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20
Nov
2019
Administrative expenses in R&DAdministrative expenses in SR&ED

Administrative expenses in SR&ED

Calculation

When are administrative expenses eligible in SR&ED?

When do some expenses other than those associated with scientific research or experimental development projects could be eligible for the SR&ED tax credit?

The Canada Revenue Agency (CRA) issued the Policy on Overhead and Other SR&ED Expenditures. It explains the rules regarding the deductibility of administrative salaries or wages in the context of SR&ED activities.

Overall, administrative expenses :

  • Must be “directly related” to the exercise of SR&ED, and
  • They would not have been incurred if the SR&ED activities had not been carried out (additional cost).

The phrase “directly related” here is important; the work performed by a particular employee or division must be linked to one of the following three elements, and must be done without any intermediary or step that intervenes between the employee / division and,

  • SR&ED work; or
  • SR&ED staff; or
  • Equipment used by staff to perform SR&ED.

In many cases, to properly determine whether an expense is directly related, an analysis of the tasks performed is required to ensure that a direct, unmediated link is present with the SR&ED work. Here are two partial lists of examples of tasks considered directly or indirectly related to SR&ED – based on the “SR&ED Overhead and Other Expenditures Policy”:

Directly related to SR&ED work  (claimable)

  • Salary or salary of administrative or clerical personnel providing services to SR&ED staff.
  • SR&ED financing (is “directly related” if the funds are used to carry out SR&ED activities).
  • Assessment, recruitment and hiring of SR&ED personnel.
  • Implementation of the technical and control of scientific projects, definition of future SR&ED projects, supervision of the SR&ED group, selection / evaluation of SR&ED projects.
  • Evaluating the technical feasibility of a product and the potential SR&ED efforts and costs involved.
  • Technological planning of ongoing SR&ED projects (assignment of technological personnel, priority of work, development of technological strategies, quality of materials to be used).
  • The work of clerical support staff for tasks directly related to SR&ED payroll, procurement and accounting.

Indirectly related to SR&ED work (not claimable)

  • Costs related to the management of the business (not related to SR&ED)
  • Costs related to bids.
  • Purchases (other than direct purchases of SR&ED materials / equipment).
  • Taxation and legal services.
  • Sales, marketing and advertising.
  • Employee relations.
  • Development of benefit programs for SR&ED employees.
  • Corporate secretariat and report to shareholders.
  • Initiation and closure of licensing agreements.
  • Feasibility studies (non-technological) that lead to potential SR&ED collaborations and assess the commercial feasibility of a given technology.
  • Commercialization of existing intellectual property.
  • Review and approval of SR&ED budgets.
  • Applications for patents.

At the federal level, these expenses are included in the proxy. In Quebec, it is possible to claim a credit on these expenses if the traditional method is chosen.

Important note: the information contained in this blog is for information only. Before evaluating or submitting a claim, you must consult an accounting or tax specialist and the relevant policies available on the Canada Revenue Agency (CRA) website.

We are honored by your visit to our blog. R&D Action thanks you for that.

On the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

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4
Oct
2019
Choosing a consultant in R&DChoosing a consultant for SR&ED

Choosing a consultant for SR&ED

Consultant

11 questions for choosing a consultant for SR&ED:

What will be the implication of our own resources: Being interviewed? Write? Revise the texts of the consultants?
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Here’s a handy list of questions when selecting your SR&ED tax credit consultant:

  1. What is your area of ​​expertise and your experience?
  2. Who will actually work on our file? What is their level of experience? Is it a single consultant or a team of technical and accounting specialists?
  3. What will be the implication of our own resources: Being interviewed? Write? Revise the texts of the consultants? Evaluate the eligible costs?
  4. How many SR&ED projects do you usually deliver per year?
  5. What is your definition of the success of your claims, ie accepted as is, accepted with adjustments, etc.?
  6. How many of your SR&ED claims were selected for review? How much are adjusted after exam and by how much? This indicates whether they include non-eligible activities, but also whether they have encountered difficulties in deeper investigations.
  7. What additional services (beyond the basic technical write-ups) are provided free of charge? Education and training? Evaluation of the documentation and suggestions for best practices? Support for audit?
  8. How do you ensure your continuing education in preparing SR&ED claims? What are you doing to stay abreast of policy changes?
  9. Are your SR&ED claim preparers employees or subcontractors? Do they share in profits?
  10. What is your tolerance for risk? Do you push the envelope to the maximum or do you stay very careful? (Note: this must match your personal style)
  11. What is your customer retention rate? Do you keep your customers for many years?

In conclusion: a consultant who adds value and integrity

If you outsource the preparation of your SR&ED claim, make sure about two things:

  • Do they add value to the process by reducing the efforts of your internal resources? It is important to choose a reputable and reputable SR&ED consultant. We are not talking here about the company alone, but about the individual technical consultant because ultimately, the preparation of your SR&ED claim will fall primarily to him. The accounting specialist will also bring value, but in other dimensions of the file.
  • Be sure to protect your investments by choosing SR&ED consultants with a high degree of integrity. This decision should not be taken lightly, even with a contingency agreement (at %). Mistakes in this area can cost your organization tens, if not hundreds, of thousands of dollars. In the end, you will be responsible for the content of the claim. And if it is considered fraudulent, the CRA will invite you to more rigorous reviews in the future.

Conclusion : choosing the right SR&ED consultant for your organization is a very important and far-reaching decision.

R&D Action thanks you for visiting our blog.

R&D Action is the choice of experience and expertise in tax credits.

Several other categories of practical and applicable solutions are available to the right of this page, in the index.

Try them. They are for you.

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9
Sep
2019
e-business or SREDe-business or SR&ED ?

e-business or SR&ED ?

Other Credits

E-business or SR&ED : which tax credit is for you ?

Is your company in Information Technology (IT)? You are surely looking for sources of financing. Do you do research and development? You probably have already studied many government funding programs and tax credits. How to evaluate the program that suits you, the one that offers the best return for your investment in time and for your efforts? Is e-business or SR&ED made for you?

This article compares two of the most popular government programs: the e-business tax credit (Crédit pour Développement des Affaires Électroniques – CDAE) and the Scientific Research and Experimental Development (SR&ED) tax credit.

Eligibility for the e-business tax credit is less burdensome, more predictable and easier to maintain for many years
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Important Notice: This information is presented briefly for presentation purposes only. Before evaluating or submitting a claim you should contact a tax specialist into such programs, such as R&D Action, to validate the calculations in your specific situation. We also suggest you consult the relevant policies available on the Canada Revenue Agency (CRA), the Quebec Revenue Agency (in French only) and Investissement Québec websites.

1- THE E-BUSINESS TAX CREDIT (CDAE)

The e-business tax credit is a provincial program administered jointly by Investissement Québec and the Quebec Revenue Agency (ARQ). It offers tax credits to companies qualified in information technology in the province of Quebec. The cost of the e-business credit for the government in 2019/20 is limited to over $ 450 million of refundable and non-refundable credits. This program receives hundreds of submissions each year. So this is another very popular financing option.

e-business credit may apply to you if your primary activity is Information Technology (IT), such as:

  • Computer systems design,
  • Software publishing,
  • IT consulting service,
  • Development, integration, maintenance or evolution of systems,
  • Design or development of e-commerce solutions.

The e-business credit provides access to refundable tax credits (checks) and non-refundable tax credits (as a deduction from Québec taxes):

  • A refundable tax credit of 24% is granted for eligible salaries, up to a maximum of $ 83,333 in salaries, for a maximum tax credit of $ 20,000 per employee;
  • In addition, a non-refundable 6% tax credit is granted for eligible salaries, up to a maximum of $ 83,333 in salaries, for a maximum tax credit of $ 5,000 per employee.

Certification of company

The company must be qualified before qualifying employees for the program. To obtain a e-business credit company certificate, it must be shown that it:

  • Maintained a minimum of six (6) eligible full-time employees (40 consecutive 26-hour weeks) at any time throughout the year.
  • Met both of these revenue or activity requirements:
  • 75% of gross revenue must come from the IT sector which is defined by twelve (12) specific NAICS codes;
  • 50% of gross revenue must be tied to four (4) specific NAICS codes.

Certification of employees

An employee is eligible when both of the following conditions are met:

  • He has a full-time job with a minimum of 26 hours of work per week, for a minimum of 40 consecutive weeks;
  • He devotes at least 75% of its time to undertaking, supervising or directly supporting work related to the performance of an eligible activity, including:

Eligible activities

  • Information Technology (IT) consulting services related to technology, systems development or e-business processes and solutions;
  • Development, integration, maintenance or evolution of:
  • Information systems, such as software packages, software and computer programs;
  • Technology infrastructure, such as upgrading the technology architecture and integrating hardware components and software;
  • The design or development of e-commerce solutions for a monetary transaction;
  • The development of security and identification services.

2- THE SR&ED TAX CREDIT

2.1 Federal

First, the SR&ED program is administered by the Canada Revenue Agency (CRA) and provides a tax credit for eligible R & D expenditures. This tax credit is refundable (a check) for most SMEs. The rate of tax credits is 35% for eligible expenses for SMEs.

  • Eligible salary expenses are increased by a 55% proxy for overhead, so that $ 100 of salary is calculated as $ 155 of expenses in the federal claim.
  • For subcontractor expenses, the federal credit rate is 28% of eligible invoices. For the materials consumed, the rate is 35%

Since the SR&ED program does not have a fixed budget, each eligible application is approved. In 2016-17, the program processed approximately 21,000 credit applications representing approximately $ 2.7 billion in federal tax credits and over half a million in provincial credits. This is more than 6 times the budget of the CDAE program.

2.2 Quebec

Also, the federal SR&ED program is duplicated by a similar program in Quebec. Quebec’s supplementary SR&ED credit is always refundable. For SMEs, the higher provincial rate of tax credits is 30% for eligible expenses exceeding $ 50,000. This means that the federal + Quebec combined credit rate is 54% on the salary of the first $ 50,000 of eligible expenses and 73.75% on salaries exceeding the first $ 50,000 of expenses.

For subcontractor expenses, the combined rate above the initial $ 50,000 is 37.75%. Material expenses are not eligible in Quebec, so the combined rate is 35%.

3- Differences e-business credit vs SR&ED

In summary, e-business and SR&ED differ in many ways:

  • e-business credit is limited to Information Technology companies. SR&ED has no limitations in the company’s technology domain;
  • e-business credit can only be claimed for companies that have six (6) eligible and more full-time employees. SR&ED can be claimed as soon as the company has eligible hours and costs.
  • SR&ED tax credit is the most rewarding but also the most intimidating. Do you really do experimental development? Once the company and its recognized employees are eligible for the e-business credit, the annual repayment may become recurring in subsequent years if the corporation continues to meet the eligibility criteria requested by Investissement Québec.
  • The e-business credit may require the creation of a new company that qualifies for the company certificate criteria. SR&ED can be claimed by any company that pays salaries or pays bills deemed eligible;
  • Any e-business credit funding reduces your eligible expenditures for the provincial SR&ED claims;
  • Once granted, the e-business credit and SR&ED tax credits will never have to be repaid (except in the case of fraud, of course);
  • The e-business credit only considers salaries. SR&ED can be claimed on wages, subcontractors and materials consumed for research;
  • The e-business tax credit is limited to $ 25,000 per employee. SR&ED has no such limit.
  • The e-business credit considers technological activities. SR&ED only deals with experimental development activities to resolve technological uncertainties in order to advance technology. The challenge of eligibility for SR&ED credit is therefore greater;
  • Both tax credits are paid in lump sum and approved once your end-of-year tax return has been accepted by the CRA, IQ and the ARQ;

4- Final verdict:

In conclusion, R&D Action experts, recommend, as experienced experts,:

  • SR&ED credit if your development advances your technology and knowledge of your technology field. It is also more generous for the efforts deemed eligible;
  • e-business credit if your activities are less “R&D ” typical and more like consultation, design, standard development, integration, maintenance or evolution of information systems.

In general, eligibility for the e-business tax credit is less burdensome, more predictable and easier to maintain for many years.

Thank you for visiting the R&D Action blog. Look at the index on the right of this page. It contains several other categories of practical and applicable solutions which are also for you.

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2
Apr
2019
Do you know the R&D tax credit ?Test your knowledge of the R&D tax credit

Test your knowledge of the R&D tax credit

Interpretation

SR&ED : Test your knowledge (3)

The R&D tax credit is among the most complex programs offered by the CRA. Recent evolution attempts by the CRA produced an even deeper cloud of smoke around many issues.

How deep is your knowledge of the SR&ED ?

We recently published similar tests here and here. So here is an other one for all of you, experts.

