

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6.1 Summary of chapter

This chapter discusses the procedures for finalizing the review. The main topics of this chapter are:

6.2 Requirements of the chapter

6.3 Introduction

6.4 Reports to document the results of the review

6.5 Forms for finalizing an SR&ED claim review

6.6 Audit Information Management System

6.7 Assessments

6.8 Loss determination

6.9 T2 Corporation Income Tax Returns approaching the statute-barred date

6.10 Preassessment refund

6.11 Loss carryback administrative procedures

6.12 Revision of capital cost allowance, SR&ED expenditures and other permissive deductions

6.13 Retention of hard copy (paper) documents

6.14 Permanent documents

6.15 Indexing and organization of working papers

6.16 Additional considerations for large files

6.17 Checklist for the assembling of the SR&ED review file

6.18 Assembling the file for (re)assessing

6.2 Requirements of the chapter

This chapter outlines what is required to finalize the SR&ED review. The minimum requirements are that the financial reviewer (FR) must complete all necessary reports and processing documents as outlined in this chapter. In addition, Audit Information Management System (AIMS) must be updated with the results of the case and any secondary files that are part of the case. The requirements listed below may not apply to all reviews, but those that apply must be met.

The FR is responsible for ensuring that:

  1. All required reports have been completed to the stated standards and are included in the working paper file. A signed financial review report (or short financial review report) must be prepared in all cases. Other reports must be included, if applicable.
  2. All required assessing forms (including revised schedules and forms) are completed as per the instructions provided.
  3. There is a "Table of contents" in the working paper file. In addition, all working papers and documents in the working paper file are indexed and cross-referenced.

In addition, the FR may be called upon, depending on the circumstances, to ensure that:

  1. All SR&ED claims are either processed before the statute-barred date for the year or that a valid waiver has been obtained from the claimant.
  2. Leads to other CRA audit areas are prepared and forwarded.

6.3 Introduction

The review process is winding down. The financial reviewer (FR) has gathered and analyzed information, identified issues, obtained enough evidence to resolve the issues, and reported the results of the review to the claimant. This chapter will lead the FR through the process of finalizing the review: from preparing reports that document the results to submitting the file to the tax centre (TC) for assessing and storage.

6.4 Reports to document the results of the review

The preparation of reports is a very important step in the finalization process. The reports summarize the work performed by the FR and any resulting decisions. In most cases, the reports should satisfy the users' needs without having to examine the detailed working papers.

The most commonly prepared report is the scientific research and experimental development (SR&ED) financial review report (FRR). Other reports include the penalty recommendation report and the taxpayer relief (fairness) report. All of these reports are discussed in this chapter.

There are many potential users of the FR's reports. They include financial review managers (FRMs), research and technology managers (RTMs), research and technology advisors (RTAs), financial technical advisors (FTAs), screeners, other FRs, appeals officers, quality assurance reviewers, justice lawyers, and even the judges of the Tax Court of Canada and justices of the Federal Court of Appeal and Supreme Court of Canada. The reports may also be made available to the claimant under the Access to Information Act or the Privacy Act. Refer to Chapter 2.21 for more details.

A report is a means of communication. It should be clear, complete and concise, and free from personal opinions, comments, or information concerning other taxpayers (claimants). The report should also be based on facts and these should be supported.

6.4.1 The SR&ED financial review report

The financial review report (FRR), previously known as the T20 report, is the FR's most essential report as it covers both the extent and the results of the review. The FRR is a summary of the findings of the FR that may or may not result in an assessment action. It is the main instrument to support the adjustments, or the decision to not adjust, and provides references to the working papers and the legislation relied upon by the FR. While the working papers provide in-depth details of the various procedures and outcomes of the review, the FRR provides more general information. It should still contain enough details to provide the reader with an accurate summary of the review from start to finish.

The FRR provides the reader with vital information about the review, including:

  • the claimant’s identification and filing period reviewed;
  • the name(s) of the reviewer(s);
  • the nature and extent of the review;
  • any use made of computer-assisted audit techniques during the review;
  • the basis and support for any audit adjustments; and
  • findings related to other issues examined that are material or that may be relevant to other users or future reviews.

Additional information may be added if the FR believes that it would enhance the reader’s understanding of the review results.

Given that the FRR is a summary of the review, the FR should ensure that the review plan, the working papers, the summary of adjustments, and the proposal and / or final letter are all completed before writing up the FRR.

The FRR must be prepared for every detailed review regardless of the scope or outcome of the review, though a shortened version can be used in certain circumstances. A separate FRR is recommended for each tax year reviewed, although multiple years may be combined where the adjustments are similar in nature.

6.4.1.1 Contents of the SR&ED financial review report

The FRR structure is made up of 10 sections (A to J). Some of the sections may not be applicable in every review and should be indicated as such. The subsections that follow the table below describe the information needed to complete the FRR.

Sections of the SR&ED financial review report

  • Section A: General information
  • Section B: Type of business
  • Section C: Other files
  • Section D: Extent of review
  • Section E: Explanation of all changes
  • Section F: Claimant’s representations
  • Section G: Claimant’s concurrence / non-concurrence
  • Section H: Referrals
  • Section I: Matters to be followed-up
  • Section J: Other items

Section A: General information

Enter the following information:

  • claimant’s name
  • claimant’s address
  • claimant’s business number (BN)
  • period covered by the FRR
  • case and file numbers
  • selection reason code (as entered on AIMS screen 1)
  • financial reviewer’s name
  • financial review manager or designate’s name
  • date FRR was completed and signed

The FRR must be signed and dated by each person who prepared, or examined and approved it. The signature of the FRM or their designate signifies approval of the extent and quality of the review process performed and acceptance of the outcome of the review.

Section B: Type of business

Briefly describe the claimant’s main business activities.

Describe the organization and its relationship with other business entities, if required to support an issue examined and described elsewhere in the FRR. Include an organizational chart if it would help readers understand the company’s capital structure.

Section C: Other files

List all the taxpayers and other claimants involved in this SR&ED claim and specify their relationship with the claimant by inserting the corresponding letter: (S) for secondary (partner); (R) for associated or related entities. Enter (S) only when the secondary file has been the subject of an adjustment.

Section D: Extent of review

D.1 Describe the reasons for the review and the extent of the review coverage and scope. It may suffice to refer to the review plan or other working papers indicating the issues identified and the audit procedures taken.

Check the following boxes:

  • whether there was a technical review, a financial review, or both;
  • whether the detailed review included a site visit by the FR or not; and
  • whether it was a proxy or traditional claim.

D.2 Provide the results of the RTA's review [the RTA's SR&ED review report is currently under revision by the SR&ED Directorate in Headquarters] in terms of the number of projects:

  • all work meets the definition of SR&ED;
  • some work meets the definition of SR&ED;
  • no work meets the definition of SR&ED;
  • work is unsubstantiated;
  • accepted as filed;
  • withdrawn by claimant.

Provide the names of the RTA and outside consultant (OC), if applicable, the date of the RTA's SR&ED Review Report, and where this report and the OC's report can be found (usually in the TF98).

D.3 Indicate the type of claimant (Canadian Controlled private Corporation (CCPC), qualifying corporation, excluded corporation, public corporation, other corporation, individual, trust, or partnership). Indicate whether the claimant qualifies for a refundable investment tax credit (ITC) and whether any portion of that ITC is earned at the enhanced rate of 35%.

Section E: Explanation of all changes

Summarize all adjustments. If the adjustments are contentious, provide more detailed explanations. The summary of adjustments will be broken down into seven sections:

  • E.1 Adjustments to the allowable Scientific Research and Experimental Development (SR&ED) expenditures and to the expenditure pool (Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim)
  • E.2 Adjustments to qualified SR&ED expenditures eligible for ITC (Form T661)
  • E.3 Adjustments to ITC earned, applied and / or refunded (T2SCH31, Investment Tax Credit – Corporations)
  • E.4 Adjustments to capital additions and capital cost allowance (T2SCH8, Capital Cost Allowance (CCA ))
  • E.5 Adjustments to non-capital losses incurred and / or applied in the year (T2SCH4, Corporation Loss Continuity and Application)
  • E.6 Adjustments to net income for income tax purposes and taxable income (T2SCH1, Net Income (Loss) for Income Tax Purposes)
  • E.7 Adjustments to ITC recapture

The summary of adjustments will have either three or four columns, depending on the type of claim that is reviewed.

Unassessed claims (2337)

The summary of adjustments should have three columns: Filed (by the claimant), Revised (by CRA) and Difference. The Difference column represents the discrepancy between the Filed (by the claimant) amount and the Revised (by CRA) amount.

If the TC corrects any of the filed information of the claimant, these adjustments will be reflected in the Revised (by CRA) column. The FR can specify that the adjustments were identified by the TC.

