GOVERNMENT RESPONSE TO THE

FIRST REPORT OF THE

STANDING COMMITTEE ON PUBLIC ACCOUNTS

 

 

 

CANADA CUSTOMS AND REVENUE AGENCY AND DEPARTMENT OF FINANCE – HANDLING TAX CREDITS CLAIMS FOR SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT

 

 

June 2001

 

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GOVERNMENT RESPONSE TO THE RECOMMENDATIONS OF THE FIRST REPORT
OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS

 

 

BACKGROUND

 

The Standing Committee on Public Accounts wanted to know how well the Canada Customs and Revenue Agency (CCRA) had administered the Scientific Research and Experimental Development (SR&ED) Program, particularly, how it processed the huge backlog of tax credit claims resulting from the 1994 legislative amendments.  As a result, the Committee examined Chapter 6, Canada Customs and Revenue CCRA and Department of Finance – Handling Tax Credits Claims for Scientific Research and Experimental Development, of the April 2000 Report of the Auditor General of Canada on June 8^th 2000.  The Committee’s examination led to 11 recommendations in its Fifteenth Report from the 36^th Parliament, 2^nd Session, which was tabled on

October 5, 2000.  Many of the Committee’s recommendations were focused on the implementation of the CCRA’s SR&ED Action Plan and encompassed many of the Auditor General’s recommendations.

 

The Committee has requested a comprehensive response to its First Report, tabled in the House of Commons on March 14, 2001.  The First Report is a re‑submission of the Committee’s Fifteenth Report.

 

The CCRA and the Department of Finance agree with the principles that form the basis of the 11 recommendations made by the Committee and the details of actions completed or underway in response to the recommendations are included below.

 

Currently, the CCRA has addressed all the issues identified in the SR&ED Action Plan resulting from the joint CCRA and industry stakeholders conference held in Vancouver in June 1998.  A second conference took place in Montréal in January 2000, to review progress in implementing the Action Plan.  A third Minister’s Conference was held on May 30 and 31, 2001, to share the successful implementation of the SR&ED Action Plan with our industry stakeholder partners, identify future priorities and reaffirm the Government’s commitment to continue working with stakeholders to achieve service excellence.

 

RECOMMENDATION 1

 

That the Canada Customs and Revenue Agency immediately implement the provisions in its action plan to clarify the eligibility criteria governing the work eligible under the SR&ED Program.  That the CCRA report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending

March 31^st 2001.

 

Government Response

 

The Government concurs with the recommendation and has implemented substantive actions in fulfilment of this recommendation.

 

In Section 6.53, Chapter 6 of the April 2000 Report of the Auditor General of Canada, the Auditor General noted that, “In November 1998, the Agency released an action plan to improve the delivery of the SR&ED program.” “Other actions were aimed at reducing uncertainty by developing new interpretation guidelines and standards and clearer documentation requirements.”

 

In accordance with Action 3 of the Action Plan which states, “Establish sector‑specific committees. These committees will develop issue sheets, standards, and interpretation guidelines for their sectors”, the following work has been completed:

 

·      The Steering Committee is dealing with the clarification of the eligibility criteria governing the work eligible under the SR&ED Program and is expected to issue guidance on eligibility by the fall of 2001.

 

·      To clarify sector‑specific issues, sector‑specific committees comprised of CCRA and industry stakeholder representatives have developed vehicles to clarify issues, address claim‑substantiation requirements and provide interpretation guidelines for individual industries.  Sector committees represent major industrial sectors including:  aerospace, automotive, chemicals, communication services, communication products, software, environmental technologies, food and beverage, oil and gas, pharmaceutical and biotechnology, plant agriculture, plastics and textiles.

 

·      To assist the Steering Committee to identify and address issues specific to small and start‑up companies, a representative for the sector joined the Steering Committee.  In addition, a Small and Start‑up Business (SSB) sub‑committee was formed.  A key issue identified as being of particular concern to small business was a failure to understand the program, including what work qualifies for SR&ED incentives. 

