2012 is going to be a year of significant change for SR&ED (Scientific Research and Experimental Development) in Canada. David Kaplan, President of SREDable.com and Founder of Revenue Services Group explains how “much of the change will be good for SR&ED in 2012 but there will be more reviews by the Canadian Revenue Agency and more compliance requirements for organizations.”
What to expect for SR&ED in 2012?
1. Expect to be reviewed. The CRA has increased its review staff by 50%. Change began with a letter in June 2010, a new Canadian Revenue Agency (CRA) directive to deny SR&ED claims that lack ‘sufficient’ supporting evidence, even if the projects clearly meet the definition of SR&ED.
2. If you are doing SR the reviewer will treat you well. The CRA appears to have decided that scientific research (SR) is the good side of the “&”. SR is what we colloquially call R&D.
3. If you’re doing ED expect the review to be more like an audit than a review. The CRA’s focus is on compliance. The CRA letter requesting information is getting longer and more demanding. Keep good records or use online web and mobile-app to ensure compliance.
4. To qualify as SR&ED, your work will need to pass the Strongly Novel (SN) test. Every year the CRA introduces a new standard of what qualifies for SR&ED. During 2012 you’ll need to pass the “strongly novel” test. In order to reduce your payout, the CRA’s SR&ED reviewers will accept as novel only projects that try to go beyond industry norms. Reviewers will try to define your activities as routine or standard practice in your industry.
5. In March, the SR&ED program for small companies will become payroll based: In March 2012 the federal government will adopt some of the recommendations of the Jenkins Report. For a headline summary of the Jenkins report recommendations for SR&ED click here. If you are a public company, foreign owned or pay the highest rate of tax, SR&ED will not change. If you are a small company, the changes will be phased in.
6. Expect to see SR&ED reviewers defending their decisions in court. The CRA has begun to penalize companies and their advisers for “overstating” their tax credits. Overstatement arises when the CRA denies the eligibility of claimed expenses. Because the CRA has not limited the imposition of penalties to obvious cases of fraud it now has the difficult burden to prove that claimants made false claims “knowingly and in circumstances amounting to gross negligence.” And because the penalties are stiff, up to 50% of the denied input tax credits (ITC), expect that penalized companies will take the matter to court.
7. If you receive an ITC in 2012, you’ll receive one in 2013. In our view, the CRA are re-cataloging claimants. All claimants are given a risk score. If you pass the new, more stringent review, you score well. In future, you will see fewer reviews.
About David Kaplan
Prior to founding SREDable.com and Revenue Services Group, David Kaplan was a senior M&A executive with Ernst and Young and founded Barzelan an innovative, benchmark steel wire producer. He has an MBA and an MIA from Columbia University.
SREDable is a web-based software application designed to improve the preparation of scientific research and experimental development (SR&ED) claims for Canadian organizations. SREDable’s online wizard ensures that SR&ED claims meet the Canadian Revenue Agency (CRA) requirements for SR&ED tax credits and cash refunds. View overview video. View sales presentation. Subscribe to SRED TIME.
About Revenue Services Group
Revenue Services Group (RSG) is Western Canada’s largest professional advisory specializing in R&D tax credits (SR&ED) and zero-interest loans. Its mission is to deliver products that significantly improve company profits. Revenue Services Group advises most mid-tier accounting firms on SR&ED and is a member of the Canadian Tax Foundation.
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