The SR&ED Technical Review: A Guide for Claimants
Date: April 29, 2015
Table of contents
- What's new in the Claim Review Manual
- Purpose of The SR&ED Technical Review: A Guide for Claimants
- Mutual expectations between a claimant and an RTA during a technical review
- Overview of the technical review process
- Step 1 – Preparing and planning
- Step 2 – Conducting a site visit
- Step 3 – Communicating, reporting, and finalizing results
The scientific research and experimental development (SR&ED) Technical Review: A Guide for Claimants is a concise version of a Canada Revenue Agency (CRA) internal procedures manual, called the Claim Review Manual.
Effective June 1, 2010, The SR&ED Technical Review: A Guide for Claimants and the Claim Review Manual cancelled and replaced the Guide to Conducting a Scientific Research and Experimental Development Review Part 1: The Technical Review dated January 14, 2000.
The two main aspects of a technical review are to determine if the claimed work meets the definition of SR&ED as given in subsection 248(1) of the Income Tax Act and to resolve any issues associated with eligibility.
SR&ED is explained in Eligibility of work for SR&ED Investment Tax Credits Policy (eligibility policy). The eligibility policy indicates that determining the eligibility of work is a two-step process. The first step determines if there is any SR&ED (248(1)(a-c) using the following five questions:
Q1: Was there a scientific or a technological uncertainty?
Q2: Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Q3: Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
Q4: Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Q5: Was a record of the hypotheses tested and the results kept as the work progressed?
There are two other publications that relate to the eligibility of work: SR&ED while Developing an Asset Policy (asset policy), and SR&ED During Production Runs Policy (production runs policy).
Technical reviews are conducted by research and technology advisors (RTAs). They report to research and technology managers (RTMs) who may become involved in a technical review. In some cases, outside consultants may also be involved in technical reviews (see Appendix 3) or an RTA may get help from a national technology sector specialist.
The review of expenditures associated with claimed SR&ED work is called a financial review and is done by financial reviewers (FRs). RTAs and FRs work as a team during technical and financial reviews to co-ordinate the review of SR&ED claims. RTAs and FRs often make joint on-site visits, information requests or interviews. Claimants can expect that information obtained will be shared as needed between FRs and RTAs in order to avoid duplication of requests.
What's new in the Claim Review Manual
Since June 1, 2010, the Claim Review Manual has been used by all RTAs at the CRA when they conduct the technical review of SR&ED claims. For reviews in progress as of June 1, 2010, the RTAs have followed the procedures in the manual that corresponded to the point at which a review was as of June 1, 2010.
The Claim Review Manual is consistent with the technical review procedures of the previous Guide to Conducting a Scientific Research and Experimental Development Review Part 1: The Technical Review. However, the Claim Review Manual provides RTAs with more detailed procedures and background information on how to conduct a technical review.
In addition, certain procedures are more strongly emphasized in it. For example, the manual reflects concerns raised by claimants during the 2007 CRA – Department of Finance Canada consultations on the SR&ED Program. Also, the manual promotes greater transparency by requiring RTAs to identify and discuss eligibility and other claim-related issues with claimants both before a review and later as new issues arise during the review.
The Claim Review Manual:
- promotes greater co-ordination with FRs;
- more strongly emphasizes the importance of working with claimants before the review process to help achieve the SR&ED Program objective as noted above;
- gives clear expectations of the RTA and the claimant, and sets clear timelines for responding to requests for information, so that the technical review can be completed in a thorough, timely, and effective manner; and
- promotes the simultaneous communication of technical and financial review results so that the financial impact of the technical review results is clear.
The last point represents a minor modification to existing procedures, as a formal draft SR&ED Review Report may be used even though it is no longer a requirement for RTAs. The emphasis on working with claimants before and during the review process is intended to establish the facts and an understanding of the technical review results in a timely and effective way. The use of a draft report may help the RTA to give the claimant a preliminary opinion before the review is finalized. In any case, whether a claimant receives a draft SR&ED Review Report or the SR&ED Review Report with the financial proposal, claimants have the same opportunities to provide more representation as they had before.
Together, these measures will contribute to having technical reviews conducted in a more timely, consistent, and predictable way, in keeping with the objectives of the SR&ED Program as noted above.
Purpose of The SR&ED Technical Review: A Guide for Claimants
The Claim Review Manual is written for RTAs and outlines their requirements concerning review procedures. The SR&ED Technical Review: A Guide for Claimants is a concise version of the Claim Review Manual. However, it is written from the perspective of the claimants who would like an overview of the claim review process to help them better prepare for the technical review.
The SR&ED Technical Review: A Guide for Claimants:
- summarizes the procedural steps that an RTA is expected to follow in completing a technical review, when a claim is selected for a detailed technical review;
- outlines how RTAs will work with claimants and how claimants can work with RTAs during the review process; and
- identifies best practices that claimants and RTAs can adopt to ease the review process.
The SR&ED Technical Review: A Guide for Claimants does not describe all the details of the technical review process. It also does not describe how to identify SR&ED work or expenditures.
Mutual expectations between a claimant and an RTA during a technical review
The SR&ED review will be more effective and efficient when both parties are clear about what they can expect from each other. The RTA is expected to work with claimants, and the claimant is expected to work with the RTA. At the start of a review, the RTA can discuss with the claimant these mutual expectations.
