Audit Defence Strategies
Demystifying the SR&ED audit begins with some basic understanding of how the program works. To start, SR&ED operates as a separate division under the Canadian Revenue Agency (CRA), and regulates and reviews all submissions to enforce the strict rules of what defines SR&ED. Within the T661 a claimant prepares a project (or multiple projects), which outline activities conducted throughout the year. This is meant to highlight and justify the technical uncertainties, what experimental tasks were conducted, and how this work sought to advance the known field of either scientific or technical knowledge at the time. What is needed to justify your position is hard evidence of this work being conducted, often boiling down to the individual(s), employees, consultant, or 3rd parties, who performed the work, how much time was spent, where, when and to what degree is considered routine development time vs. SR&ED eligible development time. This can be very tricky to defend and even track year round, making it crucial that your engineering team understand how to properly document their actions in an organized manner. This includes documenting activities, meetings, storing prototypes, pictures, emails, JIRA notes etc., and sourcing code logs where they can be easily referenced in order to develop a year-long workflow of activities and associated resource allocations.
When you submit your T661 to CRA the claim typically ends up within your local SR&ED tax office for review. An initial screener reviews the documentation and can either pass this through (back to CRA for approval) or flag for an audit or information request. While we can’t be sure of the process behind the CRA curtain, one might expect there to be an automated financial scan that might look at both the T661 and the corporate T2 tax information. This could match certain percentages being requested on the SR&ED forms against known Corporate data points such as total payroll, expenses, government funding etc., all seeking possible irregularities such as abnormally high ITC credit requests for refund year/year, or not claiming certain offsetting funding from other government programs (such as IRAP or Provincial funding), or even perhaps high commissions being charged by 3rd party SR&ED providers also claimed on the T661.
It’s certain that the government takes this program very seriously and in 2013 and then again in 2016 dedicated new funding to expand its CRA audit resources to crack down on non-compliant and ineligible claims. This included new funding to improve outreach, meaning more direct face-to-face meetings between SR&ED agents and the companies applying. This has resulted in a program FTCAS (first-time claimant advisory service), whereby a free in-person service has been offered that often means SR&ED staff will come visit your business directly to detail the SR&ED program, help identify allowable expenditures, express the types of documentation and evidence that they require, and help give tips on future SR&ED claim structures.
Once this initial screening takes place back at CRA and additional information is requested, typically the company will receive notice via mail, or phone (not-email) that CRA is requesting either a meeting to follow-up details to be provided. This is often referred to the RFI (Request for Information) stage, and the company typically has a tight window of 30-days post this notice, or post this direct meeting with the agent(s) to produce the necessary evidence requested for the auditor. Typically two types of auditors attend these meetings, a Technical auditor, and a Financial auditor. Their roles are to primarily educate you on eligibility and documentation requirements, but often can be very strict in requiring specific details reflected in your project claims.
In most cases the primary requested documentation in a SR&ED audit is the (Chronology of Claimed Activities Organization Chart). This can vary from agent to agent and is situationally dependent, but what is essentially being requested here is a full index of Key Activities (KA), the Technical Uncertainties (TU), Systematic Investigation (SI) details, Timelines start/end, and all the corresponding efforts (Technical Personnel, Consultants, Materials) and supporting Documentation for each listed activity. This is the next level full-audit material that is required to back up your claim. Below we’ve shared a basic example of what a request may look like, and depending on the audit situation it can become an overwhelming undertaking for your team to properly prepare. This is fundamentally an important part of the SR&ED program which must be understood and a key driver to proper preparedness for an audit of your SR&ED claim. Working with teams like ours helps spread this documentation and evidence preparedness over the year and ensures you are prepared to back up all statements of activities and their eligibility.
SR&ED Audit Defence (Chronology of Claimed Activities Organization Chart)