Financial Claim Review Manual – Review Procedures for Financial Reviewers

SR&ED Program

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Chapter 7.0 Appendices

Table of contents

• 7.1 Appendix 1: Glossary of Terms
• 7.2 Appendix 2: Acronyms and Initialisms
• 7.3 Appendix 3: Working with the claimant: Mutual expectations
• 7.4 Appendix 4: Functional currency reporting
  • 7.4.1 Conditions required to file a T2 return in a functional currency
  • 7.4.2 Relevant spot rate
  • 7.4.3 Revoking an election to file in functional currency
  • 7.4.4 Review process with functional currency claims
• 7.5 Appendix 5: Partnership claims for SR&ED
  • 7.5.1 Requirement to file a partnership information return
  • 7.5.2 Partnership claims and AIMS
  • 7.5.3 Procedures for processing SR&ED claims filed by partnerships and their members
  • 7.5.4 What to prepare for (re)assessment
  • 7.5.5 Adjustments transferred to or from another TSO or another division

7.1 Appendix 1: Glossary of Terms

The glossary is provided as a reference for terms and concepts found in the Claim Review Manual (CRM).

7.2 Appendix 2: Acronyms and Initialisms

Below is a list of acronyms and initialisms used in the CRM along with some additional acronyms and initialisms found at the Canada Revenue Agency.

7.3 Appendix 3: Working with the claimant: Mutual expectations

Mutual expectations between the claimant and the financial reviewer during a scientific research and experimental development review

The scientific research and experimental development (SR&ED) review will be more effective and efficient when the claimant and the financial reviewer (FR) are clear about what they can expect from each other. The FR is expected to work with claimants, and the claimant is also expected to work with the FR. It is important that, at the start of a review, the FR discusses with the claimant these mutual expectations.

During the review, FRs will work with the claimants to:

• explain the SR&ED Program, its requirements, its services and policies to claimants who would like more information about the Program, to encourage understanding of their entitlements and ensure compliance;
• identify, prior to the on-site visit, issues that they plan to address and their approach for addressing the issues;
• identify, prior to the on-site visit, what they need during the visit, whether it is information or supporting evidence to see or people to speak to, so that the claimant can be prepared for the review;
• identify and communicate, as early as possible, any new issues that arise during the review;
• identify ways to resolve the issues, such as questions to ask or supporting evidence to examine;
• provide an indication of any concerns that remain unresolved at the end of the on-site visit or, if unable to do so until the information gathered during the review is considered, indicate when they expect to be able to do so;
• give an explanation for decisions, with reasons, in writing, if any of the expenditures are not considered to be allowable as SR&ED expenditures, or if any other decisions are unfavourable to the claimant. This will help to improve claimant’s understanding of program requirements and enable them to be better positioned to provide any factual information that had not been considered in the FR’s decision;
• coordinate their review process, including information requests, with Research and Technology Advisor (RTA) to minimize the administrative burden, such as not separately requesting the same information from the claimant;
• allow a claimant the opportunity to provide additional information or explanations in response to their decisions, and to respond to the claimant concerning this additional representation; and
• provide feedback, advice and guidance to claimants, as required, to explain any deficiencies in the supporting documentation.

During the review, the claimants and their representatives will be expected to:

• comply with the SR&ED Program requirements;
• prepare for on-site visits by having requested information, evidence or personnel available;
• be prepared for the possibility of an expanded or shortened review by the FR as different issues arise during the review or the original ones are resolved;
• provide, as early as possible in the review process, information or evidence relevant to supporting their position;
• answer questions and address the issues identified by the FR during the review;
• ensure that the people who are best able to explain the supporting documentation are available to be interviewed by the FR, should other issues arise during the review process;
• ensure that all supporting documentation is available and organized for review by the FR and that someone is available to explain the significance of the documentation;
• prepare to explain how the claim was put together and what supporting evidence was used in the preparation of the claim;
• focus on the issues identified by the FR and facts related to the work done in order to address these issues;
• provide complete responses to questions asked by the FR, whether in writing or not, within a reasonable time frame;
• expedite the review by providing any information, on a timely basis, that supports the claim;
• address any concerns raised by the FR with respect to the quality and organization of the supporting documentation, and other supporting evidence for future claims; and
• advise the FR of any concerns as early as possible.

7.4 Appendix 4: Functional currency reporting

Functional currency (FC) tax reporting allows certain corporations to file their T2 – Corporation Income Tax Return in a currency other than the Canadian dollar. This new initiative came into effect for tax years beginning after December 13, 2007, and the legislation is found in section 261 of the Income Tax Act.

This appendix provides information that the financial reviewer (FR) may need to review and process FC claims.