During the SR&ED review, RTAs will work with the claimants to:
- explain the SR&ED Program, as well as its requirements, services, and policies to claimants who would like more information about the program to encourage understanding of their entitlements and ensure compliance;
- discuss, before the site visit, issues that they plan to address and their approach for addressing them;
- discuss, before a site visit, what the RTAs need during the visit, whether it is to see information or supporting evidence or to speak to people, so that the claimant can be prepared for the review;
- identify, as early as possible, any new issues that arise during the review;
- identify ways to resolve issues, such as questions to ask or supporting evidence to examine;
- provide an indication of any concerns that remain at the end of a site visit or, if unable to do so until the information gathered during the review is considered, indicate when they expect to be able to do so;
- explain decisions and give reasons in writing if any of the work is not considered to be SR&ED, or if any other decisions are not favourable to the claimant. This will help to improve the claimant's understanding of program requirements and enable them to be better positioned to provide any factual information that had not been considered in the RTA's decision;
- co-ordinate their review work, including information requests, with FRs to minimize the administrative burden, to avoid such things as asking twice for the same information from a claimant;
- give a claimant the opportunity to provide more information or explanations in response to their decisions, and to respond to the claimant regarding extra representation given; and
- provide feedback, advice, and guidance to claimants, as required, to explain any deficiencies in documentation or project information.
During the SR&ED review, claimants will be expected to:
- comply with the SR&ED Program requirements;
- prepare for site visits by having requested information, evidence, or personnel readily available during the site visit;
- prepare for the possibility of an expanded or shortened review by the RTA as the review progresses and new issues are identified;
- provide, as early as possible in the review process, information or evidence relevant to supporting their position;
- answer questions and address the issues identified by the RTA before and during the review;
- make sure that the people who are best able to explain the work done are available to be interviewed by the RTA should other issues arise during the review process;
- make sure that documentation created during the execution of the SR&ED work claimed is available and organized for review by the RTA, and that someone is available to explain the significance and relevance of the documentation;
- prepare to explain how the claim was put together and what supporting evidence was used in preparing the claim;
- focus on both the issues identified by the RTA and the facts related to the work done to address these issues;
- provide complete responses to questions asked by the RTA, whether in writing or not, within a reasonable time frame;
- expedite the review by providing any information, on a timely basis, that supports the claim;
- address any concerns raised by the RTA regarding the quality of project information, claim organization, or maintaining supporting evidence for future claims; and
- tell the RTA of any concerns as early as possible.
Overview of the technical review process
All SR&ED claims are risk assessed upon filing. Based on the risk assessment, some claims are accepted as filed, some are selected for a desk review, while others may be selected for a more detailed technical and/or financial review. The SR&ED Technical Review: A Guide for Claimants focuses on those SR&ED claims selected for a detailed technical review.
If a claim is selected for a detailed technical review, it does not mean that the claimed work is automatically not eligible, or that the RTA has already made up their mind. It simply means that the RTA is not able to determine, based on the project information alone, whether the work is eligible or not, or that the RTA cannot make a decision on specific issues. The intention of the technical review is that the RTA will work with the claimant to gather information in order to make those decisions.
The technical review consists of three basic steps:
- Preparing and planning;
- Conducting the review, which usually involves a site visit; and
- Communicating, reporting, and finalizing the results.
Each step and the typical activities within each step are discussed in more detail in this guide. These steps and activities may overlap or occur in an order that is different from that presented in this guide. The activities done within these basic steps depend on the particular claim and will be influenced by the needs and SR&ED experience of the claimant. As a result, additional activities may be needed or some may not be needed at all. The RTA and the claimant should maintain open communication at all times so that both parties know what to expect during the technical review.
More information about technical reviews is provided in the appendices:
- Requirements and authorities of the Income Tax Act are listed in Appendix 1;
- Working with the claimant and their representatives is discussed in Appendix 2;
- Due process and the Taxpayer Bill of Rights is discussed in Appendix 3;
- Outside consultants are discussed in Appendix 4; and
- Working with first-time claimants is discussed in Appendix 5.
Working Together to Facilitate the Review Process
To make sure that the technical review is efficient and effective, the RTA will work with the claimants and their representatives from the very beginning and throughout the review process to:
- explain the SR&ED Program and its requirements, as necessary;
- explain the review process and the dispute resolution procedures;
- answer questions about the SR&ED Program; and
- establish the facts concerning the SR&ED claim.
The RTA will also co-ordinate their work with the FR and together they will work with the claimant (and their representatives, if any) so that the overall review of the SR&ED claim is coherent and timely, and minimizes the administrative burden.
Because the decision to do a technical review and the conduct of the review is very dependent on the project information, a best practice is to discuss the project information in Part 2 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, to make sure that they best represent the claimant's work. Some of the common characteristics of the best project information is that it:
- focuses on the scientific or technological (not business) aspects of a project;
- identifies the scientific or technological uncertainties faced, and how the work claimed contributed to resolving them;
- identifies the systematic and investigative nature of the experimentation or analysis done to resolve the scientific or technological uncertainties, rather than focusing on the features and characteristics of the final product, process, device, or material;
- focuses on facts that help both qualify and quantify the work done; and
- focuses on the facts related to the work done in the specific tax year (for multi-year projects).
The RTA can provide recommendations to help the claimant with future claims. Any recommendations made by the RTA to improve the project information will be confirmed in writing.
For more information on completing Part 2 of Form T661, see Guide T4088, Guide to Form T661.
Step 1 – Preparing and planning
The first phase of the technical review includes the following activities:
- Review of information;
- Identification of issues; and
- First contact with the claimant.
