New CRA Policy on Gross Negligence Penalties for SR&ED Claims
The Canada Revenue Agency (CRA) has updated its enforcement approach for Gross Negligence Penalties under subsection 163(2) of the Income Tax Act, affecting Scientific Research and Experimental Development (SR&ED) claims. Effective January 28, 2025, these changes reinforce the CRA’s ability to penalize overstated claims and introduce new considerations for businesses seeking tax incentives.
The CRA will consider charging a gross negligence penalty in the following situations:
a. The claimant participated in the overstatement of amounts on which SR&ED tax incentives are being claimed.
b. The claimant included amounts in respect of a project, and there is clear evidence that the claimant knew the project did not involve SR&ED activities.
c. The claimant described the performance of SR&ED activities that did not take place, or did not take place in the year, and claimed normal business expenses as SR&ED expenditures in respect of the alleged activities.
d. The claimant continued to claim amounts that do not qualify for SR&ED tax incentives after being advised in writing that these types of amounts do not qualify, and the amounts in question are not under objection or appeal.
e. The claimant continued to miscalculate the SR&ED tax incentives after being advised in writing of the proper calculation, and the basis of the calculation is not under objection or appeal.
f. The claimant continued to claim unsubstantiated amounts for the SR&ED tax incentives after being advised in writing what is required to support these types of amounts.
Key Changes to the CRA’s Policy
Extended Enforcement to Amended Returns – Previously focused on original filings, the CRA now applies penalties to amended returns, increasing risks for businesses making corrections.
Penalties on Refundable Investment Tax Credits (ITC) – Overstated refundable ITCs can now trigger penalties, not just understated tax liabilities.
Stronger Burden of Proof – The CRA must show, on a balance of probabilities, that a taxpayer knowingly made a false statement or acted recklessly. Risk factors include repeated claims after CRA denials, inadequate documentation, and exaggerated R&D activities.
How This Affects Businesses
Higher Financial Risk – Penalties amount to 50% of the understated tax or overstated ITC, posing a significant burden, especially for SMEs.
Subjective Negligence Standards – The complexity of SR&ED tax law makes it difficult to distinguish between negligence and honest mistakes. In fact, CRA representatives commonly disagree amongst each other whether work submitted by a taxpayer as SR&ED meets the requirements, comprised of a mix of CRA policy, legislation and case law. CRA has been known to apply penalties on the basis that the taxpayer submitted ineligible work purposely rather than innocently. This ignores the fact that a SR&ED determination is nuanced, complex and sometimes inconsistent.
Greater Scrutiny & Audit Risks – The policy signals stricter CRA reviews, potentially leading to prolonged disputes and discouraging participation.
Comparison with Personal Tax Filings
Unlike personal tax returns, where penalties often require clear intent, the CRA’s new approach to SR&ED claims could penalize businesses even when errors were unintentional or based on professional advice. This is particularly problematic because the SR&ED program is complicated, nuanced and inconsistent. Taxpayers will have to be extra careful to ensure their SR&ED consultants are highly skilled, experienced and trustworthy.
Conclusion
While intended to prevent abuse, these changes may discourage legitimate innovation. Businesses should adopt proactive compliance strategies to protect their SR&ED claims and engage with industry stakeholders to refine CRA enforcement measures.
If you require assistance with your SR&ED application and processes, contact us today. We will review your facts and outline the steps necessary to optimize your claim.
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