DIY SR&ED: Money-saver or potential disaster?
Preparing an SR&ED tax incentive claim without the assistance of a consultant may appeal to many claimants. There are many RTAs (Research and Technology Advisors at the CRA) that will encourage “do-it-yourself” (DIY) SR&ED claims. In this post, we discuss the benefits and potential drawbacks of DIY SR&ED.
Consultant-Free SR&ED: The Benefits
More money for innovation
One of the largest benefits of DIY SR&ED is that there are no consultant fees. Since many SMEs (small-medium enterprises) choose to use contingency-based services, this can mean an additional 10-30% of the entire refund saved. This can greatly reduce the financial burden on innovators and allow you to further invest in your products.
Everyone gets to know SR&ED
Additionally, doing all your SR&ED preparation in-house helps guarantee that every individual preparing the claim has a fairly high level of familiarity with the SR&ED work being claimed.
While consultants are able to synthesize large amounts of information into only the most essential elements required by the SR&ED program, they lack the same depth of familiarity that, for instance, an in-house engineer may have.
The CRA wants you to apply (on your own)
The SR&ED program has undergone several phases of public consultation and amendments. The goal of these changes was to simplify the application process while ensuring the underlying principles behind the program (i.e. encouraging innovation) remained unchanged. Simplified documentation and application forms should have reduced the need for professional SR&ED preparers.
While these benefits seem to make DIY SR&ED preparation seem like the simple option, anyone seriously considering DIY SR&ED preparation should consider the potential risks of nonprofessional claim preparation.
DIY SR&ED: The Drawbacks
Fluctuating Requirements & Forms
Efforts to simplify and solidify the SR&ED program have not always been successful. The program undergoes almost constant changes and so remaining informed of changing criteria or eligibility requirements can be difficult.
Unique Skills Required
The unfortunate reality is that there are many skills required when preparing a claim, including subtle, often unexpected knowledge that a claimant must be aware of in order to avoid a costly review. In short, some activities are best left to preparers while other activities can be better covered by the claimant. For instance, it often makes more sense for a claimant to outline their technology, collect information pertinent to the claim write-up, describe the SR&ED work performed, etc. Most Chief Technology Officers (CTOs) are passionate about the technology but are rather underwhelmed when it comes to filling out forms; by contrast, crafting a word-perfect technical narrative is an art that preparers practice daily, integrating their knowledge of the political and administrative fluctuations of the program. It may be worth combining the two in a cost-effective manner (hourly).
You must provide evidence, however, the CRA won’t define what’s acceptable in advance
An unexpected area where many claims fail is in providing supporting documentation if the claimant is selected for review. This is a particularly contentious topic; the CRA insists that contemporaneous documentation is kept but will not define what they consider acceptable documentation. While this can sometimes be resolved with a Pre-Claim Review (PCR),1 an experienced preparer can help identify potential issues in the documentation (and provide feedback on ways to correct it before a review) often saving an organization hundreds of thousands in costs and hundreds of hours of frustration.
Doing it yourself means you’re on your own if you’re reviewed
In a review, you will be asked to justify every sentence fragment and show that you have complied with the CRA.
This is where claims are often denied in full. Some reviewers take the “ineligible until proven eligible” stance. Some claimants who are denied are able to successfully defend their claim in a review; however, they are often larger organizations. This is an instance where having sought the services of a consultant could save time and heartache. As one senior CRA official once said, “a good tax practitioner is a facilitator, bridging the gap between the CRA and the taxpayer to ensure everyone understands each other”.
DIY SR&ED: The Reality
Ultimately, when applying to the SR&ED program, specialized knowledge is needed to ensure you claim everything to which you are entitled to, thereby maximizing your refund. You hire an accountant to ensure you do your taxes correctly and access any other tax credits. A dedicated SR&ED tax practitioner will offer a degree of expertise and familiarity that takes years to acquire, such as:
- Legal knowledge (including the Income Tax Act & Tax Court of Canada rulings);
- CRA procedures/processes and their current interpretation by the CRA (as this tends to change);
- Experience dealing with financial and technical reviewers of all ranks;
- Dispute resolution (i.e., appeals), and more.
If the SR&ED program was as simple to apply for and administer as the CRA intended, they would not have to train their staff so extensively on the nuances of the program or host frequent SR&ED information seminars. There would also not be a niche, SR&ED consultancy industry, filled with great (and sometimes sketchy) individuals.
However, the need for consultants does not mean that claimants should be completely uninvolved in the claim preparation process. As stated above, claimants have a vital role to play in providing in-depth information, due to their level of familiarity with the work performed. The ideal claim preparation environment is one in which both the claimant and the preparer play to their strengths; the claimant bringing their familiarity with the work being claimed, and the preparer bringing their familiarity with the SR&ED program.
It would be far too deterministic to declare that either claimants or preparers are unnecessary in preparing an SR&ED claim. Before embarking on your SR&ED claim preparation, make sure to sit down with your consultant to get a clear sense of your anticipated level of involvement with the process. It is also worth checking to see if they offer an hourly service; sometimes a final, pre-submission review is all you need.
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- Government of Canada. (August 2, 2016.) Pre-Claim Review. (Accessed: August 17, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/claim-review.html. ↩