Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

C. Provincial Allocations -- Netting of Interest Charges

Where the taxpayer's provincial allocation is revised on audit, and assuming that the proper correlative adjustments are made in all other jurisdictions, the taxpayer will owe additional tax in some jurisdictions and be entitled to refunds in others. In addition, the taxpayer will be assessed interest on tax underpayments and be entitled to receive interest on overpayments. In total, the amount of tax and interest will likely entirely offset. The interest on the refund amounts, however, is taxable whereas interest charges on income taxes is not deductible. As an administrative concession, will Revenue Canada permit taxpayers to net the interest payable and refundable from all jurisdictions and only treat the net amount as either taxable (in the case of net refund interest) or nondeductible (in the case of net arrears interest)?

Audits of SR&ED Claims

The manner in which Revenue Canada's auditors are applying the "13 September 1994" cut-off and the 18-month period for claims of qualified SR&ED expenditures continues to puzzle TEI members. When the 1994 (and 1995) budget legislation limiting the period for claiming SR&ED expenditures was introduced, Revenue Canada officials assured taxpayers that auditors would be flexible and fair when reviewing affirmative claims for qualified expenditures omitted from previously filed tax returns. The experience of our members, however, suggests that SR&ED claims are being examined with an unusual degree of stringency, and that only adjustments decreasing the amount of qualified expenditures have been made.

For example, assume a taxpayer incurred qualified expenditures for scientists' salaries for clearly qualified projects for which claims were properly and timely filed. Assume further that expenditures for scientist A's salary were associated with, and reported in connection with, a timely claim for project 1, scientist B's salary was reported in connection with a timely claim for project 2, and salary expense for scientist C, who worked on both projects, was inadvertently omitted from the calculation of the claim for both projects 1 and 2. Finally, assume that A actually worked on project 2, while B actually worked on project 1. Would the taxpayer be permitted to correct its SR&ED claim for project 1 and 2 in order to claim the proper amount of salary expenditure for scientist A, B, or C on audit? Reports suggest that salary expenditures for all three scientists will be disallowed by auditors because taxpayers are not being permitted to correct errors in, and omissions from, their claims.

Where it is clear that expenditures (i) qualify for the SR&ED credit and (ii) relate to a previously identified project for which a timely filed claim was made -- but for which the amounts were erroneously omitted (or misreported) on the taxpayer's claim -- there is seemingly no good policy reason for denying the taxpayer's corrected claim. Hence, please comment on the instructions that have been issued to auditors in respect of audits of SR&ED claims. Are auditors precluded from accepting affirmative claims or adjustments to claims beyond the 18-month claim period, even to correct clerical errors related to misreporting of clearly qualified expenditures related to a claim for a previously -- and properly -- identified SR&ED project? We believe Revenue Canada can -- and should -- be more balanced in its approach to audits of SR&ED claims without opening the door to abuses. A one-way, "trap door" approach to audits of SR&ED expenditures will not enhance the perception of fair and equitable treatment of taxpayers.