The Scientific Research and Experimental Development (SR&ED) Program is a federal tax incentive program designed to encourage Canadian businesses of all sizes and in all sectors to conduct research and development in Canada. The program is administered by the Canada Revenue Agency (CRA), which, in recent years has begun to scrutinize SR&ED claims very carefully.
In order to qualify for the SR&ED Program, research activities must be able to meet the statutory requirements outlined under subsection 248(1) of the Income Tax Act. Canadian courts have simplified these requirements into five criteria for eligibility:
- Was there a technological risk or uncertainty which could not be removed by routine engineering or standard procedures?
- Did the person claiming to be doing SRED formulate hypotheses specifically aimed at reducing or eliminating that technological uncertainty?
- Did the procedure adopted accord with the total discipline of the scientific method including the formulation testing and modification of hypotheses?
- Did the process result in a technological advancement?
- Was a detailed record of the hypotheses tested, and results kept as the work progressed?
Where the answer to all of the above questions is yes, there is qualifying SR&ED.
Typically, the CRA challenges SR&ED claims on the basis that a research activity does not meet one or all of the above criteria. Following the denial of the claim, the CRA will issue a final report and a Notice of Assessment outlining which claims were allowed and which were denied. Defending a valid SR&ED claim begins with the filing of a Notice of Objection (NOO), which must be done within 90 days of the date of the Notice of Assessment. The NOO must provide explanations for why the SR&ED claim should be allowed and address any reasons provided in the final report as to why the SR&ED claim was denied. It is important to include as many facts, analysis and law in your submissions in order to create the best defense possible. In some instances, it may be possible to get an extension of time to file the NOO if the 90 day deadline has passed. The maximum filing extension allowed is one year and 90 days from the date of the Notice of Assessment.
After a NOO is submitted, the CRA will assign an Appeals Officer to review the merits of your case, usually within 12 months of filing. The role of the Appeals Officer is to provide an independent review of the file and provide a final CRA decision regarding the taxpayer’s appeal. Oftentimes, Appeals Officers will discuss the file with the taxpayer and/or their representatives, asking questions and requesting additional clarification before delivering a final decision.
Generally speaking, an Appeals Officer can either confirm the original Notice of Assessment (called a Notice of Confirmation) or vary it by issuing a Notice of Reassessment. Should taxpayers disagree with the Appeals Officer’s Notice of Confirmation, they must file a Notice of Appeal with the Tax Court of Canada within 90 days. To dispute a Notice of Reassessment issued by the Appeals Officer, a new objection to the Appeals Division can be filed. The Tax Court of Canada decisions can be appealed by filing a claim with the Federal Court of Appeal.
As can be seen, disputing a SR&ED claim is a complicated process. The experts at Tax Solutions Canada have extensive experience dealing with SR&ED matters and can help you resolve disputes in a quick and cost effective manner.
Call us today at 1-888-868-1400 or visit us online at www.taxsolutionscanada.com.