1a) Review of information
The RTA reviews all the information filed with the current SR&ED claim as well as information for past SR&ED claims (such as project information and SR&ED Review Reports). If necessary, the RTA will communicate with the claimant to gather more information or clarify certain facts. This may also occur in step 1c. The RTA may also review information from public domain sources such as textbooks, technical journals, and other sources, such as the Internet, that are generally available.
1b) Identification of issues
While reviewing the claim information, the RTA identifies any issues that need to be resolved. Issues in a claim may concern the eligibility of claimed work (Step 1 of the eligibility policy), the extent of SR&ED (Step 2 of the eligibility policy), issues concerning supporting evidence, or joint scientific-financial issues. For example, based on the review of the project description, the RTA may not be able to identify an attempt to achieve a scientific or technological advancement: question 4 of step 1 of the methodology to determine if work is SR&ED. The RTA would identify this as an issue and would, during the later steps of the review process, discuss it with the claimant to determine whether there was any attempt at a scientific or technological advancement.
Issues may be general in nature and apply to the entire claim, or they may be specific and limited to one project. RTAs try to be as specific as possible in identifying issues. However, the ability to do so often depends on the quality of the technical information submitted with the claim. A few examples of issues include, but are not limited to, the following.
- The scientific or technological objectives of the project are not clear.
- The scientific or technological advancement is not clear, or appears to be standard practice for that industry within the claimant's business context.
- A systematic investigation or search through experimentation or analysis is not apparent.
- The nature and extent of the work conducted in the tax period is not clear.
- Some of the claimed work does not appear to be included in the definition of SR&ED in subsection 248(1) of the Income Tax Act.
- Some of the support work claimed does not appear to be commensurate with the needs, or directly in support, of the SR&ED work.
- It is not clear how the use or amount of the claimed materials relates to the claimed SR&ED.
The RTA will relate these issues to specific aspects of the claim and may provide examples to better illustrate the issue. Typically, issues relate to the eligibility of the claimed work. However, even when a project has eligible work, other issues may have to be resolved, such as:
- the start and end dates of projects;
- the personnel involved and the extent of their involvement;
- work conducted under contracts;
- work that is not included in the definition of SR&ED in subsection 248(1) of the Act, such as commercial production;
- the use of equipment; or
- whether materials were consumed or transformed in SR&ED.
Some issues require that the RTA and FR work together to resolve them, prior to, during or after the desk review or site visit.
1c) First contact with the claimant
At this point, the RTA will contact the claimant, usually by telephone, to discuss the SR&ED claim and any issues identified. Sometimes it may be possible to resolve simple issues without a site visit by asking the claimant questions about their SR&ED or requesting some additional information. However, in other cases the issues are such that a site visit is required.
If more information is needed, the RTA will work with the claimant to explain what is needed and why. This will usually be confirmed by a written request with a due date. The standard due date is 30 days from the date of the letter, with two additional extensions of 15 days if requested. Any extensions beyond this would have to be reasonable and discussed and approved by the research and technology manager (RTM). Claimants are encouraged to respond to such requests as soon as possible in order to allow the review to take place in a timely manner.
The extra information received in writing or through discussions with the claimant may be enough to resolve the issues and conclude the review.
Generally, claimants will not be asked to rewrite and resubmit their project information, at this point or later in the review process, unless there are significant deficiencies with the original information submitted.
Normally, an RTA would need to make a site visit before they could make a determination that work is not eligible SR&ED. In limited situations, the RTA and claimant may agree that the review can be completed without a site visit even though some work is not considered eligible by the RTA. For example, there may have been a previous review of the same issue or project that is under objection, and there is no new information that the claimant can provide that would change the previous eligibility determination.
In such situations, the claimant should first agree to the process, preferably in writing. The RTA would explain to the claimant that they are not agreeing to the result of the review, but only as to how the review is to be conducted. This also requires the approval of the RTM. The eligibility determination, the rationale, and the claimant's agreement to the process would be documented. A proposal letter would be sent. The claimant would still have the same opportunities to respond and give more representation [see section 3b)], and still have the same appeal rights [see section 3d)].
If the issues remaining cannot be resolved through information received in writing or with discussions with the claimant, a site visit will take place, and the RTA will work with the claimant to:
- plan the rest of the technical review, such as deciding how much time to spend on the issues and whether the claimant wants to discuss the SR&ED Program, determining the projects to be reviewed and determining the most suitable date for the site visit;
- help the claimant prepare for the technical review (such as answering any questions about the technical review process, to identify what supporting evidence exists and what should be ready for review, and to identify the key SR&ED performers that are best able to answer questions about the work claimed and who should be ready and available during the interview (step 2a)); and
- answer any questions about the review process or about the SR&ED Program.
Working Together Before a Site Visit
Preparation and planning for the review is equally important for the RTA and the claimant. Through transparent and open discussions, much can be accomplished to make sure that issues are resolved effectively and in a timely manner. RTAs will work with claimants before a site visit to:
- discuss the initial scope of the review, usually which projects or work will be reviewed;
- explain any issues and discuss the suggested approach for resolving them;
- discuss and determine how best to address the claimant's needs (such as whether a presentation on the SR&ED Program and the eligibility requirements is needed); and
- discuss with the claimant the preparations they can make for an efficient and successful review (such as what kind of documentation is available and would be helpful to address the identified issues, and what technical people should be available during the site visit).
