Financial Claim Review Manual – Review procedures for financial reviewers

SR&ED Program

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Chapter 7.0 Appendices

Table of contents

• 7.1 Appendix 1: Glossary of Terms
• 7.2 Appendix 2: Acronyms and Initialisms
• 7.3 Appendix 3: Working with the claimant: Mutual expectations
• 7.4 Appendix 4: Functional currency reporting
  
  • 7.4.1 Conditions required to file a T2 return in a functional currency
  • 7.4.2 Relevant spot rate
  • 7.4.3 Revoking an election to file in functional currency
  • 7.4.4 Review process with functional currency claims
• 7.5 Appendix 5: Partnership claims for SR&ED
  
  • 7.5.1 Requirement to file a partnership information return
  • 7.5.2 Partnership claims and AIMS
  • 7.5.3 Procedures for processing SR&ED claims filed by partnerships and their members
  • 7.5.4 What to prepare for (re)assessment
  • 7.5.5 Adjustments transferred to or from another TSO or another division

7.1 Appendix 1: Glossary of Terms

The glossary is provided as a reference for terms and concepts found in the Claim Review Manual (CRM).

Terms	Definitions
Access to Information and Privacy (ATIP)	A request for access to records or information under government control under the Access to Information Act or the Privacy Act.
Audit Information Management System (AIMS)	The AIMS automates the collection of audit information and the reporting of audit results to various levels of management, from the group head at the Tax Services Office to the Parliament of Canada. Provides an inventory control system for files selected for audit (screened) and under audit (assigned), Records the results of all completed audits and supplemental activities, and Provides a means to ensure that Audit reassessments are properly issued and reasonably correct.
Audit Manual	The CRA's guide for conducting audits.
Business Client Communication System (BCCS)	The BCCS assembles and sends notices and letters to the client.
Business Consent form (RC59)	A form used by claimants to consent to the release of confidential information about the claimant's Business Number (BN) account(s) to the representative named on the consent form or to cancel consent for an existing representative.
Business Number (BN) System	A CRA mainframe system that holds the identification information of claimants such as addresses, authorizations, contacts, etc.
Case Management System (CMS)	CMS is the inventory system which is used to perform daily tasks.
Claimant	A person, partnership, or corporation filing an scientific research and experimental development (SR&ED) investment tax credit (ITC) claim. However, in certain contexts, claimant may be interchangeable with and refer to an employee, officer or director of the claimant corporation, or to an employee or partner of the partnership filing a claim.
Claimant Representative	A person or firm that is legally authorized to represent the claimant. Often, it assists the claimant in preparing their SR&ED claim and in dealing with the CRA
Control Function	The person / group in each coordinating tax services office that reviews SR&ED files referred from the tax centre.
Coordinated Review	A review where the research and technology advisor (RTA) and the financial reviewer (FR) work together cooperatively to review a claim.
Coordinating Tax Services Office (CTSO)	A tax service office (TSO that has some extra administrative responsibilities in the SR&ED Program, usually for one or more other TSOs in a region. There are 10 CTSOs for the SR&ED Program across Canada.
Corporate Administrative System (CAS)	A fully integrated, comprehensive business solution that is used to manage the financial, materiel and human resources business processes of the CRA.
Corporate Taxation System (CORTAX)	The CRA information and processing system for accessing T2 (corporation) tax information including credits and penalties.The CORTAX system interacts with other mainframe options, which contain information relating to a client's business account, such as the business number (BN), the standardized accounting (SA) system, the business client communication system (BCCS), the case management system (CMS), and the organization system (ORG).
Financial Review	A review of a claim by an FR to identify qualified SR&ED expenditures for the purposes of the ITC.
HQ1196-000	Scientific Research and Experimental Development training course for FR.
Issue	A matter or question of interest to the FR which requires resolution or an answer during the SR&ED review.
Joint Review	A subset of the coordinated review. Characterized by the FR and RTA working inseparably together as a unit to complete an SR&ED review.
Memo for File (T2020)	Any of a number of memo-style review documents included in the file. T2020 is one example of a memo for file.