Don’t take our word for it. Find out if you’re a novice or an expert by testing your knowledge with this 10 Question true or false quiz:

  1. R&D that does not lead to a viable product cannot qualify for the credit.
  2. Temporary or Leased employees are excluded from the research credit.
  3. Fine tuning activities qualify as SR&ED.
  4. It is no longer possible to claim SR&ED activities in mechanical engineering, every mechanical laws and principles have been established, all development activities only serve to demonstrate what is already proven.
  5. There is a good potential to claim activities when the results of our experiments ends up as a patent application.
  6. If you test for an hypothesis and it works the first time, this activity is claimable as SR&ED.
  7. End-User documentation is a claimable activity.
  8. Verbal testimony is sufficient to convince the RTA (Research and Technology Advisors from the Canada Revenue Agency (CRA)) of our project’s eligibility.
  9. The SR&ED begins when you start testing the technology limits.
  10. Research temporarily conducted outside Canada can be qualified research if performed by a Canadian employee as part of a Canadian SR&ED project.

Do you have a comment or suggestion about this quiz? Would you like to share your results with us? We want news from you! Please leave a comment below.

Did you like reading this ? Tell us so. What should be added ? What are you interested into ? You did not like reading this ? Tell us so. What is it that you disliked ?

Answers 1: F 2: F 3: F 4: F 5: T 6: F 7: F 8: F 9: F 10: T

6/10 is a bare minimum, you are excellent if you had 9 or 10/10

 

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5
Mar
2019
Une vérification RS&DE réussie10 Commandments of a Successful SR&ED Audit

10 Commandments of a Successful SR&ED Audit

Audit

The 10 Commandments of a Successful  SR&ED Audit

I have given several lectures on “surviving an SR & ED audit”. Several years later, one of the listeners recognizes me in another event and he tells me: “This presentation was so useful to me! Especially the list of the 10 commandments of a successful audit. ”

This list can indeed be useful to many. It can be summarized as: “The attitude to get the best results for your audit”

“SR&ED tax credits audit: It’s all in the attitude”
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The next time you are invited to an audit of your SR & ED tax credits claim, here are ten recommendations to maximize the predictability of your claim. Everything is a question of attitude … Enjoy

  1. Prepare incomplete descriptions
  2. Have a short-term attitude
  3. Make sure the technical staff is not available for the audit meeting
  4. Do not set up a documentation process
  5. Be insulting and condescending to the CRA’ RTA
  6. Move up quickly to the manager over the RTA’s head
  7. Make it a personal case
  8. Make it as difficult as possible
  9. Ignore him, take your time, do not meet the deadlines
  10. Threaten him

And you, do you have any good suggestions to help in the acceptance of your claim for SR & ED credits, or to better enjoy your next audit?

We are honored by your visit to our blog. R&D Action thank you for this.

On the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

Did you like your reading? Tell us so. What should be added? What topics are you interested in?

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5
Feb
2019
Standard PracticeRoutine work and standard practice

Routine work and standard practice

Interpretation

How to recognize routine work and standard practice

When claiming an SR & ED tax credit, it must be shown that we have done more than the standard practice. This demonstration is not obvious. We have already illustrated a way to identify and measure the technology gap. We will discuss again the method to make this demonstration in a next blog.

When preparing an SR & ED file, we describe the project and its activities. We strongly believe that this is a systematic process that satisfies all five questions. Everything remains there until the Canada Revenue Agency (CRA) Research and Technology Advisor (RTA) takes a look at your claim.

And then, IT IS OFTEN TOO LATE.

Do you like horror stories? Let me tell you about situations that all the least experienced SR & ED practitioners have encountered many times in their careers:

1- A horror story

A customer gets all his credit for all his claims for several years including an uncommented  audit or comment from the RTA.

A new RTA is assigned to your file this year and the entire claim is dismissed. Why? The new RTA responds “It’s routine development, you did not go beyond the standard practice. How could he get here? Several reasoning can lead to this conclusion. The RTA then proceeds with one of the following statements:

Experience

“You have been doing this kind of development for ten or twenty years. So you know these technologies. There are no more uncertainties.

Does this mean that if the company had been doing these developments only since, say, a year or two, then we would recognize the existence of uncertainties because this young company would not have built such a base of expertise and knowledge ? I have already heard a RTA answer “yes” to this question! …

“Would an expert find the solution obvious or would he think about it a for long time ?”
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Google

“We find this technology by a simple search in Google, so it is common practice in the field of technology. “

Nowadays many technologies are changing very quickly and there are many forums and sites of help and sharing to discuss problems and their solutions. If one applies this argument literally then there is almost no experimental research possible because the developers rarely invest in obscure and very risky searches without seeking / finding existing supports.

