The Forbidden Word: Audit
For many people, particularly those who deal directly with finances (whether business or personal), one of the scariest words in the English language is “audit”. It conjures images of a host of seemingly invasive and often confusing questions, and generating mounds of paperwork while taxing your financial reporting people.
Just over 6 months ago, SR&ED consultants in the industry noticed a new and unexpected trend among CRA SR&ED claim review processes.
It had been common practice for most first-time claims to go through the FT-CAS process ﹘ First-time Claimants Advisory Service. When a claim is selected for an FT-CAS it means that the claim has been pre-approved pending a mandatory educational session with CRA SR&ED reviewers.
However, SR&ED consultants have seen a dramatic increase in the number of audits conducted on first-time claimants rather than going through the FT-CAS process.
In October 2022, the CRA issued a cautionary warning statement to businesses using third-party SRED-claiming services, as they had received an alarming increase in SR&ED claims containing false and/or non-compliant information.
What to Expect when CRA Selects your Claim for Review
The CRA’s warning statement and new observed review practices mean that even the best-written and prepared claim may come under scrutiny, and it’s not always crystal clear why.
If your claim is selected for a review, you will first receive a letter or email from a CRA SR&ED auditor – the Research and Technology Advisor (RTA) – a science reviewer, or Financial Reviewer (or both). The letter will indicate which project(s) the CRA would like further information on, and the specific documentation they’re looking for. Typically, there is a deadline or date/time by which the RTA expects the requested documentation to be submitted.
If you require additional time to compile the information they request, this needs to be clearly communicated to and requested from the RTA through proper communication channels.
It is extremely important that you respond promptly to these communiques.
It is also important for you to include your SR&ED Consultant in the communications thread. We can guide you in the preparation of any documentation they request.
Should the CRA decide to pursue an audit after they have reviewed all your documentation, they will notify you by letter or email and may provide some dates or times of availability.
In the past, audits were conducted in person. Now, they are conducted virtually.
What happens in an SR&ED audit?
Typically, from the business side, representatives who can explain the technical and financial details of the work done will be invited to participate in the review meeting. The number of participants can vary. You can have as many company representatives as you feel you need (within reason), which can be worked out through communications with the CRA reviewer. Each identified participant will receive an invitation to the virtual meeting. From the CRA side, the RTA and a financial reviewer will attend.
As your SR&ED Consultant, we will also participate in the audit with you to help defend your claim.
The first portion of the review (usually about an hour) will include an introduction and PowerPoint presentation about what the SR&ED program is and what sorts of R&D activities are considered eligible, similar to the FT-CAS.
The goal of the second portion of the review is for the reviewer to determine if there is SR&ED. To do this, the RTA will conduct a Q&A-type of interview about the R&D work conducted and claimed. They will ask questions and review evidence. Once the RTA has established that the claim includes SR&ED, then the financial reviewer will ask questions about the financial information claimed to confirm the “scope” of SR&ED, meaning whether or not all expenses claimed make sense, or only a subset of them.
Ask your SR&ED Consultant about how breaking larger SR&ED projects into smaller ones can be an advantage in the SR&ED claim submission process.
About 6-8 weeks after the conclusion of this call, the RTA will issue a proposal letter to summarize the result of the audit.
The claimant has 30 business days after the date this proposal letter was issued to provide additional information that could change the proposal. They do not promise to change the proposal or decision, but CRA auditors are expected to review whatever additional information is submitted.
If, after reviewing the additional info, they decide to modify the original proposal, they will issue an addendum letter to the original proposal. This addendum letter indicates a “modified proposal,” and is usually more favorable than the original proposal.
Once the Notice of Assessment is received, the claimant can submit an appeal by filling out the appropriate form. It takes a very long time and almost never changes the outcome of the original review decision.
If your claim or portion of your claim is rejected, you can still submit a claim for any subsequent fiscal years. Any feedback provided by the RTA through the review process will be incorporated into the project write-ups for the next submission. We take the CRA’s constructive feedback very seriously.
Working with SRED Unlimited
As much as we would like to guarantee that your claim will be “accepted as filed”, we can make no such guarantees. Our goal is to make the SRED submission and audit process as easy and painless for you as possible.
The prospect of an audit is intimidating enough especially if you face it by yourself. It’s much easier to walk through these things with someone who knows the process and who can guide and support you.
We work with some of Canada’s busiest, fastest-growing, and most innovative companies in a wide range of industries. If your team has been doing R&D work, chances are there are SR&ED-eligible expenses that we can claim. We can minimize the amount of time you need to spend preparing an SR&ED claim so your team can remain focused on innovation. The SR&ED tax credit or refund you receive can be used to reinvest in new machinery, new people, and new product development.
Our specialty is working one-on-one with our clients, collecting project details, and preparing all project write-ups and tax schedules in the most common tax submission software formats.
We’ve been connecting the SR&ED dots for clients for over 15 years.