Some helpful points for the claimant to consider when preparing for the site visit are listed below.
- Do not focus only on the final results of the claimed work. Break the work into chronological order. Identify the scientific or technological uncertainties faced, as well as any hypotheses that were formulated to overcome these. Also, describe the experimentation and analysis that was done, as well as any conclusions reached. These kinds of facts will help to provide insight into the answers to the five questions and the requirements of the definition of SR&ED in subsection 248(1) of the Income Tax Act that will be used to determine if the claimed work is SR&ED.
- Use the tool in Appendix 2 of the Guide T4088, Guide to Form T661, to collect and organize the supporting evidence that will substantiate what work was done and demonstrate how the work followed the basic scientific method described above. Be prepared to explain how the work described in Part 2 of Form T661 is documented, and have this supporting evidence readily available during the site visit.
- Meet with the people who are best able to address the issues or questions raised by the RTA. If these people want more information about their role during the review, SR&ED Program policies, or the review process, contact the RTA to ask for help. Make sure that these people are available for consultation during the site visit. It is a best practice to remind these people of the scope of the SR&ED claim and its difference from the business project. That way they will answer questions within the scope of the SR&ED claim, not the business project.
- Make sure that key people meeting the RTA have read and reviewed descriptions of the project and the claimed work subject to the technical review. It may also be helpful for them to read past SR&ED technical reports.
As part of their preparations, the claimant should not hesitate to contact the RTA before the site visit.
More issues may arise during the technical review. Therefore the scope of the technical review may expand (such as to include other projects). To the extent possible, the claimant should prepare to discuss all the SR&ED work claimed. Ideally this could be done on the same visit, but additional meetings may be needed if the change of scope is significant.
Since the findings of the RTA during the site visit also help the FR to determine whether or how much of the expenditures associated with the claimed work are for SR&ED, the RTA will likely confirm the cost breakdown by project before the site review.
Step 2 – Conducting a site visit
This section describes what happens during a site visit, when it is needed to resolve the review issues. This section includes:
- Preparation for a site visit;
- Overview of a site visit;
- Interview of SR&ED performers;
- Tour of the claimant's premises;
- Review of documents and supporting evidence;
- Requests for more information; and
- Communication of preliminary decisions on site.
The main purpose of the site visit is to work with the claimant to discuss the SR&ED work claimed and resolve the issues identified by the RTA or any other issues that arise during the review. The resolution of these issues enables the RTA, among other things, to determine whether (or how much of) the claimed work meets the definition of SR&ED given in subsection 248(1) of the Income Tax Act. The site visit is also an opportunity for:
- the RTA to better understand a claimant's business context;
- the RTA and claimant to discuss SR&ED Program policies; and
- the RTA to address any questions or concerns the claimant may have.
2a) Preparation for the site visit
As noted earlier, the RTA will contact the claimant, usually by telephone, to set up a site visit or meeting. Unless otherwise agreed by the RTA and claimant, the RTA will send a letter to confirm the pertinent details or expectations discussed with the claimant verbally during the telephone conversation. The purpose of this letter is also to help the claimant prepare for the site visit. The letter will normally include the following:
- the purpose of the visit, including the initial review issues;
- a confirmation of the agreed date(s) and location(s) of any meetings to allow both parties adequate time to prepare;
- a meeting agenda and an estimate of the time needed for the meeting;
- a request to ensure the availability of the key SR&ED performers who, based on discussions with the claimant, would be best able to answer questions about the work done;
- any information requested by the RTA to address the identified issues, such as details concerning the work performed or the evidence and documentation that substantiate the claimed work;
- basic information about the technical review process, dispute resolution, and recourse mechanisms;
- information required before the site visit; and
- a contact number where the RTA can be reached.
2b) Overview of the site visit
Depending on the nature of a claim, the issues identified, the claimant's SR&ED Program experience and the outcome of discussions with a claimant before a site visit, the RTA will undertake some or all of the following activities as required:
- explain the SR&ED Program;
- explain the SR&ED review process, the claimant's options if there are concerns about eligibility determinations or the review process, the claimant's rights and responsibilities, the expectations of both the RTA and the claimant, how information will be communicated, and timelines for information requests;
- interview those supervising and/or performing the claimed work, typically at the claimant's manufacturing or business premises [see section 2c) below];
- have the claimant explain how the SR&ED claim was put together, and how claimed work and expenses were identified and treated;
- tour the claimant's premises to become familiar with the work and business of the claimant, and make observations of the work performed [see section 2d) below];
- review contemporaneous documents (dated documents generated before, during, or immediately after the claimed activities, including planning documents and summary reports), records, and supporting evidence for the claimed work [see section 2e) below];
- ask for more information during the meeting, as well as get copies of any documents, as needed [see section 2f) below]; and
- where possible, communicate and discuss the preliminary eligibility determinations and next steps with the claimant. This creates an opportunity for dialogue, to eliminate any misunderstandings, and to complete the review more quickly.
During a site visit, a claimant will be asked to answer questions related to and describe:
- their business operations;
- the SR&ED work done; and
- how the SR&ED claim was prepared (such as how the claimant distinguishes between SR&ED and non-SR&ED activities, and what documents served to help prepare the claim).