Troubleshooting

“The activities described do not go beyond the level of technological troubleshooting and are, therefore, routine activities”.

The goal of troubleshooting is to solve technical problems, optimize processes, or adjust equipment performance. It is not a question of advancing knowledge.

Domain completely defined

“Everything has been established in the field (mechanical engineering for example), laws, principles and standards are established. All that is possible today is to combine already defined knowledge to achieve predictable results. All work in this area is therefore common practice “!!!

That’s when we hear a jaw fall to the ground …

… And that begins a long and painful battle to overthrow this stupid decision.

2- How do you answer to this ?

Let’s say it right away. It will not be easy to convince a RTA (and his manager) to change their minds. Let’s explore some possible solutions together:

  • The first step is often to convince the RTA to stop using a term as ambiguous as “routine” or “common”. Can he clarify where the relevant knowledge base comes from and what is in more detail?
  • If he uses the argument based on the experience of the developers or the company, then it is a classic case of confusion between meeting someone competent and not seeing (understanding) the uncertainty seen in the eye of the expert. With experience the expert develops a better ability to grasp the essential elements of a problem. The presence of uncertainty is not necessarily accompanied by a lack of confidence to solve it as can be seen in the less experienced developers. Uncertainty arises at a higher level in the expert’s mind.
  • Some TRCs accept the idea that changing the design approach of an experiment (or creating an alternative concept) indicates a challenge that is not obvious. In particular, the details of an essay may not be sufficient in itself, but it is the accumulation of several essays that can converge and germinate the idea of ​​a new and possible solution.

Exceeding the limits

  • The key to answering the question of current practice is sometimes to recall the advancements sought. Uncertainty can be established and demonstrated if:
    • We can identify an unknown element that we had to discover through systematic experimentation, we can demonstrate that the research aims at overcoming the current limits of technology.

This is true unless, of course, there is not a defined sequence of steps that lead to the desired result for sure.

  • Routine work includes development challenges that can sometimes be solved through general collaboration with other practitioners. For example, if developers encounter problems and they can solve them simply by exchanging online or with their colleagues. If this simple interaction leads to the resolution of the problem, it is routine. It is also routine if the developer is able to reproduce what he finds on the Internet and introduces it directly into his solution.
  • This only becomes experimental if the developer feels that there is a risk associated with the solution, and whether he has had to improve or reinforce what he has found with a new approach. It is also experimental if one concludes that the work done is completely new and is not supported by what is found online.
  • In any case, the existence of one or more documented evidence will be extremely useful in the debate.

Recommendation

Avoid any mention of troubleshooting (or “trouble-shooting” or “debugging”). Troubleshooting is a routine activity aimed at correcting equipment, software or processes. It is very often a fault detection activity without attempting to resolve the uncertainties in the underlying technology. This is not SR & ED. That said, troubleshooting can highlight the need for SR & ED. It is also possible that troubleshooting activities are required as part of eligible activities of an SR & ED project.

3- Conclusion:

So “standard practice” and “routine work” are two catch-all concepts commonly used by RTAs to cut into projects or activities.

The answer to these hollow words is to DEMAND the RTA to prove it. That he provides you with a detailed and documented definition of what is common practice or routine activities in the taxpayer’s technological field according to the RTA. What is the source of this statement?

Any answer to this argument must therefore go through the demonstration that the work done was to solve an uncertainty and in order to advance your knowledge of the technology.

On the other hand, it must be admitted that this kind of argument is difficult to win if we discuss with the one who is both judge and party. Moreover, it is easier to say that this is standard practice than to show the opposite, especially if this debate takes place one or two years after the facts.

Let’s conclude with this analogy: In the context of the current accelerated technological evolution, many developers are building new cakes flavors, but very few of them venture to create new types of pastries. According to the spirit of the law the “flavors” should qualify, but some interpretations tend to raise the bar at the level of “types”.

Thank you

We are honored by your visit to our blog. R&D Action thank you for this.

On the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

Did you like your reading? Tell us so. Share it. What should be added? What topics are you interested in?

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8
Jan
2019
Calculating the R&D tax creditsHow much R&D tax credits ?

How much R&D tax credits ?

Calculation

How much money do you leave on the table?

The SR & ED tax credit is the highest paying tax program in Canada. It offers refundable credits (so always checks) for SMEs. It is a particularly interesting program to claim wages, because in Quebec you can get up to 73.75% in government reimbursements. Let’s see what it is:

Note : credit rates discussed on this page are a combination of provincial and federal credits for activities in Quebec. 

