You’re looking to expand your company’s R&D and this prompted you to claim the SR&ED refund. However, you were denied the tax incentive or received reduced benefits. If you are in this position, don’t fret! There is a possibility that you may have been wrongly denied. This article shares some guidance as well as preparation tactics that you can use to have the decision overturned.
SR&ED (Scientific Research & Experimental Development) is the largest tax incentive program in Canada. Claiming SR&ED in Toronto is fraught with obstacles, more so than it was six years ago, owing to the fact that there have been quite a large number of claimants. As such, denials and reductions have become a common occurrence. Experiencing a bad audit is part and parcel of the process. If nothing else, the unprecedented amount of queued cases with the Tax Court of Canada is clearly indicative of the disagreements between the CRA and claimants.
First off, understanding why your claim has been reduced or denied is paramount to deciding the right steps to take moving forward.
If denied, your SR&ED claim will have either been dismissed as “unsubstantiated” or “ineligible”. There is a stark difference between the two. Unsubstantiated refers to a decision wherein the CRA believes that they were not furnished with sufficient information or evidence to reach a proper determination. Some claimants might consider this outcome perplexing as they were under the illusion that they provided tons of relevant data to the CRA. On the other hand, an ineligible outcome is one wherein the CRA believes that the claimant understands the scope of the project well and provided sufficient information and evidence of the same, however, the work proposed is not congruent with the prerequisites laid down in the Income Tax Act.
So what should you do if you’ve received an undesired response from the CRA? Well, what you need to do is get a second opinion to ascertain whether or not the denial is grounded. This is relevant whether you prepared the claim yourself or had a professional consultant offer their services during the process. Prior to launching a time-consuming battle against the CRA, it’s always a good idea to get your facts straight. Additionally, there is also a possibility that while your project checked all the right boxes and was eligible for the SR&ED refund, there were other obstacles, such as your project had a lack of technological advancement, a lack of thorough investigation, a lack of evidence/documentation, or a combination of these. When it comes to securing an SR&ED refund, confusion usually abounds. Most people wrongly assume that as long as the nature and activities of the project relate to technology, and such project deemed an “advancement” by them (quite subjectively so!), then the project will be eligible for the refund. However, this argument does not usually bode well and the chances of getting denied are very high. This is where a sound second opinion to advice you based on your unique issues will be a massive help.
The first step is to explore all your practical options. If your claim has recently been denied, there’s still a possibility of turning that decision around without taking your case to appeals. You could either provide more evidence or draft a written argument. If the rationale for the denial seems largely unsubstantiated, the case could be presented before the SR&ED management. What happens next is that the SR&ED manager will assess your grievance and postpone the processing of the denial until a meeting can be arranged for you to discuss your issues. Based on the validity of your arguments and the provision of new evidence, the CRA is often known to reverse its original decision and resolve the case in your favour at this stage.
However, if the case doesn’t swing in your favour here, you can escalate it to the Assistant Director. It’s crucial to have an expert consultant at the ready as this often helps streamline interactions with the SR&ED senior management. Here, you will be requesting a Second Administrative Review. This will only be given to you if you can sufficiently prove that the SR&ED Reviewer did not abide by the protocol originally. It’s important to note that most requests for this review are denied as CRA Reviewers usually follow the procedures by the book and it’s very difficult to prove otherwise.
If both of the above fail to yield the desired outcome, your case can then go to appeals. This is, essentially, a process through which CRA higher ups provide a second opinion on the work of their own officials. They may be willing to approve your appeal if they find a glaring error in your case, committed by one of their own. The chances are, however, slim. To escalate your chances of getting an approval, you will need to provide more documentation and evidence, cite policy and reference the Income Tax Act. Besides the copious amounts of work you must invest at this stage, the process itself can take up to 2 years to get resolved.
There is another respite. You can bypass the appeals process altogether and approach the Tax Court of Canada. Prior to filing with the TCC, you must put in a Notice of Objection and wait out a 90-day period. The Tax Court judge uses a much more lenient audit process as compared with the CRA Reviewer. This is owing to the fact that they will adopt a “balance of probabilities” approach and use common sense when assessing the eligibility of your project, rather than the wholly technological approach used by the CRA. Essentially, the TCC judge views the SR&ED program as a tax incentive, whereas the CRA views it as a compliance program.
Enjoy affordable and professional consultancy solutions as we assess your project on a case-by-case basis and determine the reason for your claim being denied. Our team will then help you file notices, prepare settlement proposals and provide other legal advice or representation as required. Call (416) 477 5569 today!