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Financial Claim Review Manual – Review Procedures for Financial Reviewers

SR&ED Program

Chapter 5 Conducting the detailed review

Table of contents

 

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5.1 Summary of chapter

The review steps needed to resolve the issues identified at the planning stage are discussed in this chapter. The main topics of this chapter are:

5.2 Requirements of the chapter

5.3 Introduction

5.4 Contacting the claimant

5.5 Initial interview

5.6 Tour of premises

5.7 Audit evidence

5.8 Testing the claimant's books of accounts

5.9 Types of documentation

5.10 Working papers and review tools

5.11 Resolving issues

5.12 Inadequate supporting evidence

5.13 Making decisions

5.14 Concluding the review

5.15 Proposing adjustments

5.16 Claimant representations

5.17 Issuing the final letter

5.18 SR&ED claims and appeals

5.19 Additional considerations for large files

5.2 Requirements of the chapter

The following minimum requirements are outlined in this chapter. The financial reviewer (FR) must work with the claimant to:

  1. answer the claimant's questions related to the review process, and explain the issues and the general approach to resolve them;
  2. resolve the issues in the file;
  3. recommend improvements to the claimant's documentation when it is inadequate in the current year;
  4. understand the claimant's position by allowing them to ask questions, express their concerns and provide further information with respect to their position; and
  5. obtain any documentation from the claimant necessary to support the FR's decisions.

In addition, the FR must:

  1. consider additional information provided in support of the claimant's position before coming to a final decision;
  2. make decisions that are fair and impartial and respect current legislation and policy;
  3. document key activities and observations concerning the review of the claim, supporting information, and the identified claim issues;
  4. document communications and meetings (with the claimant, managers, co-workers and others) that are relevant to the decisions;
  5. communicate the options available to the claimant for resolving any contentious issues (with the financial review manager (FRM), the research and technology manager (RTM), the assistant director (AD) or Appeals Division);
  6. consult the FRM / FTA, if required by local policy, when:
    1. the scope of the review is changing significantly as a result of new information;
    2. a significant portion of the claim will be disallowed for lack of supporting documentation;
    3. penalties are being considered;
    4. fraud is suspected;
    5. a better books and records letter is needed;
    6. waivers are contemplated;
    7. difficult or problem situations arise; and
    8. a referral to another division or to Headquarter is anticipated;
  7. avoid negotiating expenditures; and
  8. refrain from investigating fraud.

5.3 Introduction

In Chapter 4, the FR gathered and analyzed the available information, discussed the issues with the research and technology advisor (RTA), concluded that a detailed review would be necessary to resolve the issues, and prepared a review plan. This chapter will lead the FR through the detailed review process, from contacting the claimant to schedule the review to issuing the final letter at the conclusion of the review.

The specific reasons for undertaking a detailed review may vary from one claim to another, but they will be reflected in the review plan. As the review progresses, some issues will be resolved through the gathering of new information or the performance of audit procedures, and new issues may emerge. The detailed review will also provide an opportunity for the FR to clarify Scientific Research and Experimental Development (SR&ED) Program policies for the claimant and resolve any other misunderstandings or concerns of the claimant.

Where an RTA is assigned to the file, the RTA and the FR will engage in parallel, complementary review processes as part of a coordinated review. Coordination with the RTA is implicit throughout the detailed review and the FR should refer to Chapter 3 for guidelines and suggestions to achieve this goal. Thus, although the RTA is only mentioned on occasion in this chapter, the RTA is actually involved throughout the SR&ED claim review. As the findings of one reviewer can profoundly impact the other, communication between the FR and RTA throughout the review is imperative.

In the absence of an RTA on the file, the FR should treat the projects as if they are eligible and review the expenditures accordingly. If the FR identifies a significant issue that requires the assistance of an RTA, the FR should consult the FRM for advice.

After conducting the review, the RTA may determine that the claimed work is not eligible or that they are unable to render a decision as to its eligibility. In this case, the FR may choose to deny the claim without reviewing the expenditures claimed or stop the review in progress. This action must be clearly noted in the financial review report (FRR) to ensure that the appeals officer refers the claim back to the SR&ED Division for a financial review in the event of an objection by the claimant.

5.3.1 Working with claimants during the review planning process

A review plan benefits not only the FR, but the claimant as well. It keeps the FR focussed on the important issues in the file. When these issues are shared and discussed, a review plan sets expectations of the needs of the FR for the claimant. It can be particularly helpful for first time claimants to understand the review process. It helps to:

As discussed elsewhere in this chapter, planning for the review involves many challenging considerations, especially when dealing with larger or complex claims. For this reason, the FR should not hesitate to contact the claimant during the review planning process to clarify questions about the claim and determine what records are available to substantiate the expenditures.

Once the issues and the need for a detailed review have been established, the FR would communicate to the claimant the issues and the proposed approach for resolving them. However, prior to this point, even before the review plan is complete, the claimant could be contacted if the FR needs to ask a few questions or communicate some of their concerns and a general outline of the review process to the claimant. Sometimes the initial concerns that the FRhas can be moved toward resolution by the claimant at an early stage by means of this two-way communication. Some possible discussion points / topics may include the following:

The fundamental premise of the review plan is that if the review is well organized, coordinated and focused from the outset, the FR can:

Clear two-way communication could also diminish the need for lengthy rebuttals from the claimant.

If a site visit is required, it is a good practice to contact the claimant shortly before the on-site review to confirm that they are prepared, and to address any questions they may have. Any communications of this sort should be documented.

Of course, working with the claimant implies that the claimant must also work with the CRA. The mutual expectations of the review need to be clear. This means that the FR needs to explain their expectations of the claimant, specifically that the claimant:

The FR may refer to Appendix 3 of the Scientific Claim Review Manual ( CRM ) for an outline of these mutual expectations. This document could be given to claimants so that they understand their responsibilities in the review process and those of the FR .

5.4 Contacting the claimant

5.4.1 Contact by telephone

The first step in conducting the detailed review is contacting the claimant. This contact is usually made by telephone with the person identified as the contact person in Part 1 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The FR and the RTA should coordinate this initial contact to the extent possible, particularly if the contact person for the financial information is also the contact person for the technical information. For example, if the RTA communicates first with the claimant, they may introduce the FR who will contact the claimant shortly. It is especially important to avoid both reviewers requesting the same information from the claimant.

In preparation for the contact with the claimant, the FR must determine if the contact person is also an authorized person, such as a majority shareholder, officer of the corporation, or an authorized representative. This information will dictate how much information may be divulged during the conversation. The FR must follow the CRA policy on communications security discussed in Chapter 2.9.1, and the procedures for determining whether an individual is an authorized person or representative outlined in Chapter 2.9.2.

The FR should advise the contact person that the return has been selected for a review of the SR&ED expenditures and the Investment Tax Credit (ITC) and ask whether they are the person with whom arrangements for the review should be made. The FR should also ask for the name and telephone number of the individual with whom the FR will be dealing to obtain information and documentation in support of the claim. This individual (subsequently referred to as 'the claimant') may be the contact person or another individual within or outside (external accountant or tax intermediary) the corporation.

The FR should begin the conversation with a brief explanation of the review process. Due process requires, among other things, that the claimant be made aware of the anticipated review process, that is, which aspects of the claim will be reviewed, and whether or not a site visit is planned. The FR should then question the claimant as to what books and records are available and where they are located. The need for assistance from Electronic Commerce Audit Specialists (ECAS) should be assessed at this time, if it was not determined at the planning stage (refer to Chapter 4.8.3.21).

