2010-06-11|Devolution of SR&ED Programme

Dr. Russ Roberts

I have come across your webpage: "SR&ED Update and Observations: Where have we come from and where are we at?" I am astounded to notice that your report captures almost exactly what I have gone through. Some parts sound as though you have put words into my mouth. I hope that you do not mind my sharing with you my own experience with the SR&ED Programme.

Dr. David Horler

I have come across your "Submission in Response to Joint Finance Canada - Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives". I am astounded to notice that your report captures almost exactly what I have gone through. Some parts sound as though you have put words into my mouth. I hope that you do not mind my sharing with you my own experience with the SR&ED Programme.

Taxpayers's Ombudsman

I would like to provide you with comments on the systemic issue which is currently under investigation by the Taxpayers's Ombudsman, i.e., "Scientific Research and Experimental Development (SR&ED) tax credit program".
Please note that I am willing to answer questions from your Office's Systemic Examination Team regarding my submission, and would like to discuss the matter further as long as my present and future SR&ED claims are not jeopardised.

I own a small business which has developed and commercialised new products and services, but is still struggling to survive in a loss situation. Although the company has benefited from CRA's SR&ED Programme over the years, I have detected a great contrast. During the three audits after I first claimed the SR&ED Tax Credit, I received nothing but encouragement from the scientific and financial advisors from Ottawa. They made sure crystal-clearly that the SR&ED Programme is an incentive for innovation. Even though they reduced the amount of my claims here and there, the atmosphere always had mutual respect.
As a matter of fact, one scientific advisor from Ottawa told me that I was "multi-talented". His positive comment is single-handedly responsible for motivating me enough to file more than 60 solo patent applications in many fields over the last 12 years or so, as featured in "Les Affaires: Palmarès des brevets au Québec (2002-04-27)" and "YOU FIND ENGINEERING IN THE MOST AMAZING PLACES".
When CRA's SR&ED field administration office changed from Ottawa to Laval, however, the difference in attitude was day and night. Instead of receiving encouragement, I have been constantly questioned for the legitimacy of my projects and for compliance for the sake of compliance in the atmosphere of interrogation and inquisition. Anything I say is taken against me to discredit my work in their report. In fact, I am still in a state of excruciating pain and discomfort from the shock of the latest audit. The last three audits were so traumatic that I plunged into severe depressions with headaches, nightmares and panic attacks for many weeks after each audit. My experience with the auditors from Laval was much worse than "masquerade" and "insulting to the intellect of claimants", as I even became suicidal after the humiliating audits.
The documentation requirement was gradually tightened from monthly to weekly, and now daily account of SR&ED activities is imposed. I am now spending more and more time in documentation rather than making innovation. My pride, dignity and self-confidence in doing SR&ED for Canada's future have been decimated, and my morale is super-low. I am seriously planning to exit SR&ED and to look for an alternative employment. If it happens, Canada would lose a precious job in STEM (Science, Technology, Engineering, Mathematics).
I am still in a dispute about the definition of "technological advancement". For the sake of argument, I cited the Hula Hoop as an example. Three scientific auditors from Laval have categorically insisted that it is only an obvious novelty item without any technological advancement, so the Hula Hoop does not qualify for SR&ED. On the contrary, three scientific advisors from Ottawa have told me that it all depends on how it is done. An NRCC's IRAP officer saw no problem with the project which a scientific auditor from Laval had objected with an emphatic "No!". Nevertheless, I did not proceed with the IRAP application for this particular project due to extra documentation which is not covered by SR&ED.
CRA's document "Recognizing Experimental Development" says: "When the material, device, product or process being developed is a technology, then the technological advancement can be measured in the increase in know-how or in the improved capability or performance of the material, device, product or process not available previously."
The attitude of the scientific auditors from Laval is "innovation is not enough", even though the project is a patentable subject matter (utility patent), i.e., there is novelty, utility and non-obviousness. The scientific advisors from Ottawa used to treat utility patents as a barometer. The scientific auditors from Laval treat utility patents as mere novelty with superficial design instead of technological advancement. Frankly, I am sick and tired of fighting to justify the legitimacy of my patented inventions with novel, useful and non-obvious features that had never existed before.
Here are some other conflicts that I have experienced.
- A scientific auditor from Laval said that "Thinking is not eligible".
- A scientific auditor from Laval said that "Trial-and-Error does not qualify". However, I found that this statement is not entirely correct. "Guidance on Eligibility of Software Projects for the SR&ED Tax Credits and Developing and Documenting Claims" on CRA's website states that with an experimental plan, resolving problems through the systematic "trial-and-error" approach is eligible work.
- A scientific auditor from Laval said that "Feasibility Study does not qualify". However, I found that this statement is not entirely correct. According to CRA's "Information Circular 97-1", "Financial or Marketing Feasibility Study" does not qualify, but "Technological Feasibility Study" qualifies as an eligible SR&ED activity.
- A scientific auditor from Laval said that anything to do with humans does not qualify for SR&ED. However, I found that this statement is not entirely correct. As explained by Mr. Peter Armstrong, ergonomic projects and even psychological research will qualify for SR&ED tax credits if the projects meet the definition of SR&ED.
- A scientific auditor from Laval said that I had to be doing "Experiments" to qualify for SR&ED. However, I found that this statement is not correct. I found at the SR&ED Seminar and in numerous publications from CRA that technical-support work and working in the areas of Engineering or Design, Operations, Technological Documentation, among others, are considered to be "directly engaged in SR&ED" if the project itself qualifies for SR&ED.