Assessed claims (450)

The summary of adjustments should have three columns: Assessed (per CORTAX), Revised (by CRA) and Difference. The Difference column represents the discrepancy between the Assessed (per CORTAX) amount and the Revised (by CRA) amount.

Taxpayer requested adjustment (TPR) claims (402 & 452)

The summary of adjustments should have four columns: Assessed (per CORTAX), Filed (by the claimant), Revised (by CRA) and Difference. The Assessed (per CORTAX) amount should be the last assessment per the CORTAX system.

The Difference column represents either the change from Assessed (per CORTAX) to Revised (by CRA) or from Filed (by the claimant) to Revised (by CRA).

The FR determines which version to present under different circumstances. Assessed (per CORTAX) to Revised (by CRA) is typically used to prepare the T7W-C as it outlines the changes to be made to the previous assessment.

Filed (by the claimant) to Revised (by CRA) is used to present the adjustments to the claimant as it shows how the Claimant requested adjustment (TPR) was changed.

In this section of the FRR, the FR should explain all adjustments in sufficient detail, but as concisely as possible. It is important to relate all of the relevant facts, both favourable and unfavourable, and to provide references to schedules, documents and correspondence used to support the decisions made. For each adjustment, the FR must indicate the specific legislative provision of the Act or Regulations, as well as any other legislative provisions and other supporting references relied upon. These other references may include application policies, guidance documents, interpretation bulletins, information circulars, and judicial decisions. At the same time, the FR should avoid using general legislative provisions, such as section 37 and section 127 of the Act, and quoting single sentences out of CRA publications. Finally, each adjustment must be cross-referenced to the applicable working papers in the file.

Where an adjustment has an effect on multiple areas of Section E (specifically E.4 to E.6), the adjustment does not have to be explained twice. For example, where a capital expenditure has been disallowed and it is explained in E.1 that it has been reallocated as a Class 10 asset, the FR should not explain this again in E.4. Reference should be made to E.1 for details.

The FR should consider all representations and positions submitted by the claimant to refute the proposed adjustments. If the representations do not result in eliminating the adjustment, they should be discussed in the explanation of the adjustment. The FR must set out the reasons for rejecting the representations. The claimant’s arguments should be set out in an impartial way and a rebuttal prepared on a point by point basis.

Any representations not addressed in the explanation section (because the adjustment is no longer required) should be discussed in Section F: Claimant’s representations.

When the representations are accepted as a result of an audit agreement, the FR should set out the reasons for the agreement.

It is essential that the FRR state the main basis as well as any secondary basis for reassessing a specific issue in case the claimant files a notice of objection in respect of the adjustment. Should the return become statute-barred during the objection or appeal process, the CRA will only have recourse to a position that was proposed to the claimant during the review. For example, an amount paid to a subcontractor is denied because the work was performed outside Canada. Even if the claimant can show that the work was done in Canada, the amount would still be denied because the performer was not a taxable supplier.

Tip: The explanations and Act references required to support the adjustments to SR&ED expenditures and the related ITC calculations can be copied and pasted directly from the working papers to Section E of the FRR. Copying portions of the working paper to the FRR will result in improved efficiency and accuracy. Similarly, the reconciliation of Net Income (Loss) for Tax Purposes to the Revised Taxable Income can be copied and pasted from the T7W-9 or the T7W-C. An explanation of the changes as well as a description of how the expenditures (expensed vs. capitalized) and ITC were reported in the financial statements should also be provided.

Section F: Claimant’s representations

Unless the claim is accepted as filed, the FR should relate in detail the steps taken to inform the claimant of the proposed adjustments (proposal letter, telephone discussion, personal interview). This section should also discuss any action taken by the claimant in response to the proposed adjustments. The FR should include the date the proposal was presented or sent to the claimant, and the date the representations were received (the chronology of events). When needed, references to relevant information in Forms T2020, the proposal letter, correspondence from the claimant and the SR&ED Issue-Related Working Papers [tool currently in development at SR&ED HQ] should be added.

As stated in Section E, all representations and positions submitted by the claimant to refute the proposed adjustments should be considered by the FR. Representations that succeed in refuting an adjustment, that is, there is no longer an adjustment to report in Section E, and any other representations not addressed in the explanation section should be discussed in this section. References should be made to the applicable Form T2020, the letter from the claimant and / or other working papers.

If an audit agreement was reached on an issue, the FR should state the basis for the agreement and whether the claimant has waived their right to object in writing, as discussed in Chapter 5.12.9. The FR should reference the representations to the audit agreement and to the waiver of right to object.

If the claimant has directed the FR to their representative to discuss any matters covered by the review, the details of the representations made by the representative should be discussed in the same manner as the claimant’s representations. The name and title of all persons who have represented the claimant should be provided. If representations have been received on behalf of the claimant from any party, the FR should reference these to any correspondence or additional information received.

Section G: Claimant’s concurrence and non-concurrence

The FR should state clearly whether or not the claimant agrees with the proposed adjustments. This section must include the name of the person(s) that agreed to the adjustments and a statement indicating one of the following:

  • The claimant agrees with the proposed adjustments. This agreement may be confirmed on the Summary of Adjustments issued with the proposal letter. The claimant will indicate their agreement and sign and date the Summary of Adjustments. A letter from the claimant confirming their agreement will also suffice.
  • The claimant does not agree with some or all of the proposed adjustments.
  • The claimant has made representations, but it is not clear whether there is concurrence.
  • The claimant has not responded orally or in writing to the proposed adjustments.

If it is on the basis of a conversation that the FR has determined concurrence or non-concurrence, that discussion confirming the adjustments must be recorded in the Form T2020. The FR should then make reference, in section G of the FRR, to the Form T2020 to establish how they have determined concurrence.

As stated in Chapter 5.15, the claimant is generally given 30 days to submit any representations to the proposed adjustments. The claimant may waive this 30-day waiting period in order to expedite the processing of the claim. The waiver may be indicated on the Summary of Adjustments included with the proposal package or in a letter from the claimant. This section should indicate whether or not the claimant has waived the 30-day waiting period. It is important to obtain the waiver in writing to avoid issues of due process.

Section H: Referrals

In this section, the FR should describe the nature of any referrals made to areas such as the SR&ED Directorate, Technical Applications (Headquarters), the Aggressive Tax Planning Division, other tax services offices (TSOs), or another area within the TSO. The FR should also include a reference to the response, if one was received, and provide a rationale if the recommendations were not followed.

Also discussed in this section are leads (Forms T133, Lead or project information, or T134, Referral to investigations) that the FR referred to other sections (by type of referral). The FR should not identify any other taxpayers by name or by any other means.

Section I: Matters to be followed-up

If, in the view of the FR or the RTA, a follow-up is recommended because there is significant potential for future adjustments or there is a high degree of risk that the claimant will not comply, details of these questions and issues should be included in this section.

Unless covered elsewhere, the FR should address issues that impact ITC recapture in the future. These include the following:

  • materials transformed
  • change in use (capital or shared-use equipment (SUE))
  • SR&ED audit changes that potentially lead to ITC recapture in a future year

If the FR has informed the claimant of concerns or shortcomings regarding the adequacy of the claimant’s books and records, the FR should indicate what suggestions, if any, were made by the FR and what corrective action will be taken by the claimant to remedy the situation for the future (for example, a better books and records (BBR) letter, an undertaking to maintain better books and records, etc).

The FR should indicate any other issue that may affect subsequent tax years, such as:

  • provincial tax credits earned on the prescribed proxy amount (PPA);
  • excess assistance received (that is, the carryforward amount of assistance available to reduce a particular project’s qualified expenditures in future years);
  • unpaid amounts (where the case was closed prior to the conclusion of the 180 days after year end);
  • a requirement issued by the Assistant Director (AD) for the claimant to maintain better books and records (legal requirement as discussed in Chapter 5.12.7); and
  • penalties considered or applied (with a reference to the Penalty Recommendation Report).

A situation may arise where a CTSO would like to ensure that the TC refers the SR&ED claim of a subsequent tax year. Instructions for intercepting an SR&ED claim were sent to the field by the Program Administration Division of the SR&ED Directorate in HQ, in an email dated June 1, 2011, and will be in their manual. The FR should indicate in this section that a request for interception was made and also which tax year was requested.