Under certain circumstances, implementation of the review plan and the steps needed to gather information from the claimant may be carried out without a site visit. Whether a review with or without a site visit is chosen is a decision based on numerous considerations. A site visit may not be necessary for relatively simple issues, for straightforward questions, or for simple information requests. If it is anticipated that the issues can be resolved without a site visit, the FR may request that the information required for the review be made available verbally or in writing.

Alternatively, if it has been determined that a site visit will be necessary, the FR should identify the information and supporting documentation to be made available for review and indicate that a written request will follow. The FR should request an appointment at a mutually convenient time to begin the review while allowing a reasonable time for the claimant to prepare for the review. The amount of time required will depend in part on the complexity of the claim and the amount of information requested by the FR.

5.4.1.1 Working with claimants: Helping claimants avoid common review problems

An effective way to work with claimants is to anticipate common problems that are either typical of first time claimants or are often encountered in the claimant's industry. Some examples are:

The FR should make a reasonable attempt to seek clarification and work with the claimant to help guide them to properly describe and document their SR&ED expenditures. However, the onus is still on the claimant to demonstrate how the expenditures relate to the SR&ED work claimed and the criteria in the Act.

5.4.1.2 Difficulty contacting claimant

There are times when the claimant may be difficult to contact. In such a case, the FR should make several attempts over a two-week period at different times of the day. The Form T2020 should indicate the date and time of each contact attempt and whether a message was left requesting a return call. The FR should also contact the tax intermediary to determine if the contact information (name and telephone number) on form T661 is still valid. If after two weeks the claimant has still not been reached by telephone, a letter should be sent to the claimant, requesting that the contact person call the FR within 15 days to arrange for the review. The letter should advise the claimant that if contact is not made within 15 days, an adjustment or (re)assessment may be processed based on available information. A letter sent by registered post is preferable over regular post as it allows the FR to confirm whether or not the claimant has received it.

5.4.2 Initial claimant contact letter

Normally, the initial telephone conversation requesting information to be provided for the review is followed up by mailing a letter to confirm the details of the discussion. The letter should address the books and records to be made available, the date and time of the meeting (or pick-up details) and indicate that additional information may be requested as the review progresses. In addition, the FR should confirm that the claimant has suitable facilities on site for the FR to work.

An initial claimant contact letter co-signed with the RTA, outlining the technical, financial and joint issues, is recommended where possible. A joint letter avoids duplication of requested information and consolidates all of the SR&ED reviewers' needs into one letter.

5.4.3 Request for books and records

When requesting books and records for review purposes, the FR should be as specific as possible as to what information is required. There are many examples of books and records that may be kept by a claimant. The specific records available depend on the industry and the size of the company, and may be maintained manually or electronically.

The CRA considers electronic records to include any information that has been directly entered into any device for electronic processing, manipulation, storage on electronic or optical media, or reproduction to paper. A claimant who uses computerized systems to generate records and books of account must keep the electronic record. If the claimant provides information on electronic media, it should be scanned for viruses and, in the absence of a virus, copied onto the FR's laptop. Ideally, the FR would return the media to the claimant before leaving the premises. If the compact disk is kept, it should be securely stored at the office and logged, in the same way as any other borrowed records. Refer to Chapter 5.8.5 for procedures on borrowing records.

The request should be tailored to the nature of the business and the claim as well as the needs of the FR. The FR may request, but is not limited to, any of the following general books and records common to most claimants:

In addition, the FR should request that the claimant have specific documentation supporting the claim, which may include some of the following:

Note: Claimants may provide condensed or consolidated financial statements which may not be useful for the FR's purposes. If this occurs, the FR should request more detailed financial statements, or unconsolidated statements, respectively.

5.4.3.1 Working with claimants: helping claimants understand the importance of documentation

Often a claimant's expenditures are disallowed when they cannot substantiate the amounts claimed due to a lack of supporting documentation. The issue may be a missing invoice or an unsupported allocation of an expense. The FR needs to determine the source of the issue and recommend ways to improve the supporting documentation for the future. The claimant needs to be made aware of why the existing documentation is inadequate and how it can be improved for future claims. To this end, a number of different approaches may help the claimant better understand the requirement to provide support by improving their cost tracking systems for future claims:

However, it is also important to remind the claimant that they are responsible for ensuring that relevant and sufficient supporting documentation is maintained to support the expenditures claimed.

5.5 Initial interview

Interviews and discussions should be conducted with persons who are knowledgeable about both the business and the SR&ED undertaken and claimed in the year under review. Interview questions should be designed to aid the FR in gathering information relevant to the issues at hand. In small to medium-sized reviews, the interview will usually be with the claimant. In larger-sized reviews, the interview will usually be with the controller or chief financial officer, and will often include tax intermediaries or external auditors.

The majority of questions asked during the initial interview are common to most reviews, though some are unique to the claim and to the claimant. Additional questions often result from information gained in the preliminary review of the available information.

5.5.1 General interview (FR and RTA)

The initial interview should be well planned, coordinated, scheduled and carried out so as to meet the FR's interview objectives, obtain information to begin the financial review, and answer related SR&ED questions posed by the claimant. Many of the questions and answers of the initial interview will benefit both the FR and the RTA. It may therefore be practical to conduct this interview together with the RTA. In this case, the claimant should be asked to make all persons involved in the claim available to begin the process.

As discussed in Chapter 4 and based on the review plan, the Notes and Adjustments Sheet(s) will have been prepared prior to visiting the claimant. This review tool outlines questions to be asked and issues to be discussed with the claimant. Additional review tools that may be useful to the FR at this stage of the process are discussed in Chapter 5.10.2.

All conversations during the initial interview should be recorded on Form T2020. The FR should also ensure that the claimant is aware that they want to tour the premises with the RTA. Other information on Form T2020 should include the location, date and time of the interview, the names of all who attended, and the projects and issues discussed.

Although the FR and the RTA will usually be conducting separate reviews, they must continue to communicate with each other throughout the review process, especially when there are joint issues. This communication could happen at the claimant's place of business or back at the office.

Tip: Coordinate note-taking between the FR and the RTA.

5.5.2 Detailed interview (FR only)

Once the general interview coordinated with the RTA is complete, a more detailed interview can take place with the claimant's financial representatives. The FR can obtain more information about the accounting system, such as the type of software used, the existence or lack of internal controls, and the condition of the accounting records.

In the case of a functional currency claim, the FR should also confirm with the claimant that the elected functional currency was in fact the primary currency used throughout the tax year for financial reporting purposes. If it is determined that the elected functional currency was not the claimant's primary currency, the FR must advise the claimant and the tax centre (TC) that the T2 return must be refiled in Canadian currency. Refer to Appendix 4 for more information on functional currency reporting.

At this time, the FR should briefly review any requested books and records that the claimant has prepared for the initial interview. This will ensure that the FR has all the records requested in the initial claimant contact letter, and has a clear understanding of the accounting system. If some of the requested records are missing, the FR should determine if the available documentation is sufficient to begin the review. If it is not, and the claimant is unable to provide the missing information within a very short period of time, the review should be rescheduled until the claimant has a sufficient portion of the records requested. A delay code in Audit Information Management System (AIMS) may be warranted under such circumstances. Refer to Chapter 2.12, Service Standards and Delay Codes.

The claimant should be prepared to explain how the expenditures claimed were captured by the accounting system and walk through examples of transactions to illustrate how the system works. The FR should ask whatever questions are necessary to clarify ambiguous items. The FR should also observe and document the suitability of the books and records for the purposes of the review. It may happen that certain planned review procedures may not be possible and that the review plan may require updating.