 

·      A Small Business Start‑up Brochure has been drafted by the SSB sub‑committee, for the release in the fall of 2001.  This booklet explains, in simple terms, the value of the program, what it offers to companies, its eligibility requirements, how to make a claim, what happens once a claim is filed, and ways to get help.

 

·      National Technology Sector Specialists positions are staffed with people from CCRA and other government departments, as well as from private industry, through the Interchange Canada program.  They work with industry representatives and CCRA staff to clarify interpretation and application of the eligibility criteria governing work claimed under the SR&ED Program.  Currently, there are sector specialists in the following areas:  agriculture, automotive, chemicals (including pulp and paper), information and communications technology, oil and gas, pharmaceuticals and biotechnology, plant agriculture (including forestry), and plastics.

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 2

 

That the Canada Customs and Revenue Agency immediately implement the provisions in its action plan to clarify the documentation requirements for the SR&ED Program.  That the CCRA report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

Government Response

 

The Government concurs with the recommendation and has taken steps to respond to it.

 

In accordance with Action 12 of the Action Plan which states, “Clarify documentation requirements for the SR&ED program”, the following work has been completed:

 

·        A draft, Guide to Supporting an SR&ED Claim, has been prepared and was reviewed during the Minister’s conference on May 30 and 31, 2001. The draft will be finalized in the fall of 2001.

 

·        SR&ED Program forms (Form T661 and T665), and the related guides, have been revised to better explain the information requirements to claimants.

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 3

 

That the Department of Finance complete the review of its legislative rules in order to clarify the concept of eligible SR&ED activity.  That the Department of Finance report the progress of this initiative in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001. 

 

Government Response

 

A review of the SR&ED Program as it applies to internal‑use software is currently underway.  This review was initiated as a consequence of the introduction in the

1994 Budget of a time limitation for claimants to identify SR&ED expenditures.  A large number of claims were submitted prior to the cut‑off date, many of which related to internal‑use software.

 

In order to achieve fairness and equity, the introduction of a time limitation was accompanied by grandfathering rules that allowed taxpayers a period of time in which to identify SR&ED expenditures that were incurred for taxation years that ended prior to February 22, 1994, but this obviously caused a large influx of claims and led to a large backlog.  It was realized that many of these claims were not consistent with the CCRA’s administrative guidelines.  These concerns were noted in the 2000 Budget.

 

As indicated in the 2000 Budget, the Government was committed to rigorously applying the three basic criteria (scientific or technological uncertainty, scientific or technological advancement, and scientific and technical content) to address both the backlog of SR&ED claims, and in particular those claims related to information technology.  The bulk of these claims have now been resolved in accordance with these criteria.

 

The Department of Finance has initiated consultations with industry stakeholders to ensure that the guidelines on internal‑use software development provide clarity and certainty of application both for compliance purposes and administration.  A background paper for discussion purposes was circulated to stakeholders and the Department is reviewing the submissions by industry stakeholders on this issue.  Once these consultations have been completed, the Government will be in a better position to determine what, if any, legislative changes are advisable to enhance both the compliance and administration of the program. 

 

These results will be made public through the most appropriate communications vehicle, such as the budget or a press release.  The Departmental Performance Report would not be a timely way of communicating the results, because it is released months after the end of the fiscal year.

 

RECOMMENDATION 4

 

That the Department of Finance, when drafting future tax credit legislation, endeavour to take all the necessary measures to insure that taxpayers can no longer claim tax credits for another taxpayer’s eligible expenses.

 

Government Response

 

The Department of Finance fully supports this recommendation.  Through regular meetings with CCRA officials, the Department of Finance became aware of the contracting‑out issue with respect to SR&ED and proposed amendments that came into effect in 1985 to eliminate the ability to claim tax credits on essentially the same SR&ED work.  Clearly, in policy terms, there was no intention to provide support to

two taxpayers for essentially the same SR&ED work.

 

RECOMMENDATION 5

 

That Canada Customs and Revenue Agency promote and ensure greater fairness and transparency in the claims review process and investigate the possibility of using outside expertise when executing the second review process.  That the CCRA report the results of its findings in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

Government Response

 

The Government concurs with the recommendation and has implemented substantive actions that will address it.

