When the Canada Revenue Agency (CRA) instigates an audit related to a particular SR&ED claim, the first step they take is to issue a request for information (RFI.) Claimants who do not have the right documentation exhibiting their scientific process at the ready are at a higher risk of getting their claim denied.
Claimants typically have 30 days to respond to an RFI, but responding at the eleventh hour indicates to the CRA that the process undertaken to prepare the claim may have been deficient. This can often lead to a more detailed review and a site visit by a Research and Technology Advisor (RTA) and / or a Financial Reviewer (FR.) The expectation by the CRA is that all the supporting documentation and evidence has already been collected, reviewed in detail, and organized during the claim preparation process.
In instances where a claimant has indicated on the S60 that they retain certain types of documents, but when the CRA requests to see those documents they are not provided or not available, this will significantly raise the risk profile of the claim.
The likelihood of a review is certainly higher if the technological uncertainty, systematic investigation or search, and technological advancement are not clear or non-existent in the S60 project descriptions. Excess “fluff” about features and functionality as well as “look-around-the-corner” technological uncertainties (“we did not know how to do it” or “this has never been done before”) should be avoided. Context about the business project should be minimal or completely removed. The focus should be on the scientific principles and experiments, not the business objective or product.
A landmark case which outlines the requirements for determining whether work qualifies for SR&ED was Northwest Hydraulic Consultants Limited v. The Queen (“Northwest Hydraulic Case.”) They made some key assessments in favour of claimants regarding documentation of the scientific process:
It has been determined that for scientific investigation to have occurred, documentation must have been consistently maintained throughout the process. That said, the claimant isn’t obligated to provide one singular and all-encompassing document, and records may take multiple formats to meet the criteria. Verbal testimony can also be considered as a legitimate means to support a claim when determining the “totality of the evidence” in relation to SR&ED criteria.
In the Northwest Hydraulic Case, it was determined that the achievement of a technological advancement is sufficient grounds to infer and conclude that SR&ED has taken place.
Another landmark case was RIS Christie v. The Queen, which involved a Tax Court of Canada ruling that the claimant did not produce sufficient evidence showing scientific investigation and technological advancement. This ruling was later overturned by the Federal Court of Appeal, which asserted the need for a more balanced test of the evidence than “repeatability,” on the grounds that making the nature and detail of the documentation a definitive proof was to do a disservice to the validity of “all other evidence pertaining to scientific research.” The Income Tax Act (the “ITA”) defines records as “an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form.”
This definition is broad enough to include the kinds of supporting evidence claimants normally retain to substantiate their SR&ED claims.
Whether you are a first-time claimant or have claimed SR&ED in the past, BeneFACT provides 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).