5.6 Tour of premises

The FR should request a tour of the claimant's premises at the beginning of the on-site interview to ensure that the tour is coordinated with the RTA. This tour is vital to understanding the technical and financial aspects of the claimant's business and claim. It provides verifications of the SR&ED activities and assists in verifying that assets and operations are as described by the claimant. The tour is often conducted immediately after the initial interview, but it may be deferred until after the preliminary review of the books and records. The FR should request a layout of the premises in order to have a visual picture before the tour. The information gathered during the tour should be documented as soon as possible. The Notes and Adjustments Sheet(s) can be used for this purpose, or the FR can use the SR&ED Interview and Tour of Premises Questionnaire [tool currently in development at SR&ED HQ], where the questions have been prepared in advance. The claimant's responses to the questions and any observations should be recorded at the time of the tour to ensure that the information is accurate and complete. If a tour is not practical or feasible, the FR should document the reason on Form T2020. If the claimant appears hesitant or refuses access to the business location, the Financial Review Manager (FRM) should be advised. The following is a sample of the items that may be noted during the tour:

The following sections deal with the relevance of specific items that may be identified during the on-site tour.

Capital used "All or Substantially All" (ASA) – The emphasis is on locating the SR&ED equipment claimed. This will provide clues as to the use of the equipment and may generate additional questions for the RTA and the FR.

Identifying areas that may be allocated to SR&ED – The RTA or FR should request to see the area(s) of the claimant's facilities that are dedicated to SR&ED. For review purposes, it may be necessary at a later stage of the financial review to estimate the size of any such dedicated area relative to the area of the claimant's normal commercial operations. Of particular importance will be an estimate of what would have been necessary or critical in order to carry out the SR&ED work described by the claimant. Questions may be posed to establish how the claimant decided upon the dedicated SR&ED area, and whether in fact the area was used as planned or anticipated.

Commercial activities – In many cases commercial and SR&ED activities will have been carried out concurrently during the claim period. Some of the labour and other costs associated with that commercial work may be erroneously included as part of a claim. The site visit is an opportunity to gather information that will help both the RTA and the FR distinguish between labour for commercial activities and "directly engaged" labour in the SR&ED.

Directly engaged employees – The interview will provide an opportunity to meet with employees who were involved in the claimed SR&ED work. The RTA or FR may want to speak to those who were directly engaged in that work, to clearly establish the nature and extent of their involvement. For these purposes the following information can be obtained either from that employee, or the claimant:

5.7 Audit evidence

After evaluating the accounting system, the FR can begin to gather audit evidence to determine whether the claimant has properly claimed the SR&ED expenditures and is entitled to an ITC as allowed in the Income Tax Act. This is accomplished through the performance of audit procedures and testing. The extent and the nature of the testing will depend on the findings of the audit procedures completed and on the FR’s judgement and interpretation of these preliminary findings.

The FR must obtain sufficient audit evidence to be able to draw reasonable conclusions. A major decision of the FR is determining the appropriate amount of evidence to accumulate in order to be satisfied that the claimant has complied, or not complied, with the Act. Evidence can be obtained from documentation, orally, or visually, and it can be generated by the FR, by the claimant or by a third party. Evidence that validates adjustments must be cross-referenced to the working papers and placed in the file.

The FR must ensure that there is sufficient evidence gathered so that another FR would likely reach the same conclusion.

There are 7 categories of evidence:

  1. physical examination – the visual inspection of prototypes and equipment;
  2. documentation (vouching) – the FR’s examination of the claimant’s documents and records to substantiate the information in the financial statements, form T661, etc;
  3. observation – the use of senses to assess certain activities;
  4. inquiries of the claimant – written or oral information received from the claimant or the claimant’s personnel in response to questions from the FR;
  5. confirmation – the receipt of a written response from a third party verifying the accuracy of information that was identified by the FR;
  6. mechanical accuracy – the rechecking of a sample of the computations and transfers of information made by the claimant during the period under review; and
  7. analytical tests – comparisons and relationships used as a means to isolate accounts or transactions that should be investigated more intensively to help in deciding that additional verification is not needed. Analytical review means studying and evaluating the relationships between elements of financial and other information.

5.8 Testing the claimant’s books of account

Generally, testing the claimant’s books of account can take two forms. The FR may examine the internal controls with the goal of reducing the substantive testing of the actual entries in the books, or the FR might decide that substantive testing is all that is required to complete the review. The latter may be a decision taken when the former is attempted and the FR’s initial tests suggest that the internal controls are not reliable, or when the claim is small.

5.8.1 Evaluation of internal controls

An internal control system consists of the procedures and policies that an entity uses to either prevent or detect a material error in the books and records, to safeguard its assets, and to ensure the optimal use of its resources.

In small companies, the entire accounting system may consist of just receipts for expenses and bank statements. The claimant may track SR&ED expenditures in the accounts throughout the year; however, it is unlikely that reliable internal controls would be implemented and monitored by the claimant. A few controls may exist but, without proper segregation of duties, the controls may be unreliable. Therefore, the FR should not spend any time evaluating the internal controls for a small claim. A proper evaluation of the controls would likely take more time than the alternative – a substantive review of the claim.

For a very large claim comprised of tens of thousands of expenditures, reliance on internal controls could significantly reduce the amount of time required for the review. Although internal controls are designed for management purposes, they may be evaluated and relied upon by an FR who is reviewing the claim. A conclusion by the FR that effective internal controls existed throughout the claim year will allow the FR to rely on those specific controls and reduce the sample of individual expenditures to be examined. Generally, each control functioning properly in the accounting system will improve the reliability of the accounting records produced by that system. Thus, evaluating internal controls can be considered a means to evaluate the risk of errors in the accounts of the claimant. If it is determined that the control upon which the FR wishes to rely was not functioning, the FR will need to evaluate the impact on the review plan if reliance on the control was integral to that plan. Essentially, this means that the sample size of the transactions to be tested would increase significantly.

5.8.2 Using IDEA

In addition to evaluating and relying upon internal controls, the FR may find the Interactive Data Extraction and Analysis (IDEA) tool particularly useful when the volume of transactions is too large to enable effective and efficient testing, and / or where the audit trail is not apparent except electronically. IDEA can be used to:

Where a systematic error is found, IDEA will allow the FR to quantify the total errors in the accounts related to the systematic error. In situations where the scope of the review is to be expanded, IDEA will permit increasing the volume of the expenditures to be examined. This expansion of the review may not be feasible using manual procedures.

5.8.3 Types of direct testing

There are two primary types of direct testing that the FR may perform: specific or representative. The FR is at liberty to choose either or combine both direct tests in formulating a review plan. Each has its advantages depending on the circumstances of the claim and the quality of the books and records of the claimant.

Specific testing is useful to examine expenditures that are material to the CRA where the expenditures are comprised of one item or a small population of items. An example where specific testing is especially useful is

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Representative testing is used by the FR where there are many similar transactions, and the claimant has likely used the same or similar methodology to determine the SR&ED portion of the expenditure. The FR would select a typical sample of items drawn from the population to reach a conclusion as to whether the claimant has dealt with such items in accordance with the Act and CRA policies. This sampling technique can increase the efficiency of the review, especially when the FR can conclude that, based on the sample tested, the claimant’s accounting for the SR&ED costs reasonably reflects the amounts allowable under the legislation.

There are two methods available to the FR for choosing a sample for representative testing: statistical and non-statistical. The FR uses professional judgement to select a non-statistical sample and a mathematical equation to obtain a statistical sample. Although statistical sampling is far more rigorous to apply, it provides a higher degree of comfort that the conclusion drawn is more reliable than for a non-statistical sample since its conclusions are based on random sampling and probability theory.

