Mar

2017

Explain the systematic experimental process

SR & ED Audit : what do you say ?

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, we established the need to understand the audit issues, we discussed who will be present and how to prepare them for what. In this article, we discuss what main argument we have to build, what do we show in order to convince the CRA.

Explain what ?

It is essential to present the project as a systematic experimental process and to justify the efforts claimed as reasonable for achieving this process.

« Explain the systematic experimental process and show that the costs claimed are reasonable »

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1- Explain the systematic experimental process

The key phrase is experimental process, experimental process and experimental process. Repeat after me … experimental process

The ideal presentation of the project is to explain how our development process was experimental and systematic. The language must be technological (or scientific), but not commercial (talking about the needs or expectations of customers).

Objectives: each project must be presented as if one views only the technological or scientific side. Still we have to give a context to the project, so we start with the business objectives (very quickly because it is not eligible) but we soon jump into the technological objectives.
Status at the beginning: We explain where we were technologically at the beginning of the year (if this project is a continuation of last year) or of the project.
Advancement and uncertainty: the advancement or progress is the result sought by the SR & ED, while uncertainty is the motivation for initiating the SR & ED. Therefore, an attempt to achieve progress is an attempt to resolve uncertainty. It is often easier to define uncertainty from the standard practice based on existing technology and from the basis of expertise available in the company and on the market. Uncertainty becomes exceeding this standard practice.
Uncertainties and process: We explain the technological issues (uncertainties) from the objectives. We identify an initial hypothesis to solve each of these issues. According to the CRA, an hypothesis is an idea, based on the facts known at the beginning, which serves as a basis for a comprehensive study to prove or disprove this idea. We then explain the process, the work carried out, the experiments and trials, the errors and conclusions drawn from these results. If the uncertainty is not resolved, we then issue a new hypothesis and so on until the uncertainty resolution. The technological advancement will be achieved (or not) as a result of the resolution of the uncertainty.
Status at the end: We explain where we stand at year end (if this project continues the following year).

We have described an ideal systematic process. It is not always possible to describe such a perfect process. But we must stick to this structure as much as possible if we want to convince the CRA auditor that we have managed a SR & ED process.

2- Demonstrate reasonable costs

Here, the demonstration aims at highlighting the distinction between the activities of this SR & ED experimental process from the regular R & D developments required for our customers and our technologies. We must show traces of distinctive choices. This results in a few key issues, including:

Were claimed employee hours identified and linked to activities necessary in the experimental process to resolve the uncertainties?
Did you show the distinction between the total costs and the SR&ED costs ?
Are the managers hours claimed directly related to the experimental development activities?
Does all the staff claimed fit into a technical role?
How do you explain the resources or projects claimed as SR & ED at 100%? (This means that these resources have performed experimental development activities only from January 1 to December 31)
Do your contracts for your subcontractors specify that :
- they make SR & ED activities on your behalf, and
- you retain all rights to this technology?
Are your customer’s contracts labelled for the delivery of a good or service rather than providing research hours?

This is only an overview of issues for which the CRA financial examiner will want answers. Your guideline should be to demonstrate that the expenses claimed are reasonable.

Build a preliminary presentation of the project

This presentation will answer the 5 eligibility questions for each project. This preliminary statement will be presented to your employees at the first preparatory meeting. They will be rework and adapt it to their language, to their presentation style.

In the next article we discuss what happens at the audit meeting.

What do you think ? Have you lived audits where you had no idea what to say? How have you prepared (or not)? What were the results? What lessons have you learned? Why ?

Mar

2017

10 Questions R&D Quiz

InterpretationMichel Rheault, M.Sc.No Comment

So, you know the R&D Tax Credit ?

Test your knowledge with this 10 Questions R&D Quiz

The R&D Tax credit is one of the most complex areas of the Income Tax Act. In fact, over recent years, the CRA has frequently evolved it into an “uncertain tax position”. Because of these many claimants (including some R&D experts and CPAs) are now uncertain about what qualifies or not for claiming the R&D credit.

« The R&D tax credit has evolved into an “uncertain tax position” »

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You think you’re an R&D tax credit expert? You don’t need help from anybody? Let’s see how much this is true.

