R&D Tax Credit Revisited: Muller Report

The following is an excerpt from the final “Full Report” by Paul Daniel Muller, a consultant to the Minister of National Revenue Jean-Pierre Blackburn, dated 30 November 2009, of his review of the R&D Tax Credit Program and the CRA’s action plan, “CRA Action Plan on Consultant’s Recommendations for the SR&ED program”. It was obtained through an Access to Information request to the Department of Finance by the CATA Alliance. Portions of the report are reproduced here as a service to the SR&ED stakeholder community.

2 Timeliness
2.1 Critiques

Timeliness remains a major concern to claimants. Among those respondents to the 2005 Claimant Survey that were dissatisfied with the program, duration of process was the most frequent source of dissatisfaction.² Duration of process is the second most frequent reason claimants had for writing to the MNR in 2009. It is the only criteria for which CRA has publicly committed to service standards.

Most claimants want to shorten processing time; but at the same time one also want the RTAs

to spend more time counseling them on their claim.

2.2 Accomplishments/Current Initiatives

SR&ED Directorate has taken several steps to improve timeliness. In particular;

• In 2006-2007, CRA reorganized its claim treatment process by devolving a greater portion of the process to the tax services offices.
• Pursuant to Budget 2008 which allocated an extra 10M$ to CRA for SR&ED, CRA hired 68 additional science advisors to increase capacity and allow RTAs to spend more time with claimants.

2.3 Findings

2.31 What are the expectations?

Not all claimants have the same expectations with respect to timeliness. Different incentives are at play. In the case of refundable claims, claimants want their claims assessed and their ITCs refunded ASAP in order to help with their cash flow. They are thus are incentivized to file sooner and collaborate with CRA to fullest extent. In the case of non-refundable claims, ITCs are used to offset taxes otherwise payable. With respect to cash-flow, the claimant does not have to wait for CRA to assess its claim; it benefits from the claimed ITC as of the time of filing, assuming it has taxes payable. It can only risk losing some of that credit if its claim is audited. Therefore, for non­refundable claims, the incentives are mixed: on the one hand, the claimant wants to close the issue ASAP so as to be certain of its tax liability and close its financial statements; but on the other hand, the claimant has an incentive to file later and delay closure if it perceives the risk of disallowance as large.

Filing statistics reflect this factor. Refundable claims are generally filed sooner than non­refundable claims, a difference that might be attributable to cash flow concerns. The spread between refundable and non-refundable filing patterns suggests that claimants are not all equally concerned about timeliness. Those claimants with the most legitimate concerns about timely service would be those expecting refunds and those submitting claims within six months.

Overall, over the past five years, less than half of claims (excluding adjustments) were filed within 6 months of the claimant’s fiscal year-end. Also, between 20 and 25 per cent of claims were filed at least 15 months after the end of the claimant’s fiscal year.³

2.3.2 What are the numbers saying?

CRA service standards distinguish between refundable and non-refundable claims. The service standard is 120 days for first time refundable claims and 240 days for adjustments to those claims. For non-refundable claims, the service standard is 365 days, both for first time claims and subsequent adjustments. CRA’s stated objective is to meet those service standards in 90% of cases. Results for 2008-2009, the last complete fiscal year, show CRA is meeting its service standards for 95 to 97 per cent of claims, depending on type of claim.

Table 1 – Success Rate in Meeting Service Standard, by Type of Claim, 2008-2009

Data on timeliness of service for previous fiscal years. going back to 2003-2004, shows improvement. Overall success rate in meeting the service standards for all four types of claims was in the range of 93-94 percent until 2005-2006. From 2006-2007 onwards, overall success rate has remained in the range of 96-97 percent. This improvement, beginning in 2006-2007, is contemporaneous with the reorganization known as “process realignment”, which was implemented in 2006-2007.

This improvement in the success rate has occurred even as the total intake of claims grew by 51% over the same period: from 17,900 in 2003-2004 to 27,000 in 2008-2009.

A breakdown by Coordinating Tax Services Office of the overall success rate in meeting service standards shows general consistency across the country, albeit with some exceptions. Thus the Halifax CTSO has shown the lowest success rate in meeting service standards at 93-94%, for the past three full fiscal years: from 2006-2007 to 2008-2009. Prior to that, from 2003-2004 to 2005-06, it was the Toronto CTS0 that lagged.