Section J: Other items

In this section, the FR should comment on items that were not discussed in other sections of the FRR. This would include any of the following items that were included in the review plan or covered during the review:

  1. Screener’s comments – screener’s comments that were not addressed elsewhere in the FRR.
  2. Coordinated review – check the box if coordination between the FR and the RTA occurred and reference to the Form T2020, or provide the reason coordination did not occur.
  3. Additional services provided such as first-time claimant service or in-house presentation.
  4. Multiple jurisdiction – If the claimant had a permanent establishment (PE) in a jurisdiction other than those identified in Part 1of the T2SCH5, Tax Calculation Supplementary – Corporations, or, conversely, did not have a SR&ED in a jurisdiction so identified.
  5. Assistance from Electronic Commerce Audit Specialists (ECAS) – When the FR uses computer-assisted audit techniques to perform the review, the following information should be provided:
    1. name of ECAS auditor;
    2. the extent of the services provided by the ECAS auditor;
    3. if the services of an ECAS auditor were requested, the reason(s) why the data download was not used.
  6. Ambiguities in the law or CRA policy – If the FR's review exposed ambiguities in the law or in the CRA's policies and interpretations with respect to an issue, these should be highlighted in this section. The discussion should address whether the decision taken may have resulted in an unfair interpretation of the current provisions of the legislation, or if unforeseen potential tax consequences resulted. If the ambiguities were thoroughly discussed in memoranda or correspondence, it is sufficient to make reference to those documents.
  7. Contentious issues (for example, association, CCPC status, foreign SR&ED) not discussed in Section E: Explanation of All Changes.
  8. Advance tax rulings – Whether or not the proposed transaction was in fact carried out as described in the ruling.
  9. Other reports prepared, such as:
    1. Penalty Recommendation Report under section 163(2) – If a penalty under subsection 163(2) of the Act is recommended or was considered. Refer to Chapters 6.4.3 and 2.20.1.
    2. Taxpayer Relief (fairness) Report – If claimant relief provisions were considered. Refer to Chapter 6.4.4.
    3. Third-Party Civil Penalty (TPP) Recommendation Report – If a penalty under section 163.2 of the Act is recommended or was considered. Refer to Chapter 2.20.2.
  10. Other matters:
    1. Notice of Determination / Re-determination – If the FR is aware that the claimant has received a Form T67AM, Notice of Determination / Redetermination of a loss, for the year under subsection 152(1.1) of the Act, provide details of the type and amount of the determined loss(es).

6.4.2 Short SR&ED financial review report

There are situations when a short version of the FRR would be adequate for purposes of explaining the claim review adjustments, if any, to be processed. Generally, this might occur when the following six situations arise:

  1. The only issues in the file relate to the screener's comments and the review process results in no adjustments (that is, accepted as filed).
  2. The screener's comments are addressed and the additional financial and technical issues reviewed by the FR and the RTA result in either no adjustments or adjustments that are not considered material and will not be processed (that is, accepted as filed).
  3. The only reason for referral to the FR is to adjust the expenditures as a result of the RTA's review, that is, the FR did not conduct a detailed review.
  4. The adjustments relate to errors in filing the claim (including the Form T661, T2SCH1) and the claimant was either not contacted or contacted only to inform them of the corrections that will be processed. The FR did not conduct a detailed review.
  5. The FR conducts a detailed review and the proposed financial adjustments are clear. The claimant concurs that the adjustments should be processed and no written representations were made by the claimant or their representative.
  6. The claim is a TPR but it is the initial SR&ED claim for the year, and one of the above situations applies.

The short FRR should not be used when the FR conducts a detailed review and believes that the claimant does not agree with the adjustments, the claimant makes written representations, or the claimant plans to file a Notice of Objection with the Appeals Division. Likewise, if the issue or issues in the file are complex or the adjustments result from a settlement between the claimant and the CRA, the standard FRR should be completed.

The short FRR should have the following sections of the standard FRR completed, but only to the extent described below:

Section A: General information

  • Complete all fields of the standard FRR.

Section B: Type of business

  • Describe main business activities only if the FR conducted a detailed review.

Section C: Other files (for a partnership only)

  • List partners.

Section D: Extent of review

D.1 Describe the reasons for the review and the extent of the review coverage and scope. It may suffice to refer to the review plan or other working papers indicating the issues identified and the audit procedures taken.

Check the following boxes:

  • whether there was a technical review, a financial review, or both;
  • whether the detailed review included a site visit by the FR or not; and
  • whether it was a proxy or traditional claim.

D.2 Provide the results of the RTA's review [the RTA's SR&ED review report is currently under revision by the SR&ED Directorate in Headquarters] in terms of the number of projects:

  • all work meets the definition of SR&ED;
  • some work meets the definition of SR&ED;
  • no work meets the definition of SR&ED;
  • work is unsubstantiated;
  • accepted as filed;
  • withdrawn by Claimant.

Provide the names of the RTA and outside consultant (OC), if applicable, the date of the RTA's SR&ED Review Report, and where this report and the OC's report can be found (usually in the TF98).

Section E: Explanation of all Changes

Refer to Section E of chapter 6.4.1.1 if adjustments are the result of a detailed review. Otherwise, a brief explanation is required.

  • Provide support and calculations for all of the adjustments to be processed
  • Provide references to working papers and other documentation in the file

Section G: Concurrence

  • Complete this section only if adjustments were proposed to the claimant and the claimant did not make any representations.
     
  • State that the claimant concurs and how the FR received concurrence to the adjustments

Section J: Other Matters

(a): Screener's Comments

  • Assert that all screener's comments have been addressed in the file

When the short form of the FRR is used, the FR should ensure that all of the working papers and documentation used to arrive at any decisions related to the issues examined are included in the file, even where no adjustments resulted from the review process.

6.4.3 Penalty recommendation report

The FR must prepare a Penalty recommendation report for each review where the application of a penalty was considered, regardless of the final decision. The report should constitute a documented summary of all the facts relevant to determining the application of the penalty. All statements in this report must be substantiated with working papers and other documents in the file. The Penalty Recommendation Report must be approved by the AD or other delegated authority, regardless of the final decision.

The application of penalties is discussed in Chapter 2.20 of the Claim Review Manual (CRM). For more information on completing this report, the FR should consult Chapter 11 of the Audit Manual. The job aid entitled Best Practices in Writing Penalty Reports is also a good source of assistance for the FR.

 6.4.4 Taxpayer relief (fairness) report

The Minister may grant relief from the application of a penalty and / or interest where the following types of situations exist:

  • extraordinary circumstances (that is, flood, fire, illness, etc.);
  • actions of the CRA (that is, undue delays in completing a review); or
  • inability to pay or financial hardship.

The FR is expected to be proactive when they believe that the claimant relief provisions may apply in a given situation. If there are obvious reasons for waiving a penalty and / or interest, the FR should ensure that this is addressed before finalizing the review.

In such a case, a report must be prepared for each file on which claimant relief provisions are being considered, regardless of the ultimate decision. The report should constitute a documented summary of all the relevant facts. All statements in this report must be substantiated with working papers and other documents in the file.

Note: The nature of the types of situations listed above implies that the penalty in question would likely be the late-filing penalty, not the penalty for false statements or omissions. There are no late-filing penalties in SR&ED, therefore only interest would be subject to waiving. An example of a potential relief situation in SR&ED would be where the claimant has taxes otherwise payable that are expected to be offset by the ITC. If the claim is reduced as a result of a review that was unreasonably delayed by the CRA, the FR could recommend relief of all or part of the interest on the revised taxes payable.

For more information on completing this report, the FR may consult Chapter 11 of the Audit Manual and Information Circular IC07-1, Taxpayer Relief Provisions.

 6.4.5 Documentation for Headquarters

To ensure the reliability of review results, HQ conducts on‑going reviews of high-impact files. For this purpose, documentation to support the reason codes used and other results‑oriented information is to be assembled and forwarded to HQ.

A package for HQ is required for each changed file which meets the following criteria:

  • any file where the permanent income change exceeds ±2,000,000 or the permanent tax change exceeds ±400,000; or
  • any file where the net present value of the tax earned by audit (TEBA-NPV) exceeds ±400,000; or
  • any file where the net present value of the tax protected changes (TPRO-NPV) exceeds ±1,000,000.

The package is to include:

  1. a file edit (PRF form GRANTNR.G101E_FILE_EDIT);
  2. all reports (including short and standard FRR, Penalty, Fairness) and, if requested by the coding team, other relevant documentation;
  3. all T7W forms and accompanying schedules sent to the claimant; and
  4. coding support for all codes used on screens 5 and 6 in AIMS (detail of each code, permanent change reconciliation, list of permanent changes).

This package may be prepared by the FR or by the control function and forwarded to the address noted on the G101E file edit. Detailed instructions can be found in the Audit Results Coding Handbook and in the Guide for HQ Documentation Packages – Tax Audits.

6.5 Forms for finalizing an SR&ED claim review

This section deals with the completion of the forms and schedules that support the (re)assessments originating from the SR&ED review process. For reviews of the T2 Corporation Income Tax Return (T2), these forms are the T2 Tax Calculation Information Sheet (T99A) and the T7W. The T7W-9 is used where the adjustments are made to a T2 return prior to the initial assessment, while the T7W-C is used in the case of a previously assessed T2 return.

