Now more than ever the CRA is cracking down on SR&ED claims. Even if you haven’t done anything wrong, they’re making it more difficult to claim SR&ED refunds and credits. To SR&ED applicants, the rules seem convoluted, vague, a cloud of grey zone uncertainty. Being one of those companies whose claim has been reduced or completely disqualified is pretty frustrating, and more companies know this experience within the past couple of years (i.e. a large proportion of companies whose claims have been audited in recent years).
The degree of frustration can make it tempting for a company to avoid the time and effort of claiming SR&ED, but this is not an advisable approach. The average applicant still receives over a hundred thousand dollars in SR&ED refunds each year from the most generous program of its kind in the world. If you believe that your company has done eligible research, and in the past you’ve been confident enough to make a claim, then isn’t it worthwhile to determine how you can win your piece of that tax refund or tax credit pie?
The SR&ED program being full of uncertainty, a SR&ED like approach works best for deciphering it; companies and consultants have used a systematic approach to determine ways of avoiding certain red flags and having the strongest possible position in the event of an audit. Here are five strong suggestions:
Never lump the time spent on due diligence in with the claimable/experimental time. If you do, you’re lucky if that’s the only time that gets reduced from your claim in the event of an audit. It’s about making sure you don’t send up a red flag by talking about non-claimable activities in the parts of reports where you are only expected to talk about your SR&ED research.
Document everything, even if you’re marking it as due diligence. In the event of an audit, you can show what led to the SR&ED claimable activities if you document your due diligence/pre-SR&ED activities.
Assign one person (i.e. a “SR&ED Champion”) to gather together and organize all the different records you keep about SR&ED eligible experimentation.
Don’t wait for your fiscal year end or project end to start documenting your SR&ED project. Do it on the fly, because it’s easier to documenting things as they happen, as your memory is fresh, and it also spreads out the workload evenly. Tracking and documenting in real time will also make it easier to defend your labour cost claims in the event of an audit.
It’s important to claim management hours for meetings and plans regarding the experimentation, such as discussing the process, the results, or designing the experiment. That said, understand the appropriate claims you can make for management and senior level staff, and be realistic about it. Disproportionately high percentages in this category can send up a red flag, especially when the CRA knows that your management staff also have to oversee the business side of things.
Of course, it takes more than five tips to gain working knowledge of SR&ED. If you have any questions, contact SRED Unlimited and we will do our best to answer them.