Non-statistical sampling can occur when the FR selects items for review that pose questions in the mind of the FR. Some examples follow:  

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The CRA has guidelines on the use of statistical sampling found in Chapter 13 of the Audit Manual. This sampling method could be useful in situations where there is a large volume of SR&ED transactions. As stated earlier, the items in the sample are randomly selected and probability theory is applied to reach conclusions on projected error rates within the population of items. Consequently, the results obtained can be used to propose adjustments. Further, by stratifying the population of items, statistically valid error rates could be established for each stratum (a stratum being a discrete portion of the population having an identifying characteristic, for example, amounts less than $200 or purchases from ABC Inc.). This could increase the overall accuracy of the projections of error in the population. IDEA should be used by the FR opting to use statistical sampling.

5.8.4 Other audit procedures

There are many audit procedures for gathering audit evidence. Some of the more common procedures are described below:

The FR will apply various audit procedures to the expenditures claimed for SR&ED purposes to form conclusions concerning the level of compliance with the Act and CRA policies. The FR is not required to examine all of the information available if conclusions can be reached by using sampling approaches or other means of selecting items for testing. If examining only part of the data provides the FR with reasonable assurance as to the reliability of the entire set of data and that there are no material errors, the FR may draw conclusions and end the review. However, where material amounts of the claim are still at risk, and reasonable assurance is not provided by the sampling technique selected, the FR will not be able to extrapolate the quantum of non-compliance from a sample of the expenditures claimed. In this latter case, further substantive testing is recommended until the FR is satisfied that no material errors remain. If this means that significant changes to the review plan are required, the FRM may have to be consulted.

5.8.5 Making copies of the claimant’s documentation

During the review process, the FR may need to retain copies of various documents of the claimant for further examination or to support adjustments. Under section 231.5 of the Act, the FR has the authority to make copies of any documents belonging to the claimant, including print-outs of any electronic documents. The procedures for making copies can be found in Chapter 10 of the Audit Manual. If the claimant either cannot or will not make a photocopier available, the records should be borrowed and photocopied at the tax services office (TSO) and returned to the claimant afterwards. If that is the case, the FR should follow the procedures for borrowing books and records outlined in Chapter 10 of the Audit Manual. Form T2213, Receipt for borrowed books, records and documents, may be used for that purpose.

5.9 Types of documentation

A working paper file will usually contain some or all of the following items:

Reports, correspondence and claimant filings

Working papers and review tools

Supporting documentation

A copy of any supporting documentation received should be kept in the file and referenced in the working papers when it supports an adjustment. Such documentation may sometimes be annotated by the FR with review marks, comments or even highlighted. When this occurs, it becomes a working paper. If the FR needs to mark up the original photocopy, a clean copy of the document should be retained in addition to the copy used as a working paper. Any extraneous marks on the original copy might invalidate the document as evidence of what was received from the claimant should the claimant challenge its authenticity in a court of law.

5.10 Working papers and review tools

Working papers and review tools are especially critical as they track what the FR looked at and what conclusions the FR reached when looking at the information gathered or provided by the claimant. They form the primary evidence detailing what the FR reviewed, what interactions took place with the claimant and others, and the chronology of the review.

5.10.1 Working papers

Working papers are defined in the Canadian Institute of Chartered Accountants (CICA) Handbook as “the records kept by the auditor of procedures applied and the result thereof, information obtained and conclusion reached in performing his or her examination and preparing his or her report.”

Each working paper should be properly titled and include the claimant’s name, business number, the claim period covered, a brief description of the contents, the name of the preparer of the working paper, and the date of preparation.

Working papers should be both indexed and cross-referenced to aid in organizing the review file and process. Indexing and numbering of working papers will be discussed in Chapter 6.15.

5.10.1.1 Purpose of working papers

Good working papers are the key to understanding the rationale of every decision made by the FR. They should be standalone documents in the sense that any other user of the working papers should not need to contact the FR for any explanations of what occurred during the review.

The purposes of working papers are to:

5.10.2 Review tools

Review tools are job aids such as questionnaires, checklists, issue-related working papers and query sheets. Some of these templates can be modified to the FR’s needs for the particular claimant, thus helping the FR to obtain relevant information related to the issues in the claim and ensuring that nothing of importance was omitted. The SR&ED Directorate is presently working on a number of these tools.

5.10.2.1 Questionnaires

Questionnaires allow the FR to interview a claimant or the claimant’s personnel and ensure that all of the FR’s questions were addressed. Typically, the questionnaire template may by used by the FR for many files and over many years, as similar issues in the file will normally result in similar questions. The claimant’s responses to the questions should be recorded at the time of the interview, or shortly thereafter, to ensure that the information is accurate and complete. When using a questionnaire template, the FR should ask only the questions that are relevant to the particular file and either remove or cross out the questions that are not needed.

An example of a standard questionnaire is the SR&ED Interview and Tour of Premises Questionnaire [tool currently in development at SR&ED HQ], which may be used to document the information gathered during the initial interview. This document provides a list of questions designed to collect basic information needed in most reviews. The tool can be expanded to include more questions. Of course, changes to questions may be required depending on the claimant’s responses, and that may also result in changes to the preliminary review plan.

5.10.2.2 Checklists

Checklists can also be used to ensure that all aspects of the review have been completed. The checklist serves as a control on the review process undertaken. That is, every contemplated action can be included in a checklist and when the audit procedure is accomplished, it is noted and referenced on the checklist. In this way the FR can examine the checklist to see what remains to be done at any point in the review process. An example of a checklist is the Tour of the Claimant’s Premises Checklist, which could include references to ASA capital to be examined, personnel to be interviewed (referenced to the questionnaire), floor space to be estimated, and samples of the output to be requested (for the RTA).

Simply stated, a checklist can be thought of as a “to-do list” and can be as detailed as needed for the particular FR. Any item completed on the checklist should be referenced to the appropriate working paper or note(s) taken. Short notes may be inserted directly on the checklist itself.

5.10.2.3 Issue-related working papers

An Issue-Related Working Paper [tool currently in development at SR&ED HQ] consists of one or more pages that clearly show the audit procedures undertaken, the findings of those procedures and the conclusions drawn. It provides an explanation of the scope and depth of the review, details of complex calculations, and the application of legislation to the decisions made. It may also indicate what the FR has decided not to do, and the reasons. Additional information that should be included in each Issue-Related Working Paper includes:

There should be only one lead sheet for a particular line number on Form T661, though it may relate to multiple issues. Thus, each lead sheet referring to a particular Form T661 line number will have one or more working papers supporting the conclusion on the lead sheet. Audit notations (that is, symbols or tick marks) on working papers, including the lead sheet, must be clearly explained on the working paper or in a separate key for the symbols used in the file.

Referencing and cross-referencing of the working papers is important. When a figure is shown, its source should be indicated, that is, the working paper or other reference from where the figure came. When a figure is carried to another working paper, a cross-reference to indicate the working paper to which the figure was carried should be shown. This makes it easier for the FR and other readers to follow the review trail and findings that lead to the conclusions. By convention, the referencing of the source document or working paper (from) would be shown upper left of the figure, while the referencing of the destination document or working paper (to) would be indicated at the bottom right of the figure.

Example:

300-4$4,800 [amount brought forward from w / p 300-4]

300-4 $3,200

$8,000 300 [amount carried to w / p 300] $8,000

5.10.2.4 Query sheets

During a review process, the FR may require additional information or documentation from the claimant. Form T997, Query Sheet, is a useful tool for that purpose. It provides for the FR’s question or request for information, the expected reply date, as well as a space for the claimant’s reply. The claimant may attach supporting documentation, as needed. The FR and the claimant should determine the best way to present such queries, for example, as they arise for very small claims or at the end of each day for larger claims or a combination of both.