The information obtained during the site visit will help the RTA to:
- understand the process that supports SR&ED claims within the claimant's organization. For example, if the claimant's process for identifying SR&ED projects to be included in the claim results in projects that are in agreement with the CRA's understanding of SR&ED, then there is a greater certainty that the projects being claimed will be compliant;
- understand the business context in which the claimed SR&ED was done;
- understand why the claimant thinks their work represents a scientific or technological advancement, and the claimant's views on the scientific or technological uncertainties faced;
- work with the claimant to establish the key facts and understand the factors that support their position;
- understand the work and the qualifications of the personnel who worked on the project;
- determine how the claimant documents their work. The availability of contemporaneous documentation of the claimed work is important since it is the best kind of substantiation for an SR&ED claim; and
- understand how the project's start and end dates relate to the scope of the project.
Working Together to Avoid Common Review Problems
RTAs will work with claimants to anticipate and try to avoid common review problems through such things as:
- explaining how a business project may differ from an SR&ED project;
- interviewing the claimant in a way that lets them first discuss their business project (that is, the context in which the SR&ED fits) and then to focus on the scientific or technological aspects of a project;
- explaining the CRA definitions of such items as pilot plants and prototypes, which may differ from the claimant's definitions for their industry industry (This subject is discussed in detail in SR&ED while Developing an Asset Policy); and
- explaining documentation requirements.
Claimants can help their staff work with the RTA by:
- briefing them before being interviewed by the CRA. The people who did the work may not know what elements of the business project were claimed and which were not;
- having someone present in the interview who can help with that differentiation; and
- reviewing important SR&ED Program documents such as the Eligibility of Work for SR&ED Investment Tax Credits Policy and other policy papers related to the claim before the site visit.
Another best practice involves discussing and making necessary improvements to project information (see "Overview of the technical review process") and documentation (see Appendix 2 of Guide T4088, Guide to Form T661).
The RTA will make a reasonable attempt to seek clarification and work with the claimant to help them properly describe and document their work. However, the onus is still on the claimant to show that their work meets the requirements of SR&ED.
2c) Interviews with SR&ED performers
Interviews conducted by the RTA during a site visit are intended to:
- help determine if the claimed work meets the requirements of the definition of SR&ED in subsection 248(1) of the Income Tax Act;
- get more information such as the claimant's business context (for example, their history, markets, products, expertise, business objectives, and the objectives of the project related to the claim) to help resolve issues identified by the RTA;
- help the RTA better understand the claimant's knowledge of the SR&ED Program; and
- allow the claimant the opportunity to present more information in support of their claim or to demonstrate the relevant aspects of their science or technology such as prototypes, finished products, processes, or devices.
The interview may begin with the RTA asking how the claim was put together, including how SR&ED was distinguished from non-SR&ED work, and what contemporaneous documentation was used in preparing the SR&ED claim. This will help the RTA to determine, among other things, whether or not the claimant is receiving their full entitlement under the SR&ED Program. These questions are best answered by those who put the claim together and differentiated the work. After that, the RTA's questions during the remainder of the interview help focus the interview on the work that took place and help the claimant to make sure that nothing of importance is missed. That way, the RTA can make sure that all the issues that they identified can be addressed. The nature of the questions asked will allow the claimant to explain the objectives, challenges, plans, and details of the claimed SR&ED work. This explanation would start from the identification of the scientific or technological objectives and continue to work elements as required. Claimants should not worry about discussing failures or problems with the RTA. These are of considerable importance in understanding the development process.
The RTA cannot provide a comprehensive list of questions before the interview. The interview process is a dynamic interaction between the claimant and the RTA. The answer to a question may lead to more questions that cannot be determined beforehand, or an answer may eliminate the need for more questions.
The people who performed or supervised the claimed work are often the best ones to give the facts necessary to establish whether the work meets the eligibility criteria. The RTA will interview the employee, or the person directly responsible for the employee, to get or validate information such as:
- time frame(s) and work schedule for the employee's participation in the claimed work;
- nature of the work they did, in detail;
- technological problems or issues they were trying to resolve; and
- the credentials and roles of the key technical and management staff.
During the interview, the RTA will take notes. These notes will form part of the RTA's working papers and will be securely stored with the claim documentation and other related correspondence in accordance with CRA security policy. Statements made in interviews will be considered along with the other supporting evidence that the claimant provides. However, oral statements are not a substitute for the claimant keeping adequate documentation or other evidence. Oral statements must be consistent with other evidence provided [see 2e) "Review of documents and supporting evidence"].
2d) Visiting the claimant's premises
In most cases, it will be necessary for the RTA to visit the claimant's business and manufacturing premises to better understand the claimant's SR&ED claim and their business environment, (such as business size, competition, nature of industry, and access to technical resources.)
Items that could be covered during a site visit include the identification and viewing of:
- locations where the claimed work was performed, including laboratories and other testing facilities;
- capital equipment claimed as all or substantially all for SR&ED or shared-use equipment, as well as dated logs of equipment use;
- production lines and commercial plants (This subject is discussed in detail in SR&ED During Production Runs Policy);
- the claimant's scrap yard; and
- any claimed prototypes, pilot plants, custom products, and commercial assets.
2e) Review of documents and supporting evidence
During the technical review, the RTA will ask to see the supporting evidence that the claimant has (including evidence identified in Part 2 of Form T661).
Evidence is anything that substantiates that SR&ED work was performed. As described in Appendix 2 of Guide T4088, Guide to Form T661, supporting evidence can take a number of different forms. Appendix 2 and the tool within it can be used by the claimant before the technical review to collect and organize their documentation and other evidence for presentation to, and use by, the RTA. Contemporaneous documents (documents created at the time when the SR&ED work was done, and produced as a result of performing such work) is the best kind of evidence.