 

The CCRA is continuing to bring about greater fairness and transparency in the administration of the SR&ED Program by implementing the following Action Plan items:

 

Action 4 of the Action Plan states, “Develop a communications package covering the SR&ED audit (review) process and taxpayer’s (claimant’s) rights”;

 

Action 5 of the Action Plan states, “Develop a code of rights, obligations, and responsibilities for stakeholders”;

 

Action 6 of the Action Plan states, “Focus on preventing disputes through better communications.  This involves CCRA personnel improving their understanding of industry (stakeholders) practices and industry (stakeholders) improving its understanding of the SR&ED program requirements and the audit process”;

 

Action 7 of the Action Plan states, “Establish a standard mechanism for dealing with informal disputes.  Industry (stakeholders) recommended that when a dispute arises, a second opinion should be required.  This would take place prior to the Appeal process”; and

 

Action 11 of the Action Planstates,“Improve the auditing (review) process”.

 

The following work with respect to the preceding actions in the Action Plan has been completed:

 

·        The Guidelines for resolving claimants’ SR&ED concerns became national policy in 2000, and is on the CCRA SR&ED Website.  These guidelines outline procedures for resolving issues associated with a claim, including a process for claimants to follow should they dispute the findings of the technical reviewer or have concerns about how the SR&ED review is being conducted (related to Action Plan

      items 4 and 5).  These guidelines also discuss a second review process.

 

·        The Claim Review Process Letter has been in use since October 2000.  This letter was developed to explain the claim-review process to claimants whose SR&ED claims have been selected for further review (related to Action Plan items 4 and 5).

 

·        The Alternate Dispute Resolution Mechanism will commence as a pilot in 2001, in Ottawa, Toronto and Calgary, following training of the mediators, which was completed in May 2001.  Twenty‑four individuals have been selected from industry (stakeholders) and were trained in mediation and neutral evaluation of disputes about eligibility opinions on SR&ED claims between CCRA and claimants (related to Action Plan item 7).

 

·        The Guide to Conducting a Scientific Research & Experimental Development (SR&ED) Review has been in use since January 2000.  It is the primary reference for how the SR&ED technical review is to be conducted, including communications between the CCRA technical reviewer and the claimant during an SR&ED review (related to Action Plan items 6 and 11).

 

·        Account Executive and Preclaim Project Review (PCPR) Services are offered across Canada.  Both services are described on the SR&ED Program Website and provide claimants, including small and medium‑sized enterprises, assistance with the claim-review process.  Specifically, PCPR provides claimants with an up‑front review and preliminary opinion on the eligibility of work for SR&ED incentives.  PCPRs can occur before the work has commenced, during the work, or after the work is completed but before the claim is made.  Through PCPR, all business, including small and medium‑sized enterprises, can obtain assistance to more fully understand the program and its eligibility requirements.

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 6

 

That the Canada Customs and Revenue Agency immediately implement the provisions of its action plan to establish a standard mechanism to resolve internal disputes within the CCRA.  That the CCRA report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001. 

Government Response

 

Action has been taken to deal with internal disputes.

 

As indicated in the CCRA response to the recommendation contained in Paragraph 6.49 of the April 2000 Report of the Auditor General of Canada, “The CCRA’s accountability framework, internal communications practices and decision‑making fora provide effective means to address differences of opinion.”  The CCRA will continue to address internal differences of opinion through the various means available and will reinforce, within the CCRA, the importance of using these means to reconcile differences.

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 7

 

That the Canada Customs and Revenue Agency immediately implement the provisions of its action plan to resolve all outstanding disputes about past claims.  That the CCRA report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

 

Government Response

 

The Government concurs with the recommendation and has taken concrete actions that respond to it.