Notes and Adjustments Sheet	This working paper is a reminder of the items requiring clarification or verification.
Notice of (Re)Assessment (NOA)	The first or subsequent assessments of tax for the year filed. The notice is mailed to the claimant and provides the claimant with the outcome of any review or audit affecting a tax return filed or simply acknowledges a tax filing that has been accepted as filed.
Notice of Objection (NOO)	A formal disagreement filed by the claimant in response to a notice of (re) assessment.
Online Taxpayer Information System (RAPID)	The CRA information system for accessing tax information.
Organization System (ORG)	The ORG provides some of the point-of-contact information.
Outside Consultant (OC)	A specialist hired by the CRA to provide an eligibility opinion to the research and technology advisor.
Platinum Reporting Facility	The Platinum Reporting Facility is a software program which can retrieve statistical data, arrange it into a chart, and print it as a finished report.
Process Review	An evaluation of the claimant's internal processes (that is, their policies, procedures, organization and systems) that leads to a decision on the SR&ED work rather than a detailed review of the projects.
Revocation of Waiver	A form filed by a claimant to revoke a previous waiver filed by the same claimant. The revocation is effective 180 days after the date the revocation is received by CRA.
Risk Management Tool and Risk Grid	The risk management tool utilized at the tax centres (TCs) establishes a risk level for each claim resulting in a "score" that recommends the referral of the claim to a CTSO or an automatic downscreen at the TCs. A risk grid is available for use in TSOs for viewing risk scoring information.
SR&ED Claim / Claim	A claim in the CRM is an SR&ED claim; the two terms are interchangeable.
SR&ED Review/ Review	A review in the CRM is an SR&ED review; the two terms are interchangeable.
SR&ED ReviewFile	A complete file of the review of an SR&ED claim, including the working paper file and all forms required for processing at the tax centre.
Standardized Accounting (SA)	A CRA system that calculates the interest maintains the payments and determines the final assessment.
Statute-barred	The normal reassessment period for a claimant is defined in section 152(3.1) of the Act. Reassessments are "statute-barred" (that is, not legally allowed) beyond this period. Some exceptions apply.
T2020	A specific "memo for file" form used by CRA personnel to document or log all conversations. It may also be used to log other contacts with the claimant or their representatives, decisions made and actions during the course of a review or any service provided.
T2 Assessing Case Management System (CMS) (CSCOR)	A mainframe application developed to electronically gather, track, manage, and share T2 assessing line-of-business information for various service areas within the Canada Revenue Agency (CRA). In order to process any transactions in the CORTAX system, or to work on any T2 assessing case, T2 Assessing CMS must be employed.
Tax Earned by Audit (TEBA)	Federal tax results are compiled and allocated to the years audited and to all subsequent years.
Taxpayer (TP)	Defined in the Income Tax Act as "any person whether or not liable to pay tax." The term encompasses, individuals, corporations, trusts and is interchangeable with claimant.
Taxpayer or Claimant requested adjustment (TPR)	Any request made by a claimant to the CRA to adjust any amount or balance on the tax return. The request is always received after an initial filing by the claimant of the tax filing and is usually accompanied by information supporting the request.
TD1170-000	The online training course for the RTA.
Technical review	An examination of a claim by a research and technology advisor.
TF98 file	A file folder for keeping all the information related to the technical review.
Waiver	When a claimant formally gives up certain rights under the Act. It usually applies either to the right to the normal reassessment period or the right to appeal.
Windows Audit Laptop System (Win/ALS)	The program provides auditors with an electronic download of pertinent client data, a library of working paper templates / audit programs, the ability to electronically upload audit results to mainframe systems, and the ability to electronically archive the completed audit file for future use.
Working Paper File	Documents required when conducting an SR&ED review. The documents indicate the audit procedures performed, the evidence obtained and the conclusion or opinion reached by the FR. These working papers are indexed and cross-referenced.

7.2 Appendix 2: Acronyms and Initialisms

Below is a list of acronyms and initialisms used in the CRM along with some additional acronyms and initialisms found at the Canada Revenue Agency.