The supporting evidence reviewed and the documents obtained from the claimant are vital parts of the review process, along with the interview to resolve the identified issues. Supporting evidence can be used to verify items such as:
- the eligibility of claimed work, that is, whether the work meets the definition of SR&ED given in subsection 248(1) of the Income Tax Act;
- the work that was done and when it was done;
- the start date and the actual or expected completion date of each project;
- the personnel, their qualifications, and their time spent on the claimed SR&ED work;
- how much of the work done is commensurate with the needs and in direct support of the systematic investigation or search done within, the project under review;
- details of any contracts between the claimant and contractors who performed SR&ED or SR&ED support work;
- details of any payments to a qualifying third party;
- details of partnership agreements between the claimant and others in a research consortium or collaborative research agreement;
- ownership of intellectual property generated;
- details of how equipment was used for SR&ED;
- details of materials consumed or transformed in SR&ED; and
- details of overhead, and other work or items directly attributable to the claimed SR&ED (if the traditional method of overhead calculation is used).
The Income Tax Act requires taxpayers to keep books and records. Keeping records, gives general advice on how to understand the legislation. This requirement is confirmed in the eligibility policy and is supported by the courts. For legislative references, see Appendix 1.
If the claimant does not maintain adequate evidence to support the claim, the RTA will tell the claimant that the supporting evidence is inadequate and discuss with the claimant what has to be done to improve it for future claims. Lack of supporting evidence will likely result in the denial of an SR&ED claim.
2f) Requests for more information
During a site visit, the RTA may ask that more information be given:
- verbally, if the claimant can give the information rapidly;
- in writing, in response to a written list of questions and requests given to the claimant by the RTA before leaving the site; or
- in writing with a formal letter after the site visit.
The RTA may also ask for copies of supporting evidence. If copies cannot be made on site, the RTA can borrow the documents and make copies at a CRA office. Borrowed documents will be noted on a receipt for the claimant. When the records are returned, the claimant should sign the RTA's copy of the receipt to acknowledge the return of the borrowed documents.
2g) Communication of preliminary decisions on site
When possible at the end of a site visit, it is preferable for the RTA to give the claimant a preliminary verbal indication of the RTA's eligibility decisions or outstanding concerns. This will allow the claimant to bring forward any other representation or information to address concerns.
However, the RTA may not be able to make decisions regarding eligibility or issues raised until the RTA has had a chance to review the interview notes, along with the original claim submission and any supporting evidence viewed or obtained during the site visit, as well as discuss the issues with the FR. If so, the RTA will discuss with the claimant any outstanding concerns, as well as give an outline of the next steps in the review process and the time frame within which a decision can be expected. The RTA will inform the claimant of the review decisions prior to sending the SR&ED review report to the claimant in the proposal package. This could be done by telephone, or through a draft report. More meetings can be held at the RTA's discretion, but before another meeting is held the claimant and the RTA should come to a clear understanding of the goals of the meeting, as well as what is to be addressed and accomplished during the meeting. By working together throughout the review process as documented in this guide, RTAs and claimants greatly increase the likelihood of all issues being resolved efficiently and effectively during a site visit.
Whether the RTA can communicate eligibility determinations at the end of the site visit or not, the claimant will be provided with the RTA’s preliminary review decisions prior to receiving the Science Review Report in the proposal package, thereby having an opportunity to provide more representation before the review is complete (see Step 3).
Finally, during the technical review, the RTA will strive to identify projects or work that were not claimed but which may be SR&ED. The RTA will also advise the claimant that they can file an amended claim if the deadline for filing SR&ED claims has not passed.
Step 3 – Communicating, reporting, and finalizing results
This section describes what happens after a site visit is done. This section describes the:
- SR&ED Review Report;
- Presentation of technical and financial review findings;
- Dispute resolution process; and
- Appeals process.
3a) SR&ED Review Report
After a site visit, and taking into consideration any more representations from the claimant, the results of the RTA's work will be documented in an SR&ED Review Report, which will be given to the claimant.
The SR&ED Review Report is a summary of the technical review. It documents the facts discussed with the claimant and observed by the RTA, and explains and provides a rationale concerning the review decisions, most particularly on the eligibility of the work and other issues related to the eligibility.
Determinations on eligibility issues will be based on the definition of SR&ED in subsection 248(1) of the Income Tax Act. Decisions on all review issues will also consider the claimant's business context.
Where appropriate, the SR&ED Review Report will also include recommendations to the claimant on necessary improvements to future SR&ED claims. This may include suggestions on improvements to project information, contemporaneous documentation and supporting evidence, and what kind of work should or should not be claimed.
An SR&ED Review Report is made available to the claimant in one of two ways:
- preferably as part of a joint proposal that includes the SR&ED Review Report and the findings of the financial review [see section 3b) below]; or
- as a draft SR&ED Review Report that is separate from the financial review findings.
The advantage of the joint proposal is that the full impact of eligibility decisions in the SR&ED Review Report will be known by the claimant. However, a draft SR&ED Review Report may be used by the RTA to communicate preliminary review findings.
In all situations, if the RTA cannot send out a report within 30 days of the technical review (either as a draft or as part of the proposal), then they should inform the claimant as to when it might be expected.