5.10.3 Indexing and numbering of working papers

All working papers in the file must be indexed and numbered so that they can easily be found. A standardized indexing and numbering system for working papers should be adopted at the level of the coordinating tax services office (CTSO) and, preferably, across all CTSOs. Chapter 6.17 offers an alternative indexing and numbering system to the one found in the Windows Audit Laptop System (Win / ALS).

The numbering of working papers is vital to the organization of the file. It both facilitates cross-referencing from one working paper or document to another and sheds light on all of the review process performed by the FR from beginning to end. To be useful, the index would both situate and describe the working paper or other document in the file.

5.11 Resolving issues

In the preliminary review stage, the FR will have started one or more Notes and Adjustments Sheet(s), (refer to Chapter 4.9). During this stage of the review, the FR will start to clear items from the notes and adjustments as well as issues identified in the review plan. Any required adjustments should be noted immediately.

The onus is on the FR to verify the explanations provided by the claimant during the interview. If the information provided by the claimant appears inconsistent with other information obtained by the FR, the claimant should be asked for further explanations or for more information.

5.11.1 Consultation with CRA colleagues

On occasion, while conducting the review of the claim, the FR may come across a newly-discovered complex or challenging issue. In this instance, a consultation may be required to fully understand and address the issue. The FR may consult with another FR, a Financial Technical Advisor (FTA), an FRM, an RTA, or an agent from another area of expertise such as Aggressive Tax Planning or the Technical Guidance Division in HQ. Local policy will determine how the FR can approach others for advice or information. Details of all consultations should be recorded on Form T2020 if they affect the review process and / or decisions reached.

5.12 Inadequate supporting evidence

5.12.1 Requirements of the Income Tax Act

Subsection 230(1) of the Act requires the claimant to maintain records and books containing sufficient information to determine the amount of tax credits claimable. Therefore, in order to claim SR&ED investment tax credits, the claimant must maintain supporting evidence to demonstrate that the expenditures claimed meet the requirements of the Act. For example, the evidence must demonstrate that:

Note: A memorandum on the SR&ED reporting deadline and the investment tax credit (ITC) amount was issued by the Policy Development Division on January 8, 2009.

This memo states that, if the claimant has not identified an expenditure by the reporting deadline on the Form T661, this expenditure would be deemed not to be an SR&ED expenditure as outlined in subsection 37(12) of the Act. An expenditure amount that has been disallowed cannot be substituted with another expenditure amount. The reclassification of an expenditure to correct an error in classification will be allowed after the reporting deadline, even when the request comes from a claimant. For additional details, refer to the memorandum.

5.12.2 Format of evidence

Subsection 230(1) of the Act also requires the claimant to maintain books and records in such form as will enable taxes or other amounts to be determined. This implies that the supporting documentation or evidence presented by the claimant must be properly organized or in a usable form. Examples of evidence that may be rejected by the FR (that is, the FR declines to review it in detail) include the following:

The FR should make a reasonable effort to work with the information as presented by the claimant. However, if evidence is presented in a format which cannot be used with a reasonable effort, it can be treated the same way as inadequate evidence, and the FR should advise the claimant to present the requested information in an organized fashion. The FR should document what was seen and explain the deficiencies to the claimant, indicating, for example, that they are unable to determine what was claimed based on what was presented. Under these circumstances, the FR is not required to read or describe in detail every document or paper that is presented as evidence. A summary of the information received (for example, “3000 pages of unsorted papers from the production plant” or “a 10 kg box of unsorted invoices”) would be adequate. If this situation arises, the FR should consider consulting the FRM to get a second opinion on the correct approach.

5.12.3 Inadequate books and records

In some cases the books and records provided by the claimant may be properly organized and in a usable form, but may not contain sufficient information to support the claim. The FR will need to determine if the review can reasonably proceed or needs to be postponed until the claimant can supply alternative documentary evidence supporting their claim. In either case, the inadequacies in the books and records and the importance of keeping proper records should be discussed informally with the claimant and this conversation should be documented on Form T2020.

Notwithstanding the lack of adequate books and records, the FR may find alternative evidence that would reasonably support that the expenditures claimed were incurred in the year. The FR will use professional judgement to decide to what extent that evidence supports the SR&ED expenditures and ITC claimed. For example, the claimant does not have invoices for materials used in the SR&ED but has purchase orders and cancelled cheques to the supplier. However, in the absence of alternative means of verifying the expenditures, if the FR believes that the records are such that a review of the SR&ED expenditures cannot be completed, the FR may disallow any unsupported expenditures.

5.12.4 Documenting observations

The FR should document relevant observations concerning supporting documentation presented by the claimant and requests for supporting documentation from the claimant. The lack of, or inadequacy of, supporting documentation must be clearly documented. It is insufficient to simply state that the supporting documentation is inadequate without providing some explanation. A clear distinction can be made between no supporting documentation, and supporting documentation presented by the claimant but not considered adequate or relevant.

5.12.5 Disallowing an expenditure due to lack of supporting evidence

If the FR has requested information and it has not been provided, the claim may be disallowed in whole or in part. The request must have been reasonable and justifiable, and the claimant must have been given sufficient time to provide the information. Sufficient time, where a large amount of information is requested, should be determined jointly with the claimant; otherwise 15 to 30 days would be considered reasonable.

An example of a claim disallowed due to lack of supporting evidence is where only salaries are claimed, the individuals claimed as employees were paid by a related entity, and the claimant did not present any evidence indicating that the employees and salary costs are shared. Since neither an employee nor contractor relationship can be established by the claimant, the entire claim would be disallowed. In this situation, the FR should inform the FRM or FTA of the pending disallowance prior to issuing the proposal letter denying the SR&ED expenditures and ITC earned.

5.12.6 Request for better books and records

Whether any expenditures were allowed or disallowed, a letter highlighting any inadequacies in the books and records should be sent to the claimant. The letter may offer constructive suggestions on how the claimant may rectify the inadequacies. The FR should include a statement to the effect that the present letter is giving notice that failure to undertake recommended improvements to the books and records could result in the disallowance of future SR&ED expenditures and ITC claims. A letter of undertaking for the claimant to sign and return, acknowledging the inadequacies that will be corrected, should be included with the request for better books and records (BBR) letter. If the claimant has not returned the undertaking within 30 days, the claimant should be contacted to ensure that the letter was received. If it was not, a follow-up letter with another copy of the undertaking should be sent. A copy of all of these letters, including any returned undertaking, should be placed in the working paper file and the originals in the permanent document (PD) file. In some cases, a follow-up visit is recommended after a minimum of 60 days to ensure that the improvements have been implemented and that they meet the needs of the review process.

5.12.7 Requirement to keep books and records

Where the claimant has ignored multiple requests to keep better books and records, the FR should bring the situation to the attention of the FRM and be prepared to draft and serve a formal requirement to keep specific books and records per subsection 230(3) of the Act. This requirement is issued at the discretion of, and signed by, the Assistant Director (AD). Failure by the claimant to comply with the requirement could result in a prosecution action and the application of penalties under subsection 238(1).

A requirement pursuant to subsection 230(3) should only be recommended by the FR after thoroughly considering any extenuating circumstances of the case. When recommending that a requirement be issued, the facts of the case must justify the recommendation.