New knowledge is always an advancement, so even learning what will not work is an advancement.
Improvements to existing products can qualify for the research credit.
Qualified research expenditures for prototype development include material cost, consultants cost and labor cost.
SR&ED begins when you have exhausted all known standard practices.
A custom product developed to meet customer specifications is usually claimable.
Expenditures of a capital nature for capital property acquired for use in R&D qualify for SR&ED tax incentives.
All technological innovation development activities automatically qualifies to SR&ED
User acceptance testing is a claimable SR&ED activity.
Market Research activities are claimable as SR&ED when they are part of a SR&ED project.
What distinguishes an R & D approach from a SR & ED approach is the achievement or not in the development process of the limits of the underlying technology.

Results

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

6/10 is a strict minimum, you are excellent if you have 9 or 10 /10

Thank you for taking the time to read our page. The index of our blog (to the right of this page) contains several other answers and 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? You did not like this reading? Tell us so. What is it that you disliked?

Feb

2017

Other R&D examples of evidences

DocumentationMichel Rheault, M.Sc.No Comment

How do you prove SR & ED? (2/2)

Contemporary documentation of SR & ED projects is the new credo of the RTAs. There must be documentary evidence that our research has taken place or there is no eligible SR & ED. Verbal testimonials are no longer enough. But how do we do that?

On the day your SR & ED is audited, you will be asked to answer each of the five questions defined in recent years by the CRA to determine eligibility for SR & ED. In a recent article we proposed to group your evidences according to these five questions.

Today, here are the evidence for the last three questions.

« There must be documentary evidence that your research has taken place or there is no eligible SR & ED »

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3- Evidence of a systematic investigation

A systematic investigation is a structured approach that involves moving from the identification of scientific or technological uncertainties to the issuance of hypotheses to resolve them, testing through experimentation or analysis, and the formulation of logical conclusions.

In a business context, this implies that:

The SR & ED objectives are clearly established and written early in the project,
The methods and experiments attempted to solve the uncertainties are specified,
The work is supervised by personnel with appropriate technical competence.

Examples

To demonstrate a systematic process it is necessary to:

Demonstrate systematic experimentation while supporting the costs:
How many experiments and alternatives have been studied to try to solve each uncertainty,
Demonstrate the working method:
Analyzes (which, why, how many alternatives analyzed or simulated (theoretical), etc.)
Testing process (what test environment, what changes from one test to another, how many process runs, conclusions, etc.),
Keep evidence and inconclusive test results,
Prototypes (how many prototypes (physical or simulated), why and what is the cause of their rejection),
Take pictures of the physical prototypes before destroying them.
Results of performance analyzes (over time and following the evolution of the process),
Conclusions: compare results to expectations and explain variations,
For which uncertainties do you think you can draw a conclusion (thus identifying a technological advance)?
List in chronological order the key events, activities, tests and results relevant to the resolution of uncertainties,
Keep copy of the results and the conclusions drawn at the time,
Prepare and maintain minutes of your technical follow-up meetings including dates and participants,
Document any new direction taken following the tests (iterations),
Keep versions of project plans, budgets, resource utilization plans, test plans, and accompanying explanations,
Note the support activities. The use of well-established technologies that are recognized as “routine” is not eligible unless the activity is carried out in support of an experimental development project. It can then become eligible. Do not neglect the tests which would seem to you ineligible at the outset,
Keep all other relevant technical documents.

4- Proof of advancement

Advancement is defined by the CRA as the eligibility policy: “the generation of information or the discovery of knowledge that advances our understanding of scientific relations or technology. (…) Technological advancement shifts the scientific or technological knowledge base of a society to a higher level by increasing the understanding of technology. ”

http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/lgbltywrkfrsrdnvstmnttxcrdts-eng.html#s2_1_4

Examples

We have already illustrated the documentation of current practice and the technological gap. It is necessary to :

Define the initial knowledge base,
Specify the deviation sought in relation to the existing technology,
Keep negative opinions on the feasibility of our technological approach by external experts or technology providers,
Document the « rejection of a hypothesis, which is an advancement because it eliminates a possible solution»,
Refer to a scientific or industry journal defining the state of technology capabilities at certain times,
Record the results (even negative ones),
Note the knowledge that we would be proud to show to our colleagues. What would be their opinion about the achieved/sought-after progress of knowledge?
Periodically document your vision on topics such as:
Is the new knowledge or technology generalizable? Where?
Can this knowledge be applied elsewhere than in this specific situation?
For what technological reason has advancement not been sought or obtained before?
What would you do differently if the project started today?
Compare your results/technologies to previous or competing products.