Acronyms and Initialisms	Definitions
AAF	Accepted as filed
Act	Income Tax Act
AD	Assistant Director
AE	Account Executive
AIMS	Audit Information Management System
AP	Application Policy
ASA	All or Substantially All
ASPE	Accounting Standards for Private Enterprises
ATIP	Access to Information and Privacy
BBR	Better Books and Records
BCCS	Business Client Communication System
Bill	Taxpayer Bill of Rights
BN	Business Number
CanAS	Canadian Auditing Standard
CAS	Corporate Administrative System
CC	Canadian Currency
CCA	Capital Cost Allowance
CCPC	Canadian Controlled Private Corporation
CFO	Chief Financial Officer
CICA	Canadian Institute of Chartered Accountants
CMS	Case Management System
CORTAX	Corporate Taxation System
CPB	Compliance Program Branch
CP+ED	Commercial Production with Experimental Development
CRA	Canada Revenue Agency
CRM	Claim Review Manual
CSCOR	T2 Assessing Case Management
CTSO	Coordinating Tax Services Office
ECAS	Electronic Commerce Audit Specialists
EID	Effective Interest Date
EFC	Elected Functional Currency
EP	Experimental Production
FAM	Finance and Administration Manual
FC	Functional Currency
FR	Financial Reviewer
FRM	Financial Review Manager
FRR	Financial Review Report
F/S	Financial Statements
FTA	Financial Technical Advisor
GAAP	Generally Accepted Accounting Principles
HQ	Headquarters
IC	Information Circular
IDEA	Interactive Data Extraction and Analysis
IFRS	International Financial Reporting Standards
IP	Intellectual Property
IT	Interpretation Bulletin
ITC	Investment Tax Credit
LFCM	Large File Case Manager
MPPD	Manufacturing and Processing Profit Deduction
NOA	Notice of (Re)Assessment
NOO	Notice of Objection
NTSS	National Technology Sector Specialist
OC	Outside Consultant
ORG	Organization system
PAD	Program Administration and Quality Assurance Division, SR&ED Directorate
PCPR	Pre-Claim Project Review
PD	Permanent Document
PDD	Policy Development Division, SR&ED Directorate
PE	Permanent establishment
PPA	Prescribed Proxy Amount
QA	Quality Assurance
RAPID	Online Taxpayer Information System
RFI	Request for Information
RTA	Research and Technology Advisor
RTM	Research and Technology Manager
RTO	Research and Technology Officer
SA	Standardized Accounting
SBD	Small Business Deduction
SIN	Social Insurance Number
SRD	Stakeholder Relations Division, SR&ED Directorate
SR&ED	Scientific Research and Experimental Development
SUE	Shared-Use Equipment
T1	Income Tax and Benefit Return
T2	T2 Corporation Income Tax Return
T4	Statement of Remuneration Paid
T5013	Partnership Information Return
TC	Tax Centre
TEBA-NPV	Tax Earned by Audit – Net Present Value
TGD	Technical Guidance Division, SR&ED Directorate
TOC	Table of Contents
TP	Taxpayer
TPP	Third Party Civil Penalty
TPR	Taxpayer (Claimant) requested adjustment
TPRO-NPV	Tax protected changes to future taxable income and tax – Net Present Value
TSO	Tax Services Office
TYE	Tax Year End
UCC	Undepreciated Capital Cost
Win/ALS	Windows Audit Laptop System
W/P	Working Paper

7.3 Appendix 3: Working with the claimant: Mutual expectations

Mutual expectations between the claimant and the financial reviewer during a scientific research and experimental development review

The scientific research and experimental development (SR&ED) review will be more effective and efficient when the claimant and the financial reviewer (FR) are clear about what they can expect from each other. The FR is expected to work with claimants, and the claimant is also expected to work with the FR. It is important that, at the start of a review, the FR discusses with the claimant these mutual expectations.

