CRA SR&ED Audits: How to Prepare and What to Expect

Filing an SR&ED claim is often just the beginning of your interaction with the Canada Revenue Agency (CRA). Depending on the size and nature of your claim, it may be selected for review (or “audit”) before a final assessment is issued. Understanding why reviews happen, what the process involves, and how to prepare can make the process much easier to manage. 

The important thing to understand upfront is that being reviewed is not the same as being accused of wrongdoing. It is a normal part of the SR&ED program, and companies that have solid records and honest claims have every reason to approach the process with confidence. 

Why Claims Get Selected for Review 

The CRA does not audit every SR&ED claim. Many are assessed as filed and processed within the prescribed review period. That said, certain circumstances do increase the likelihood that your claim gets flagged for review. 

The CRA may flag claims based on its size or complexity, the industry of the claimant, irregularities found in the filing, or no obvious reason. A large refundable claim, a sharp jump in claimed amounts from one year to the next, or work in sectors the CRA is currently paying close attention to can all attract a review. Claims where the technical description and the financials do not quite line up are also more likely to be reviewed. And some claims are simply randomly selected. 

Types of SR&ED Reviews 

When a claim is selected, the CRA typically conducts one of three review types. 

A technical review is led by a Research and Technology Advisor (RTA), someone at the CRA with a science or engineering background. Their job is to determine whether the work you described actually meets the SR&ED eligibility criteria. That means looking at whether there was technological uncertainty, whether you were genuinely trying to advance the state of the technology, and whether your team followed a systematic approach in attempting to resolve the problem. 

A financial review is handled by a Financial Reviewer and focuses on the numbers. The reviewer will check whether the expenditures you claimed (salaries, subcontractor costs, materials) are properly documented, correctly calculated, and tied to eligible work. 

A combined review brings both types together and is common for large or more complex claims. Refundable claims going through a combined review are generally completed within 180 calendar days of the CRA receiving your full submission. 

What to Expect During the Review 

Once the CRA has selected your claim for review, they will reach out to get things started. Typically, this means an initial request for documents, followed by a meeting. That meeting can be held on-site at your office or virtually.  

The RTA will want to understand your project from a technical standpoint. What were you trying to build or solve? Why was the answer not readily available? What approaches did you try, and what did not work? The Financial Reviewer will have a different set of questions. How did you track time spent on SR&ED? How did you calculate salary allocations? And what documentation do you have to support the expenses you claimed? 

The CRA recommends that senior technical and financial people be available during the review. Having the actual engineers or scientists who did the work speak directly to the RTA helps ensure technical questions are answered accurately and completely. Organizations working with an SR&ED consultant should ensure that internal technical personnel remain involved throughout the claim preparation process and are prepared to discuss the underlying work during a review. A collaborative approach not only strengthens the claim itself but also helps ensure the organization is well prepared if the CRA requests additional information or initiates a review. After the review is complete, the CRA will issue a report with their findings. From there, one of three things can happen: 1) the claim is accepted as filed, 2) the claimed amounts are reduced based on the reviewer's findings, or 3) the claim is refused entirely. You will have the opportunity to respond to the report before the claim is officially assessed. 

How to Prepare: Documentation 

Strong and organized documentation is key to a successful SR&ED review.  

On the technical side, contemporaneous information that includes lab notebooks, experimental logs, design documents, version histories, test results, and meeting notes that capture how the project evolved over time is the preferred support documentation. These records should clearly document how the project evolved over time, including unsuccessful approaches, failed tests, and design iterations.  Ideally, documentation should demonstrate and support the related experimental work and iterative development undertaken in an attempt to resolve the technological uncertainties.  

On the financial side, you will need payroll records, time-tracking data showing what portion of each employee's time was related to SR&ED activities, invoices and contracts for subcontractors, and bank records and receipts for any materials consumed or transformed in the course of the work. If applicable, overhead allocations should also be clearly documented. 

A useful habit is to review your records before you file, not just in case of a review, but because strong documentation typically leads to a stronger and more accurate claim. 

How to Prepare: Your Team 

It is important that your technical lead(s) understand what the reviewers are looking for and what to focus on and what not to focus on. They should be able to explain the project clearly in plain SR&ED language found in the technical reports, including what was uncertain, what approaches they tested, and what they found out. When we work with clients, we will always schedule a review simulation session with the technical leads to ensure the team is comfortable and well prepared for the actual review, and to provide support during the review as required.

On the finance side, it is equally important to walk the Financial Reviewer through how time was tracked and how expenses were attributed to SR&ED projects. It is also important to have all the support documents ready. We generally take responsibility for the financial side during a review when we work with clients.  

When the CRA asks for additional documents or information during the process, it is important to respond as promptly. Delays can drag out the review, and if the SR&ED reporting deadline has already passed, information submitted late may be put aside. 

If You Disagree with the Outcome 

A CRA review may not always end in your favour. If you believe the proposed adjustments are incorrect, start by raising your concerns directly with the RTA or Financial Reviewer. If that does not resolve things, you can escalate to their managers. 

Once a Notice of Assessment or Reassessment has been issued, you have 90 days to file a formal Notice of Objection. If you are still not satisfied after the objection process, you can take the matter to the Tax Court of Canada as a last resort. 

Being Prepared Pays Off 

An SR&ED audit can feel stressful, especially if it is your first time going through one. But the process is designed to be fair. Companies that have kept good records, filed accurate claims, and made sure their technical and financial teams are on the same page are generally well-positioned to come through a review without major changes to their claim. 

The best time to prepare for an audit is before you file, not after CRA calls. If you are not sure whether your documentation holds up to scrutiny, or if you want to make sure your claim is structured in a way that reduces audit risk, talking to an SR&ED specialist before you submit can be worth the time. 

If you have questions about an upcoming review or want help strengthening your documentation practices, contact R&D Partners at 1-800-500-7733 or mlee@rdpartners.com. 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to, nor can it replace the evaluation of your specific SR&ED claim or review situation by a dedicated professional.