Both of the above approaches give a claimant the same opportunities to identify any facts with which they disagree and to provide new information or make more representations, either before or in response to the proposal. If a draft SR&ED Review Report is used, a final report will also always be issued to account for any extra representations or changes made to the draft SR&ED Review Report.
3b) Presentation of technical and financial review findings
When both the technical and financial reviews are completed, the FR works with the RTA to prepare the CRA proposal which includes:
- a proposal letter which provides a summary of any proposed adjustment of the claimed expenditures;
- a copy of the RTA's SR&ED Review Report; and
- recommendations and requests for future claims, in particular concerning books and records.
The proposal may be:
- presented jointly by the RTA and FR during a meeting;
- discussed by telephone; or
- sent to the claimant for discussion afterwards.
If the claimant does not agree with any of the information contained in the proposal package or has any concerns, they can respond within the deadline (usually 30 days, but extensions can be requested). The claimant may do one or all of the following.
- ask for an explanation or clarification of the rationale for the RTA's and the FR's determinations on the issues;
- rebut the CRA's position, in writing; or
- give new information for consideration.
The CRA will provide the claimant with further explanation, or consider the claimant's arguments or new information, and explain in writing whether or not the CRA proposal will be changed.
If the new information does change the CRA's decisions, the proposal and the SR&ED Review Report will be amended (either an addendum or a revised report may be used) and sent to the claimant, and the claimant will then be issued a notice of assessment or reassessment based on the modified proposal. If the new information does not change the CRA's position, or the claimant does not respond to the proposal, this will be communicated to the claimant and they will be issued a notice of assessment or reassessment based on the original proposal, and a final report if required.
Working Together to Understand Eligibility Determinations
The purpose of communicating issues transparently is to better allow the RTA and the claimant to work together to establish all necessary facts and evidence such that the RTA can make a determination on eligibility. When an RTA and a claimant disagree and the claimant has been presented with either a joint proposal (including an SR&ED Review Report) or a draft SR&ED Review Report, the following points will help the RTA and claimant minimize delays and deal with concerns effectively.
For the RTA:
- Give a rationale and explain why work meets or does not meet the definition of SR&ED in subsection 248(1) of the Income Tax Act;
- Explain how the legislation or a particular policy applies in their situation; and
- Explain how and why more information either changes or does not change the eligibility determinations.
For the claimant:
- Be clear about concerns and requests for clarification, and be specific in rebuttals; and
- Give information that can clarify misunderstandings, and give any facts that had not been considered. Resubmitting the same information or reiterating arguments about the application of policy will not likely change a determination.
3c) Dispute resolution
During a review process, a claimant may not agree with decisions made by the RTA. Because dispute resolution is important to the CRA and the SR&ED Program, a process for dealing with disagreements has been developed in Application Policy 2000-02R Guidelines for Resolving Claimants' SR&ED Concerns. This policy describes a three-step process whereby a claimant is encouraged to talk first with the RTA or the FR to resolve disputes, second to talk with the RTM or the financial review manager, and third to ask for an administrative review by the assistant director, SR&ED.
Working Together to Resolve Disputes
Resolving potential conflicts and disputes involves much more than following a procedure. It requires good communication, mutual respect for each other and the review process, and a commitment to listen and understand concerns. When disputes arise, the RTA will explain the rationale for the eligibility determination or will ask the claimant to explain their concerns and try to understand them.
The RTA will do the following to ensure good communication and open dialogue to help resolve issues and attain mutual understanding:
- indicate concerns or issues at an early stage;
- ask questions from a different perspective that may enable the claimant to present their work in a different light;
- give more explanation or clarification of their (preliminary) determinations;
- ask the claimant about other ways they may substantiate or present evidence; and
- listen to the claimant's concerns and consider any other evidence given by the claimant.
Similarly, in trying to resolve disputes with the RTA, claimants should:
- consider whether other evidence exists to address any outstanding issues or concerns raised by the RTA;
- clearly identify and explain any policy application concerns they have in the context of their claim; and
- focus on the facts of their claim rather than opinions, by describing the work that was done, why it was done, and how it addresses the issues identified by the RTA.
Both the claimant and RTAs can benefit by not basing arguments on individual statements within CRA application policies, guidance documents, or other publications or from jurisprudence. These should be considered as whole concepts; otherwise, individual statements can be taken out of context.
3d) The appeals process
If a claimant does not agree with a notice of assessment or reassessment, they have the right to a formal review of it by filing a notice of objection with the CRA. They have up to 90 days from the date of the notice of assessment or reassessment to file an objection. Objections are handled by the Appeals Branch at the CRA. More information on how to file an objection and on our appeal process can be found at objections and appeals.
Appendix 1 – Requirements and Authorities (Income Tax Act)
The Income Tax Act has requirements for all taxpayers as well as authorities for RTAs:
- Subsection 230(1) requires taxpayers to keep books and records in an organized form so that the CRA can determine their taxes payable.
- Subsection 230(3) outlines the CRA's authority when a claimant does not keep adequate books and records.
- Subsection 231.1(1) gives an authorized person (for example, an RTA or an outside consultant) the right to conduct a review, which includes among other things examining books and records and requiring the claimant to help and answer questions.
- Section 231.5 gives the CRA the authority to make or get copies of documents.
- Section 239 outlines the legal consequences to taxpayers of not providing information and of providing information that is not correct.
- Subsection 163(2) outlines the penalties applicable for false statements or omissions.