During the review, FRs will work with the claimants to:

• explain the SR&ED Program, its requirements, its services and policies to claimants who would like more information about the Program, to encourage understanding of their entitlements and ensure compliance;
• identify, prior to the on-site visit, issues that they plan to address and their approach for addressing the issues;
• identify, prior to the on-site visit, what they need during the visit, whether it is information or supporting evidence to see or people to speak to, so that the claimant can be prepared for the review;
• identify and communicate, as early as possible, any new issues that arise during the review;
• identify ways to resolve the issues, such as questions to ask or supporting evidence to examine;
• provide an indication of any concerns that remain unresolved at the end of the on-site visit or, if unable to do so until the information gathered during the review is considered, indicate when they expect to be able to do so;
• give an explanation for decisions, with reasons, in writing, if any of the expenditures are not considered to be allowable as SR&ED expenditures, or if any other decisions are unfavourable to the claimant. This will help to improve claimant’s understanding of program requirements and enable them to be better positioned to provide any factual information that had not been considered in the FR’s decision;
• coordinate their review process, including information requests, with Research and Technology Advisor (RTA) to minimize the administrative burden, such as not separately requesting the same information from the claimant;
• allow a claimant the opportunity to provide additional information or explanations in response to their decisions, and to respond to the claimant concerning this additional representation; and
• provide feedback, advice and guidance to claimants, as required, to explain any deficiencies in the supporting documentation.

During the review, the claimants and their representatives will be expected to:

• comply with the SR&ED Program requirements;
• prepare for on-site visits by having requested information, evidence or personnel available;
• be prepared for the possibility of an expanded or shortened review by the FR as different issues arise during the review or the original ones are resolved;
• provide, as early as possible in the review process, information or evidence relevant to supporting their position;
• answer questions and address the issues identified by the FR during the review;
• ensure that the people who are best able to explain the supporting documentation are available to be interviewed by the FR, should other issues arise during the review process;
• ensure that all supporting documentation is available and organized for review by the FR and that someone is available to explain the significance of the documentation;
• prepare to explain how the claim was put together and what supporting evidence was used in the preparation of the claim;
• focus on the issues identified by the FR and facts related to the work done in order to address these issues;
• provide complete responses to questions asked by the FR, whether in writing or not, within a reasonable time frame;
• expedite the review by providing any information, on a timely basis, that supports the claim;
• address any concerns raised by the FR with respect to the quality and organization of the supporting documentation, and other supporting evidence for future claims; and
• advise the FR of any concerns as early as possible.

7.4 Appendix 4: Functional currency reporting

Functional currency (FC) tax reporting allows certain corporations to file their T2 – Corporation Income Tax Return in a currency other than the Canadian dollar. This new initiative came into effect for tax years beginning after December 13, 2007, and the legislation is found in section 261 of the Income Tax Act.

This appendix provides information that the financial reviewer (FR) may need to review and process FC claims.

As with the returns filed in Canadian currency (CC), FC returns are validated and checked for completeness by the tax centre (TC). The returns are entered into CORTAX in the FC, that is, all of the amounts in CORTAX for any FC year are presented in a currency other than the Canadian dollar.

The FC of a taxpayer is defined in subsection 261(1) as the currency of a country other than Canada that is, throughout the tax year, a qualifying currency and the primary currency in which the claimant maintains their books and records for financial reporting purposes. The only qualifying currencies currently identified in subsection 261(1) are the US dollar, the euro, the British pound and the Australian dollar.

7.4.1 Conditions required to file a T2 return in a functional currency

A taxpayer that meets the conditions outlined in subsection 261(3) may elect to file their T2 return in their FC. The five conditions are:

1. The taxpayer is a corporation, other than an investment corporation, a mortgage investment corporation or a mutual fund corporation, resident in Canada.
2. The corporation files an election with the Minister in prescribed form not less than 6 months before the end of the particular year. (The prescribed form is the T1296, Election, or Revocation of an Election, to Report in a Functional Currency. The election is filed only once and applies to all future years unless it is revoked.)
3. The primary currency in which the corporation keeps their books and records is one of the four qualifying currencies.
4. The corporation has not previously filed an election. (The corporation cannot change their elected functional currency and cannot re-elect to report in a FC after having revoked a previous election.)
5. The corporation has not revoked the election for the particular year.

If the above conditions apply, subsection 261(5) provides that, in respect of a FC year:

1. The taxpayer’s Canadian tax results are to be determined in the elected functional currency (EFC).
2. Amounts in the Act that are expressed in Canadian dollars are to be converted to the EFC using the relevant spot rate for the first day of the FC year.
3. If any amount that is relevant in computing the taxpayer’s tax results is expressed in a currency other than the EFC, it must be converted to the EFC using the relevant spot rate for the day on which the amount first arose.
4. To (h) Various provisions of the Act that refer to CC must be read as if they refer to FC.