“In Quebec, you can get up to 73.75% in government refunds“
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Small and medium-sized enterprises (SMEs)

Canadian-controlled SMEs are defined as having less than $ 50 million of taxable assets and less than $ 500,000 of taxable net income in the previous year.

All their credits are refundable (two checks).

Usually SMEs that do a lot of SR & ED do not have taxable income and that is why they receive 2 checks.

But the client will not receive a check or a partial amount if he has tax to pay. The government refunds the tax before and issues the check for the difference

The first $ 50,000 of eligible SR & ED expenditures

This gives entitlement (Table 1) to refundable credits of 54.25% on salaries, 28% on unrelated subcontractors and 35% for materials consumed in SR & ED.

SMEs

Expenditures less than 50k $
Wages

54,25%
Non-related subcontractors

28%
Materials consumed

35%

Table 1 – SME – Combined Credits Rates Federal and Provincial (in Qc)

The excess of this $ 50,000 eligible expenditure for SR & ED

This gives entitlement (Table 2) to refundable credits of 73.75% on wages, 37.75% on unrelated subcontractors and 35% for materials consumed in SR & ED.

SMEs

Expenditures more than 50k $
Wages

73,75%
Non-related subcontractors

37,75%

Materials consumed

35%

Table 2 – SME Excess – combined credit rate Federal and Provincial (in Qc)

All credit rates discussed on this page are a combination of provincial and federal credits for activities in Quebec.

Large companies (GE)

Other companies are either large companies or foreign-controlled companies. THE QUARTER ABOUT THESE CREDITS IS REFUNDABLE (Quebec portion):

The first $ 225,000 of eligible SR & ED expenditures

This gives entitlement (Table 3) to credits of 23.25% on wages, 12% on non-related subcontractors and 15% for materials consumed in SR & ED.

Large Cies

 Expenditures exceeding 225k $
Wages

23,25%
Non-related subcontractors

12%
Materials consumed

15%

Table 3 – GE – Combined Credits Rates Federal and Provincial (in QC)

The excess of this $ 225,000 eligible expenditure for SR & ED

This gives entitlement (Table 4) to credits of 35.15% on wages, 17.95% on non-related subcontractors and 15% for materials consumed in SR & ED.

       Large Cies

Expenditures exceeding 225k $
Wages

35,15%
Non-related subcontractors

17,95%
Materials consumed

15%

Table 4 – Excess GE – Combined Credits Rates Federal and Provincial (in QC)

Your competitors are probably already claiming these credits. How much longer are you going to leave so much money on the table?

Important note: the information contained in this blog is for information only. Before evaluating or submitting a claim, you must consult an accounting or tax specialist and the relevant policies available on the Canada Revenue Agency (CRA) website.

We are honored by your visit to our blog. R & D Action thanks you for that.

Look at the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

Did you like your reading? Tell us. Share it. What should be added? What topics are you interested in?

Did not like this reading? Tell us. What did you like least about this text? How can we best meet your needs?

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4
Jan
2019
R&D documentationSR & ED Technical Documentation

SR & ED Technical Documentation

Documentation

SR & ED Technical Documentation: Reconciling Reality and Hypotheses

In a technical audit, sufficient evidence can make all the difference between the success and failure of a claim.

CRA Research and Technology Advisors (RTAs) expect you to manage your SR & ED projects in parallel with your client projects. Consequently, the requirement is to keep contemporary, dated, signed and specific records of the SR & ED work carried out.

In practice, very few development managers go beyond documenting the activities leading to the delivery of a technology solution to their client. During a technical audit, some RTAs use the repeated mention of the name of clients in the documents provided to consider that it is not evidence of SR & ED experimentation but rather the normal delivery of a project. customer.

“Document the knowledge acquisition”
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How to reconcile the reality of development work with the requirements of the CRA? Here we distinguish two types of justification: the development project, often carried out in part for a client, and the experimental SR & ED project, especially carried out in the minds of the designers of the technology.