5- Register of assumptions and results

“A record of assumptions, tests and results should be kept in the course of the work. (…) the work must be documented so as to clearly state the rationale for their main elements and how they fit into the overall project. (…) A systematic investigation or search can generally not be conducted without recording work as it progresses. It is not intended to suggest a particular format of documentation to support SR & ED. ”

Appendix 2 of the T4088 – Guide for Form T661 contains some examples of evidence suggested by the CRA. But he does not give an example of a register of hypotheses. Here are a few practical suggestions:

Examples

For each SR & ED project, documentation must be produced while the activities are being carried out to ensure the consistency and integrity of the content. The following table should be revised and updated two to four times a year:

Identify the project (name, numbers in management systems and timesheets, etc.),
Identify the manager,
Prepare a table of technological content specifying, for each uncertainty and for each hypothesis:
- Start/end of activities,
- Technological uncertainty and associated common practice,
- Assumptions formulated to resolve uncertainties,
- Results obtained for each hypothesis,
- Technological advances targeted and obtained, knowledge generated by this work,
- Resources and efforts (hours) used, including consultants.

Conclusion

This complements our documentation examples to support your SR & ED claims. The new RTAs now require such contemporary documentation of SR & ED projects. It has become a condition of acceptance. It is therefore necessary for you to organize to produce it, to enrich it and to preserve these traces of your projects during the year in order to reduce the risks of an unfortunate decision by these RTAs.

How do you document your SR & ED projects? Do you have any tricks or pitfalls to share? Which of your documentation practices have convinced the CRT?

We are honored to see the time spent reading our page. Our blog index (to the right of this page) contains several other solutions that are also intended for you.

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

Feb

2017

R&D Proof Examples

DocumentationMichel Rheault, M.Sc.No Comment

How do you prove SR & ED? (1/2)

Contemporary documentation of SR & ED projects is the most recent hype for the RTA. You have to prove by documentary evidence that your research has taken place. Otherwise there is no eligible SR&ED. Verbal testimonials are no longer enough. How do we do that?

In recent articles we have presented some ways to document your SR & ED projects. We have presented an inexpensive process, we have illustrated how to organize to document and how to document the deviation from current practice.

« Organize to prepare, enrich and maintain strong traces to reduce the risks of your R&D tax credit claims »

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Here is another approach to gather your evidence for SR & ED. In recent years, the CRA has identified five questions to determine eligibility for SR & ED. We must now be ready, in audit, to answer each of these questions and to demonstrate our arguments. So here we propose to group your evidences according to these five questions.

Today we present the evidence for the first two questions. We will conclude with the evidence of the last three questions in a future blog

Before you start

Some warnings are needed before starting:

Contrary to the CRA’s assertions, documentation of experimental processes is not “natural” in a commercial venture.
Documenting your SR & ED projects is a new discipline to be implemented on a weekly or monthly basis in your company.
Appointing a Technical Documentation Manager for each requested project is now a must.
Paper is not the only acceptable support. A Word, Excel, Visio, Txt file, an e-mail, a picture or a Wiki will do the trick, the important thing is that it is dated,
Be creative. Here we present a reminder, a source of inspiration from which you will build your bank of evidence, do not limit yourself to this list.
Date all your documents.
Finally, there is a great deal of overlap between the evidences presented here for each question, since we are talking about the same project in terms of uncertainties, experiments and advances and so on.