The T7W-9 or T7W-C sets out the claimant's revised taxable income and details of all adjustments to reported income resulting from the review. It is also the primary source of information used by the TC (and some provinces) to determine the revised income tax payable and the ITC refund, if any.

The T99A provides the TC with additional information that cannot be included on the T7W and that is required to update the T2 return.

The schedules required for (re)assessment purposes include all T2 forms and schedules that are revised as a result of the review. CORTAX does not allow the correction of an amount without revising the underlying data that leads to the amount. For example, the details of the salary base calculation in Part 5 of Form T661 must be revised in order to change the PPA allowed. The most common forms and schedules are listed in Chapter 6.4.3, but there may be others.

All of these forms and schedules are applicable to one tax year. A separate version is required for each tax year to which adjustments are made.

These documents are required whether the adjustments result from a detailed review by the FR or a limited review by the control function. For example, the control function may conclude that the expenditures claimed are reasonable but that the provincial government assistance is understated. The correction, regardless of the amount, will not be made by the TC without at least a revised Form T661, a revised T2SCH31, a T7W-C / T7W-9 and a T99A. If the error stems from the provincial R&D claim form of an agreeing province, the revised provincial R&D schedule will also be required. (The provincial schedules are tabled in Chapter 6.4.2.1.) The T7W-C / T7W-9 and the revised schedules will be sent to the claimant to explain the changes to the assessment.

The T2 assessing officer in the TC will process the (re)assessment based on the information supplied by the FR in these documents. Missing or incorrect information will result in delays in the processing of the claimant's T2 return and the file may be returned to the FR for correction. The FR must ensure that the amounts on the T7W are consistent with those on the T99A.

In order to avoid errors and returned files from the TC, the FR should obtain the most current CORTAX information before finalizing the review. For assessed T2 returns, the FR must use the amounts provided by the latest (re)assessment (IAS or RAP) that does not have a letter next to it (X, C, R, N, or S). The latest version may have been an internal assessment not requiring the issuance of a notice, for example, to update the opening balances as a result of an adjustment to the capital cost allowance (CCA) of a prior year. For unassessed T2 returns, the FR must start with the amounts reported by the claimant, even if the TC has made changes on CORTAX. The details of any changes made by the TC can be found in the T2 Assessing Case Management system (CSCOR). Under such circumstances, the FR will report the TC's adjustments with those resulting from the review.

The T7W and the revised schedules are prepared for the claimant. They must therefore be presented in the official language of the claimant and should be free from whiteout or hand-written corrections.

6.5.1 T7W-9 and T7W-C

The T7W-9 (for initial assessments) and T7W-C (for reassessments) are prepared in the same manner and, for SR&ED reviews, should generally contain the following information.

In the pre-printed boxes in the top right corner of the form:

  • the tax year being assessed or reassessed;
  • the claimant's BN;
  • the tax services office (TSO) assigned to the claimant; and
  • an X in the box indicating that the Notice of (Re) Assessment is 'being mailed to you'.

The narrative portion of the T7W should provide the following information:

  • The claimant's name and address:
    • The mailing address reported in the BN system is used as opposed to any other address of the claimant, including the Head Office address. If the claimant's address has changed, the new information must be indicated on the T99A or a change request forwarded to the T2 Specialty Services Division.
  • A detailed description of all adjustments to each source of income. Adjustments resulting from an SR&ED review will typically be limited to Active Business Income.
    • The starting point is the amount of net income (loss) for tax purposes per line 300 of the T2 return, that is, the last assessed amount (IAS or RAP) in CORTAX if the T2 return was previously assessed, or the amount reported (RPT) if the initial assessment is pending.
    • All adjustments affecting net income must be listed, including the adjustments identified by the TC, to arrive at the revised net income (loss) for tax purposes.
    • All deductions affecting taxable income must then be listed, whether or not they were previously claimed, to arrive at revised taxable income (which cannot be less than nil). These deductions may include charitable donations, taxable dividends and non-capital losses of previous tax years.
  • Following the "Revised Taxable Income" line, additional information may be included, where applicable:
    • In respect of the SR&ED claim: 'filed' or 'assessed', and 'revised' amounts for:
      • qualified current expenditures
      • qualified capital expenditures
      • ITC earned
      • the ending balance of the subsection 37(1) expenditure pool
    • The following statement in respect of the provincial tax credit earned on the PPA in the current year:

"The portion of the [insert name of credit] earned on the Prescribed Proxy Amount must be included in income per paragraph 12(1)(x) of the Income Tax Act in the year it is received. This amount is $[insert amount]."

  • If a loss has been created or revised, a reference to subsection 152(1.1) of the Act, Notice of Determination. Refer to Chapter 6.8 for the loss determination statement.
  • Where the claimant has requested a refundable ITC by filing a TPR (no SR&ED claim in the original T2 return) and the ITC has been denied in full, the following statement in respect of the determination of the deemed payment on account of tax payable under paragraph 152(1)(b):

"Your refundable investment tax credit for the year has been determined to be zero. A Notice of Reassessment will be issued indicating this determination. You can object to this determination by writing to the Chief of Appeals for your Tax Services Office within 90 days of the date of the Notice of Reassessment."

  • The following statement in respect of the review, if not on the final letter:

"These adjustments relate only to the review of the claim for SR&ED. The T2 Corporate Income Tax Return may be subject to a general audit at any time during the normal audit selection process."

  • Where a penalty under section 163 of the Act has been levied on income that has been earned in the provinces of Quebec or Alberta, an explanation of the amount of income subject to tax on which the penalty applies in those provinces. This will assist the non-agreeing provinces in reconciling the amount of income subject to penalty.

6.5.1.1 Amalgamations

Where two or more corporations have amalgamated, a new corporation is formed and each amalgamated corporation becomes a predecessor corporation. If the T2 return of a predecessor corporation must be reassessed, the T7W-C must be prepared in the name of new corporation with a reference to the name of the predecessor corporation.

For example, where A Ltd and B Ltd amalgamate, they become AB Ltd. The T7W-C must be addressed to AB Ltd, followed by the reference "Re: income of the predecessor corporation A Ltd."

However, the BN of the predecessor corporation must be used because that is the account that will be reassessed.

6.5.1.2 Non-capital loss application on T7W-9

Where a non-capital loss arises in a year being initially assessed, and the claimant has requested that the loss be applied to the previous year also being initially assessed, the T7W-9 for the previous year will not include the loss carryback. A note in the Special Instructions (Area L) of the T99A or in CSCOR is required so that the T2 return will be reassessed at a later date to apply the loss carryback. The note should include the following information:

  • claimant's name;
  • business number (BN);
  • if the claimant is a corporation, the complete year-end date using the format year / month / day;
  • a statement similar to the following: "The claimant has requested that a loss in the amount of $[insert amount] from the [insert TYE where the loss was incurred] tax year be applied to the [insert TYE where the loss will be applied] tax year." and
  • the date the loss carryback was requested (effective date for interest calculation purposes).

6.5.2 T99A - T2 Tax Calculation Information Sheet

The FR must complete a separate T99A for each year assessed, reassessed, updated, or where a nil assessment is to be issued.

Boxes in the areas A to K of the T99A

The "yes" boxes in the areas A to K must be ticked by the FR if an item therein is adjusted or is affected by an adjustment. For example, if taxable income is revised and this adjustment affects the Small Business Deduction, the FR ticks the "yes" box in Area D. The FR enters the revised amount or attaches the applicable revised schedule. If a "yes" box is ticked, all fields within that area must be filled even if they remain unchanged; a blank field is considered as nil.

If there is no change to the amount originally claimed by the claimant or the amount previously assessed, the "yes" box will not be ticked and the data fields will be left blank.

Identification Area

  • Auditor (FR) identification information – Enter the FR's name, telephone number, section, group and unit.
  • Corporation identification information – Enter the claimant's name, BN, the AIMS file number and the tax year (fiscal period start and end).
  • Enter the mailing address only if it is different from the address on the BN system (change of address).
  • Corp type– Enter if changed:
    • Code 1 – Canadian-controlled private corporation
    • Code 2 – Other private corporation
    • Code 3 – Public corporation
    • Code 4 – Other corporation.
  • Late filing penalty code – Leave blank.
  • Statute barred date – Enter the statute barred date for the year if the return was previously assessed; otherwise, leave blank.
  • Waiver of interest – Enter waiving period, if applicable.

6.5.2.1 Area A – Multiple jurisdictions

There are four 'Yes' boxes in Area A that are to be ticked only if there are adjustments to the particular tax or credit. The first two are the most likely to apply to SR&ED files and are discussed below. The last two (federal foreign tax credits and federal logging tax credits) may apply under limited circumstances, in which case the applicable portion(s) of Form T2 / T1 / T3 supplementary tax calculation information (T99M) should be completed.

