Avoid a Terrible Review With These Four Tips

a safe place to workThe Scientific Research & Experimental Development (SR&ED) landscape as we knew it pre-Jenkins report era has changed significantly in the last few years. In other words, the Canada Revenue Agency (CRA) is selecting many more firms for reviews, even those companies that are used to getting their SR&ED claims accepted as filed for decades.  The CRA continues to further tighten the regulation of eligibility criteria and the rules governing the interpretation of what qualifies for SR&ED.

While it may be true that there is a higher probability of being selected for a SR&ED review, there are several actions you can take to minimize the chance of a review that can drastically reduce your tax credit refunds or worse yet, be rejected as filed.

Maintain contemporaneous documentation of the project activities you’re working on

This means that at the end of every week, pull out your log book and write down the projects you were working on, how much time you spent on the projects, what were you trying to achieve, and what the results were (i.e. testing, development, prototype build-up, etc.).  A log book, from a dollar store, should be provided to the employees who are working on the specific projects.  It should take no more than 10 minutes to capture the project activities at the end of the day on Friday.  E-mails, lab reports, pictures, geometric dimensioning and tolerancing (GD&T) drawings, prototypes, etc. should all be captured in the book, or at least a record of where they are kept.

Make sure you can defend the claim being submitted

Read and verify the technical reports to ensure accuracy and that no other projects are missed.  Make sure to validate the projects with the employees that worked on them.  Speak to those employees and inform them that a review may be imminent and they should be ready to speak about the specific projects/activities with the CRA reviewer.

Verify that the financials can be justified by cross-linking to the time sheets or labour allocation reports.  If the labour allocations were estimated, be sure to explain how and why they were estimated.  Establish a time tracking method if one isn’t already in place, as it’s considered best practice to document the labour allocations for the projects so that there is certainty in the financial report.

Verify that the material consumed or transformed are only used during the design/developmental phase, prototype creating, etc.  Scrapped materials during production cannot be used as part of the SR&ED expenditure calculations.  Subcontractor costs should be verified through invoices.

Talk it out with the CRA reviewer

Contacting a technical reviewer at the CRA to discuss the format for the SR&ED technical report is a good way to be proactive before you begin to write the report.  You can easily get the name and contact information by contacting the nearest CRA office that will manage your SR&ED claim.  By getting their opinion, you will be further ahead because the reviewer will guide you in the right direction for completing the claim properly.  Furthermore, the same reviewer will be reviewing your claim from a place of mutual understanding that has already been established.

Be ready for a review in all circumstances

If you receive a letter from the CRA stating that there will be a review on your SR&ED claim, do not panic.  This is considered routine work from the CRA, who just want to ensure there is integrity in your application.  In other words, they will simply verify the true nature of the projects and the authenticity of the financial materials that have been submitted.  If this is your first review, ensure you have all the proper documents as listed in your application.  Ask reviewers to elaborate and gain context on their questions so you thoroughly understand what is being asked.  Provide them with specific documents they may be looking for.  Take them on a plant tour if possible and have them speak to project leaders.  Make sure to coach these project leaders to only answer what the reviewer is asking for to avoid getting the review off track.  Always stay focused and keep your goals in front of you to manage expectations.

At BeneFACT, we are proud of our reviews team as they focus on nothing but ensuring that our clients have a positive review experience through effective dialogue, exchange of information, and meeting request deadlines in a timely manner, minimizing the risk involved in a review.  For further information, please contact our office at (855) 829-2225 and speak to one of our resident experts.

Quebec government issues cheques for IDM companies to recoup their labour costs

3D Quebec  Flag

In our last blog about digital media tax credits, we showcased the rich funding opportunities available for companies operating in Ontario. This week, Quebec takes the spotlight as a vibrant cluster of activity in Canada’s Interactive Digital Media (IDM) industry.

Montreal and Quebec City have long been known for producing some of Canada’s most talented and promising creative talents, and it was only a matter of time for Quebec to become a hot spot for innovative and creative companies. It was nearly two decades ago that the Quebec government decided to support these companies with tax incentives, including the introduction of the Production of Multimedia Titles Tax Credit.