So let’s go for examples of documentary evidence for the first two questions:

1- Proof of uncertainty:

An uncertainty exists “if whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience “

We have already discussed how to document current practice and how to overcome the knowledge base. Other examples of uncertainty documentation include:

Examples

Uncertainties are rarely described formally by the project staff. It is therefore necessary to create the habit of referring to them during the course of the project.

From the beginning of the project, prepare a list (in the project’s birth certificate, which we will soon be discussing) stating the:
- Main risks that the technological objective is not achieved within the technological constraints,
- Anticipated problems and standard solutions for each,
- Initial needs for testing of technologies, develop prototype (s)
- Technical limits and known alternatives, in order to compare them later with the reality of the project.
Write and update dated lists about:
- Attempts (by others or by you) to resolve the problem raised,
- Conceptual alternatives envisaged to solve the uncertainties,
- Tests or serious analyzes to evaluate alternatives,
- Constraints, peculiarities or problems specific to your environment (size, architecture, resources, adaptability, etc.) that prevent you from using the existing solutions,
- Compelling specifications (performance, cost, stability, functionality, compatibility …).
Identify and document conflicting constraints (eg performance versus reliability)
Document the unpredictability of the environment to illustrate the interactions, reactions or behaviors of several components that could not be determined in advance in a given system. This may lead to the demonstration of systemic uncertainty,
Clarify the status of the project and technology at the beginning and end of the year:
- What uncertainties were resolved during the year
- What uncertainties remain to be solved
Document the reasons for abandoning prototypes.

2- Evidence of assumptions

An hypothesis is “intended to resolve scientific or technological uncertainty. An hypothesis is an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea. ”

We must therefore note the ideas, the options and the alternatives that we envisaged to solve the various uncertainties. Do not forget to :

Date these documents,
Specify to what uncertainty each hypothesis tries to answer,
Identify who carried out the work,
The best places to record the assumptions are the birth certificate, periodic reports and logbook that we will discuss in another page of this blog.

Examples

Examples of documentation of assumptions include:

Describe the initial approach envisaged to resolve each uncertainty,
Illustrate the alternative hypotheses envisaged (not necessarily tested, nor the final approach),
State what tests or analyzes have been undertaken to evaluate the alternatives?
Test plans or test reports: What results and conclusions have we drawn from them?
At what point (following which results) was the hypothesis rejected? Or demonstrated?
Describe what justified the initial need to develop a prototype(s)?
Why was the prototype abandoned?

Conclusion

In conclusion, contemporary documentation of SR & ED projects is now a condition of acceptance according to the new RTAs. It is therefore necessary to prepare, enrich and save these traces of your projects during the year in order to reduce the risks of an unfortunate decision by the RTA.

We are honored to see the time you spent reading our page. The index of our blog (to the right of this page) contains several other 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? You did not like this reading? Tell us so. What is it that you disliked?

Feb

2017

Sharing the SR & ED benefit

IdentificationMichel Rheault, M.Sc.No Comment

Sharing the SR & ED benefit

Expand your business with SR & ED (1)

Are you developing technology? Use SR & ED credit as a tool for business development. It is a radical thought, I agree, but, you will see, it works, if you change your point of view.

Traditional vision

The SR & ED tax credit is a great tool to fund your technology development. It helps you to advance your technology, develop your platform or generalize the application of your technologies to other fields. This, of course, is the generalized view. It is used everywhere and it is always adequate.

« Look at the SR & ED tax credit as a source of development …. of your business »

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On the other hand more and more companies are encountering difficulties with their claim. Many look to their R & D at the end of the year as a “retrofit” funding mechanism in the SR & ED program. This is one of the important causes of difficulties encountered by claimants: they have never thought or seen their development as a systematic process of technological transformation. And now they are claiming their projects as such. No wonder the CRA sometimes encounters difficulties in believing them …

R & D to develop your business

My point here is this: There is a tax credit program that is still generous enough to open up very interesting opportunities for all those who are developing technology.

The CRA now requires that the projects sought be seen and managed from the start as systematic experimental development project, so let’s go one step further. If we have the expertise to develop advanced technologies:

Let’s use the features of this program to identify business opportunities.
Maximize this credit by defining, from the outset:
the best legal structure
the top organizational model,
the optimal positioning of the project

In summary let’s develop another way to use this credit to your advantage and to that of our business partners. Just keep your eyes and mind open.