5.12.8 Negotiations with the claimant

The FR must not negotiate the eligibility of expenditures with the claimant under any circumstances. Review decisions must be based on the facts of the case and applicable legislation. The FR must never:

Negotiation creates several problems. The first is that it does not help the claimant to comply in future years since the decision is arbitrary. Secondly, the claimant can change their mind later and file an objection for the expenditures not considered SR&ED. If there were no rationale in the file for the expenditures not considered SR&ED, the determination would not be defensible at the objection stage. Working with the RTA and the claimant to establish a reasonable basis for an estimate is acceptable in certain situations. Sometimes there is documentation or evidence that SR&ED was performed but it is limited and does not establish the precise boundaries of SR&ED. In these circumstances, the FR works with the RTA and the claimant to arrive at a reasonable estimate of the amount of labour, materials, or production that could be attributed to SR&ED. This process is not negotiation and is acceptable. However, there must still be some basis for the estimate and the rationale for the estimate should be documented.

CRA documents describe two methods of estimating SR&ED expenditures in the absence or lack of technical documentation. They are the following:

5.12.9 Waiver of the right to object

The claimant may waive their right to object to the assessment of one or more particular issues under specific circumstances where it is difficult to resolve the issues any other way. The waiver relates to an audit agreement, a separate document that sets out the terms reached between the CRA and the claimant as to how the issues will be treated.

This waiver is considered binding by the Appeals Division provided that it is valid and used correctly. Several factors and conditions must exist before such a waiver can be contemplated. They are described in Compliance Program Branch (CPB) Communiqué AD 05-02B, The Audit Agreement and Waiver of a Client’s Right to Object.

5.13 Making decisions

5.13.1 Evaluating the results of the audit procedures performed

At this stage the FR has completed the necessary audit procedures and gathered sufficient evidence to make decisions / conclusions. Conclusions can be made independently if the issues are solely financial; otherwise the FR must discuss the findings with the RTA before advising the claimant. The conclusions must be clear and concise, as well as consistent with the findings / evidence and the Act.

5.13.2 Statute-barred situations

There are generally two types of reviews where the return may be approaching its statute-barred date: an original assessed return under review (0450 case) and a taxpayer (claimant) requested adjustment (TPR) (0452 or 0402 case). A TPR may be treated as an implied waiver in some cases (refer to Chapter 5.13.2.3).

The FR must be aware at all times of the statute-barred date of any return in their inventory. There must be sufficient time to propose the adjustments, receive and consider representations, and reassess the year prior to the statute-barred date. Otherwise, the FR may have to close the file without adjustments, unless the conditions outlined below are met.

5.13.2.1 Reassessment beyond the statute-barred date

The rules relating to a reassessment after the claimant’s normal reassessment period for the year are contained in section 152 of the Act. For example, a reassessment is permitted at any time in the case of fraud or misrepresentation or where a waiver has been filed in respect of the year. A reassessment is also permitted within three years after the statute-barred date as a consequence of certain circumstances, such as the carryback of a loss or a change to a balance resulting from a decision on an appeal.

Notwithstanding the limitations of the Act, the CRA will nevertheless accept requests for adjustments in certain statute-barred situations, provided that the conditions stated in IC 75-7R3, Reassessment of a Return of Income , are all met. These conditions are, generally, that:

  1. the taxpayer (claimant) has filed the return within the filing period identified in subsection 164(1);
  2. the CRA is satisfied that the previous (re)assessment was wrong (the claimant must justify this claim);
  3. the reassessment can be made within the period referred to in paragraph 1 of IC 75-7R3 or the taxpayer (claimant) has filed a waiver in prescribed form;
  4. the requested decrease in taxable income assessed is not based solely on an increased claim for CCA or other permissive deductions, where the taxpayer (claimant) originally claimed less than the maximum allowable; and
  5. the application for a refund is not based solely upon a successful appeal to the courts by another taxpayer (claimant).

IC 84-1, Revision of Capital Cost Allowance Claims and Other Permissive Deductions, describes the CRA’s administrative policy in respect of a taxpayer’s (claimant’s) request for a revision to a permissive deduction. Of particular interest to the FR are paragraph 9, which applies to requests in respect of taxable years, and paragraph 10, which applies to requests in respect of non-taxable years.

5.13.2.2 Waiver to the normal reassessment period

The purpose of this waiver is to extend the reassessment period beyond the statute-barred date for the tax year, in order to allow additional time for the CRA to consider all the relevant information and for the claimant to submit further representations. The Act requires a waiver to be filed in prescribed form (form T2029, Waiver in respect of the normal reassessment period or extended reassessment period), and each issue waived to be fully described. However, a letter containing all of the required information may also serve as a waiver, provided that the issues are well explained. It does not suffice to simply list the sections of the Act; the waiver must include a full description of the subject matter. The waiver should be as precise as possible to ensure that the claimant’s intention is clear. Chapter 11 of the Audit Manual states that waivers that contain only the sections of the legislation rather than a description of the subject matter should not be accepted. The Audit Manual goes on to state that it is not necessary to set out the legislative provisions, provided that the issue is sufficiently well defined and described. Therefore, a waiver that simply lists sections of the Act and is not in relation to a specific issue may not be considered a valid waiver by the CRA.

According to the Audit Manual, a waiver remains valid as long as the claimant has not revoked it. However, that does not entitle the claimant to have TPRs processed indefinitely. Once the issue specified in the waiver has been resolved, the CRA considers the matter closed.

5.13.2.3 Implied waiver

A TPR is considered to be an implied waiver when the adjustments requested would benefit the claimant. For example, the claimant may have filed an amended return to increase the amount of the ITC earned from the amount that was previously assessed. Such a request will always be to the advantage of the claimant, even if the revised amount is reduced as a result of the review. The claimant may not have defined or described in words the adjustments that may be made after the statute-barred date but the amended return clearly outlines what the claimant expects. The claimant will not object to the reassessment without a formal waiver because, without the reassessment, the claimant would not obtain the additional ITC. (The claimant may object to the amount of the reassessment but that’s another issue altogether.)

Another example of an implied waiver is the one described in Directive SR&ED 95-01, Implied Waivers for SR&EDTaxpayer Requested Adjustments (TPRs) in Respect of ITC Claims. In this situation the TPR is filed close to the statute-barred date of the year to which the ITC is to be applied (carried forward or back), not the year in which the ITC was earned. For example, a TPR to increase the qualified expenditures for the 2008 tax year is filed on September 30, 2009. The claimant requests that the additional ITC earned be carried back to the 2005 tax year, which was assessed on October 15, 2006. Since the request was received prior the statute-barred date of October 15, 2009, the waiver is implied and the adjustment may be assessed.

5.14 Concluding the review

The issues and findings should be discussed with the claimant throughout the review process and resolved as they arise, if possible. As a result, there should not be any real surprises at the conclusion of the review. The claimant should know whether or not any adjustments will be proposed, and be aware of any unresolved issues.

5.14.1 No change reviews

Where all material issues have been resolved to the satisfaction of the FR and the RTA, and both reviewers have determined that the file can be closed without adjustments, a letter is issued to the claimant confirming that the claim for the year under review is accepted as filed.

The letter will inform the claimant that the review was limited to the SR&ED claim and will also note that the T2 Corporation Income Tax Return (T2) may be subject to a general audit at any time during the normal audit selection process. This letter will also provide confirmation that the claim will not be reviewed again under normal circumstances, and list the conditions under which it could be reopened.

The conditions are as follows:

Finally, the letter should advise the claimant that the books and records are to be retained and include a link to IC 78-10R5, Books and Records Retention/Destruction, on the CRA website.

5.14.2 Review with adjustments required

Where, at the conclusion of the review of the available evidence and supporting documentation, one or more material issues have not been resolved, adjustments may be required.

The adjustments are usually presented in writing but, depending on the size of the claimant’s business, the complexity of the file, and the nature of the proposed adjustments, the FR may discuss the adjustments with the claimant orally (in person or by telephone). This discussion should nevertheless be followed up with a proposal package outlining the financial and tax implications of the adjustments. The RTA should assist the FR in explaining the adjustments that result from the RTA’s review.

