Claims for the SR&ED tax credit are denied for various reasons. Fortunately, this is not the end of the road. With the right guidance and preparation, there are steps you can follow to give your case the best chance and save you taxes. This article will discuss what you can do when your SR&ED claims are denied.
If your communications with the CRA's research and technology advisor (RTA) and/or financial reviewer (FR) led you to believe that your client's SR&ED claim will be denied, then the first step you should take is to contact the CRA Research and Technology Manager and/or the Financial Review Manager. You can discuss your concerns with the Managers to get a second opinion.
If your concerns are not satisfied by the discussions with the Manager, then the matter can be pursued further by requesting an Administrative Second Review from the SR&ED Assistant Director. The Assistant Director will not repeat the work completed by other CRA officials, but will instead seek to determine whether their work complied with theIncome Tax Actand CRA's practices as well as whether you were given the due process.
According to the CRA, the Assistant Director will look at whether:
- you were given reasonable opportunity and time to explain the work and / or expenditures claimed;
- theRTAand / orFRasked for clarification of the issues, and whether the request was clear;
- you were given reasonable opportunity and time to provide additional information;
- theRTAand / orFRconsidered all the information that was submitted by you;
- theRTAand / orFRclearly explained to you why the work and /or expenditures claimed were not eligible;
- you were given a report which included the eligibility decision of the claimed work and an explanation as to why the work was not eligible; and
- you were given reasonable opportunity and time to respond to the report.
It is rare that the Assistant Director will reconsider the RTA and FR's decision because the above criteria is difficult to satisfy.
Notice of Objection
If you disagree with the final report and a Notice of Assessment issued regarding what SR&ED deductions are allowed, then you should consider retaining a tax lawyer to assist in filing a Notice of Objection. The Notice of Objection must be filed within 90 days of when the Notice of Assessment was sent. It should address any reasons provided in the final report as to why the SR&ED expenditure was denied. It should include facts, reasons and law to support your decision. If you missed the deadline to file the Notice of Objection, then it is possible to ask for an extension of time to file if the deadline has not lapsed for over a year.
You should be able explain why the activity undertaken should qualify as SR&ED. Subsection 248(1) of theIncome Tax Act(the "Act") provides for the definition of SR&ED. InNorthwest Hydraulic Consultants Ltd. v. Canada, the Tax Court of Canada interpreted the provisions of the Act and found a five step approach to determine if an activity falls under SR&ED:
- Was there a technical risk or uncertainty – an uncertainty that could not be removed by techniques, procedures and data that are generally accessible to competent professionals in the field?
- Was a hypothesis formulated for the purpose of reducing or eliminating that technological uncertainty?
- Were the procedures used consistent with established and objective principles of scientific method, including trained and systematic observation, measurement and experiment, and the formulation, testing and modification of hypotheses?
- Did the process result in a scientific or a technological advancement?
- Was there a detailed record of the hypotheses, tests, and results kept as the work progressed?
The test mentioned above which was provided for by the Tax Court has been adopted by the CRA.
There are further conditions for SR&ED credits to apply even if the above test is satisfied. Other conditions include, but are not limited to: the expenditures must all or substantially all be for SR&ED, the activity must be performed in Canada, and the activity must not be for commercial production.
After a Notice of Objection is filed, the CRA will assign an Appeals Officer to review. It may take up to a year for an Appeals Officer to be assigned to your file. The Appeals Officer will review the arguments presented and ask for you to provide further information if any is available. It is recommended that you communicate with the Appeals Officer and find out what further facts or documents can be provided to strengthen your case.
The Appeals Officer will provide you with a written decision. If the Appeals Officer agrees with CRA's final report, then a Notice of Confirmation will be issued. If the Appeals Officer varies the assessment, then a Notice of Reassessment will be issued.
Tax Court of Canada
If you disagree with the Appeal Officer's decision, then you should retain a tax lawyer to file a Notice of Appeal with the Tax Court of Canada. The Notice of Appeal should be filed within 90 days of the Notice of Confirmation or Notice of Reassessment being sent.
There are two sets of rules for matters being heard by the Tax Court of Canada:
- Informal Procedure exists to minimize the legal steps for disputes but the amount has to be limited to $25,000. Matters with income tax amounts greater than $25,000 can still be heard, but only if it is agreed that the settlement amount is limited to $25,000; and
- General Procedure is for matters that include amounts of any size. It follows a more formal approach and there are legal steps that must be observed.
Matters heard under Informal Procedure follow a less formal process such as not requiring discoveries. They are often completed faster and at less cost than matters heard under General Procedure. The Tax Court of Canada's decision can be appealed by filing a claim with the Federal Court of Appeal.
To conclude, the dispute process with the CRA and the Tax Court of Canada can become quite complicated and could be costly if it is not prepared and carried out correctly. It is strongly recommended that your client consult with a tax dispute and litigation lawyer. The leading Tax Lawyers at HazloLaw – Business Lawyers have extensive experience dealing with this matter and can help solve your client's issues.
 Application Policy SR&ED 2000-02R,Guidelines for resolving claimants' SR&ED concerns, revised June 30, 2005 at 3.2
  T.C.J. No. 340,  3 C.T.C. 2520 at para. 12
 SR&ED Policy Review Project December 12 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdplcyrvwprjctpdt-eng.html
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.