Let’s look at simplified situations illustrating our purpose:

IMPORTANT NOTE: We limit our discussion by avoiding important but very technical details regarding eligibility. Once opportunities are identified, qualifying the projects remains. If you intend to use one of these strategies, do not do it alone, consult your preparer, or better yet, call us.

Characteristics of SR & ED

Let us first recall some important features of SR & ED credit:

Generally, the SR & ED tax credit is available to those who take the technological risk, unless they transfer this right through an R & D contract to another entity.
In the contract (or proposal) if you are paid to do R & D, you surrender the right to claim SR & ED. If you want to retain this right, write your contract to deliver a good, a product or a service. Your client does not have control over the SR & ED done, but he acquires the right to exploit the results.
The highest credit is on salaries. In Quebec, for example, the combined (federal + provincial) credit rate for salaries is almost double that of subcontractors. It is therefore very advantageous to claim salaries rather than subcontractor invoices.

In summary, we are asking for credit where the salaries paid to develop this technology are the highest and we write our contracts to facilitate our claims. Let’s now look at how best to use these features.

Share the best credit

Do you have a technology development team? Why not offer your potential customers to reduce their invoice by sharing the credit for a given project. A discussion can also determine:

Who has the most advantage in claiming SR & ED credit?
How to define contracts in order to maximize these benefits.
How to share the results.

Example:

A customer built his proposal by offering his client a rebate (from the tax credit) if he agrees to be the first to use the new technology. The credit is claimed by the developer because he is the one who pays the wages and gets the maximum credits. Ultimately, the customer gets cutting-edge technology at a reasonable price, which compensates him for the small drawbacks that this immature technology will have for him – and he will benefit from the improvements that will come in the next set-ups.

Conclusion:

SR & ED credits finance your technology development, but it is also a very powerful tool to support your business development and your technological vision. It is a matter of point of view.

It takes a good deal of vision, creativity and planning. But it is very possible. The key is to plan the credit rather than try to recover it at the end of the year.

In upcoming articles we explore alternative ways to use SR & ED credit to grow your business development.

If you see value for this blog, share it or comment on it.

And you what do you think ? Do you have any experiences or questions to share about this? Did you like your reading? Tell us so. What should be added? What other topics are you interested in? You did not like this reading? Tell us so. What have you appreciated less in this text?

Feb

2017

SR & ED and Murphy’s Law

InterpretationMichel Rheault, M.Sc.No Comment

SR & ED and Murphy’s Law

There are several ways to explain the R & D tax credit. Today we go with humor. It is, of course, a very serious subject. But it is necessary, sometimes, to prove by the absurd if we want to bring out the sad but deep reality.

Several years ago I read an article where the author applied Murphy’s law to SR & ED. Unfortunately, I have not kept the exact reference, so I can not give him the credit due to him and I apologize very humbly. On the other hand, it remains that his observations are very wise and humorous stupidities today. They reflect the reality, the subtlety and the complexity of the SR & ED claim process. Do not take these examples to the first degree. The second meaning is definitely more funny, … and closer to reality.

« When it comes to SR&ED tax credits, if anything can go wrong, it will »

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I have modified some of the examples. So it has become a collective creation that I share with you today.

You’ve all heard about Murphy’s Law. “If anything can go wrong, it will”. Here are some variations of this law applied to SR & ED. Let’s have fun …

Murphy’s Law applied to SR & ED

Anyone who considers himself an “expert” does not yet know the details.

Desk reviews give a first impression. First impressions are always false.

Companies with the best time sheets do the least amount of SR & ED.

Companies with the worst documentations are most likely to be innovation leaders in their industry.

The archeology of retroactive claims is not an exact science.

The business owner’s definition of SR & ED expands with each refund check. The employee’s definition shrinks after each audit.

If it seems too good to be true that the new claimant will make a very large claim for SR & ED, then it’s probably true.

Mathematics of contingency rates: 25% of nothing still gives nothing.