Refer to Chapter 5.15 “Proposing Adjustments” below.

5.14.3 Considering the application of penalties

Chapter 2.20 describes the penalties that may be imposed on a claimant or, in some cases, a tax preparer. If the FR is contemplating the application of a penalty to the claimant under review, they must begin the process prior to proposing the adjustments.

5.14.4 Referral to the enforcement division

During the review, the FR may uncover unusual situations that have possible indicators of fraud. As stated in Chapter 2.20, such cases should be referred to the Enforcement Division. The FR should refer to the communiqué in InfoZone, regarding the Jarvis/Ling decisions to obtain a better understanding of how to proceed with the review when fraud is suspected.

The procedures for referring SR&ED cases and the timing of the referral differ from regular audit cases. The following is a brief description of the process for SR&ED files:

Most of the documentation listed above would not normally be prepared until after the proposal stage. The FR may have to refer to Chapter 6 for assistance.

There should be no further contact with the claimant. If the claimant should call after the file has been referred, they should be advised that the file is with Enforcement and that someone from Enforcement will call them.

5.15 Proposing adjustments

A proposal letter providing details of all proposed adjustments and the related financial and tax implications, including proposed penalties, if applicable, should be issued to the claimant as soon as possible after the completion of the review. The letter should allow the claimant 30 days from the date of the letter to provide any further response, rebuttal, explanation or additional documentation relating to the proposed adjustments. The letter should be accompanied by the following documents:

Note: It may not be necessary to provide the revised schedules at the proposal stage; the summary of adjustments may provide sufficient details to allow the claimant to follow the changes to the schedules. The schedules may be further modified following the claimant’s representations and will be sent to the claimant as part of the assessment package.

Note: If the proposal letter does not explain the adjustments, the Issue related Working Paper [tool currently in development at SR&ED HQ] should be provided as support for the adjustments, removing all audit procedures. If the proposal letter clearly explains the adjustments, the Issue related Working Paper is not provided to the claimant.

5.15.1 Presenting the proposal letter package

The proposal letter package (that is, the proposal letter and accompanying documents, such as, the summary of adjustments), may be presented to the claimant at the time of the final meeting, or in advance in order to allow the claimant to prepare for the discussion. The final meeting, if one is needed, should be scheduled within a reasonable time period after the fieldwork is completed and should include the RTA if adjustments are a result of joint or technical issues. The final meeting may be held via telephone. This may occur when, for example, a meeting in person would require extensive travel or the adjustments are not contentious.

The FR should have been discussing and resolving issues with the claimant throughout the review process. The proposed adjustments should therefore consist only of the items that remain outstanding, and the claimant should already be aware of them.

The final meeting is essential for providing detailed explanations of the adjustments to the claimant and to discuss any representations from the claimant that he may have at this time. During the meeting, the outstanding issues should be revisited to ensure that the claimant is given another opportunity to present their position and any additional information.

If the claimant agrees with the proposed adjustments, he may confirm this agreement 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 can also waive the 30-day waiting period for representations in order to expedite the processing of the file.

If there are still outstanding issues because the claimant disagrees with the CRA’s position on one or more issues, the claimant is provided 30 days to provide written representations and additional information. The FR should ensure that the CRA’s positions were clearly and fully understood by the claimant.

5.15.1.1 Working with claimants: resolving claimants’ concerns and avoiding disputes

The AP SR&ED 2000-02R, Guidelines for resolving claimants’ SR&ED concerns, provides the fundamental procedures for resolving claimants’ concerns in a meaningful and productive manner. However, resolving potential conflicts and disputes involves much more than following a specific procedure. It requires communication of the FR’s desire to achieve a common understanding, respect for the claimant’s concerns and demonstrated patience to listen to concerns and address them. Without a similar commitment on the part of the claimant, it may not be possible to resolve a dispute. Claimants also need to listen to what the FR is saying and try to understand their viewpoint.

When a dispute arises, the FR should explain the three steps available to the claimant to try to resolve the dispute and reinforce to the claimant that the CRA is committed to ensuring that disputes are resolved as early as possible in the dispute resolution process.

Ask the claimant to explain their concerns to the FR and RTA. If the claimant is upset, allow them to express themselves without arguing with them or raising your voice. Listen and calmly try to bring the discussion back to the need to find documentary evidence for the expenditure claimed or allocation made. Consider what other evidence might be available to help the claimant’s cause (for example, a third party might be able to provide lost documentation). If the discussion starts to become heated, suggest that a short break be taken so that the claimant’s concerns can later be discussed in a productive manner.

One of the most effective ways of dealing with disputes is to engage in practices that prevent disputes from occurring in the first place. Many FRs believe that open, early and effective communication with the claimant is the key to preventing or resolving disputes.

One important technique is for the FR to demonstrate through their actions and words that they have no stake in the outcome of the review. Further, the FR could explain that the CRA’s review process is in place to ensure that the claimant receives its full entitlement; no less and no more. Another technique is to focus on the legislation and policies of the CRA when explaining why a particular cost might not be eligible.

Before making a determination, ask questions and focus on the facts as presented by the claimant to avoid giving the impression that a decision has been made before all of the facts have been considered. For example, the FR should not indicate that a particular kind of expenditure is usually not eligible without first hearing why the claimant feels that the expenditure was incurred for SR&ED work claimed. The FR’s demonstrated openness and consideration of all of the facts prior to making a disallowance should persuade the claimant that all expenditures that were disallowed were given every consideration prior to the decision being made.

Another technique of open and effective communication is to ensure that potential issues are identified and explained to the claimant at the outset of the review or as soon as they are discovered.

When the FR suspects that there is a good chance that a particular review may lead to a dispute (for example, based on previous experience with the claimant), some options for prevention include:

It is important to treat the claimant with respect. Remember that most claimants are very proud of their work. Disputes can involve either the eligibility of work or issues concerning substantiating documentation. If the RTA has determined that some of the work is not eligible, the FR should break down the impact of the RTA’s decision separately from any financial adjustments proposed. The claimant may disagree with the RTA and may be considering its options within the Appeals Branch. An understanding of the amount of Investment Tax Credit disallowed by the RTA could help the claimant make a decision one way or the other.

If it still appears likely that the claimant wishes to take the discussion to the second and third steps, the FR should advise the FRM or AD to expect contact from the claimant and defer processing the file.

5.16 Claimant’s Representations

The claimant is provided 30 days to provide representations and additional information. A courtesy telephone call should be made to the claimant to ensure that they will have the additional information within the 30 days. An extension of time may be granted depending on the circumstances (for example, the claimant is out of the country).

If the claimant does not provide any representations and additional information and does not request additional time within the 30 days, the FR should close the file and process the adjustments.

If written representations and additional information are received within the 30 days, the FR should determine whether there is anything new or if it is a repetition of representations and information previously addressed. The FR should consider any new information provided by the claimant prior to finalizing the CRA position. This may entail further communication with the claimant after the final meeting to discuss the new information or any revisions made to the adjustments. Revisions to the proposed adjustments do not entail a new proposal letter, although the FR may revise the summary of adjustments to outline the revised financial and tax implications; this revised summary may be issued to the claimant if requested.

If any contentious (non-concurrence) issues remain outstanding after all of the claimant’s representations have been considered, the FR should discuss the issues with the FRM and / or FTA to arrive at the final CRA decision. That decision should be communicated to the claimant and, if the claimant still does not agree with the conclusions, the claimant should be referred to the CRA’s Dispute Resolution process described in Application Policy (AP) SR&ED 2000-02R, Guidelines for Resolving Claimant’s SR&ED Concerns. This policy outlines a three-step process for dealing with disagreements before the file is closed and processed.

