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Learn about the different levels of documentation for SR&ED claims.
Identifying, establishing, and appropriately tracking your company’s R&D environments determines what documentation is necessary for your SR&ED claim. In documenting work performed, claimants should keep in mind that the Canada Revenue Agency (CRA) has three distinct “levels” of labour allocation support: corporate strategy (“high”), project level (“medium”), and activity (“low”).
In this article, we’ll explain the differences between each level of support documentation, provide examples, and offer some hints to ensure that your company is producing quality, useful documentation to submit along with your SR&ED claim.
Types of Support for Labour Allocation
Below, are the three approaches to labour allocation, as laid out in Section 13.3 Support for Labour Allocation of the SR&ED Salary or Wages Policy. We strongly encourage you to read this policy from start to finish, paying particular attention to the points we’ve highlighted here: 1
1. High-level information (corporate or strategic concept level)
The documentation of a business’s overall corporate and strategic objectives is referred to as high-level information. High-level information is generated by the conceptual high-level management processes and systems that businesses (especially large businesses) use for project management and cost control. For example, the strategic planning process, cost allocation and cost control systems, and project planning and project evaluation processes may all produce information that is relevant and useful in shaping and proving SR&ED claims. High-level information may provide context for the allocation method and may, in some circumstances, contain enough information to support a claim and no further review is needed. However, medium or low level information should be available to support high-level information.
2. Medium-level information (project level)
Information related to specific work efforts within a project or subproject is referred to as medium-level information. This includes management processes associated with specific work efforts or projects undertaken by the business.
This information supports the information generated by the high-level systems. Medium-level information is generated at the project level and generally relates to a business’s documentation of specific work efforts. Specific project plans that break projects into components or subprojects would be an example of medium-level information. These project plans could be revised as a result of the SR&ED process.
In some businesses, these work efforts are documented using financial reports (budget to actual), Gantt charts, time lines, resource allocation or utilization summaries, specific project cost control systems, and supervisor summaries for project team members. There should be a clear link between the SR&ED project objectives and the work undertaken by the members of the project team. Documents should identify all employees involved in an SR&ED project and should give enough information to identify SR&ED work that is included in the claim. A small sample of medium-level information should show the relevance of the high-level information and support the allocation methods that the claimant has used.
3. Low-level information (activity level)
Information related to individual tasks is referred to as low-level information. In some cases, information may be summarized at the lower level tasks undertaken to complete major work. Tasks can be documented with such things as resource allocation or utilization summaries, time sheets, and personal logs. An effective system of documenting tasks records hours worked on a project-by-project basis. There should be a clear link between the SR&ED project objectives and the tasks undertaken by the members of the team.
Sources of supporting information
The following is a list of potential sources of supporting information that could be used by claimants to support an allocation of labour expenditures to an SR&ED project. The objective is to provide key facts including: 2
- the names of the employees performing the SR&ED work;
- confirmation of employment (hire and termination dates);
- verification that the individual is an employee and not a contractor;
- identification of specified employee.
In addition, appropriate allocation methodologies can be used to determine the number of hours an employee spent working in SR&ED. When appropriate and effective controls are in place, each of the sources identified below may provide the information required. In some cases, more than one source of supporting information may be required to evaluate whether the labour allocation is reasonable or not.
Supporting information can include things such as development plans, supervisor’s summaries, time sheets, and naturally generated information i.e. project objectives/milestones, organizational charts, minutes of meetings, etc.
Things to Keep in Mind
Although it may be easy to forget to keep contemporaneous documentation whilst performing SR&ED work, documentation should not be thought of as something that will be left to collect dust in a company filing cabinet.
Any documentation produced by an SR&ED claimant must adhere to Income Tax Act provisions, CRA policies, and must incorporate controls or evidence that can be used to evaluate the accuracy and tangibility of the labour allocation data. As an example, being able to verify that a specific employee was in a specific location of your company working on a specific task for a specific period of time can go a long way toward ensuring your documentation efforts don’t go to waste.
This article is based on CRA policy documents available at the date of publication. Please consult the CRA website for the most recent versions of these documents.