There are also legislative provisions and stringent rules in place for protecting the confidentiality of all claimants' records. These include harsh penalties for any CRA employee or any outside consultant working for the CRA who violates these rules. The legislative requirements for RTAs are as follows:
- Section 241 outlines the restrictions regarding the communication of information.
- Subsection 239(2.2) indicates the penalties for offences.
The CRA has procedures in place to keep claimant information secure and limit access to those who have a legitimate need to know it.
Appendix 2 – Working With the Claimant and Their Representatives
During a review, an RTA will work with a claimant as outlined in Appendix 4. Furthermore, the RTA will also work with the claimant's authorized representative. The right to be represented is a fundamental right in the Taxpayer Bill of Rights. This means, among other things, that the authorized representative can participate in meetings if requested by the claimant and make representations on their behalf.
However, the RTA will very likely need to speak to individuals in the company who did the technical work to either get or validate information. Having an authorized representative does not restrict the RTA from getting the information needed to conduct the review from, for example, the people who led or did the SR&ED work. Direct discussions with SR&ED performers and/or project leaders are essential to resolving issues efficiently and effectively. Delays or unfavourable findings may result if an RTA cannot get information from SR&ED performers or project leaders.
To protect a claimant's privacy, a signing officer of the company has to notify the CRA that someone is an authorized representative, by filing Form RC59, Business Consent Form, or Form T1013, Authorizing or Cancelling a Representative. The RTA will not give confidential information to a third party without appropriate authorization.
Appendix 3 – Due Process and the Taxpayer Bill of Rights
Due process is a fundamental principle in the review of SR&ED claims and means that a review is fair and impartial, a claimant is treated with courtesy and respect, and the legislation and CRA policies are applied correctly. The principle of due process follows from the CRA's Taxpayer Bill of Rights.
A claimant can still be given due process even if some steps or procedures described in this guide are not followed or are followed in a different order than presented. For example, some steps or procedures may not be applicable, or the RTA and the claimant may agree that they are not necessary. Therefore it is the treatment of the claimant as a whole, during the entire review process, which determines whether due process is given.
Eight principles of due process and the related taxpayer rights follow:
- Provide service in official languages (right No. 2).
- Explain the review process, issues, and the planned approach to resolve them to the claimant (rights Nos. 5, 6, and 10).
- Communicate the options available to the claimant if they do not agree with the review decision (rights Nos. 4 and 9).
- Give the claimant information on the CRA requirements and explain what information the CRA needs to satisfy them (right No. 6).
- Give claimants the opportunity to present their position, ask questions, express their concerns, and provide more information regarding their claim (rights Nos. 1, 5, and 15).
- Consider extra information given in support of the claimant's position before coming to a decision (rights Nos. 1, 5, and 15).
- Explain decisions and the rationale to the claimant (rights Nos. 5, 6, 9, and 11).
- Make decisions that are fair and impartial, and that respect current legislation and policy (rights Nos. 1 and 8).
Appendix 4 – Use of Outside Consultants
The CRA may use an outside consultant to complete a technical review. The RTA responsible for the file will supervise the outside consultant's work, co-ordinate communication with the claimant, and approve the outside consultant's report. An outside consultant has the same legislative authorities, is subject to the same confidentiality provisions of the Income Tax Act (see Appendix 1), and will follow the same review procedures as outlined in this guide. Copies of all claimant correspondence and documentation will be returned to the CRA on completion of the contract.
Before an outside consultant is contracted by the CRA, the claimant will be notified. The outside consultant must agree that his or her curriculum vitae, specifying educational and professional qualifications, as well as work experience, may be released by the CRA to the claimant.
The CRA will not use outside consultants that are in a conflict of interest, and requires that consultants declare all situations that could reasonably be regarded as constituting a conflict of interest (such as relationships with competitors and investment interest). If a claimant has a concern regarding an outside consultant under consideration, this concern should be communicated to the RTA who, along with management, will try to resolve the concerns raised by the claimant.
The outside consultant is required to take all necessary security precautions to make sure that the research, intellectual property, and trade secrets of any claimant, obtained during the performance of the contract, are secure at all times from use not permitted by the contract, by any person whatsoever, including the employees and subcontractors of the contractor. The final decision on the hiring of an outside consultant and the existence of any potential or real conflict of interest rests with the CRA's management.
Outside consultants will have a letter of authorization from the CRA to enter the claimant's premises for the SR&ED review. This must be taken on all site visits.
Appendix 5 – Working With First-Time Claimants
The CRA recognizes that first-time claimants may not be familiar with the SR&ED Program requirements. An RTA is expected during a visit to a first-time claimant to spend more time answering questions and explaining the review process, as well as the SR&ED Program and its requirements in detail, if necessary. In some cases, a presentation on the SR&ED Program and its requirements may be useful. It is recommended that first-time claimants attend one of the local public information sessions or a webinar and read the literature on the CRA website, including completing the Self-Assessment and Learning Tool.
First-time claimants may choose to file a claim even if they were not aware of the record-keeping requirements of the Income Tax Act and did not maintain detailed records of all of their SR&ED work. However, being a first-time claimant does not reduce or eliminate the responsibility of a claimant to substantiate their claim and provide supporting evidence of the work performed.
The CRA also offers a First-Time Claimant Advisory Service (FTCAS) to those who are new to the program. It is a free in-person service that provides first-time SR&ED claimants with an opportunity to meet with local CRA SR&ED staff, at their place of business, to gain a better understanding of the SR&ED Program.
For more information visir the First-Time Claimant Advisory Service.
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