As with the returns filed in Canadian currency (CC), FC returns are validated and checked for completeness by the tax centre (TC). The returns are entered into CORTAX in the FC, that is, all of the amounts in CORTAX for any FC year are presented in a currency other than the Canadian dollar.

The FC of a taxpayer is defined in subsection 261(1) as the currency of a country other than Canada that is, throughout the tax year, a qualifying currency and the primary currency in which the claimant maintains their books and records for financial reporting purposes. The only qualifying currencies currently identified in subsection 261(1) are the US dollar, the euro, the British pound and the Australian dollar.

7.4.1 Conditions required to file a T2 return in a functional currency

A taxpayer that meets the conditions outlined in subsection 261(3) may elect to file their T2 return in their FC. The five conditions are:

1. The taxpayer is a corporation, other than an investment corporation, a mortgage investment corporation or a mutual fund corporation, resident in Canada.
2. The corporation files an election with the Minister in prescribed form not less than 6 months before the end of the particular year. (The prescribed form is the T1296, Election, or Revocation of an Election, to Report in a Functional Currency. The election is filed only once and applies to all future years unless it is revoked.)
3. The primary currency in which the corporation keeps their books and records is one of the four qualifying currencies.
4. The corporation has not previously filed an election. (The corporation cannot change their elected functional currency and cannot re-elect to report in a FC after having revoked a previous election.)
5. The corporation has not revoked the election for the particular year.

If the above conditions apply, subsection 261(5) provides that, in respect of a FC year:

1. The taxpayer’s Canadian tax results are to be determined in the elected functional currency (EFC).
2. Amounts in the Act that are expressed in Canadian dollars are to be converted to the EFC using the relevant spot rate for the first day of the FC year.
3. If any amount that is relevant in computing the taxpayer’s tax results is expressed in a currency other than the EFC, it must be converted to the EFC using the relevant spot rate for the day on which the amount first arose.
4. To (h) Various provisions of the Act that refer to CC must be read as if they refer to FC.

The Canadian tax results of the claimant include income, taxable income, taxes, credits and any other amount that is relevant in determining the taxes and credits of the claimant.

7.4.2 Relevant spot rate

The relevant spot rate is the noon rate quoted by the Bank of Canada on the particular day, or the closest preceding day if no such rate is quoted on the particular day. The rates applicable to a particular return are determined by the TC and can be viewed in CORTAX in Part 2 of screen Func. It is important to note the differences in the rates when converting to or from CC. For example, if the rate from CC to FC is 0.9978, the rate from FC to CC will be 1.0022. The FR can also look up the rates on the Bank of Canada website.

The relevant spot rate dates are described in subsections 261(7) and (15). The following is a summary providing a quick view of the dates that apply to particular amounts:

• Last day of the last CC year
  • Carryforward of amounts from a CC year to a FC year
  • Carryback of amounts from a FC year or a reversionary year to a CC year
  • Cost of property acquired in a CC year
  • Adjustments to the adjusted cost base of capital property acquired in a CC year
  • Reserves deducted in a CC year
  • Prepaid expenses incurred in a CC year
  • Adjustments to paid-up capital in a CC year
  • Any other amount from a CC year that is relevant in determining the tax results in a FC year
• First day of the FC year
  • Any limits such as expenditure limit or small business limit
• Balance-due date of the FC year
  • Taxes, credits and penalties for the notice of assessment
• Last day of the last FC year (in case of revocation)
  • Carry forward amounts from a FC year to a reversionary year
  • Carry back amounts from a reversionary year to a FC year
• Last day of the FC year
  • Statistics Canada, Finance, AIMS

7.4.3 Revoking an election to file in functional currency

Subsection 261(4) allows a taxpayer to revoke an election and revert to CC reporting. The revocation must be filed in prescribed form (also T1296) and applies to tax years that begin not less than 6 months after the date of filing the form. The revocation cannot be filed during the taxpayer’s first FC year. The subsequent tax years will be referred to as reversionary years.

Although a reversionary year is reported in Canadian dollars, the previous FC years cannot be ignored. Subsection 261(7) provides for the conversion of the attributes from the CC year to an FC year using the relevant spot rate for the last day of the last CC year. Subsection 261(12) then uses the provisions of subsection 261(7) to convert the attributes from the FC year back to Canadian dollars for the reversionary year, at the relevant spot rate for the last day of the last FC year. The double conversion is intentional.

The other subsections in section 261 deal with the following:

7.4.4 Review process with functional currency claims

The review process for the FR is almost identical for FC claims and CC claims. The FR must keep in mind that the currency used for the amounts reported and claimed is something other than the Canadian dollar. The review must be conducted and documented in the FC. The FR should identify the FC on all working papers, reports, letters, forms and schedules to ensure that the reader is aware that the amounts are not in Canadian dollars.

