Telephone SRED Audits

 

CRA is doing their SRED audit meetings via telephone now. I have been in a few of them, and here are my observations:

1. Time is saved. People don’t want to be on the phone overly long, and are willing to be more economical in their dialogue than was usual at in-person meetings.

2. People cannot see each other and consequently sometimes start speaking as someone else begins, so listening and waiting can be virtues.

3. The only communication is the words spoken and the tone of voice. No body language. No facial expressions. While a lot of the communication process is missing, there is more focus on the words and voice than there might have been in different circumstances. I suppose it’s similar to a blind person having a heightened sense of hearing.

4. I prefer this new way. I don’t even have to get dressed.

I also like the fact that CRA is in recent times focusing more on the outcome of projects. What I mean is that there is getting to be more acceptance of the fact that developed tools did not fall from the sky. Too often I have seen claims challenged by CRA for want of detailed records of the work done. I have normally pointed out that if a technological or scientific uncertainty existed at the start of a project and if there has been progress at reducing the uncertainty (i.e.: advancement), then the fact of the tool or process or discovery existing is prima facie evidence of the work having been done: who needs records to prove it? Last year the CRL case was heard and the Court came to the same conclusion. The realization seems to be informing CRA’s approach to SRED audits now.

Help for Alberta Innovators

Alberta is getting a new government program to subsidize what SRED activities: the Innovation Employment Grant. From an Alberta Government website: 

How it will work

• Provide an 8% payment towards a corporation’s R&D spending in a given year, up to its base level of spending.
• A firm’s base level of spending will be determined by calculating its average qualifying R&D spending over the previous 2 years.
• Deliver a 20% payment towards a firm’s R&D spending that exceeds its base spending level.
• Focus on small and medium-sized firms by phasing out the grant for firms with between $10 million and $50 million in taxable capital.
• Provide benefits on up to $4 million in annual R&D spending.
• Be delivered through the corporate tax system.

This seems better for a company that starts doing R&D than for a company that has already been doing it. The latter gets told “You only get 8% of the costs unless they exceed last year’s. That will reward you for having helped the province last year.” Maybe someone there will realize the implications and perhaps the program will be changed.

SRED Processing Times and Thoughts on other Subsidies

It is not clear to me how Covid-19 has affected CRA’s processing of SRED claims. I find that assessing claims seems to be taking about 2 months now on average, except where a claim has been flagged for intermediate action such as an FTCAS. Actually, the recent processing time seems perhaps better than the norm has often been, so it could be that CRA is being less stringent in the application of review standards. The mandate seems to be to get money into the hands of business to keep the doors open and the staff employed.

I expect that the distribution of subsidies such as the CEWS will continue until the next federal election. I think that the government will simply keep extending the end dates to keep up their popularity. The Liberals have the electorate’s support now; they don’t want to lose it. Once the election is done, I think the subsidies will be also. That’s when we will hear that we can’t afford them.

How much can we afford? Well, the current PM’s dad ran a government that had some major deficits in the early 80s when interest rates were excruciatingly high. Adjusting for inflation (and the higher GDP now) I estimate that it would take a budget deficit of about 300 billion dollars to be the same burden as a 30 billion dollar deficit 35 years ago. So I think we can handle the current programs for quite awhile. I don’t say they are a good idea though. This country needs to strengthen its income statements now more than its balance sheets. We need economic activity more than savings accounts.

Jason Kenny thinks he can get the needed economic action for Alberta by lowering provincial corporation income tax rates. I think he’s wrong. The provincial rate accounts for too small of a portion of the total corporation income tax bill to make a 2% reduction in the rate meaningful. Further, the taxation of dividends paid to individual shareholders is so onerous now that a reduction in the corporation income tax rate is to a large extent offset by the tax bite out of dividends. Moreover, companies have to actually have a taxable income for a tax rate reduction to be appealing.

No, what Mr. Kenney ought to do is support the development of Alberta technology in fields other than oil and gas. Get Alberta diversified, and do it quickly. Reinstate the provincial SRED credit and the investor tax credit, and develop fundings for companies developing twenty-first century industries.

After the Fact Creation of SRED Documents

At https://www.mondaq.com/canada/income-tax/833802/gordon-et-al-v-the-queen-canadian-tax-lawyer39s-analysis-and-comments are comments on a court case decided last year, which was fought over the issue of whether a CRA Investigation into an SRED practitioner’s routine of creating back-dated documents to make it appear that transactions and circumstances had occurred when they had not. The court’s findings make sense to me, with the exception of the determination that government reports labeling one of the individuals connected with the plaintiff as a “troublemaker” were not damaging to the subject’s name. The reason given by the Court to support the finding that the individual’s reputation was not damaged by the remarks is that such labeling practices are common within government! So, holding up a convenience store (easier now that masks are routinely worn) is alright because hold-ups are common? Yikes! It is a sad state into which a Just-Us system has fallen when such reasoning passes scrutiny. 

It is interesting though that the Court seems to have acknowledged that where poorly documented transactions or relationships had existed, it is a satisfactory accounting tactic to post hoc create missing documentary evidence.