Adjustments to the allocation of taxable income to multiple jurisdictions may be required if:

  • the total salaries and / or gross revenue attributable to the jurisdiction are revised;
  • a T2 return assessed as a single jurisdiction must be reassessed as a multiple; or
  • a T2 return assessed as a multiple jurisdiction must be reassessed as a single.

These adjustments may be reported on the T99M or on a revised T2SCH5. The allocation code requested on the T99M is the Income Tax Regulation that applies to the particular type of corporation. These codes are listed on page 1 of the T2SCH5.

The most common items to report in Area A are adjustments to the provincial and territorial tax credits, more specifically, the various provincial R&D tax credits. The FR must revise the following provincial R&D schedules, where applicable:

Province Title Schedule
Newfoundland and Labrador Newfoundland and Labrador Research and Development Tax Credit T2SCH301
Nova Scotia Nova Scotia Research and Development Tax Credit T2SCH340
New Brunswick New Brunswick Research and Development Tax Credit T2SCH360
Ontario Ontario Research and Development Tax Credit

Ontario Innovation Tax Credit

Ontario Business-Research Institute Tax Credit

Ontario Business-Research Institute Tax Credit Contract Information
T2SCH508

T2SCH566

T2SCH568

T2SCH569
Manitoba Manitoba Research and Development Tax Credit T2SCH380
Saskatchewan Saskatchewan Research and Development Tax Credit T2SCH403
British Columbia British Columbia (BC) Scientific Research and Experimental Development Tax Credit T666
Yukon Yukon Research and Development Tax Credit T2SCH442
Multiple jurisdiction Tax calculation supplementary - Corporations T2SCH5

Note: The FR may submit a revised T2SCH5 but it is not necessary; the T2 assessing officer at the TC will transfer the revised credit to the applicable line on T2SCH5.

6.5.2.2 Area B – Calculation of taxable income – Loss carryback

This area must be completed when the amount of the loss carried back from a subsequent year is increased. In this area, the initial amount requested and the adjustments are shown separately to enable the accurate calculation of the interest.

The other fields in this area require the tax year end (TYE) date of the subsequent year and the effective interest dates (EID). The EID for the initial and adjustment amounts may be different and is determined as described in paragraph 161(7)(b) of the Act. This date is the latest of four dates:

  • the TYE of the year in which the loss or tax credit arose, plus one day;
  • the date that the T2 return for the tax year in which the loss or tax credit arose was filed;
  • the date the prescribed form was filed, if it was not filed with the T2 return; and
  • the date the written request for an adjustment was made.

6.5.2.3 Area C – Changes in investment income and income from active business

Active business income is generally income earned from a business source, including any income incidental to the business. The total adjustment resulting from SR&ED should therefore be allocated to active business income.

Income from Active Business   Enter the Revised Net Income for tax purposes per T7W.

The following items should be deducted from Revised Net Income. These amounts will rarely change as a result of the review so most will come directly from CORTAX per the T2SCH7, Calculation of Aggregate Investment Income and Active Business Income.

  • taxable dividends
  • property income from an interest in a trust
  • Canadian investment income
  • foreign investment income
  • personal services business income (net of related expenses)
  • foreign business income (net of related expenses)
  • share of active business income from partnerships (net of related expenses)
  • other income

The resulting amount is the Total Income from Active Business that should be entered on the T99A.

6.5.2.4 Area D – Small business deduction

This area requires the following amounts, if the small business deduction (SBD) is affected by any adjustments to the T2 return:

  • active business income
  • business limit for the year
  • taxable income

The active business income may have been revised in area C; otherwise it can be found on line 400 of the T2 return in CORTAX.

The business limit for the year can be found on line 410 of the T2 return in CORTAX. The FR may have to revise this amount if the previous year's T2 return was also reviewed and not yet reassessed.

The revised taxable income, if any, is calculated on the T7W.

Business limit

The calculation of the business limit for a corporation can be found in section 125 of the Act. A CCPC that is associated with one or more corporations during the tax year must file T2SCH23, Agreement Among Associated Canadian-Controlled Private Corporations to Allocate the Business Limit.

Note: Large CCPCs that had taxable capital employed in Canada of $15 million or more in the previous year do not qualify for the SBD. The business limit is reduced for CCPCs (or associated groups) that have taxable capital employed in Canada of between $10 million and $15 million in the previous year.

6.5.2.5 Area E – Manufacturing and processing profits deduction

The calculation of the Canadian manufacturing and processing profits deduction (MPPD) may have to be revised as a result of the review. Even an adjustment to net income / taxable income will trigger an adjustment to this deduction. If the MPPD is to be adjusted, the FR should prepare a revised T2SCH27, Calculation of Canadian Manufacturing and Processing Profits Deduction , and enter the revised MPPD amount on the T99A.

6.5.2.6 Area F – Part IV Tax (private and subject public corporation at any time during the year)

This area should be left blank for SR&ED claims.

6.5.2.7 Area G – Dividend refund

This area should be left blank for SR&ED claims.

6.5.2.8 Area H – Surtax credit (1992 and subsequent years)

Part 1.3 Tax is no longer applicable. This area should be left blank.

6.5.2.9 Area I – Federal investment tax credit (Subsection 127(5) of the Act)

If any part of the ITC calculation has been revised, the FR must tick the "Yes" box and attach a completed and revised T2SCH31, Investment Tax Credit - Corporations .

6.5.2.10 Area J – Section 163 penalties

The FR will provide an analysis of the total income subject to penalty, if any. The application of penalties was discussed in Chapters 5.14.3 and 6.4.3. To ensure that the penalty is applied and not overlooked, a notation should also be entered in red at the top right corner of the T99A.

6.5.2.11 Area K – Appeal

This area applies only if the claimant has filed a notice of objection or an appeal. In such a case the appeals officer will prepare the file for assessment.

6.5.3 Revised schedules

The T7W and revised schedules should provide the details of any adjusted component of the tax calculation as listed on Form T99A that is not otherwise evident. The package for assessing should include revised forms and schedules, as applicable, most notably:

A second copy of the T7W must be submitted to the TC to be sent to the claimant at the time of issuing the Notice of (Re) Assessment. The revised schedules may or may not be included, depending on whether or not the FR provided them to the claimant earlier.

A third copy of the T7W and revised schedules should be prepared if the claimant operates in one or more non-agreeing provinces (Alberta and Quebec). The TC will also send this proposal package to the province at the time of issuing the Notice of (Re) Assessment.

6.6 Audit Information Management System

Audit Information Management System (AIMS) automates the collection of audit information and the reporting of audit results to various levels of CRA's management, from the manager at the TSO to the Parliament of Canada.

AIMS:

  • provides an inventory control system for files selected for audit (screened) and under audit (assigned);
  • records the results of all completed audits and supplemental activities; and
  • provides a means to ensure that audit reassessments are properly issued and reasonably correct.

Through the use of AIMS, changes to inventory files are immediately reflected in the database, and new or changed records are immediately accessible. AIMS includes a module to collect the additional information required by the SR&ED Program. AIMS also receives information from external sources, such as hours from the Corporate Administrative System (CAS) and reassessments from CORTAX.

When finalizing the review, the FR must update the relevant AIMS screens with the results of the SR&ED review. Every claim has its own case and file numbers; unlike regular audits, there are no multiple year cases in SR&ED.

In the case of a functional currency claim, all of the documentation in the file will be in the functional currency. However, AIMS information is used for national reporting purposes and must be presented in Canadian currency. The AIMS information captured by the TC will have been converted to Canadian currency when the case was created by the risk management tool. The amounts that are required for the completion of the AIMS screens must also be converted to Canadian currency by the FR, using the relevant spot rate for the last day of the year under review. This rate can be found on screen Func in CORTAX. Refer to Appendix 4 for more information on functional currency reporting.

Screen L – SR&ED info: reports the adjustments to the SR&ED expenditures and the ITC earned, as well as miscellaneous information regarding the review. This screen must be updated in all cases, whether or not there are adjustments to the claim. If there is an open delay on the case it must be closed before the case can be closed.

Screen 5 – Results: is a general audit screen used to report adjustments to taxable income, income taxes and credits resulting from the review, for the current and subsequent tax years. The completion of this screen leads to screens 6 and 7 which request additional result information. If the review results in no adjustments to the return, screen 5 must still be updated if the FR has charged more than 25 hours to the case; however the information required will be very limited.

For line-by-line help in updating AIMS screens, the FR may refer to the AIMS Online Guide – Update Screens.

6.7 Assessments

6.7.1 Legislative authority

Section 152 of the Act provides the legislative authority for (re)assessments. Subsection 248(1) defines "assessment" to include a "reassessment". Under subsection 152(1), the Minister is required, with all due dispatch, to examine a tax return for the tax year and assess the tax, the interest and the penalties, if any, payable and to determine certain amounts.