During the review, the FR should ensure that the claimant is entitled to use the EFC for tax reporting purposes. If the claimant did not maintain their books and records in the EFC throughout the tax year, the FR must advise the claimant and the TC that the T2 return must be refiled in CC.

The FR should also review the conversion of material amounts that were incurred in a currency other than the claimant’s EFC, including amounts incurred in CC. This issue is not limited to FC claims but is more likely to occur in such claims due to the fact that the claimant is operating in Canada. A claimant operating in Canada will usually incur some expenditures in CC, particularly salaries and wages, but will not necessarily incur any expenditures in a foreign currency. Paragraph 261(5)(c) provides that amounts that are expressed in a currency other than the EFC must be converted to the EFC using the relevant spot rate for the day on which the amount first arose. This requirement is similar to subsection 261(2) which applies to CC (non-FC) returns: An amount expressed in a currency other than CC must be converted to CC at the relevant spot rate for the day on which the amount arose.

AIMS information is used for national reporting purposes and must be presented in Canadian dollars, even though the claimant’s tax results are reported in CORTAX in the FC. The AIMS information captured by the TC is converted to Canadian dollars when the case is created by the risk management tool. The amounts that are required for the completion of the AIMS screens must be converted to Canadian dollars by the FR, using the relevant spot rate for the last day of the year under review. This rate can be found on screen Func in CORTAX.

7.5 Appendix 5: Partnership claims for SR&ED

Where SR&ED is undertaken by or on behalf of a partnership, Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, must be prepared at the partnership level, detailing the SR&ED expenditures incurred by the partnership. The financial reviewer (FR) and the research and technology advisor (RTA) review the claim at the partnership level, but the adjustments to income and investment tax credits (ITC) flow through to the members. Form T661 must be submitted with the Partnership Information Return (PIR) – T5013 , if such a return is required; otherwise the onus lies with each member to file the partnership’s form T661 with their income tax return for the year.

This appendix covers the following topics:

• requirement to file a partnership information return;
• partnership claims and AIMS;
• procedures for processing SR&ED claims filed by partnerships and their members;
• what to prepare for (re)assessment; and
• adjustments transferred to or from another tax services office (TSO) or another division.

7.5.1 Requirement to file a partnership information return

Regulation 229 requires every partnership to file an information return in prescribed form (T5013) and containing prescribed information. However, the CRA has established an administrative policy that limits that requirement to partnerships meeting certain conditions. These conditions have been revised for partnerships with fiscal periods ending on or after January 1, 2011.

A partnership with a fiscal period ending on or before December 31, 2010, is required to file a T5013 return if, at any time during the fiscal period:

• it had six or more members;
• one of the members was a partnership (tiered partnership);
• it invested in certain flow-through shares; or
• the Minister requested one in writing.

A partnership with a fiscal period ending on or after January 1, 2011, is required to file a T5013 return if:

• at the end of the fiscal period,
  • the absolute value of its revenues and expenses exceeded $2 million, or
  • it had more than $5 million in assets; or
• at any time during the fiscal period,
  • one of the members was a partnership (tiered partnership);
  • at least one member was a corporation or a trust;
  • it invested in certain flow-through shares; or
  • the Minister requested one in writing.

7.5.2 Partnership claims and AIMS

As discussed earlier, the review of a partnership SR&ED claim occurs at the partnership level. A case is set up in AIMS for the partnership, using selection reason code 0406 and the partnership’s business number (BN) if it files a T5013 return, or the BN or social insurance number (SIN) of one of the members. The information on screen L for a partnership case always represents the entire partnership claim, that is, the total SR&ED expenditures and the total ITC allocated.

A secondary file (screen 2) is set up in AIMS for each member of the partnership, whether or not the claim is assigned for a review. The adjustments reported on screen 5 of the member’s file represent the adjustments to be made to that member’s return. There is no screen L for a secondary file.

7.5.3 Procedures for processing SR&ED claims filed by partnerships and their members

The procedures outlined below apply to a variety of scenarios considering whether or not a T5013 return has been filed, whether the claimant requesting an ITC allocated from a partnership is a corporation or an individual, and whether or not that claimant has also claimed expenditures and ITC for its own SR&ED. ITC claims by trusts are rather rare and will not be discussed in the Claim Review Manual (CRM).

The T5013 return and form T661 are submitted to the partnership section at the tax centre (TC). Partnership SR&ED claims are not subjected to any validation, completeness or risk assessment processes at the TC. They are referred to a coordinating tax services office (CTSO) based on the physical location of the partnership, in a TF98 jacket with other relevant information, such as the partnership’s financial statements, a list of its members, and the ITC calculation and allocation to members.

