If you claim Scientific Research and Experimental Development tax credits (otherwise known as SR&ED), you are guaranteed to experience either a First-Time Claimant Advisory Service (FTCAS), a partial review, or a full review—also called an “audit”. Here is what you need to know to survive any of these experiences.
1. Take the FTCAS seriously
After you submit your claim, a government representative may casually call to tell you that you have been accepted but that they would like to visit your office to see how things are going. Take this visit seriously, as it will likely be the most important meeting you ever have with the Canada Revenue Agency (CRA). Though the FTCAS may sound friendly, it is really an assessment of the risk of your future claims, and the worst mistake you can make is underestimating its long-term importance. We know a few companies that are still trying to recover from an overly casual FTCAS meeting with the CRA.
2. Make sure you understand the SRED program
Unlike many grants and other forms of investment, the eligibility of your SR&ED claim is not based on personal relationships, timing, being a nice guy, or other qualitative factors but instead admissibility as it is described in the Income Tax Act (ITA). Though the CRA attempts to administer the law found in the ITA fairly, they are not the organization that created it, nor do they update it. Consequently, in the event you disagree with the CRA’s interpretation of your eligibility, it is ultimately a judge who will decide whether you qualify according to the ITA or not.
3. Be prepared
In the event of an audit, you must be as prepared as possible. This means having systems and procedures in place from the day your SRED project starts that allow you to collect information auditors may want to see, namely, time tracking systems and other work management systems as well as proper and efficient systems related to accounting and payroll. It’s often the case that superior presentation of contemporaneous information (documentation created at the time the work was done) can overcome weaknesses in your actual SR&ED work.
4. Focus on SR&ED problems
Most technology company executives are used to selling the simplicity and reliability of their product to clients and investors. The purpose of the SR&ED program, however, is not to fund the building of successful products but rather to encourage companies to take technological risks. As such, auditors are most interested in the failures and frustrations that occur during technical development. It is important to demonstrate that your SR&ED work could not be resolved using standard technology or routine processes. When speaking with auditors, therefore, minimize sales and product-oriented discussions and maximize conversations that highlight attempts at technological advancement.
5. Be transparent and reasonable
At the end of the day, it is important to understand that intelligent individuals with a job to do run the CRA. As such, it is important to be transparent and reasonable with them so that they can get the information they require. That said, it’s comforting to know that, in the event that you disagree with your CRA reviewers, you can undertake a multi-stepped resolution process that will ultimately end up in the hands of a neutral third party.
How R&D Partners can help
If you have any questions about the SR&ED audit process, or if you are considering submitting a SR&ED claim, don’t hesitate to contact me, Mike Lee, at R&D Partners: