Differents R&D environments and documentation processes to suit them.

The Canada Revenue Agency (CRA) recognizes that not all research and development (R&D) environments are the same. The CRA have identified four primary R&D environment types and the type of documentation that they expect to be generated within these environments. These documentation processes should be used to help determine how best to allocate costs to your project.

What kind of R&D environment do you have?

Below, we’ve excerpted the text from the CRA’s SR&ED Salary or Wages Policy (that include sample labour allocation methods) and a few thoughts from our SR&ED Policy Advisor.1

1. Distinct well-defined R&D projects

This environment is found in situations where the claimant’s organization assigns personnel and resources to specific R&D projects. Projects have a defined start date, targeted finish date, and are based on well-defined technological objectives. Where the core project is SR&ED and support work is necessary to resolve the technological challenges, the work effort can be allocated completely to the project. Controls to identify and segregate non-SR&ED work, such as negative time reporting, provides an indication that the labour allocation is reasonable. Supporting information in this setting may include a development plan that can be used to verify job functions. Where labour resources are used in many projects and in both SR&ED and non-SR&ED, labour allocations can be made based on such things as:

  • resource allocation or utilization summaries;
  • project cost control systems;
  • supervisor summaries;
  • Gantt charts;
  • time lines.

2. Dedicated R&D environments

In principal, these are environments where a defined group of personnel are focused exclusively on R&D for new products or processes, usually to the exclusion of all other activities of the business. A dedicated research department may be found in any industry, but is more likely to be found in a large multidisciplinary business. It should be noted that a dedicated R&D department might be involved in SR&ED and non-SR&ED work.

Personnel in other areas of the company may also do SR&ED work. The claimant should be able to identify the SR&ED performed by the dedicated research department. The claimant should also be able to distinguish allowable SR&ED labour expenditures from the total expenditures of the dedicated research department. Additionally, the claimant should be able to provide documentation with appropriate controls supporting the allocation of SR&ED labour expenditures. A negative time reporting system that captures non-eligible labour expenditures is generally quite effective in these settings. Supporting information in these environments can include such things as:

  • supervisor summaries;
  • resource allocation or utilization summaries;
  • Gantt charts;
  • time lines;
  • time sheets.

3. Early stage or start-up business

Early stage or start-up companies do R&D to develop new products or processes. In some situations, personnel may be focused on one SR&ED project. If so, the simplest approach may be to identify employees working on non-eligible work and subtract that portion of labour expenditures from the total labour expenditures. In this type of environment, a claimant should be able to identify the employees performing SR&ED within the business operations. The claimant should be able to distinguish allowable SR&ED labour expenditures from the total operating costs of the business. Additionally, the claimant should be able to give information supporting the allocation of personnel to an SR&ED project. Documentation in this setting can include such things as:

  • job descriptions;
  • development plans;
  • Gantt charts;
  • supervisor summaries;
  • time sheets.

4. Shop floor SR&ED

Shop floor SR&ED commonly occurs in a variety of industry sectors. This type of SR&ED involves creating new, or improving existing, materials, devices, products, or processes in the field or at a commercial facility. Shop floor SR&ED can involve a variety of employees from different parts of an organization. An SR&ED project of this nature could involve shop floor supervisors, engineers, machine operators, mechanics, and welders. Individuals may report their time using time sheets, a time clock system, or other methods. Because of the variety of employees involved in shop floor SR&ED, claimants should ideally develop a process to collect information at the start of a project, otherwise it may become difficult to support the time an employee spends performing SR&ED work.

Make Your R&D Environment Work for You

Once you’ve analyzed your specific SR&ED project(s) and figured out which of these four categories best fits you, it is important that you create a strategy for capturing all of the information necessary to your R&D environment.

1. Adjust, and Update, Don’t Reinvent

Implementing SR&ED-only documentation processes never work — it’s one more document to fill out and one more task to complete that reduces the time your team members spend on real SR&ED. Figure out what you’re already doing to track your projects, time, and profitability and determine what minimal adjustments would allow you to reverse-engineer the time spent on specific SR&ED tasks.

2. Create Good Habits

Set and stick to a schedule for collecting key information from team members and refreshing their understanding of the SR&ED program. Organizations with good SR&ED habits are able to claim more reliably and increase their claim size.

3. Educate

It’s impossible to collect the right information if the purpose and importance are unclear to those who are involved. Invest in upgrading the knowledge of your team in relation to SR&ED — it will pay for itself over time, particularly if there is a review.

4. Think Like An Auditor

How can you prove (a) your R&D environment and (b) the costs associated with the eligible SR&ED work?

Policies to Know

The SR&ED Salary or Wages Policy features valuable information about the SR&ED program and we encourage claimants and potential claimants to read it from start to finish.2

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.

 

What is your R&D environment and how do you keep contemporaneous documentation?
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Show 2 footnotes

  1. Government of Canada. (2014, December 18). SR&ED Salary or Wages Policy. (Accessed: September 14, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/salary-wages-policy.html#s13_5.
  2. Government of Canada. (2014, December 18.) SR&ED Salary or Wages Policy. (Accessed: September 14, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/salary-wages-policy.html.

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