The Canadian tax results of the claimant include income, taxable income, taxes, credits and any other amount that is relevant in determining the taxes and credits of the claimant.

7.4.2 Relevant spot rate

The relevant spot rate is the noon rate quoted by the Bank of Canada on the particular day, or the closest preceding day if no such rate is quoted on the particular day. The rates applicable to a particular return are determined by the TC and can be viewed in CORTAX in Part 2 of screen Func. It is important to note the differences in the rates when converting to or from CC. For example, if the rate from CC to FC is 0.9978, the rate from FC to CC will be 1.0022. The FR can also look up the rates on the Bank of Canada website.

The relevant spot rate dates are described in subsections 261(7) and (15). The following is a summary providing a quick view of the dates that apply to particular amounts:

• Last day of the last CC year
  • Carryforward of amounts from a CC year to a FC year
  • Carryback of amounts from a FC year or a reversionary year to a CC year
  • Cost of property acquired in a CC year
  • Adjustments to the adjusted cost base of capital property acquired in a CC year
  • Reserves deducted in a CC year
  • Prepaid expenses incurred in a CC year
  • Adjustments to paid-up capital in a CC year
  • Any other amount from a CC year that is relevant in determining the tax results in a FC year
• First day of the FC year
  • Any limits such as expenditure limit or small business limit
• Balance-due date of the FC year
  • Taxes, credits and penalties for the notice of assessment
• Last day of the last FC year (in case of revocation)
  • Carry forward amounts from a FC year to a reversionary year
  • Carry back amounts from a reversionary year to a FC year
• Last day of the FC year
  • Statistics Canada, Finance, AIMS

7.4.3 Revoking an election to file in functional currency

Subsection 261(4) allows a taxpayer to revoke an election and revert to CC reporting. The revocation must be filed in prescribed form (also T1296) and applies to tax years that begin not less than 6 months after the date of filing the form. The revocation cannot be filed during the taxpayer’s first FC year. The subsequent tax years will be referred to as reversionary years.

Although a reversionary year is reported in Canadian dollars, the previous FC years cannot be ignored. Subsection 261(7) provides for the conversion of the attributes from the CC year to an FC year using the relevant spot rate for the last day of the last CC year. Subsection 261(12) then uses the provisions of subsection 261(7) to convert the attributes from the FC year back to Canadian dollars for the reversionary year, at the relevant spot rate for the last day of the last FC year. The double conversion is intentional.

The other subsections in section 261 deal with the following:

Subsections	Topics
Subsection (2)	Amounts expressed in foreign currency
Subsection (6)	Partnerships
Subsection (6.1)	Foreign affiliates
Subsection (8) to (10)	Pre-transition debt
Subsection (11)	Conversion dates for tax instalments, tax credits and taxes payable
Subsection (12) to (14)	Reversionary years
Subsection (16) to (17)	Wind-ups and amalgamations
Subsection (18) to (22)	Anti-avoidance rules

7.4.4 Review process with functional currency claims

The review process for the FR is almost identical for FC claims and CC claims. The FR must keep in mind that the currency used for the amounts reported and claimed is something other than the Canadian dollar. The review must be conducted and documented in the FC. The FR should identify the FC on all working papers, reports, letters, forms and schedules to ensure that the reader is aware that the amounts are not in Canadian dollars.

During the review, the FR should ensure that the claimant is entitled to use the EFC for tax reporting purposes. If the claimant did not maintain their books and records in the EFC throughout the tax year, the FR must advise the claimant and the TC that the T2 return must be refiled in CC.

The FR should also review the conversion of material amounts that were incurred in a currency other than the claimant’s EFC, including amounts incurred in CC. This issue is not limited to FC claims but is more likely to occur in such claims due to the fact that the claimant is operating in Canada. A claimant operating in Canada will usually incur some expenditures in CC, particularly salaries and wages, but will not necessarily incur any expenditures in a foreign currency. Paragraph 261(5)(c) provides that amounts that are expressed in a currency other than the EFC must be converted to the EFC using the relevant spot rate for the day on which the amount first arose. This requirement is similar to subsection 261(2) which applies to CC (non-FC) returns: An amount expressed in a currency other than CC must be converted to CC at the relevant spot rate for the day on which the amount arose.

