Canadian Tax Adviser
February 14, 2012

Ombudsman Finds Taxpayers Misunderstand SR&ED Program

David Regan
GTA, Scientific Research and Experimental Development

The Taxpayers' Ombudsman recently released its long-awaited report on the SR&ED program. The 24-page report follows the Ombudsman's investigation into dissatisfaction with the SR&ED program from tax credit claimants and their representatives. The Ombudsman finds that many claimants do not understand the CRA's policies for administering the $3 billion SR&ED tax incentive program and the CRA needs to enhance its communication with them.

Background
The Taxpayers' Ombudsman is an independent and impartial officer appointed to review service-related complaints about the CRA and uphold the Taxpayer Bill of Rights. The Ombudsman's mandate is also to identify and investigate systemic and emerging service-related issues that could have a negative impact on taxpayers. 

The government has also focused on the SR&ED program in the recent Jenkins report (see KPMG's TaxNewsFlash-Canada 2011-30, "Expert Panel Recommends Changes to Federal R&D Funding Programs" ).

Few taxpayers willing to file formal complaints
The Ombudsman says that, while it heard numerous accounts of discontent with the SR&ED program among claimants and other stakeholders, including tax advisers and industry associations, it was unable to validate many of the criticisms due to a lack of specific complaints to investigate. The report notes that the Ombudsman encouraged taxpayers to file formal complaints so that it could fully investigate them, but few people were prepared to come forward and detail their issues on a file.

Despite being limited in its role because so few formal complaints were lodged, the Ombudsman's office did undertake an informal review of the SR&ED program and provides "observations" in its report rather than formal recommendations.

KPMG observation
David Regan notes that, for the most part, the Ombudsman validates the CRA’s administration of the SR&ED program and suggests that taxpayers misunderstand the program's administration. The report does not suggest changing any CRA processes. As such, nothing is likely to change in the program, as far as taxpayers are concerned, as a result of this review.

Observations in the Ombudsman's report
The Ombudsman investigated the following taxpayer complaints and provides its conclusions:

The CRA is being "too tight fisted" in administering the SR&ED program, over-emphasizing its audit role and denying claims in a manner contrary to the program's intended purpose — The Ombudsman notes that the CRA claims it has struck the appropriate balance, while acknowledging that it has concerns about the appropriateness and quality of a growing number of SR&ED claims.

The CRA's requirements for documentation supporting SR&ED are too demanding — The Ombudsman appears to agree with the CRA that better documentation is needed and the CRA should do a better job of telling claimants why the higher level of documentation is needed.

The CRA does not administer the program consistently between regions — The Ombudsman says it does not see the CRA being inconsistent —  the complaints made seem to be based on differing facts as opposed to differing CRA interpretations. According to the report, the CRA’s new Claim Review Manual and other internal processes (e.g., peer reviews, training) are improving this area.

Science reviewers are not giving early enough eligibility conclusions or their science reports do not provide enough basis for disallowing a project — The Ombudsman said the CRA could do better in this area. Some of the complaints filed during the process dealt with early comments on eligibility during the field review. 

Interestingly, the Ombudsman’s review of these complaints concludes the CRA did give comments early enough and the taxpayers' complaints were unfounded. However, taxpayers may benefit from the Ombudsman's comment on page 18:

The CRA acknowledged to us that simply referring to elements of the work as “standard practice,” ”knowledge commonly available in the industry,” “routine testing,” “routine engineering,” or making statements such as “the work does not contribute to an advancement in a field of science or technology” without adequately explaining why the work has been found to have those characteristics, would not be defensible should the claimant decide to appeal the decision by filing a Notice of Objection.

The operation of the administrative second review process and the appeals process is confusing — The Ombudsman seems to conclude that nothing is wrong with these processes; they are operating as designed and taxpayers and their representatives misunderstand what these process are intended to do. The Ombudsman recommends that the CRA do a better job of informing taxpayers and their representatives about these processes.

Ombudsman's conclusions
The conclusion to the Ombudsman's report gives an overall snapshot of the report's findings:

The observations we have made speak to the need for the CRA to continue, and even enhance, its proactive communication with SR&ED claimants and their representatives. There are reasons why apparently similar claims can result in different eligibility determinations in different parts of the country other than discrepancies or inconsistencies in the application of policy, and these should be explained to claimants. Overall, stakeholders would benefit from greater clarity with regard to the CRA’s policies and procedures for this program. The CRA continues to review and refine its policies for administering the program, and its efforts to improve timeliness and consistency are noteworthy. Stakeholders will be well served by improvements to policy and procedure as long as those changes are communicated in a complete and timely manner.

For more information, contact your KPMG adviser.

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