- A scientific auditor from Laval said that I needed "Equations" to qualify for SR&ED. However, I found that this statement is not correct at all. I found no mention of such requirement in any publication, information circular, CRA website or at the SR&ED Seminar given by CRA. Moreover, if a project already had a set of "Equations", there would be no need for "Experiments" because the outcome would have been derived from the "Equations".
- A scientific auditor from Laval said that "This (SR&ED) Programme is not for you (independent inventors)". I am extremely disturbed by this statement because independent inventors who honestly comply with Subsections 37(1) and 248(1) of "Income Tax Act [R.S.C. 1985, c. 1 (5th Supp.)]", Sections 2900. 2901 and 2902 of "Income Tax Regulations [C.R.C., c. 945]", and meet the SR&ED requirements of Technological Advancement, Technological Uncertainty and Systematic Investigation, should receive encouragement from the SR&ED Programme. According to Mr. Peter Armstrong, the Government of Canada promotes SR&ED tax credits as a means to foster innovation, and that small business claimants, including entrepreneurs, are an important sector in the Canadian economy.
A scientific auditor from Laval said "this is how the game is played" about the need for documentation with dates. He completely cut one of my projects with inadequate documentation "to teach me a lesson". When I complained about the auditor's behaviour, my SR&ED claim was held up for more than 15 months. The processing resumed only after I wrote a desperate letter directly to the Minister of National Revenue.
My observation is that such narrow/close-minded specific attitudes have become an entrenched culture of a particular office over the years, all the way to the directors's level who have been promoted within. Also, it is unfair that past abuses of the SR&ED programme by large corporations, especially the banks's ATM projects, have led to a blanket policy which negatively affects honest small businesses. As of 2010-02-04, CRA continues to accept claims in Part 2 of Form T661 for only the 20 largest SR&ED projects until further notice, benefiting large corporations while all projects of small companies are examined by CRA's auditors under the microscope.
The advisors from Ottawa had explained to me that the SR&ED Programme requires technological advancement, technological uncertainty and systematic investigation, but does not care about the success or failure, unlike other assistance programmes like NRCC's IRAP. The auditors from Laval, however, indicated to me that my claims will become "progressively difficult" as time goes by.
Even after a face-to-face audit for verification, the auditors from Laval make endless requests for more documentation after documentation for the sake of documentation, taking up my SR&ED time by having to dig up, print and send documents. I also suffered from constant nitpicking, harassment and disparaging comments like "dentists are not allowed to claim SR&ED", implying that I may not be qualified to conduct SR&ED activities in the fields outside of my education, even though I am a bona-fide licensed professional engineer. The auditors have made zero attempt to see the global benefits of SR&ED, especially inter-disciplinary product/service development with the goal of Canada's socio-economic progress.
Even though computing equipment with the intent to be used for SR&ED qualifies for capital expenditure, my claim for the second computer is being denied by the auditors from Laval because it is a backup. This is inconsistent with the SR&ED seminar which explains that the "intent" is the important determining factor.
Although my company is in a loss situation, the auditors from Laval pressured me to agree that my SR&ED salary is only 85 % of the entire salary even after I explained to them that I spend more than 90 % of my time on SR&ED effort because I have simplified and automated routine business tasks. As a result, my company must pay me a salary for commercial activities because of the existence of a "guideline", despite CRA's Interpretation Bulletin IT-151R5 (Consolidated): "When that portion represents all or substantially all (90% or more) of the time spent by the employee on such work, all of the expenditure is deemed to be on SR&ED." The artificially inflated salary does not change the amount of SR&ED Tax Credit whatsoever, but increases my Personal Income Tax. Outside of SR&ED, small businesses are not required to pay a salary if the company is not profitable. It is remarkably disturbing that CRA's auditors treats "guidelines" as gospels with no flexibility, even though the Income Tax Act and Regulations leave room for flexible application depending on the taxpayer's situation.
I am investing my own money into SR&ED activities to enhance Intellectual Property (IP) for the future prosperity of Canada's Knowledge Economy (KE). The company pays a major portion of the SR&ED Tax Credit back to the governments for the employer's portion of RRQ, RQAP, FSS and CNT, for the patent filing/examination/maintenance fees to the Canadian Intellectual Property Office (CIPO), etc. Since I also have to pay my Personal Income Tax out of the SR&ED Tax Credit, I begged the auditors from Laval to respect CRA's stated goal of processing the SR&ED claim within 120 days to no avail. For my part, I had promptly filed the Corporate Income Tax Return within 10 days after the taxation year end. Their excuse was that the period of 120 days starts 6 months after the tax filing deadline! I was amazed by such pathetic disconnect.
At least three financial advisors from Ottawa have suggested that I could claim the SR&ED salary as Bad Debts for Allowable Business Investment Loss (ABIL) in my Personal Income Tax Return for the SR&ED investment from my own money, as long as a T4 is properly issued. CRA's financial auditors from Personal Income Tax and CRA's appeals officer both denied Bad Debts in ABIL. My desperate plea to the SR&ED director from Laval fell into deaf ears. I do not believe that it is good for Canada's socio-economic progress if I incorporate a company every year that does the same SR&ED, but intentionally goes bankrupt at the end of the year in order for me to claim the ABIL in my Personal Income Tax Return. Yet, such a scheme would completely satisfy CRA's audit department. The Bad Debts in ABIL is now before the Tax Court of Canada, further draining my energy and spirit...
So, this is how my life has become living hell because of SR&ED. Together with an unrelated personal tragedy, I am in a worse-than-dead situation. Nevertheless, I hope that you will find my comments useful.
I attach a diagram showing the desperate situation of a "Small Business doing SR&ED" for your review.
Thank you very much for your attention.