Will the Courts Catch on to CRA?

Canada has what is theoretically maybe the most generous R&D subsidy programs in the developed world. The SR&ED program can reimburse over 40% of eligible expenses, while the USA’s program does maybe 10% and the UK’s does about 25% for small and medium size enterprises. I say “theoretically” because over the past 4 to 5 years, CRA has chosen to become increasingly restrictive in its allowance of expenses. There has been no legislative change that would justify this. It’s simply government functionaries deciding that nothing is really innovative. I am being somewhat facetious, but the effect is fairly correct.

The attitude is often that a company only brings existing knowledge to bear on a technological objective. If you seek to reduce a technological uncertainty, you use knowledge you already have. Yes, you might build knew knowledge in the process, but you already knew something about what to do or you couldn’t have done that. It’s an absurd approach.

Another approach is to ask the applicant what new understanding was gained, and then, no matter what the response, take it further by asking “but WHY does that work? What is the new understanding there?” A mechanical engineering problem becomes a physics problem, and soon that moves from physics into cosmology and then into philosophy once that road is chosen.

The huge increase in the number of SR&ED appeals over the past several years, combined with the rate at which applicants drop the application process, shows that something is amiss. I think that the courts will start cluing into this and I hope we will see justices reminding CRA to apply the law as it is written and in accordance with Parliament’s objectives for the SRED program. Otherwise, Canada will not be competing with the 90% of the developed nations that have effective R&D subsidy programs. But at least some auditors will have the satisfaction of knowing they protected foolish Parliament from its short-sightedness and kept money out of someone’s hands.