AIMS information is used for national reporting purposes and must be presented in Canadian dollars, even though the claimant’s tax results are reported in CORTAX in the FC. The AIMS information captured by the TC is converted to Canadian dollars when the case is created by the risk management tool. The amounts that are required for the completion of the AIMS screens must be converted to Canadian dollars by the FR, using the relevant spot rate for the last day of the year under review. This rate can be found on screen Func in CORTAX.

7.5 Appendix 5: Partnership claims for SR&ED

Where SR&ED is undertaken by or on behalf of a partnership, Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, must be prepared at the partnership level, detailing the SR&ED expenditures incurred by the partnership. The financial reviewer (FR) and the research and technology advisor (RTA) review the claim at the partnership level, but the adjustments to income and investment tax credits (ITC) flow through to the members. Form T661 must be submitted with the Partnership Information Return (PIR) – T5013 , if such a return is required; otherwise the onus lies with each member to file the partnership’s form T661 with their income tax return for the year.

This appendix covers the following topics:

• requirement to file a partnership information return;
• partnership claims and AIMS;
• procedures for processing SR&ED claims filed by partnerships and their members;
• what to prepare for (re)assessment; and
• adjustments transferred to or from another tax services office (TSO) or another division.

7.5.1 Requirement to file a partnership information return

Regulation 229 requires every partnership to file an information return in prescribed form (T5013) and containing prescribed information. However, the CRA has established an administrative policy that limits that requirement to partnerships meeting certain conditions. These conditions have been revised for partnerships with fiscal periods ending on or after January 1, 2011.

A partnership with a fiscal period ending on or before December 31, 2010, is required to file a T5013 return if, at any time during the fiscal period:

• it had six or more members;
• one of the members was a partnership (tiered partnership);
• it invested in certain flow-through shares; or
• the Minister requested one in writing.

A partnership with a fiscal period ending on or after January 1, 2011, is required to file a T5013 return if:

• at the end of the fiscal period,
  • the absolute value of its revenues and expenses exceeded $2 million, or
  • it had more than $5 million in assets; or
• at any time during the fiscal period,
  • one of the members was a partnership (tiered partnership);
  • at least one member was a corporation or a trust;
  • it invested in certain flow-through shares; or
  • the Minister requested one in writing.

7.5.2 Partnership claims and AIMS

As discussed earlier, the review of a partnership SR&ED claim occurs at the partnership level. A case is set up in AIMS for the partnership, using selection reason code 0406 and the partnership’s business number (BN) if it files a T5013 return, or the BN or social insurance number (SIN) of one of the members. The information on screen L for a partnership case always represents the entire partnership claim, that is, the total SR&ED expenditures and the total ITC allocated.

A secondary file (screen 2) is set up in AIMS for each member of the partnership, whether or not the claim is assigned for a review. The adjustments reported on screen 5 of the member’s file represent the adjustments to be made to that member’s return. There is no screen L for a secondary file.

7.5.3 Procedures for processing SR&ED claims filed by partnerships and their members

The procedures outlined below apply to a variety of scenarios considering whether or not a T5013 return has been filed, whether the claimant requesting an ITC allocated from a partnership is a corporation or an individual, and whether or not that claimant has also claimed expenditures and ITC for its own SR&ED. ITC claims by trusts are rather rare and will not be discussed in the Claim Review Manual (CRM).

The T5013 return and form T661 are submitted to the partnership section at the tax centre (TC). Partnership SR&ED claims are not subjected to any validation, completeness or risk assessment processes at the TC. They are referred to a coordinating tax services office (CTSO) based on the physical location of the partnership, in a TF98 jacket with other relevant information, such as the partnership’s financial statements, a list of its members, and the ITC calculation and allocation to members.

A corporation that is a member of a partnership must file a T2 Corporation Income Tax Return (T2) with a T2SCH31, Investment Tax Credit – Corporations, to claim the ITC allocated from the partnership. An individual must file a T1 – Income Tax and Benefit Return (T1) with a T2038(IND), Investment Tax Credit (Individuals) to do so.

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Date modified:

2015-06-24