 

In accordance with Action 8 of the Action Plan which is to, “Clear outstanding disputes about past claims.  Industry (stakeholders) feels the number of unresolved claims has a negative effect on new claims and is an impediment to the orderly implementation of new initiatives”, the following work has been completed:

 

-          Section 6.24 of the April 2000 Report of the Auditor General of Canada indicates that, as a result of a legislative amendment proposed in the February 1994 Budget, “… the Agency received 16,000 taxpayer‑requested adjustments (TRAs).…  The 16,000 TRAs created a huge backlog in the work of science advisors and financial auditors.  These claims are referred to as the ‘bulge claims’.”  The number of “bulge claims” remaining to be processed were:

 

o       March 31, 1999      ‑ 630

o       March 31, 2000      ‑ 237

o       May 2, 2001      ‑ 107

 

-          The process for SR&ED claims with Notices of Objection with respect to eligibility issues, has been streamlined.  As a result, the number of claims in inventory has decreased significantly:

 

o       April 10, 1999    ‑  400

o       March 31, 2000 ‑  290

o       March 31, 2001 ‑  220

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 8

 

That Canada Customs and Revenue Agency immediately implement the provisions in its action plan to ensure that the claims review process is carried out in a more consistent, coherent and timely fashion.  That the CCRA report the progress of this initiative in its Departmental Performance Reports, beginning for the fiscal year ending March 31^st 2001.

 

Government Response 

 

The Government concurs with the recommendation and has implemented several measures.

 

Work was completed to ensure that the claim‑review process is carried out in a more consistent, coherent and timely fashion in accordance with Actions 4, 5, 6 and 11 of the Action Plan as described in the Government Response to Recommendation 5.  In addition, as described in Action 13, the CCRA continues to, “Explore options to focus on process audit (review) rather than audit (review) of individual projects to reduce the burden of frequent technical reviews.  Consider developing procedures to conduct a one‑time audit (review) of the company’s process for compiling SR&ED claims, with fewer audits (review) of separate projects”.  Further work was completed as follows:

 

·        Two new products address the recommendation.  They are the Claim Review Process Letter and The Guide to Conducting a Scientific Research & Experimental Development (SR&ED) Review.  Both are available on the CCRA’s SR&ED Program’s Website.

 

·        Process Review workshops were held nationally with industry stakeholders and CCRA staff, between November 2000 and March 2001, to help focus on the company’s claim preparation process as a basis for reviewing SR&ED claims.  The objectives of the Process Review initiative include, reducing the review time and resources required, and resolving claimant concerns and misunderstandings about the SR&ED Program as early as possible.

 

·        The CCRA First Time Claimant Service, established in 1992, is designed to help companies new to the program, including small and medium‑sized enterprises.  It provides assistance, in the form of information kits and personal contact to potential new claimants preparing their first SR&ED claims.

 

·        Account Executive and Preclaim Project Review (PCPR) Services are offered across Canada.  Both services are described on the SR&ED Program Website and provide claimants, including small and medium‑sized enterprises, assistance with the claim‑review process.  Specifically, PCPR provides claimants with an up‑front review and preliminary opinion on the eligibility of work for SR&ED incentives.  PCPRs can occur before the work has commenced, during the work, or after the work is completed but before the claim is made.  Through PCPR, all business, including small and medium‑sized enterprises, can obtain assistance to more fully understand the program and its eligibility requirements.

 

·        Service standards have been established to ensure that claimants receive SR&ED refunds or credits without delay.  For example, CCRA aims to process refundable claims within 120 days of receiving a complete claim.  More than 80 percent of refundable claims, generally submitted by small and medium‑sized enterprises, are currently processed within this standard.

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 9

 

That the Canada Customs and Revenue Agency develop standard criteria for assessing the compliance risk for claims.  That the CCRA report on the progress of this initiative in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

Government Response

 

The Government concurs with the recommendation and has implemented substantive actions in fulfillment of it.

