The 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.