1- Justification of development work

In Appendix 2 of T4088, the CRA identifies in a table “Examples of Evidence Supporting SR & ED”:

  • Project planning documents
  • Resource Allocation Records, Timesheets
  • Experimental plans
  • Design documents, computer-aided design (CAD) and technical drawings
  • Project records, laboratory notebooks
  • Design, system architecture and source code (software development)
  • Test registers
  • Project progress reports
  • Project meeting reports
  • Test protocols, test data, test results
  • Analysis of test results, conclusions
  • Final project report or professional publications
  • Photographs and videos
  • Prototypes, samples
  • Destroyed materials, material disposal records
  • Contracts and invoices

All these documents are typical of a conventional development project. The problem is that they are normally produced as part of a client project. Nothing links this work to the objectives, uncertainties and technological advancements requested in Form T661. So what is missing to prove the experimental work?

2- Justification of the experimental work: document the SR & ED hypotheses

Oddly none of the documents listed above and in Table 1 of Annex 2 of Guide T4088, is related to the column: “Work done: experimentation, analysis, support work, progress ” which corresponds to the line 244 of Form T-661. Why ?

“Instead of the word hypothesis, it would be clearer to use a term such as option, or choice”
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The answer is the record of the hypotheses that is defined in the description of the fifth question to determine if work meets the definition of SR&ED :

“[The CRA] expects the work to be recorded in a way that clearly indicates the purpose of their key elements and how they fit into the overall project. The indicators or measures that will be used to determine if the project objectives are being achieved should be identified and documented at the beginning of the work. (Eligibility policy 2.1.5)

Therefore, the CRA expects us to have both development project tracking information and monitoring information from the claimed experimental process.

“The hypothesis register is used to link knowledge acquisition to activities, uncertainties and advancements”
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Two important remarks remain despite this definition:

2.1 It is necessary to document the acquisition of knowledge

The record of the hypotheses is the only place where the acquisition of knowledge can be linked to activities, uncertainties and technological advancements. It is therefore a key document to support your technical claim.

Note: the quality prevails on the quantity. What we demonstrate here is the acquisition of knowledge rather than the generation of a mass of more or less relevant information.

2.2 Hypothesis = choice

Nobody uses the word hypothesis in daily exchanges between members of the development team. However, the CRA requires “a record of verified assumptions and results retained during the course of the work”.

First, in a real project of technological development, the issue of hypotheses to resolve uncertainty is an exercise that happens between the two ears of those who conduct the work. It is therefore necessary to explain, verbalize and write the hypotheses raised, even if they were rejected even before formally testing them.

In addition, the word “hypothesis” is certainly far from the reality of engineers and solution designers. It would be clearer to use the term “option” or “choice”.

Basically, what the CRA is looking for is a record of the uncertainties encountered, the choices considered, the tests carried out, the results obtained, as well as the knowledge that we drew from them.

3- Conclusion

In conclusion, let us remember that for the CRA, we claim a systematic experimental process, where the progress of the work is done by an analysis of the results step by step. In this context, to use the results of the tests, we must record, write, note, the experimental work and analysis that will one day lead us to solve the technological uncertainties and to better understand the scientific or technological relations (also called scientific or technological advancement).

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8
Dec
2018
The R&D audit is the most critical moment for your claimSR&ED Audit meeting

SR&ED Audit meeting

Audit

SR & ED Audit : what do we do ?

The audit by the CRA is certainly THE crucial moment in the claiming process for SR & ED tax credits. We cannot avoid an audit, but we can certainly minimize it’s negative impacts. In earlier articles in this series here, here, here,  here, here, and here, we reviewed the preparation of this audit meeting. In this post we review what happens during and after the audit meeting.

The SR&ED audit meeting

Claiming means selling

A claim for SR & ED tax credits may be accepted as submitted. But when our claim is selected for an audit, we have to proceed to the second phase of the «sale»: we must close the sale. And that goes like a chess game: you have to plan several moves in advance and answer all the CRT’s questions.

“Claiming is selling. It’s like a chess game: plan many shots in advance”
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Atmosphere and attitude

The meeting with the CRA staff should be as relaxed as possible. Of course there is a lot of money on the table, and no one is used to deal with tax representatives. Still, it is essential to keep a maximum control over what happens in the room and this begins with the climate, the atmosphere that we generate since we do not control the initial mood of the auditors.

Two groups are in the room :

  • The CRA advisors are empowered over your claim. They have already discussed it internally, identified their issues and their decision only depends on some key answers.
  • Your representatives are convinced that they have super R & D projects, that they “are worth it”, and that they need the money.

