In late 2012, the SR&ED Directorate of the CRA released the final versions of the policy documents resulting from the Consolidated Policy Review Project. The 24 documents released are intended to ameliorate the problems with the +70 pre-existing guidance papers – most notably disjointed presentation of information, redundancy, and non-harmonized use of terms. The new documents provide admirably succinct guidance on the history and future administration of the SR&ED program.
Perhaps the most interesting of the new publications is the Eligibility of Work for SR&ED Investment Tax Credits Policy, which introduces a Five Questions test for use in assessing the technical eligibility of SR&ED work. The Five Questions test is derived from a well-known legal case referred to as The Northwest Hydraulics Case, this is the first time the test has been proposed as a formal part of SR&ED eligibility policy. The Five Questions test is considered by CRA to be equivalent to the current Three Criteria method. The Five Questions are as follows (with their associated Three Criteria equivalent shown in brackets):
- Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice? (Technological Uncertainty)
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty? (Technological Content)
- Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses? (Technological Content)
- Did the process result in a scientific or a technological advancement? (Technological Advancement)
- Was a record of the hypotheses tested and the results kept as the work progressed? (Technological Content)
The CRA has stated that the purpose of the policy review project was not to create new policy, but to clarify and harmonize existing policy. For this reason the new policy papers became effective for administrative purposes immediately upon final publication on December 19, 2012.
Concern has been expressed within the SR&ED community as to whether the new policy papers represent a de facto elevation of the technical eligibility standard to which SR&ED claims will be held. For example, it has been observed that the legislation governing the SR&ED program does not require adherence to the “total discipline of the scientific method”: the Income Tax Act specifies that SR&ED be a “systematic investigation or search… in a field of science or technology by means of experiment or analysis…”. These two specifications are not equivalent. Whether the new papers result in effective changes to the eligibility standards for SR&ED will likely come down to how they are interpreted and applied by frontline CRA personnel and their managers.
It should be noted that CRA-generated policy papers, while important for the administration of the program do not carry the weight of law. This is particularly true of the new documents since they have not been tested in court in their current forms. SR&ED claimants should be cognizant, however, of the fact that the CRA will be using these papers authoritatively to administer the program on a go forward basis.
TSGI-Chartered Accountants is recommending that taxpayers review their SR&ED processes in light of the new guidance papers and make any necessary adjustments. Observance of the CRA’s interpretation of appropriate contemporaneous documentation is particularly advised if claimants desire to avoid conflict with the agency.
For further information, please contact TSGI-Chartered Accountants:
Note: TSGI does not maintain this news article after its initial posting. Readers are further advised that the information presented here may not be sufficient for unassisted tax planning. Please contact a TSGI representative if you require clarification or other assistance regarding this topic.