Claimants for Scientific Research and Experimental Development (SR&ED) tax credits must always keep in mind that their claim may be subject to an audit or review by the Canada Revenue Agency (CRA). Having everything prepared for a SR&ED audit or review, before it happens, is key to ensure your audit goes successfully and to secure the tax credits you are entitled to. The most important thing to remember is to keep contemporaneous documentation: log, update, and track each step of your R&D process so that you can substantiate the work undertaken.
There are three main types of CRA reviews: Request for Information (RFIs), financial audits, and technical audits.
RFIs are becoming the most common type of audit and typically consist of a form letter from the CRA requesting additional information about your claim, as well as some documents to prove the costs and the type of support available for the work associated with your claim. These documents will be used to “spot check” different items in your application, and may include such things as the costs of materials consumed or transformed during your SR&ED project(s), documentation on salaries, as well as time sheets and trial logs.
Financial audits review things such as cost allocations for labour expenditures, cost of materials consumed, time logs, and proof of contractor payments. Financial reviews are, not surprisingly, heavy on documentation speaking to the dollar amounts spent on various aspects of your claim. It is recommended that you ensure that all relevant information is kept in a central location, and that all documents are dated and clearly identified in terms of their relation to each SR&ED project.
A technical audit often includes a financial audit, but technical audits can vary in scope and depth. These audits focus on substantiating how your project identifies technological uncertainties, advances a field of science beyond common practices, and utilizes scientific experimentation in doing so. A technical audit reviews all technical documentation related to your R&D project including project notes, meeting documentation, time logs, trial run logs, or any other type of document which captures your SR&ED project from preliminary iteration to final (or most recent) evolution. It is often useful to have a “SR&ED Champion”, a person at your business who understands your SR&ED projects and can explain each step of their development process. This is a topic that will be further explored in an upcoming post.
In addition to the above three review types, new claimants (or claimants that haven’t filed for SR&ED in the past 3 years) may also be subject to a First Time Claimant Review (FTCR) through the First Time Claimant Advisory Service program. The FTCR involves an educational meeting during which the CRA representative goes over many aspects of the SR&ED program, and often reviews your documentation, logging strategies and operations to ensure you are meeting CRA standards for future SR&ED claims. While this is not formally an audit, it is still an important review and you should be prepared with relevant documentation.
The key to any audit or review is being well prepared, including having all your documentation ready and on-hand. NorthBridge has years of experience working with clients and strives to ensure any and all audits our clients may be subject to conclude successfully and are accepted as filed.