Tax credit system seeks more consistency (July 01, 2000)

Officials overseeing the Scientific Research and Experimental Development (SR & ED) tax credits, a program long used by the plastics and moldmaking industries to re-coup or offset costs associated with risky development work, are looking at ways to improve administration, including the use of mediation arbitration of disputes. The actions coincide with increasing criticism of the methods used to determine what kinds of work are eligible for tax credit status under the program’s guidelines.

The tax credit program is administered by the Canada Customs and Revenue Agency (CCRA). Generally, to be eligible for SR & ED tax credits, a project or work must have technological advancement, technological uncertainty and be carried out systematically by qualified personnel.

Sol Agranti, an owner of F.G.L. Precision Works Ltd. and Shirlon Plastics, is one of those who believes the program needs to be better managed.

“Every year it seems the rules are changing,” Agranti says. “The program is becoming less attractive to us and discouraging us from taking on risky projects.”

Agranti is particularly critical of the way in which projects are reviewed to determine whether or not they are eligible for SR & ED tax credits.

“There’s a lack of consistency,” Agranti says. He thinks the problem is the lack of a clear standard for evaluating projects. He also believes some of the program’s advisors do not have enough experience in the plastics industry to understand what constitutes a technological advancement.

Jerry Goodchild, manager of client liaison at the CCRA, says that for moldmakers, the issue of SR & ED tax credit eligibility often boils down to whether or not to call a failed mold a prototype.

“Sometimes a prototype has a very specific meaning,” says Goodchild. “It’s not so much the guidelines changing as an interpretation as to what is eligible with regards to work.”

Goodchild admits there is some validity to the criticism of inconsistency in the reviewing process and says the agency is working to address the problem.

“Part of the problem is that the facts often do not get established in these reviews,” says Goodchild. “Often the descriptions of the work provided by the claimants focus on their products and processes and not the underlying technology. We’re looking for advances — either scientific or technological.”

He says the agency has established a pre-claim project review that allows claimants to call up a local office and ask if a project is eligible. It has also established a new program in which an individual advisor will work with a company on an on-going basis. It is also considering a new mechanism to settle disputes.

“We are looking at a dispute resolution mechanism to pilot in the fall which would use mediation arbitration to settle claim disputes,” Goodchild reports. He cautions that the pilot project still needs formal approval and funding.