All claims are made, on a fiscal year basis, through the filing of the corporation’s income tax (T2) return and have to identify all expenses and funding support related to the claimed activities for that year.
The claimant is required to complete a number of forms and schedules on the T2 tax return, as well as prepare a technical description for each of the projects being claimed that describes the technological/scientific objective(s), advancements sought, related uncertainties that had to be resolved, the work performed, and the new technological/scientific knowledge/advancements gained as a result of the work in that year. The project descriptions must be sufficiently detailed and focused to enable the staff at CRA to understand its nature (from a scientific or technical point of view), why the activities were necessary, the work performed, the results and what new knowledge/insight/capabilities you gained from the work during that year.
The deadline for submitting a claim under the SR&ED program is 18 months after the company’s fiscal year end in which the work took place. For example, if a company’s fiscal year ends on December 31, 2014 they must file a claim for any SR&ED projects that took place during the 2014 year by June 30, 2016.
CRA does not permit any extensions to the “18 month rule” – even for missing forms or clerical errors. If a complete claim is not filed within the 18 month window the opportunity to claim tax credits will be lost.
The time to complete an engagement is highly dependent on the quality of the documentation and records maintained by a client. If there are multiple projects being claimed it could easily take over 120 hours to scope out the eligible aspects, interview technical & financial staff, prepare initial project detail drafts for further review & refinement, gather the financial information, detail the supporting documentation, prepare the schedules for the client’s accountants to put on the original or amended tax returns, conduct required research, etc. Preparation time is also impacted by the availability and co-operation we receive from the client’s staff.
How much time and work would be required from our staff to support the preparation of any SR&ED claims?
This can be difficult to determine until we have had a chance to examine the specifics of your claim and how you capture & track your activities & expenses. We understand that your staff have limited time and availability, so we always try to minimize the amount of time they are involved by ensuring our meetings are conducted as efficiently as possible. At a minimum during a typical engagement we would need access to the key technical staff members, who were involved with the project(s) and have a fairly broad understanding of the objectives, challenges, activities and timeframes. Most of the time required would be for interviews to scope out & define the parameters of the potentially eligible projects, to obtain project details, clarification, etc. We will also need some of the technical staff’s time to assist in drafting and reviewing/editing the project descriptions, as they have the best first-hand knowledge of the issues. We may also need input from the financial & HR staff to obtain information on expenditures related to wages, contract payments, material purchases, any government assistance received, etc.
The commercial success of the project is not a factor in determining its eligibility for the SR&ED program, nor is the ultimate success or failure of your efforts to resolve the technological uncertainties and achieve the advancements sought. The government understands that these types of projects have a significant risk of failure by their very nature. The main criteria for eligibility is that the work was undertaken, in a planned (systematic) fashion, in an effort to resolve the uncertainties and gain the technological advancements needed to achieve the objectives. As long as the eligibility criteria are met the costs related to the SR&ED activity should be claimable.
No. The CRA review will focus solely on the SR&ED claim.
The SR&ED Program has the following service standards for processing SR&ED claims:
How will we know if our SR&ED claim will be reviewed by CRA? How do they decide which claims to look at?
CRA chooses to review SR&ED claims on a case-by-case basis based upon their initial assessment of the project descriptions, the size and experience of the claimant, the size of the claim, etc. Usually first time claimants are visited by CRA to ensure that they understand the SR&ED program and are correctly identifying and claiming eligible items.
During the claim preparation process we take time to educate your staff about the SR&ED program, its eligibility criteria, what activities, expenses, projects typically qualify so they have a good understanding. We have found that this significantly improves the information we receive. In fact, since we began submitting SR&ED claims many of the “first-time” claims we filed were accepted solely based upon a desk review by CRA (with no visit to the claimant). There is, however, no guarantee that a future claim would be given the same treatment so we always work from the assumption that the claim will be reviewed and our client visited in order to prepare the strongest position possible to support the claim and minimize its time under review.
We work to ensure that the key staff members are prepared as well as possible for any meetings with CRA. We will also attend these meetings to support the eligibility and acceptance of the claim. Our work at this phase could involve conducting research, providing additional information, negotiating with CRA staff, etc. The scope of our engagement generally involves working with the client from the initial scoping of potential projects and concludes when the client has received notification of their entitlement/acceptance by CRA.
The CRA currently uses a 2-step review methodology:
Step 1: Determine if there is SR&ED
This is done by reviewing the project looking to answer five key questions:
1. Was there a scientific or a technological uncertainty?
2. Did the effort involve formulating hypotheses (theories) specifically aimed at reducing or eliminating that uncertainty?
3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
4. Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
5. Was a record of the hypotheses tested and the results kept as the work progressed?
If the answer to each of these questions is “yes” there is SR&ED.
Step 2: Determine the extent of eligible work
In this step, the details of the activities undertaken for each project are examined to determine what work is SR&ED.
How important is it to have created and retained supporting evidence and documentation to support the claims?
Claims that are submitted with little or poor supporting documentation run the risk of being substantially reduced or even disallowed completely.
Since 2012 CRA’s program review and administration policies have undergone a substantial change. There is now a much greater requirement for the claimant to be able to demonstrate that work on the project was undertaken as part of a “systematic investigation or search”.
The ability to capture (and provide) contemporaneous documents cannot be overstated.
It is important that the Scientific/Technological Objectives, Knowledge/Technology base, Advancements and Uncertainties be documented as soon as possible to show when you identified that there were significant issues that required you to undertake the SR&ED efforts. This helps to establish the starting dates and explain why any existing solution/knowledge was unsuitable/insufficient for your specific needs. Records should also be kept of research, plans, work, testing and analysis, hypotheses/designs/components/approach changes as the project progresses to demonstrate that your efforts were undertaken in a systematic, planned manner.
The exact documentation that would typically be created/available depends on the nature of the project. It is not expected that claimants will have all or most of the following examples, however having them definitely is useful (both for claim preparation and defense):
No, you do not have to submit copies of your supporting documentation at the time of filing. In the project descriptions you need to provide a listing of the evidence and documents available to support the information you have provided. These records must be available should CRA ask to look at them.
Normally “first-time filers” will not have kept very detailed records, as most didn’t even know that the SR&ED program existed when they performed their R&D. However it is likely that some project planning, activity and testing documents/prototypes were created that may be helpful in supporting your claim. We have the expertise to work with our clients to help them identify the material they have available to support, directly & indirectly the eligibility of their projects. This is just one of the key areas in which our specialized knowledge and experience can provide our clients with a significant advantage in terms of the preparation and defense of their SR&ED claims.
Our practice is to be mindful of the availability of information and staff resources, so we try to advise our clients as soon as possible should we determine that there is insufficient information or insufficient costs related to potentially eligible activity to justify making a claim. We always operate with a goal of establishing and maintaining an excellent long-term relationship with all of our clients.
Why does the SR&ED eligibility criteria use the term “Technological” instead of “Technical” when they are describing the objective, advancement and uncertainty aspects of the SR&ED claim?
CRA is trying to convey that activities which can be fairly easily resolved through the application of existing technology, knowledge, or processes in a straight forward fashion usually do not contain sufficient technological risk to qualify as SR&ED projects by themselves, although they can be claimed as eligible supporting activities if necessary as part of the larger eligible SR&ED project. There have to exist significant limitations, knowledge gaps, constraints, etc. that require the claimant to undertake a process of research, experimentation, testing, analysis and redesign to attempt to overcome the problems. Basically there has to be some item(s) of technological uncertainty & risk that requires the claimant to undertake activities to try to resolve the uncertainties.