The AG in Y2K

In April 2000 the Auditor General released a report entitled CRA and Department of Finance - Handling Tax Credit Claims for SR&ED. This audit is a follows on the 1994 audit, and addresses the handling of the 16,000 retroactive (bulge claims) filed by taxpayers in that year. The audit also addressed the administration of the program, audit risk assessment procedures, and the impact of the program on the economy.

The Auditor General reported that:

There were significant inconsistencies in the handling of claims that compromised the fairness of the review process.
There is a lack of clarity about the eligibility of SR&ED projects resulting in unresolved claims dating back to 1985.
There is a lack of clarity as to what constitutes an eligible activity or project, how thoroughly a claim should be reviewed and how much documentation is necessary to support a claim.
CRA has no standard methodology for audit risk assessment.

In 1997 Finance and CRA undertook a joint study of the value of the program. The benefits of the program were found to be marginal. Versus over one billion dollars in cost to the fiscal purse, the net increase in Canada’s real income was found to be $20 to $50 million.

Large corporations (8% of claimants) earn about 85% of the assistance under this program. Most large company audits are not current.

The new definition of “project” (available on CRA’s web site) modifies the level of eligible work and could result in additional costs.

When claims are found to be ineligible, taxpayers are being allowed second reviews. This second review process is not publicised.

Financial institutions and telephone companies are challenging the disallowance of hundreds of millions of dollars of tax credit claims dating back to the mid 1980s.

The AG in Y2K

The Auditor General recommended that:

CRA should review its procedures so that claims are audited in a fair and consistent manner.
The Agency should establish a process to reconcile internal differences of opinion.
Clearer eligibility rules are needed to improve the administration of the program.
CRA should clarify the rules as to what constitutes eligible work under the program.
Finance should review these rules to insure adequately reflection of tax policy.
CRA, Finance and Justice should develop a strategy to resolve outstanding claims by financial institutions and telephone companies.
CRA should adopt standard criteria to assess the audit risk of claims.
Large claims should be audited in a timely and consistent manner.

The Strategy
If you are unhappy with your audit result obtain professional advice as to whether the result was consistent with other audits. Consider asking for a second review.

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