If your company engages in research and development (R&D), it likely participates in the Canada Revenue Agency’s Scientific Research & Experimental Development (SR&ED) tax incentive program. This program is among the most generous R&D funding offered by the Canadian government. It recognizes the high cost of R&D activities and their importance to the country’s economy. Yet denied claims leave businesses without the credits and refunds needed to continue R&D work. Fortunately, it’s possible to overcome a denied claim. Here, we explain the steps companies can take to resolve the issue.
1. Get a Second Opinion
SR&ED claims are incredibly complicated and require a great deal of supporting information. It’s very easy to make errors in the submission process. Additionally, even those experienced with SR&ED claims can make erroneous assumptions about the eligibility of R&D activities.
Before pursuing any options to reverse a denial, consult with an SR&ED expert and an income tax lawyer with experience in this area. They can help determine if the CRA was correct in denying your claim or if you have grounds to challenge the decision.
2. Connect with the CRA for More Insight Into Your Denied Claim
Once your claim has been denied, reach out to a CRA Research and Technology Manager or Financial Review Manager. These agents will hear your concerns and offer their insight into your chances for a reversal. They can also put the processing of your claim denial on hold, giving you time to provide additional proof of eligibility or craft a compelling written argument. If your claim was deemed unsubstantiated, this step might be the only action required to reverse the decision.
3. Request an Administrative Second Review
Rather than a review of your SR&ED claim, the Administrative Second Review examines the work of the CRA officials who evaluated it. The local SR&ED Assistant Director will assess their efforts to confirm relevant policies were followed and you were given due process.
It is unlikely that your claim will be granted due to this process. CRA agents are highly trained to follow all relevant procedures closely, and proving a lapse is rare.
4. File a Notice of Objection
If your attorney or other representatives still believe you have a viable complaint after working with the SR&ED Manager and Assistant Director, you may file a Notice of Objection. This objection must be filed within 90 days of receipt of a final report and Notice of Assessment upholding the denial. Companies that miss the 90-day deadline may request an extension, as long as they do so within one year.
Your Notice of Objection is a written argument addressing the reasoning provided in the final report. It should cite relevant tax law that supports your argument and any additional facts that prove your work adheres to the 5-step SR&ED test provided by the Tax Court of Canada.
5. Complete the Appeals Process
Once you’ve filed a Notice of Objection, a CRA Appeals Officer will be assigned to review your claim. A proactive approach to communication is the best way to make the most of this process. Ask about any additional documentation or details that could make a difference in establishing the validity of your claim.
After a review, the Appeals Officer will provide a written decision in the form of:
- A Notice of Confirmation, which supports the CRA’s findings
- A Notice of Reassessment, which requires an adjustment
A positive outcome via this process is unlikely. Additionally, it can take up to two years, causing extended delays even if you are successful.
6. Turn to the Tax Court of Canada
The CRA views the SR&ED program as a compliance program. Their goal is to ensure claimants adhere to the rules. In contrast, the Tax Court of Canada approaches claim disputes with an attitude that is generally more favorable to claimants. Judges utilize a common-sense framework to determine eligibility. They seek to confirm that the evidence provided in your Notice of Objection was sufficiently reasonable and consistent with a lower standard than required in a CRA audit.
You may seek a judgment from the Tax Court after an appeal or skip this process altogether. If you do forego an appeal, you are still required to submit a Notice of Objection within 90 days of a denied claim.
The Tax Court offers two procedural options, which include:
You may choose the informal procedure for claims valued at or under $25,000 or with an acceptance of a maximum settlement value of $25,000 regardless of the value of the initial claim. This is a favorable option for many companies because it offers a streamlined process that is faster and typically less expensive.
Available for disputed claims of any size, the general procedure requires a more complex process with a greater number of steps. However, it is a better choice for higher-value claims.
7. File a Claim with the Federal Court of Appeals
As a last resort, your company may turn to the Federal Court of Appeals. This court hears both legal and civil cases and reviews judgments delivered by the Federal Court and many agencies, as well as the Tax Court of Canada. Like all previous steps, representation by an attorney with SR&ED expertise is essential. If the court upholds the denial of your claim, there are no further opportunities to receive tax credits for your expenditures.
Secure Your SR&ED Refund
A denied SR&ED claim means the difference between R&D work that leads to profitable innovation and significant financial hardship. However, a successful challenge restores tax credits and often reduces the risk of future denials, making it worthwhile to undertake this process.
Even when the CRA approves SR&ED claims, it may take months to receive a refund. Eliminate these delays with help from Easly. Our Capital-as-a-Service (CaaS) platform provides SR&ED refund financing to deliver your first advance in as little as 72 hours after approval.
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