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How to Prepare for a SR&ED Review

SRED Asset Policy SREDucation recording
Getting through an audit by the CRA
is as simple as preparation! 

 

No one enjoys being audited by the Canada Revenue Agency (CRA), but when it comes to the SR&ED tax credit program, it seems to be happening frequently. What is the process to follow when the CRA contacts you? There are a few steps to take in order to better prepare yourself for a consultation with the CRA.

1. Prepare Your Documentation

Documentation is becoming more important for SR&ED claims, especially since the federal budget released in 2013. This means you should have documentation prepared well in advance of any notification of an audit. Track your employees’ work, and be sure to use a documentation software such as Day One.

Your data should be organized either chronologically or grouped by major parts of your project. You will want to have current documentation, which shows the CRA that your work is eligible for the SR&ED claim.

Technical documentation may include:

  • Trial runs
  • Test protocol/data
  • Experimental designs or sketches
  • Test results

Financial documentation may include:

  • Contracts
  • Time sheets
  • Records of resources allocated for materials, machinery, and equipment.

When audited, make sure to have the most relevant documentation on hand. Avoid anything that’s not needed. This will save the reviewers’ and your employees’ time and prevents confusion.

2. Prepare for a Site Visit

When you’re first contacted by the CRA, this doesn’t mean that you’re automatically ineligible for the tax credit. A first contact simply means that the reviewer needs more information to see if your work is eligible, according to the Income Tax Act. The CRA will arrange, by phone or by mail, for a site visit.

Have on hand more than three samples of supporting documentation that you will need. Be prepared with this documentation at least three days in advance of the site visit. Ask the CRA to provide to you, in writing, all things you will need for their site visit. Call them repeatedly for this if you have to.

Have your SR&ED advisor be the first person you call as soon as you receive your letter from the CRA. Prior to the site visit, try conducting a “mock audit” with your SR&ED professional playing the role of the Devil’s Advocate. Here, you are looking to see if there are any gaps in the information you provide.

3. Prepare Your Team

Prepare a meeting with your SR&ED advisor and the team members involved in the eligible work — even if they no longer work for your business. Review the specifics of the program to ensure everyone understands which work qualifies and which work does not. Review your documentation to make sure that you and your team will be able to efficiently show the auditor if needed.

During the review with the CRA, your employees should be able to:

  • Talk about their relevant qualifications and how much time they spent on the work.
  • Give the extent of their work performed vis–à–vis systematic investigation requirements.
  • Have details of any contracts, partnership agreements, and payments to qualified third parties that performed or supported SR&ED work.
  • Tell the reviewer about the ownership of any intellectual property that was invented.
  • Explain how any relevant equipment was used.
  • Reveal the materials consumed, overhead costs and any other work that’s directly tied to the SR&ED claim.

Remember that your SR&ED claim hinges on proving that the work solves a technological or scientific uncertainty. To be eligible, you must take the following steps through a systematic investigation or search:

  • Define a problem.
  • Have a hypothesis towards resolving the problem.
  • Planning and testing the hypothesis by experiment or analysis
  • Developing a logical conclusion per the results.

During the audit process, answer questions as directly as you can and only give the needed information. If you provide anything else, your auditor could use it out of context to amend or deny your claim. Thus, be as straightforward as you can in responding to questions. This will make it easier for the CRA to review and process your claim.

Conclusion

Preparing for a review takes time, but it’s best to be proactive. Work with your SR&ED advisor from the very start of the project to make sure you have all proper documentation as well as time tracking standards. This will increase the likelihood of your claim being ready for any review.

Always treat any audits as an opportunity to learn, to note which questions were asked and to address them in any other claims you make moving forward. Do this and you’re well on your way to making successful claims for years to come.

Share your experiences by adding to the conversation in our LinkedIn group.

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