What is the difference between an “audit” and a “review,” and why does it matter in SR&ED?
If you have been notified by the Canada Revenue Agency (CRA) that your SR&ED project is being reviewed, you may wonder if your project is actually being audited. The way the terms “audit” and “review” are used by the CRA throughout its documentation varies. This is especially true in the context of SR&ED. It is important to know the distinction between an “audit” and a “review” when filing your SR&ED claim, as the CRA may review your claim, and it is important to know what this will entail.
What is an Audit?
The dictionary defines the term “audit” as follows:
- a formal examination of an organization’s or individual’s accounts or financial situation
- a methodical examination and review1
There is no mention of “audit” in the SR&ED Glossary; however, as a search term on the CRA’s website, it displays 1,336 results.2 A more comprehensive search of the CRA website found information on business audits, and one page states that “during business audits, the [CRA] closely examines books and records of small and medium-sized businesses to make sure they fulfill their obligations, apply tax laws correctly, and receive any amounts to which they are entitled.” 3
What is a Review?
One of the definitions of “review” featured in the dictionary states it is “a general survey (as of the events of a period).”4 Like “Audit”, there is also no mention of the term “Review” in the SR&ED Glossary. A search of the word “review;” however, displays 2,018 results, and the top result is the document, Financial Claim Review Manual – Review Procedures for Financial Reviewers.5
In the Financial Claim Review Manual – Review Procedures for Financial Reviewers document, in chapter 2, part 2.3, Outline of the review process, the 13-step process alludes to much more than “a general survey” or a “routine check,”6 and may more accurately show what a review entails in the context of SR&ED.
However, on the What to do if the Canada Revenue Agency reviews your tax return page of the CRA website, a review is defined as being “a routine check” and “not an audit,” and that if the CRA request to review your tax return it is to “ensure that the amounts you have claimed are reported accurately.”7
SR&ED Context: Audit or Review?
In the context of the SR&ED program, a “review” is an audit where the CRA confirms the eligibility of the research and development work you have performed and the corresponding SR&ED expenditures claimed.8 The terms “audit” and “review” are, therefore, interchangeable within the context of the SR&ED program; however, the CRA will most likely refer to an audit as a review in the context of the SR&ED tax credit program.
If the CRA request to conduct a “review” your SR&ED claim, this will entail providing the CRA with comprehensive project documentation, much like what is requested during an “audit” in most other tax contexts.
In the Claim Review Manual for Technology and Research Advisors, in Section 3.3.1 the CRA offers, a definition of what a coordinated review entails between a Research and Technology Advisor (RTA) and a Financial Reviewer (FR), the people who would be processing your claim. This information is good to know to build an awareness of how detailed this “review” process will be from the CRA’s perspective.
When a review is coordinated, the RTA and FR will consult and communicate with each other on the following relevant items:
- the scope of their reviews, including the need for an on-site visit;
- joint issues in the claim that require the input of both reviewers to resolve, and the planned approach to resolve those issues;
- responsibilities for initiating contact with the claimant, and mechanisms for obtaining and then sharing pertinent information with the other reviewer;
- significant events (such as planned leave and changes to availability) or occurrences (new priorities and decisions to abandon the review) that may impact the work plan, or may provide milestone or status information on the review process;
- contemplated significant revisions to the review plans of the RTA or the FR. In the CRM (Claim Review Manual), the words “review plan” may also refer to a joint review plan;
- on-going findings of review work performed, especially as they impact joint issues;
- adjustments each reviewer will be proposing and representations / additional information received from the claimant;
- sources of delays that affect the review process;
- content of communications with the claimant;
- the SR&ED review report and the proposal letter so that feedback from the other reviewer can be sought and provided prior to mailing to the claimant; and,
- any other information that affects the review process of the other reviewer, or that affects the completion of the file on a timely basis.9
As one should be able to determine from the list of definitions above, the review process is incredibly detailed from the CRA’s perspective on the roles and responsibilities of the reviewers. Therefore, the process is not to be taken lightly.