 

As described in CCRA’s Response to the recommendations contained in Paragraph 6.78 of the April 2000 Report of the Auditor General of Canada, “The CCRA in all its programs, is committed to continuously improving its management of risk.  With regard to the SR&ED Program, the Auditor General recognized in his 1994 Report that all claims are subject to a desk review by a science advisor and an auditor when they are filed.  This review is designed to determine whether the activities being claimed meet basic eligibility requirements and whether the costs are reasonable.  Since then, we have included standard risk criteria in the annual workplans and have taken other measures, such as the provision of detailed compliance rates by strata to the field, inclusion of risk assessment practices in training materials and other guidelines, and sharing and discussion of best practices….  The cornerstone of risk assessment in the SR&ED program is ‘Knowing Your Client’.  With the implementation of the client‑centered approaches called for in the Action Plan, our ability to assess risk will be further enhanced.”

 

Furthermore, a workshop entitled Conducting Technical Reviews within a Risk Management Environment, jointly developed with industry stakeholders, has been held in Vancouver and Ottawa this year, and others are scheduled for Calgary, Montréal, Halifax, Mississauga and Hamilton for May and June 2001.  In addition, a National Risk Management Framework document is to be released.

 

 

The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending March 31^st 2001.

 

RECOMMENDATION 10

 

That the Canada Customs and Revenue Agency and the Department of Finance prepare an annual report on the results of the SR&ED Program to be tabled in Parliament, and that the report be referred to the House of Commons Standing Committee on Industry.

 

Government Response

 

The Government is committed to reporting on its performance in delivering the SR&ED Program.

 

The CCRA has identified an effective and timely means of reporting results of the SR&ED Program to Parliament.  The CCRA will report the progress of these initiatives in its Departmental Performance Report, beginning for the fiscal year ending

March 31^st 2001.

 

In addition, the CCRA publication entitled, Working Together to Deliver Research & Development Incentives – Economic Development Through SR&ED Tax Incentives, was shared with industry (stakeholder) partners at the Minister’s conference on

May 30 and 31, 2001.  SR&ED Program updates are also available on the program Website.

 

The Department of Finance agrees that ongoing review of the SR&ED tax incentive program is important to ensure that the benefits are properly targetted, and that the program is effective in meeting its policy objectives and doing so in a cost‑effective manner.  Information on the foregone revenue from this measure is published annually in the Department of Finance’s Tax Expenditures publication.  If the Department produces any other information that pertains to the SR&ED Program, it will ensure that a copy of this material is provided to the House of Commons Standing Committee on Industry for its information.

 

RECOMMENDATION 11

 

That the Canada Customs and Revenue Agency and the Department of Finance carry out every five years an in‑depth evaluation of the SR&EDProgram in order to assess its impact on SR&ED activity and its contribution to productivity and economic growth in Canada and that the Minister of Finance table the report in Parliament.

 

 

Government Response

 

There are a number of formal and informal mechanisms in place to ensure that the SR&ED tax incentives are monitored and managed appropriately.  These mechanisms include liaison between officials responsible for policy or administration of the SR&ED tax‑incentive program, the SR&ED Interdepartmental Working Group, and the CCRA Advisory Committee on SR&ED.

 

The CCRA and the Department of Finance will continue to review the program on an ongoing basis to ensure its effectiveness in the context of the overall federal strategy of providing assistance for R&D.  For example, the Department of Finance and the CCRA completed an evaluation of the program in 1997.  This evaluation was part of the Department of Finance’s on‑going program of evaluations of tax measures.  The evaluation found that the program is effective ‑‑ $138 of incremental SR&ED spending is being generated for every $100 of federal tax revenue foregone.  The SR&ED tax incentives are viewed very favourably by the business community and are widely recognized as providing one of the most favourable investment climates for R&D in the world.

 

The Department of Finance will periodically provide a fuller review of this program, as it is needed.  The CCRA will report the progress of the SR&ED Program initiatives in its Departmental Performance Report, beginning for the fiscal year ending

March 31^st 2001.  CCRA recently published, “Working Together to Deliver Research & Development Incentives – Economic Development Through SR&ED Tax Incentives,” produced for the May 2001 Minister’s Conference on SR&ED.  In addition, SR&ED Program updates are available on the CCRA SR&ED Program Website.