A corporation that is a member of a partnership must file a T2 Corporation Income Tax Return (T2) with a T2SCH31, Investment Tax Credit – Corporations, to claim the ITC allocated from the partnership. An individual must file a T1 – Income Tax and Benefit Return (T1) with a T2038(IND), Investment Tax Credit (Individuals) to do so.

7.5.4 What to prepare for (re)assessment

In addition to the documentation normally required to finalize the review of a corporation's or an individual's SR&ED claim, the FR should submit the following documentation in respect of the partnership's SR&ED claim.

1. If the partnership filed a T5013 return

• Attached to the T5013 return and sent to the partnership section at the TC:
  • the financial review report (FRR);
  • the partnership's revised SR&ED claim (form T661);
  • revised T5013SCH1, Partnership's Net Income (Loss) for Income Tax Purposes – Schedule 1, and T5013SCH8, Partnership's Capital Cost Allowance (CCASchedule – Schedule 8, if applicable;
  • the revised ITC calculation and the allocation to members;
  • a copy of the proposal letter and the final letter to the partnership; and
  • the working paper file.

2. If the partnership did not file a T5013 return

• If the partnership did not file a T5013 return, the documents listed above should be sent to the TC (T1 or T2 Unit) for storage with the principal file. It is neither necessary nor recommended to include copies of the above documents in all secondary files, other than the revised form T661. The name of the member in whose return the working paper file is stored should be noted on the revised form T661.

3. In respect of each member of the partnership

• Sent to the T2 Assessing Unit at the corporate member's TC:
  • the revised SR&ED claim (form T661) if the partnership did not file a T5013 return;
  • the revised T2SCH31;
  • revised T2SCH1, Net Income (Loss) for Income Tax Purposes, T2SCH4, Corporation Loss Continuity and Application, and/or T2SCH8, Capital Cost Allowance (CCA), if required as a result of the adjustments to the partnership income;
  • the T7W-C or T7W-9 reflecting all adjustments to the partnership's income that affect the net and / or taxable income of the corporation;
  • the T2  Tax Calculation Information Sheet (T99A) with a note in Area L that the adjustments result from the review of the partnership's SR&ED claim;
  • if the claimant has applied the maximum amount to reduce taxes otherwise payable for the current year or for a previous year (ITC carryback), a note to that effect on the T99A to ensure that the revised ITC amount is treated accordingly.
• Sent to the T1 Assessing Unit at the individual member's TC:
  • the revised SR&ED claim (form T661) if the partnership did not file a T5013 return;
  • the revised T2038(IND);
  • the T1 and T3 Tax Calculation Information (T99), reflecting all adjustments to the partnership's income that affect the net and/or taxable income of the individual;
  • a note on the T99 that the adjustments result from the review of the partnership's SR&ED claim; and
  • if the claimant has applied the maximum amount to reduce taxes otherwise payable for the current year or for a previous year (ITC carryback), a note to that effect on the T99 to ensure that the revised ITC amount is treated accordingly.

7.5.5 Adjustments transferred to or from another TSO or another division

Where the return of a taxpayer is under review by another TSO or another division, the CRA policy usually dictates that only one assessment should be issued to consolidate all audit actions. The FR may arrange to transfer the adjustments related to the partnership to the other FR / auditor. However, the decision to transfer or not the adjustments may depend on whether or not the ITC will be refunded or applied to reduce taxes of another year, particularly if the other review / audit will unreasonably delay the assessment. The FR is encouraged to communicate with the other FR / auditor and with the claimant prior to making the decision.

If the decision is to transfer the adjustments, communication with the other FR / auditor is also important to ensure that the correct AIMS results reason codes are used. The codes are determined by the receiving FR / auditor because they know if the adjustments will affect the current year (001/101) or a subsequent year (003/103). For every receiving code there is a corresponding sending code. A change to a tax credit, that is, where the income and the tax are affected by the same item, requires the use of only the tax codes.

The sending FR (the one reviewing the partnership's SR&ED claim) is responsible for advising the claimant of the proposed adjustments and dealing with the representations. The receiving FR / auditor will merely include the adjustments in their assessment.

The coding documentation in the sending FR's SR&ED review file must include at least the following information for each ‘transfer to' code:

• claimant's BN or SIN,
• year to be (re)assessed,
• nature of adjustment,
• amount,
• AIMS file number of the FR / auditor receiving the transfer, if known.

More details can be found in the following subsections of the Audit Results Coding Handbook on InfoZone: Adjustments transferred to others: T1 returns, T2 returns, other returns and Concurrent Audits.

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