2.3.3 Do service standards tell the whole story?

Service standards apply to the time for which CRA considers itself accountable. CRA does not take responsibility for the time elapsed between initial filing of a claim and the date the claim is deemed complete. Beyond that point, after a claim is deemed complete, CRA will temporarily stop the clock when delays occur due to reaons outside its control. Common reasons why CRA stops the clock include:

• When a claimant takes over 30 days to respond to a request to extra information (during an audit, after the claim has been deemed complete);
• When a claimant asks CRA to assess adjustments to a series of several tax-years, it can focus on the earliest and ask CRA to put the others on bold pending a decision on the initial one.

A directive explains all reasons than CRA can invoke to temporarily stop the clock. However, the same directive also states: “from a claimant’s perspective, the only factor of importance is the total elapsed time to process a claim”.⁴ This is not to imply CRA should take responsibility for the entire duration, but merely to remind ourselves that total elapsed time is the only metric that matters from the claimant’s perspective.

Table 2 compares the average number of days, per type of claim and type of review, for which CRA holds itself accountable (Accountable Days), as opposed to the average total number of days (Total Days). For those claims that are audited, the ratio shows that Accountable Days represent between 38 and 55 percent of Total Days, depending on type of claim. This ratio may explain why claimants, especially those that are audited, continue to complain about the duration of the process despite the fact that CRA is meeting its service standards.

Table 2 also shows the interplay between the goal of meeting the service standard and the goal of ensuring fiscal integrity. In other words, the easy way to reduce average total days is to reduce the proportion of claims that are reviewed. Conversely, greater emphasis on ensuring fiscal integrity, which is at the core of CRA ‘s mission, will come at the price of lengthier processing times.

Table 2 – Average accountable days vs. total days, 2008-2009

* Lines do not total because claims with coding errors were excluded.

Nonetheless, even when total days are considered, claim processing times have improved over the past five years, especially since 2006-07. Figure shows maximum number of total days for 9 out of 10 deciles of processed claims. from 2004 to 2009⁵. For example, 90% of claims were processed within 380 days (total_, time) in 2004-2005, down to 328 days in 2008-2009. This depiction of processing duration, in Total Days, is consistent with CRA’s ‘service standards which are measured in Accountable Days.                  .

The tenth docile contains the problem files, including the worst cases. Worst case values range from 2492 in 2005-06 to 4793 in 2007-08

Processing times vary by Industry – Among those industries with over 100 claims since April 2007 and where a detailed (desk or on-site) review was performed, the six industries with the highest mean-processing time are:

• Transportation Equipment Manufacturing
• Chemical Manufacturing
• Administrative and Support Services
• Telecommunications Carriers
• Paper Manufacturing, and
• Management of Companies and Enterprises.

The four industries related to agri-food do not stand out with respect to processing time.

Incomplete claims are trending down – Total time is impacted, among other factors, by the time a claimant takes to file the information that was lacking at the time of first filing. Overall, the percentage of claims that did not contain all prescribed information at time of first filing dropped from 21% in 2004-05 to 12% in 2008-2009. The inclusion of a completeness check list in the new T66I form (Part 7) might help push the proportion of incomplete claims even further down. The percentage of incomplete claims over total claims is greater for non-refundable claims than for refundable claims, which might result from the greater impact the program has on companies eligible to refundable ITCs. 

Footnotes:

² CRA, SR&ED Directive 2003-03

³ Claimants have been obligated to file claims within 18 months of the end of their fiscal year since 1994. MNR used to have discretion to accept claims filed after the 18-month deadline but that discretion was removed in 2006. Nowadays, approximately I% of claims are rejected because of this I8-month rule.

⁴ CRA, SR&ED Directive 2003-03

⁵ A decile is a group composed of one tenth (10%) of all individuals in a population. Here, the population of processed claims is sorted by duration of process and then divided into ten groups. The figure shown for each docile is the duration of the longest (worst) claim in that decile.

To see the full report of the R&D Tax Credit as a PDF, visit the CATA Alliance page here.

This report was completed in November 2009.  When it was released to the then Minister of Revenue Jean-Pierre Blackburn his assistant assured us that the Minister found the report significant, that actions were merited, and that he would release it to promote discussion.  Many of you met with Mr. Muller and provided input to this report.  We find it to be a very interesting, third party review, highlighting many issues that we are still discussing.

Subsequent Ministers chose not release the report.  Why?  Its release could have encouraged a more productive dialogue. ” – CATA Alliance