Note: As a result of adjustments to taxable income and / or ITCs earned, the claimant may wish to revise certain permissive deductions, such as CCA, the SR&ED expenditure pool deduction, or the application of unclaimed non-capital losses from other years, in order to minimize the tax payable resulting from the proposed adjustments. Normally, such requests are provided in writing by the claimant and accepted by the FR.

5.17 Issuing the Final Letter

The final letter should be sent to the claimant following the proposal and representation meetings / discussions. This letter has multiple purposes, as follows:

The final letter should be accompanied by the final Summary of Adjustments, the revised Form T661 and any revised schedules, if any of these documents differ from what was presented to the claimant at the proposal stage.

5.18 SR&ED Claims and Appeals

If a claimant objects to an assessment resulting from the review of an SR&ED claim, in most cases the appeals officer will handle the financial issues without contacting the FR. Whether the objection is of a technical or financial nature, the documentation in the file (working papers and FRR) should be detailed enough to allow the appeals officer to relate the adjustments to a particular project or activity.

There will be times, however, when the appeals officer will contact the SR&ED Division to request a review of the expenditures claimed. That would occur, for example, where the TC denied the claim for failure to meet the filing requirements, or the RTA either considered the work to be ineligible or was unable to determine its eligibility. These situations are discussed in Chapter 5.18.1.

There will also be times when the FR will be required to communicate with the Appeals Division prior to finalizing a review. If the year being reviewed is under objection, whether or not the objection is related to SR&ED, there cannot be a reassessment until the appeals stall code has been removed. These situations are discussed in Chapter 5.18.2.

Finally, the FR may be reviewing a claim while a prior year is under appeal. These situations are discussed in Chapter 5.18.3.

Some of the procedures presented on this topic relate to finalizing the review. However, given that all of the information deals with the topic of appeals, limiting it to one comprehensive part of the Claim Review Manual (CRM) will make it easier for the FR to identify the procedures applicable to any particular situation.

5.18.1 SR&ED Claim Referred from Appeals

As previously noted in Chapter 5.3, the FR may not have reviewed the expenditures claimed or may have ended the review prematurely if the RTA had considered the work to be ineligible or was unable to render a decision as to its eligibility. The FR would not even have seen a claim that had been denied by the TC for failure to meet the filing requirements. Such claims do not undergo risk assessment, let alone a financial review. Two situations are described below:

  1. If the objection relates to a claim that was denied by the TC:
     
    • The appeals officer will undertake the appropriate steps to determine if the TC’s conclusion that the claim did not meet the filing requirements is defensible.
    • If it is determined that the conclusion is not defensible, the appeals officer will refer the claim to the SR&ED Division at the CTSO for a manual risk assessment.
    • If warranted, the claim will be assigned for financial and / or technical review.
  2. If the objection relates to a claim that was denied by the RTA:
    • The appeals officer will confirm that there had not been a financial review at the time of assessment or that the FR had stopped the review in light of the RTA’s decision.
    • The appeals officer will also confirm that the control function or the FR had not recommended that the claim be accepted as filed prior to receiving the RTA’s decision.
    • If both conditions are met, the appeals officer will refer the claim to the SR&ED Division for financial review consideration. The FR must consider this review carefully even if the RTA’s decision is maintained at the objection stage. If the claimant takes the issue to court, the expenditures claimed in respect of any work that the judge accepts as eligible will be allowed unless there is sufficient documentation in the file to disallow them.

Directive SR&ED 97-04, Guidelines for Processing SR&ED Claims, Section 6, outlines the procedures to be undertaken by the FR and / or the RTA when dealing with claims referred from Appeals.

These reviews are performed on behalf of the Appeals Division, on a priority basis and following the SR&ED Program’s policies and procedures. A new case must be set up in AIMS in the usual manner, except for the following fields:

The appeals officer is responsible for communicating the status of the file to the claimant, such as whether or not a financial review will be performed and the results of the review. The FR may communicate with the claimant throughout the review process, that is, to request whatever documentation or information is required to support the expenditures, to discuss any issues and concerns regarding their eligibility, and to propose adjustments and discuss representations. However, the FR must not discuss the final outcome of the review with the claimant. If questioned in that regard, the FR should advise the claimant that the appeals officer will contact them.

At the conclusion of the review, the FR must draft a FRR and include a schedule detailing the recommended adjustments. The AIMS screen 5 results must be based on the amounts filed by the claimant, as if the SR&ED claim had not been denied. (File concurrence should be coded as 8 ‘no opinion’.) The appeals officer will make the final decision in respect of the expenditures and discuss the results with the claimant.

5.18.2 Finalizing a file for a year under objection

A reassessment to a year under objection automatically invalidates the objection. Therefore, whenever a taxpayer files a NOO, a stall code is set in CORTAX to prevent a reassessment.

In this part of the discussion we are referring to an objection that is not SR&ED-related.

If a taxpayer files a TPR with an SR&ED claim for a year that is under objection, the TC will contact the appeals officer to determine if the objection is still valid. If the objection is no longer valid, the appeals officer will remove the appeals stall code and advise the TC that the file can be processed through the normal procedures. If the objection is still valid:

In some instances, the claimant will file a NOO (unrelated to SR&ED) after the TC referred the claim to the CTSO for review, but prior to the conclusion of the SR&ED review. This action will not affect the SR&ED review itself but it may affect its finalization.

5.18.3 Reviewing a claim when a prior year is under objection

An objection to a prior year that is not related to SR&ED will not affect the review of a claim in any way. The FR must use the assessed amounts in CORTAX as the opening or carryforward balances. If there is a reassessment of a prior year, the system (or the assessing agent) will correct the balances in the subsequent years.

An objection to a prior year that is related to SR&ED will not affect the current review of a claim, except to the extent that the issue under objection also exists in the current claim. The FR must maintain the position adopted in the previous claim, whether or not they agree with it. It is now up to the appeals officer to determine if the adjustment is justified or not.

There are two options available in this situation. The FR can close the file with the same rationale as the previous claim and advise the claimant to file an NOO to protect their rights. Alternatively, the FR can put the review on hold until the objection has been resolved. The decision may very well depend on factors such as the type of claim (refundable vs. non-refundable), the size of the adjustment affected by the objection, the anticipated delay in resolving the objection, and the statute-barred date. The decision is the claimant’s to make but the FR may request a waiver and put a delay code on AIMS. This position is supported by Directive SR&ED 2003-03, Use of Delay Codes on AIMS, which states at number 7 in the appendix that a delay code may be added if the claimant requests a delay until the earlier issues are resolved.

5.19 Additional considerations for large files

The FR should communicate with the large file case manager (LFCM) prior to contacting a large claimant to schedule a review. As discussed in Chapter 4.13, there may be a protocol in place, establishing the guidelines that the FR must respect during the audit process. The LFCM may advise the FR on how to proceed with the claimant.

Upon initially contacting the claimant, the FR should request the names and contact information of the various individuals who will be involved in the financial portion of the review process (accounting manager, tax manager, controller, external representative). There may also be additional individuals representing the corporation’s various divisions or geographical locations.

In the review of a large file, the FR and RTA will jointly attend the meetings that impact both the financial and scientific or technological aspects of the review, such as the initial interview, the proposal meeting, representations and the final meeting. The LFCM may also attend some or all meetings.

The FR should consult with the LFCM early in the review process to discuss when and how to submit requests for information and query sheets. As the review progresses, the FR will also need to know how the claimant would prefer to be advised of the proposed adjustments.

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