Examining the CRA’s Financial Claim Review Manual – Review Procedures for Financial Reviewers a little more closely, section 2.16 notes just how detailed the CRA will be taking the process of examining one’s financial portion of the review. It notes that:
A quality review is one that meets the minimum requirements in this manual. Primarily, this requires ensuring that the financial review process performed is adequately documented, follows established procedures, and decisions made are in keeping with SR&ED policies.10
Section 2.16.1 goes further and notes:
Review procedures undertaken, their outcomes, and the conclusions drawn must be clearly stated, usually on a working paper, in the file. All correspondence and any discussions of relevance to the review process must likewise be documented and included in the file. Discussions could include internal emails, telephone conversations and messages left or received, interviews, and other face-to-face conversations.11
The description of an SR&ED review above describes an incredibly stringent process in which all forms of supporting documentation are analyzed. This certainly suggests that in SR&ED, a review is as strict as an audit, and should be taken seriously and prepared for accordingly.
In the context of the SR&ED program, an “audit” and a “review” mean the same thing, which may cause confusion as both terms have different meanings elsewhere. Do not think that because the CRA is using the word “review” that your work is going to be lightly examined. Be prepared in advance for your work to be heavily scrutinized by the CRA if they ask to conduct a review, and ensure you follow the due diligence of any business tax audit.
If you would like to know more information as to what to expect during an SR&ED review, we have created a comprehensive guide to Audits and Reviews; SR&ED Audit Prevention – 3 Tips to Avoid Reviews. The CRA document, The SR&ED Technical Review: A Guide for Claimants, also contains more general information on SR&ED reviews.
Has your SR&ED project been reviewed? If so, what was the experience like?
- Merriam Webster Dictionary. (May 22, 2018.) Audit. Retrieved May 22, 2018, from: https://www.merriam-webster.com/dictionary/audit. ↩
- Government of Canada. (April 12, 2018.) Search CRA: “Audit”. Retrieved May 22, 2018, from: https://www.canada.ca/en/sr/srb.html?q=review&wb-srch-sub=#wb-land. ↩
- Government of Canada. (January 17, 2018.) Business Audits. Retrieved May 22, 2018, from: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/changes-your-business/business-audits.html. ↩
- Merriam Webster Dictionary. (May 22, 2018.) Review. Retrieved May 22, 2018, from: https://www.merriam-webster.com/dictionary/review. ↩
- Government of Canada. (April 12, 2018.) Search CRA: “Review”. Retrieved May 22, 2018, from: https://www.canada.ca/en/revenue-agency/search.html?_charset_=UTF-8&q=%22review%22&wb-srch-sub=#wb-land. ↩
- Government of Canada. (October 31, 2017.) Financial Claim Review Manual – Review Procedures for Financial Reviewers. Chapter 2.0 Overview and general information. 2.3 Outline of the review process. Retrieved May 22, 2018, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/financial-claim-review-manual-review-procedures-financial-reviewers-1.html#N1026D. ↩
- Government of Canada. (August 8, 2017.) What to do if the Canada Revenue Agency reviews your tax return. Retrieved, June 1, 2018, from: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2017/what-to-do-if-the-canada-revenue-agency-reviews-your-tax-return.html. ↩
- Samson, P. (December 15, 2017.) “Re: Your Query.” (Email to SR&EDucation.) ↩
- Government of Canada. (2015, April 20.) Claim Review Manual for Technology and Research Advisors. Chapter 3.0. Guidelines for Coordinated Review. 3.3.1 Definition of Coordinated Review. Retrieved June 15, 2018, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/claim-review-manual-research-technology-advisors-program-2.html. ↩
- Government of Canada. (October 31, 2017.) Financial Claim Review Manual – Review Procedures for Financial Reviewers. Chapter 2.0 Overview and general information. 2.16 Quality Financial Review and Documentation. Retrieved June 16, 2018, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/financial-claim-review-manual-review-procedures-financial-reviewers-1.html#N10BAD. ↩
- Government of Canada. (October 31, 2017.) Financial Claim Review Manual – Review Procedures for Financial Reviewers. Chapter 2.0 Overview and general information. 2.16 Quality Financial Review and Documentation. Retrieved June 16, 2018, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/financial-claim-review-manual-review-procedures-financial-reviewers-1.html#N10BC7. ↩