SR&ED tax credits constitute an important proportion of a company’s assets and make the pricing of its products or services more competitive. Managing the risk of a cut to this funding has become a necessity.
The SR&ED tax credit program used to represent more than $4 billion in incentives; it is now a $3 billion program. Modifications to the rules and their applications have brought increasing pressure to companies who sometimes see their CRA audit result in a 30% cut. Staying ahead of the curve and being prepared for an SR&ED audit (or review) could save a substantial sum of money and protect your claim.
Managing the Risk
Risk management starts by assessing how the CRA could challenge your claim.
The CRA’s decision to audit your file is first based on data parameters such as your claim history, increases of SR&ED expenditures in proportion to salaries, comparisons with similar companies, etc.
These parameters can trigger your claim to be reviewed by a research and technology advisor (RTA) to determine whether or not an audit is required. The probability of having an audit can be greatly reduced by improving your project descriptions and the coherence of your claim.
Preparing for Your Audit
There is no way to avoid an audit, preparation is the most important risk mitigation initiative.
Two main preparation priorities:
1. Demonstrate the eligibility of each project.
This can be tricky now that the CRA is changing the focus from a project perspective (based on an advancement sought) to detailed obstacles faced within each project. In practice, this means the demonstration you made in your claim (answering the three questions of advancement, obstacles, and work performed) will now need to be answered with more precision to also answer the CRA’s new five eligibility questions: uncertainty, hypotheses, scientific methodology, advancement, and documentation.
2. Produce SR&ED documentation.
We have seen audits based only on a request of documentation (without any visit or verbal explanations by the claimant/taxpayer). This is a change from the earlier practice of discussions to reach a common understanding of the claim.
The accepted idea that documentation is a natural by-product of SR&ED work is being extended to conclude that if there is no specific SR&ED documentation, then the nature of the work could not have been SR&ED. The practical consequence is simply that you will need solid contemporaneous technological documentation to defend your claim.
Conclusion: Have Documentation and Be Prepared for an Audit
Starting your SR&ED projects with a documentation process in place is the best approach to increase your probability of obtaining your full SR&ED tax credit.
Have you ever had an SR&ED audit (or review)?
About Patrick Des Marais:
As VP Technological Assessment at Finalta Capital CII-ITC Inc., Patrick Des Marais is responsible for assessing SR&ED claim risk for the purpose of financing tax credits. In addition to financing claims filed for a completed year and accrual SR&ED claims, Finalta pre-finances SR&ED activities by disbursing funds before any activity has started, lends on average 50% more, and achieves financial close in 15 days. According to Mr. Des Marais, “Finalta offers the best SR&ED tax credit financing terms in Canada, because it built its own SR&ED risk management capabilities.”