Paragraph 152(1)(b) determines the amounts that are deemed by various specific provisions to be paid on account of the claimant's tax payable for the year. Among others, the claimant is deemed to have paid an amount equal to the amount of the refundable ITC available to the claimant under subsection 127.1(1).

Subsection 152(4) of the Act allows the Minister to make an original assessment, reassessment or additional assessment for taxes, interest or penalties, if any, payable under Part l at any time or notify the taxpayer (claimant) in writing that no tax is payable for the year. However, the Minister may assess, reassess or make an additional assessment, as a general rule, only within the "normal reassessment period" for the taxpayer with respect to the year in question. The Minister is not bound by an assessment he has issued, and may reassess within the time permitted in subsection 152(4).

6.7.2 Normal reassessment period (statute-barred date)

Subsection 152(3.1) of the Act defines the expression "normal reassessment period". This is the time within which the Minister may generally reassess a tax year. The normal reassessment period ends three or four years after the day of mailing of a notice of an original assessment for a tax year or the day of mailing of a notification that no tax is payable for the year. The date upon which the normal reassessment period ends is commonly known as the "statute-barred" date.

The statute-barred date does not apply to situations described in paragraph 152(4)(a), that is, where there has been fraud or misrepresentation attributable to neglect, carelessness or wilful default, or the filing of a waiver in respect of the year.

The following table outlines the reassessment period for circumstances other than those provided for in paragraph 152(4)(a).

4 years: For a corporation other than a Canadian-controlled private corporation (CCPC)

3 years: In any other case (individual or CCPC)

3 years plus the normal reassessment period: Paragraph 152(4)(b) of the Act – when subsection 152(6)* of the Act is applicable, for example, losses carried back or carryback of investment tax credits

* Subsection 152(6) allows a taxpayer to carry back amounts from one tax year to reduce the claimant's income, taxable income or tax for a prior year.

6.7.3 Nil assessment – Notification

A notification that no tax is payable for the year is commonly known as a nil assessment. This assessment form is identical to a notice of assessment. Where no income tax, interest or penalties are assessed, it is not an assessment in law, but a notification.

An assessment and a notification are similar for the purposes of determining the normal reassessment period.

In the case of a notification, the normal reassessment period does not have any relevance where the CRA disagrees with a claimant's reported loss or where the claimant wishes to revise a claim for permissive deductions, provided the adjustments do not create tax payable for that year or for any other year that is statute-barred. Refer to Chapter 6.12 for more information.

A nil reassessment may be issued after the normal reassessment period for the year, provided the previous (re)assessment was also nil. If the previous assessment was not nil and the year has become statute-barred, no assessment notice will be issued. In such a case, the changes should be explained in a letter or in a T7W-C accompanied by a letter.

6.8 Loss determination

A nil assessment is not an assessment; therefore the claimant is precluded from filing a notice of objection or an appeal for the year. In the absence of additional provisions, the claimant would have to wait until the loss could be applied to reduce the income of a subsequent tax year, and appeal the denial of the loss at that time.

Subsection 152(1.1) of the Act allows the claimant to appeal the adjustments earlier. It provides that where the Minister notifies a claimant that a change has been made to a reported loss (the claimant may have reported a loss of a different amount, a profit or a nil income), the Minister shall, at the claimant's request, make a determination and issue a T67AM, Notice of Determination / Redetermination of a loss, confirming the amount of the changed loss. This determination applies to a non-capital loss, a net capital loss, a restricted farm loss, a farm loss, and a limited partnership loss.

The notice of determination is equivalent to a notice of assessment under the law (as per subsection 152(1.2)) and provides the claimant with the statutory right of objection or appeal. It is similar to an assessment for the purposes of determining the statute-barred date.

The determination is binding (according to subsection 152(1.3) of the Act) on both the Minister and the claimant for the purpose of calculating the taxable income of the claimant in any other year. In essence, a claimant who receives a notice of determination in respect of a loss may only object to the amount of the loss within 90 days after the mailing of said notice, as outlined in subsection 165(1) of the Act. Where the claimant does not obtain a determination of the loss, the claimant may only object to the amount of the loss within 90 days after the mailing of the notice of assessment for the year in which the claimant applied the loss to reduce taxable income.

While the initial determination may be made only at the request of the claimant, the Minister may make a redetermination within the normal reassessment period from the date on which the notice of determination was issued, or at any time as provided in paragraph 152(4)(a) of the Act.

Requests for determination of losses are sent to the Director of the TSO and referred to the Audit Division. The FR reviews only a small portion of the T2 return and is not in a position to validate the amount of the loss.

6.8.1 Loss determination statement

The following statement should be included on the T7W whenever the amount of a loss has been changed, or a loss has been created, as a result of a review. This statement informs the claimant of their options should they disagree with the amount of the revised loss.

"The CRA has determined that the amount of the loss you incurred does not agree with the amount you reported. As the difference does not affect your assessed tax, the Act does not allow you to file an objection. However, you have the following choices if you want to dispute the loss amount as determined by the CRA:

  1. Request the CRA, in writing, to issue to you a T67AM, Loss Determination, under subsection 152(1.1) of the Act with respect to the loss. This loss determination is binding on both you and the Minister, subject to your right to object or appeal. Once you have received your loss determination, you can file an objection to the amount of the loss. The CRA will treat your objection in the same manner as an objection to a tax reassessment.
  2. Alternatively, you may wait until you can apply your losses to a year in which you reported taxable income. You can then deduct the losses to the extent you originally reported them. The CRA will reassess that year's return to adjust the loss claimed and you will then be able to file an objection to that reassessment."

6.9 T2 Corporation Income Tax Returns approaching the statute-barred date

6.9.1 Processing procedures

The FR should add an extra 10 days to the days specified below to allow for processing of the file through the review and forms preparation stages in the TC. Procedures vary depending on the circumstances as follows:

Calendar days Procedures
Over 120 calendar days to the statute-barred date No special processing procedure is required if statute barred date is over 120 days from the date the file is sent to the TC.
Between 60 and 120 calendar days to the statute-barred date Process the file in the normal manner, placing it in a red folder with the statute-barred date clearly marked on the front cover. Also, enter the statute-barred date in red in the top margin of the T99, or T99A, using the YY / MM / DD format.
Between 30 and 60 calendar days to the statute-barred date
  • Enter the statute-barred date in red in the top margin of the T99 or T99A, using the YY / MM / DD format.
  • Prepare a three-part Form T287, Priority Reassessment Control, which will be Assessments Control's method of ensuring that the priority tax return is adequately controlled while in the process.
  • Place the priority tax return and the processing documents in a red folder with the statute-barred date clearly marked on the outside.
  • Staple all three copies of Form T287 to the top of the folder.
  • Submit the file to the FRM or delegate for approval as a priority reassessment action.
  • Once the file has been approved, the control function will forward it as follows:
    • Copy 3 of the T287 to Assessments Control Unit;
    • Copy 2 to Revenue Accounting; and
    • Copy 1 and the folder to the T2 Assessing unit at the TC.
Less than 30 calendar days to the statute-barred date Walk-through:

Follow procedures for the 30 to 60 calendar day statute-barred files.

The FR will complete the priority procedures and pass the file to the FRM or delegate, who will forward the file using express delivery or fax to the attention of the expeditor (liaison officer) in the TC.

The TC will treat the "walk-through" reassessment in the same manner to ensure that there is no undue delay in completing the reassessment.

Priority reassessments are primarily for returns approaching the statute-barred date but they may also be considered in other urgent or exceptional circumstances, such as a claimant leaving the country.

6.10 Preassessment refund

The AD may recommend the issuance of a preassessment refund where the claimant is experiencing cash flow difficulties. A preassessment refund can be considered when all of the following conditions are met:

  1. the claimant has made an SR&ED claim in a prior year;
  2. the review has commenced and is expected to go beyond the 120 day target;
  3. the claimant is experiencing cash flow difficulties; and
  4. the claimant has requested the preassessment refund in writing.

A risk analysis must be made when determining whether or not to issue a preassessment refund. The risk analysis should consider both the financial and technological risk associated with the claim, as well as the claimant’s track record with SR&ED and with the CRA in general. For more information refer to the Directive SR&ED 98-01, Preassessment Refund.

The approval of a preassessment or any other refund does not guarantee that the refund will be issued to the claimant. Communication 2010-280 of the Assessment and Benefit Services Branch states the following:

The CRA is required by legislation to release refunds only where all applicable business program account returns have been filed as required and to offset refunds against other applicable business program account debts. Prior to the issuance of a refund, the standardized accounting (SA) system searches for outstanding debits and facilitates the automated transfer, allocation and offset of credits which are eligible for refund. Within the same process, the SA system checks to see if it has been passed information indicating there are missing returns. If so, a non-compliance account instruction will be set, preventing the credits from being refunded.