“Lawmakers chose long ago to bet on video game development with the belief it would generate well-paying creative jobs and help compensate for the declining manufacturing and textile sectors,” says one Financial Post article from 2012.

Since then, video game publishers like Ubisoft Entertainment SA and Eidos have developed a presence in the province, thanks in large part to this tax credit.

The credit allows companies to claim up to 30 per cent of qualified labour expenditures for commercialized products. Unlike Ontario, there aren’t specific limitations on content, although promotional products are restricted and the product must present information using text, images or sound. There is also a premium of 7.5 per cent offered on top of the regular tax rate for companies that produce a French language version of their products.

Companies should be aware that there is an 18-month deadline from your fiscal year end in which expenditures were incurred to submit a claim to Revenu Quebec, and you must first apply to Investissement Quebec to have your eligibility and expenditures certified. The Initial Eligibility Certificate provides details of your company and projects being claimed, which you can submit when work is complete or while it’s in progress. The Production Work Certificate details your expenditures incurred during the whole project, and you can only submit it after the end of your fiscal year. The 18-month deadline means you should really be claiming on an annual basis, but on the upside, you can claim expenditures for the entire lifecycle of the product. To make sure you receive the certificate in time to submit it to Revenu Quebec, it’s important to apply as soon as possible, although we don’t see the same wait times for Investissement Quebec as we do for certification from the Ontario Media Development Corporation in Ontario.

All over Canada, provinces are focused on strengthening and sustaining the IDM industry. At BeneFACT, we have a dedicated team who can help you apply for provincial digital media tax credits. To learn more about credits available in your province, call us toll free at 1-855-TAX-BACK (829-2225).

Get a higher SR&ED return with the track and stack method

Pink Piggy bank on top of books with chalkboard in the background as concept image of the costs of education

Knowing how to properly calculate eligible expenditures while still maximizing your SR&ED claim is something every consultant worth their salt can do for their clients. SR&ED claims get significantly more complex when you are applying different provincial and federal SR&ED rates, as well as considering other financial assistance you have received within a given fiscal year. That’s where a more dynamic approach called “tracking and stacking” comes in.

The SR&ED program is administered at both the provincial and federal level. The maximum Investment Tax Credit (ITC) at the federal level is 35 per cent, and the provincial programs range between 10 and 20 per cent. Used together, these are “stackable” credits and can be applied to the same expenditures to generate a higher combined rate.  In Alberta, for example, the 35 per cent federal and 10 per cent Alberta SR&ED credits are stackable for a combined effective credit rate of 41.4 per cent when the government assistance rules are applied (the 10 per cent provincial credits are treated as assistance, and thus the federal rate of 35 per cent is only applied to 90 per cent of expenditures.)  Stackable credits have more value than non-stackable credits.

There are many types of government assistance that affect the size of your SR&ED claim. Once you determine the source of the funding, you must also consider if the assistance was applied to the expenditures being claimed. The payback terms are also a determinant in how it must be accounted for and this is where tracking comes into play.

An example is when a forgivable government loan is repaid in a future year.  If that loan had been stacked with SR&ED credits, it can be added to SR&ED Qualified Expenditures in a future year when it is repaid, thereby earning future SR&ED credits.  The idea is to keep track of the incentives throughout their lifecycle with awareness of the consequences of future events.

One of the common mistakes that SR&ED claimants make is subtracting government assistance directly from the pool of available expenditures for SR&ED. It’s important to understand if the applicable funding sources are “stackable” – meaning they can be subtracted from your base expenditures rather than directly from your SR&ED expenditures.

Planning ahead and considering the interaction of different sources of funding along with the costs (be they financial or restrictive covenants) can lead to more effective and efficient project funding.

At BeneFACT, we provide comprehensive SR&ED services, from claim preparation and filing, to supporting claim justifications. We are Canada’s largest independent SR&ED firm with a full-time staff of over 60 employees. If you have any question(s), please do not hesitate to give us a call toll free at 1-855-TAX-BACK (829-2225).