The tone of the meeting must reflect a mutual respect. The attitude must be positive, even though we perceive differences. No arrogance. We let the CRA advisors speak, because our priority is to answer to their questions and comments. We are flexible and willing to negotiate. We have managed our expectations since it is rare that an audit meeting ends with 100% acceptance of projects and costs. It is usually hard to completely eliminate all of the initial issues identified by the CRA auditors. But we can select our battles and sometimes leaving a chunk makes it possible to keep an other (bigger).

Who will be there?

As few people as required. The rule of thumb is to be as many as the CRA officials, never more than double. If we need more, then there must be a flow of resources in and out with a permanent representative in the room during the entire process. We must ensure that each one is necessary, is prepared and knows what to say and how to respond.

You used subcontractors to carry out part of the project? Their role during the meeting should be limited to describe what they have achieved under your direction, when and how. It is essential not to be technically overwhelmed by your subcontractor. You claim the projects for which you are the supervisor. If your contractors are the only ones who can explain the technology and what they have done, the CRA may suspect that you are not the one who should claim the efforts to meet these technological challenges. So, do these subcontractors bring valuable content to this meeting? Did they resolve some uncertainties?

You have used a SR & ED writer, or added a consultant to support you in your audit process? His role during the meeting must be secondary. The CRA wishes to discuss with your employees, and have as little interaction as possible with your consultants. Still, competent consultants are welcome at the meeting as a safeguard in case of slippage. Not as master of ceremonies and even less so as the star of the meeting.

The agenda

The agenda is rather standard :

  1. Presentation of the people in the room,
  2. Introduction of the CRA consultant if they bring a consultant, presenting the letter mandating him,
  3. Site visit (if required)
  4. Review of the agenda and the expected duration,
  5. The CRA presents the SR & ED program (optional)
  6. The CRA states it’s objectives for this meeting and his issues (not always the case though but you must insist on a statement on those issues)
  7. You outline the company (mission, markets, products)
  8. You underline the importance of the SR & ED program for the development and growth of the firm,
  9. You explain each project,
  10. Review of the costs claimed (if not already done for each project)
  11. Next steps and expected deadlines,

Your presentation.

Say it in your words. Your presentation must be technical, concise, visual, accurate and complete. It illustrates only the experimental process used to resolve the technical uncertainties. It must give priority to the issues and the questions raised by the CRA advisers.

The presentation of each project is always the same:

  • The technological (or scientific) objective of the project,
  • The initial state of the art of the technology or science,
  • The technical or scientific issues, and uncertainties encountered,
  • The systematic investigation process followed, and the hypothesis raised while trying to resolve the uncertainties,
  • The advancements achieved or not, what has been learned thru this process,
  • The status at the end of the project or fiscal year end.

The meeting ends

So what do we do ?

  • From now on their judgment is almost set and it will be difficult to make them change.
  • You can ask their conclusion; they rarely communicate it during the meeting. But it’s worth trying it. Maybe they will conclude on some projects.
  • You ask what issues have not been resolved and if additional information may be provided or within a short time (never provide unverified new information on the spot).
  • Ask what are the delays for the next steps:
    • If we send the additional information within two weeks,
    • So when will we have your position?
    • When will we have a copy of the technical report?
    • When will the assessment be provided?
  • If your feeling is positive, you think they accept your claim, then:
    • Talk about the next year, about the projects that are ongoing or about the new anticipated challenges.
    • You want you make sure that they will not be surprised next year and that they do not feel the need to come back for years.
  • If, however, you feel that it did not work, then:
    • Ask them what is missing ? Why aren’t you convinced ? What would change your opinion?
    • Would a second meeting be required ? To talk about what?
    • Need new documents? more details?

Thereafter

The additional information: Quickly prepare the detailed and accurate information requested. Meet the deadlines, this may be your last chance to avoid a cut.

Make sure you negotiate before being assessed. After that it becomes very difficult to change their opinion. You will then have to prepare a notice of objection instead if it is worth it.

Conclusion

This concludes our series on preparing for a SR & ED audit claim. We hope you found us interesting and that we reduced the anxiety of the unknown.

Feel free to call us for advice, or support.

What do you think ? Have you had audit meetings? How were you prepared (or not)? How did it go ? What were the results? What lessons have you learned? Why ?

We are honored by your visit to our blog. R&D Action thank you for this.

On the right of this page the index contains several other categories of practical and applicable solutions that are also intended for you.

Did you like your reading? Tell us so. What should be added? What topics are you interested in?

Did you dislike this reading? Tell us so. What did you like least about this text? How can we best meet your needs?

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