6.11 Loss carryback administrative procedures

If a claimant wishes to carry back a current year non-capital loss to any of the three preceding tax years, they should complete Form T2A, Request for Loss Carryback, or T2SCH4. If the claimant wishes instead to apply the loss to a subsequent year, a simple written request is all that is required. It is important to note the date that the loss application was requested on the T99A, for the purposes of calculating interest.

6.12 Revision of capital cost allowance, SR&ED expenditures and other permissive deductions

The following comments outline the CRA's position regarding requests for a revision of capital cost allowance (CCA) or SR&ED expenditures of prior years. These comments apply equally to other permissive and discretionary deductions.

A claimant may wish to amend or claim further discretionary deductions in a previously assessed year.

When a review of a claim results in an upward reassessment of tax in a year and the claimant has not claimed the maximum deductions available for the year, the claimant will be advised of the circumstances and allowed, if so desired, to make a revised claim for that year (for example, increase the claim for SR&ED 37(1) expenditures or CCA).

If a claimant requests a revision of the SR&ED expenditures or the CCA claimed in a year that is no longer being reviewed, the provisions in IC84-1, Revision of Capital Cost Allowance Claims and Other Permissive Deductions, should be followed. The claimant must forward a letter to the director of the TSO outlining the pertinent information concerning the requested adjustments, along with amended schedules that are affected by the request.

The FR will occasionally receive a request for an adjustment to a prior year during the course of a review. In general, a request for a year that was assessable to tax must be made before the time to file a notice of objection for that year has expired (refer to paragraph 9 of the IC84‑1). A request for a year for which a notification that no tax is payable has been issued will generally be allowed provided there is no change in the tax payable for the year or any other year that the time has expired for filing a notice of objection (refer to paragraph 10 of the IC84-1).

Notwithstanding the provisions of the IC84‑1, it has been established through various policies, opinions and court cases that the CRA does not allow retroactive tax planning. For example, while preparing the SR&ED claim for 2011, a claimant may file an amended return to increase the CCA deducted in 2010, or to decrease the ITC deducted from tax in 2009. In both cases the result of the adjustment would be to reduce the taxable income earned in 2010 and increase the expenditure limit for 2011. CCA and ITC are both discretionary amounts that cannot be changed where it is reasonable to conclude that the request was made for retroactive tax planning purposes.

6.13 Retention of hard copy (paper) documents

If the T2 return is filed on paper, the working paper file is attached to the T2 return. If the T2 return is filed electronically, the TC attaches the working paper file to form T1216, T2 Internet Attachment Cover, and files it as if it were the T2 return. Some documents are placed in the Permanent Document (PD) file. These files are retained by the TC for a time period in accordance with CRA policy:

  • T2 return (basic and large case files) – indefinitely;
  • T2 return (others) – 3 years active, 7 years archived; and
  • PD files – indefinitely, unless a shorter period was noted on the document.

6.14 Permanent documents

Permanent document (PD) files are specifically for storing documents that may relate to multiple tax years. They may have an impact on future tax years or be useful in future review of claims.

The outside of the PD file should be updated to reflect the documents added. Where a PD envelope is not available, Form TX75A, T2 permanent document filing slip, should be used to add the document to the PD.

There are two PD file categories:

  • category I documentation with a retention period in excess of 5 years; and
  • category II documentation with retention period of 5 years or less.

The retention period is noted on Form TX75A when a document is put in the PD file.

The following documents should be placed in the PD:

Document Category I Category II
Better books and records letters Yes No
Formal requirement to keep books and records Yes No
Financial Review Report, if it impacts future tax years or may be useful in a future review of a claim No Yes
Penalty reports Yes No
Referrals Yes No
HQ rulings Yes No
Audit agreement and waiver of right of objection No Yes
Waiver in respect of the normal reassessment period Yes No
Authorization letters regarding representatives, if covering multiple periods Yes No
Schedule of non-capital losses Yes No
Limited-partnership agreement Yes No
Taxpayer relief (fairness) report No Yes
Other information regarding issues that may require follow-up, and other documents that are considered to be of assistance for future review Yes No

6.15 Indexing and organization of working papers

Keeping the process organized during the course of a review is important because it will make for a more efficient review and it will make it easier for future readers of the file to review it. Complete, indexed and cross-referenced working papers are of critical importance when the FR's findings are reviewed by management, the Appeals Division, or in court. They can also facilitate answering subsequent queries from the claimant and others, and the planning of future reviews. Clear indexing and cross-referencing is key to ensuring the evidence is readily accessible.

A table of contents (TOC) that lists the working papers should be prepared for each review. The indexing, numbering, and arranging of working papers are standardized.

6.15.1 Indexing and cross-referencing

Finding information in the working paper files is best facilitated by an indexing system and use of cross-referencing. The indexing system should be simple and flexible and it should accommodate a large body of working papers. The FR should be familiar with the indexing system at the beginning of the review. The working papers should be referenced on an ongoing basis to avoid a situation where the FR is faced with a mass of unreferenced working papers.

Cross-referencing related data within the working papers facilitates review and provides ready access to supporting information. Examples of where cross-referencing is most useful are when cross-referencing the review plan to procedures applied on the Issue related Working Paper [tool currently in development at SR&ED HQ] and the FRR to the supporting evidence.

One method of cross-referencing commonly employed places significance on the location of the reference. References appearing to the left of the correlated data indicate the working paper from which the information was derived. References to the right of the correlated data indicate the working paper to which the information is being carried forward. Refer to Chapter 5.10.2 for details.

6.16 Additional considerations for large files

Once again the FR should consult with the LFCM to determine if the SR&ED adjustments will be assessed independently or concurrently with the adjustments of other audit functions. This decision may determine the amount of revised tax information that the FR will provide to the claimant, such as changes to taxable income, loss balances, taxes payable, and whether or not revised T2 schedules will be prepared.

The revised schedules are usually required by the T2 assessing agent at the TC to update CORTAX; however, where the assessment encompasses multiple audit functions, the adjustments will be transferred to the LFCM for processing. The FR may not be able to finalize Form T661 and T2SCH31 as the amounts to be deducted may not yet be available.

If the FR is allowed to process the file upon completion of the review, the normal finalizing procedures should be followed, including preparing the documentation for headquarters and for the LFCM. The LFCM needs copies of the FRR, the T7W-C, all revised schedules, the audit agreement and the waiver of the right to object, if applicable.

The working paper file for a large case is typically quite voluminous and should not be forwarded to the TC for storage. These files should be stored at the TSO for future reference.

6.17 Checklist for the assembly of the SR&ED review file

Below is a sample table of contents with indexed documents. For illustrative purposes, it is fairly comprehensive. It is not expected that all of these documents would be found in a single file. Explanations of the basis of the indexing used follow each section, if needed.

Section Table of Contents – SR&ED Review Reference
- Other Items (Loose on Top) -
- Waiver – T2029 -
- Appeals Waiver -
- AIMS Screen 1 (if req'd) -
- AIMS Screen 5 (if req'd) -
- AIMS Screen L (if req'd) -
- T7W (if req'd) -
- T99A (if req'd) -
A Schedules and Forms -
A T2SCH1 – Comparative (or revised GIFI) schedule A-1
A T2SCH4 – Comparative (or revised GIFI) schedule A-4
A T2SCH8 – Comparative (or revised GIFI) schedule A-8
A T2SCH23 – Revised A-23
A T2SCH27 – Revised A-27
A T2SCH31 – Comparative (or revised GIFI) schedule A-31
A T661 – Comparative (or revised GIFI) schedule A-32
A T2SCH33 – Revised A-33
A T2SCH49 – Revised (or revised GIFI) schedule A-49
A T2SCH50 – Revised A-50
A T2 Jacket – Revised GIFI schedule of changes A-300
A T2SCH506 – Revised A-506
A Provincial Government Tax Credits (if required) A-###
A T1145 – Revised A-1145
A T1146 – Revised A-1146
A T1263 – Revised A-1263
B Reports -
B Coding Reconciliations B-10
B Financial Review Report – FRR B-20
B Taxpayer Relief (Fairness) Report B-30
B Penalty Recommendation Report B-40
B Penalty Recommendation Report (Third Party) B-50
B Other – Administrative Second Review B-60
B Explanation of delays or AIMS Screen 4 (if used) B-70
C Review Plan and Checklists -
C Screener’s comments C-10
C Initial Review Plan (subsequent changes C-20.1 etc.) C-20
C Discussion of Risk and Materiality C-30
C Issue Identification C-40
C Review Planning Checklist C-50
C Other Checklists used (C-51 to C-59) C-51
C Claimant Overview and History (books and records) Checklist C-60
C Additional Checklists used (C-61 to C-89) C-61
C Preliminary information gathering C-90
C Follow-up items C-100
C Review of Notes to the Financial Statements (F / S) C-120
C Reconciliations (c130 to C-149 as needed) C-130
D Correspondence with Claimant (chronological order) -
D Claim Review Process Letter mailed dd-mm-yyyy D-01
D Confirmation of Appointment Details mailed dd-mm-yyyy D-02
D Letter of Authorization re:preparer faxed dd-mm-yyyy D-03
D Proposal Letter D-20
D Final Letter mailed dd-mm-yyyy D-50
D Query sheet #1 issued (copy for file) D-101
D Query sheet #2 issued (copy for file) D-102
D Other Internal Items (chronological order if possible) -
D T2020 (if more than one…D-2020.1 to D-2020.99 can be used) D-2020
D Memo (chronological order) D-2100
D Emails D-2110
D Referral D-2133
D T2213 – Receipt for Borrowed Books D-2213
E Working Papers -
E Expenditures per project E-100
E Employee salary and wages E-300
E Specified Employee salaries E-305
E Employee salaries / wages for work outside Canada E-307
E Specified Employee salaries for work outside Canada E-309
E Unpaid salaries adjustment (memo) E-315
E Materials consumed E-320
E Materials transformed E-325
E Arm's length contracts E-340
E Non-arm's length contracts E-345
E Lease costs of equipment – ASA E-350
E Lease costs of equipment – primarily used in SR&ED E-355
E Overhead and other expenditures E-360
E Third party payments E-370
E SR&ED ASA capital E-390
E Provincial government assistance E-429
E Other government assistance E-431
E Non-government assistance E-432
E Prior years ITCs applied / refunded E-435
E Sale of SR&ED capital and other deductions E-440
E Repayments of assistance E-445
E Amount of ITC recapture in the prior year E-453
E Payment of prior years’ unpaid amounts
(other than salary or wages)
E-500
E Prescribed proxy amount E-502
E Shared use equipment E-504
E Qualified expenditures transferred in – current E-508
E Qualified expenditures transferred in – capital E-510
E Provincial government assistance – current QE E-513
E Provincial government assistance – capital QE E-514
E Other government assistance – current QE E-515
E Other government assistance – capital QE E-516
E Non-government assistance – current QE E-517
E Non-government assistance – capital QE E-518
E Current unpaid expenditures (other than salary or wages) E-520
E Contract payments to persons who are not a taxable supplier E-528
E Prescribed expenditures – current E-530
E Prescribed expenditures – capital E-532
E Other deductions – current E-533
E Other deductions – capital E-535
E Assistance allocated to claimant – current E-538
E Assistance allocated to claimant – capital E-540
E Non-arm’s length SR&ED contracts E-541
E AIMS coding Worksheets (if any) E-800
E Summary of adjustments to net income and taxable income E-1000
E Summary of income taxes payable E-2000
E Summary of adjustments to ITC earned and carried forward E-2100
E Summary of adjustments to recapture E-2602
E Summary of non-capital loss continuity E-4000
E Summary of adjustments to capital additions and CCA E-8000
F Supporting Information Received from the Claimant -
F Financial Statements F-9000
F Documents Received from the Claimant (F-9300 to F-9499) F-9300
F Trial Balance F-9500
F List of shareholders F-9600

6.18 Assembling the file for (re)assessing

The following table provides a list of forms required at the end of a review for (re)assessment at the TC.

Form/Document Description Number of copies required Form / Document placed in / on or Forwarded to:
Routing Slip (or memo) Include the following information:
  • claimant name
  • business number
  • tax year
Also indicate:
  • originator name (FR)
  • section, division
  • telephone number
  • TSO
1 copy per tax year

Instruct the TC to attach the working paper file to the original T2 return.

For a Change file: Send to T2 Assessing at the TC.

For a No change file: Send to T2 Records Unit at the TC.

Attached to the top of the working paper file.

T99A

Tax calculation Information for T2 return.

Required if any changes are to be made to what is currently in CORTAX.

1 copy per tax year Loose in the review folder to be sent for processing.
T2SCH5 (can replace the T99M) Tax Calculation Supplementary – Corporations 1 copy per tax year Attached to the T99A (or to the T7W if it is to be sent to the claimant).
T99M Supplementary Tax Calculation Information (when applicable) 1 copy per tax year Attached to the T99A.
T2029 Waiver in Respect of the normal Reassessment Period (with date received) Original plus 2 copies

Copy to be filed with the tax return to which the waiver applies.

Copy in the working paper file.

Original in the Permanent Document file.

T7W-C original to claimant Explanation of the changes to taxable income and other amounts to be reassessed. 1 copy per tax year Loose in the review folder. TC will send to claimant after processing

Revised forms and schedules must be attached to the T7W (unless they were given to the claimant earlier and have not changed). These include the following:
  • T2SCH1
  • T2SCH4
  • T2SCH8
  • T2SCH31
  • Form T661 (including Parts 5 and 6)
T7W-C copies Explanation of the changes to taxable income and other amounts to be reassessed 2 copies per tax year for corporations operating in a non-agreeing province (Quebec or Alberta)

1 copy per tax year in all other cases
File copy attached to the front of the working paper file (behind routing slip or memo) and accompanied by all revised forms and schedules. The assessing officer cannot make the required changes without the underlying data. The most common schedules include:
  • T2SCH1
  • T2SCH4
  • T2SCH8
  • T2SCH31
  • Form T661(including Parts 5 and 6)
  • Form T1145
  • Form T1146
  • Form T1263
  • T2SCH23
  • T2SCH49
  • T2SCH506
Copy to non-agreeing province – loose in the review folder
T7W-9 original to claimant Explanation of the changes to taxable income and other amounts to be initially assessed 1 copy per tax year Loose in the review folder. TC will send to claimant after processing

Revised forms and schedules must be attached to the T7W (unless they were given to the claimant earlier and have not changed). These include the following:
  • T2SCH1
  • T2SCH4
  • T2SCH8
  • T2SCH31
  • Form T661 (including Parts 5 and 6)
T7W-9 copies Explanation of the changes to taxable income and other amounts to be initially assessed 2 copies per tax year for corporations operating in a non-agreeing province (Quebec or Alberta)

1 copy per tax year in all other cases
File copy attached to the front of the working paper file (behind routing slip or memo) and accompanied by all revised forms and schedules. The assessing officer cannot make the required changes without the underlying data. The most common schedules include:
  • T2SCH1
  • T2SCH4
  • T2SCH8
  • T2SCH31
  • Form T661 (including Parts 5 and 6)
  • Form T1145
  • Form T1146
  • Form T1263
  • T2SCH23
  • T2SCH49
  • T2SCH506
Copy to non-agreeing province – loose in the review folder
Financial Review Report (standard and short)(FRR) - 1 copy per tax year

1 extra copy if impacts future tax years or is useful in future review claims

1 extra copy for corporations operating in a non-agreeing province (Quebec or Alberta)
  • One copy in the working paper file
  • Extra copy in the PD file
  • Extra copy attached to the T7W-9 or T7W-C for the non-agreeing province
Penalty Report - 2 copies per tax year

1 extra copy for corporations operating in a non-agreeing province (Quebec or Alberta)
  • One copy in the working paper file
  • 1 copy in the PD file
  • Extra copy attached to the T7W-9 or T7W-C for the non-agreeing province
Business consent for access by telephone and mail (RC59) Or Authorizing or Cancelling a Representative (T1013) - Original plus one copy

Original to the TC.

Copy in the working paper file.

Permanent Document (PD) file or TX75A - - The following should be inserted in the PD or attached to the TX75A:
  • Copy of the Financial Review Report (FRR) if impacts future tax years or is useful in future review claims
  • Penalty report
  • Other - refer to Chapter 6.14
Final Letter - 2 copies Original sent to the claimant with final schedule of adjustments and the RTA’s SR&ED review report (if the report was modified after the proposal and if it was not already given to the claimant).Place in single envelope

Copy in working paper file
T133 Lead or project information 3 copies 2 copies are sent to the appropriate areas after the file is approved

1 copy stays with the originator TSO
T134 Referral to the Enforcement Division 3 copies 2 copies are sent to the Enforcement Division after the file is approved

1 copy stays with the originator TSO
AIMS screens - - AIMS screens that the TSO has designated as required should be in the working paper file. These may include screens 1, 5, 6, 7, and L
HQ Package - Refer to Chapter 6.4.5 -
Working paper file The financial review of a claim on a specific claimant, including all working papers not included above. 1 copy per tax year The working papers must be attached together. If the T2 return has been charged out, the W/Ps must be attached to the tax return of the year reviewed. (The W/Ps may be attached anywhere in the tax return as long as the first page of the tax return is on top.) All W/Ps must be numbered

Refer to Chapter 6.17 Assembly of the Working Paper File.

6.19 Processing the SR&ED File

When the file is completed and assembled, the FR provides the completed file to the FRM and / or FTA for review and approval.

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