SR & ED is expanding at each recession, declining with every cycle of economic growth. True developers have too much work to take this into account.

The best SR & ED work is always older than the 18-month limit.

One always sees more clearly when working for the dark side of the force.

Do you know the author of these observations? Can you give me the reference? I will be happy to update this page and pay due tribute to him.

Do you have any other anecdotes, or stupid truths about SR & ED? Want to share them with us?

Did you like your reading? Tell us so. What should be added? What topics are you interested in? You did not like this reading? Tell us so. What have you less appreciated in this text?

Jan

2017

SR & ED : Prepare audit meeting

AuditMichel Rheault, M.Sc.No Comment

SR & ED: how do we prepare audit meeting?

The CRA’s audit is certainly THE crucial moment in the entire SR & ED tax credit claim cycle. An audit can not be avoided, but the negative impacts can certainly be minimized. In previous articles in this series, we identified the need to understand the audit issues and to discuss who will be attending at this important meeting. In this article, we discuss how to prepare for the meeting.

How do we prepare?

Preparing for an audit meeting requires a lot of humility. We have to look at our claim with the very critical eye of the auditor.

« On the day of the R&D tax credit audit, all the money claimed is on the table. You must organize to defend yourself »

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1- Review the content of your claim with those responsible

It’s easy to put on pink glasses and tell ourselves that our projects are all eligible because we got all our credits for so many years. But that does not mean anything.

If your claim is in audit this year it is that some have seen weaknesses, what they call stakes. The audit meeting will be used by departmental advisors to demonstrate that their intuition is good, or it will serve you to demonstrate the merits of your claim.

Be objective

I know, it’s difficult. This is your project and you really believe it is eligible. But the SR & ED value of your file must be assessed coldly. You may need a bit of outside help here. Someone neutral to your file and who knows this audit process.

First identify your strengths and weaknesses for each project in your claim, starting with the one that represents the most costs.

Review the documents sent to the CRA: your T661 forms for that year, the previous year’s form and any other details provided to the CRA thereafter. What perception can your reader have built up by reading this (and nothing else)? Does the reader easily find answers to the five questions used to determine the eligibility of the work?

How can we convince him that we have distinguished between standard development and SR & ED? The reader expects that the SR & ED project will be managed as a systematic research project. Does he see uncertainties, assumptions, experiments and test results?

2- Consult the CRA review guides

Also review the CRA review guides. In recent years, the CRA has released two important documents to prepare for the audit: the technical review guide, and the financial review manual.

Even though they are edited copies of CRA internal procedures documents, they are very important. There is plenty of relevant information. We recommended these two readings as a priority prior to the preparation of the audit meeting.

3- Gather and evaluate your documentary evidence.

Then look for any documentary evidence from your experimental project. Find any reports, emails, photos, meeting minutes, analysis tables, timesheets, project cost tables, and analysis results. You must find them, classify them, and find some more. In recent years, it has become essential to show contemporary documentation to demonstrate eligibility.

CRA advisors expect to have easy access to this information during the meeting. You should therefore be prepared to show it and to answer the following questions:

What is your documentation process?
Is your documentation contemporary with the project or is it produced later?
What documentation is available upon request?
Does the documentation show the obstacles, processes, experiments?

4- Evaluate your financial record.

Do you have financial documents? Here are some questions that are likely to be asked about them:

Time sheets (include those of the team leaders?). Or do you claim them in proportion to efforts (%, which is not as credible for the CRA)?
Structure of your teams. How many hierarchical levels are claimed? (Only one level of management is accepted)
Are you claiming only wages or are dividends included?
How do you distinguish between claimed and unclaimed efforts?
What is written on the invoices? On the contracts?
Can we see all the contracts signed with your subcontractors?
Can we see the contracts signed with your customers?

5- Build your argument

After such an analysis, your strengths and weaknesses begin to emerge. Now you have to start building your argument. How will you explain each project and its technological challenges? What do you insist on? How can you tackle the weaknesses you have identified? How do you build on the strengths of your case?

Here, the questions we identified at the beginning about the issues are very useful. The RTA does not understand the magnitude of the costs of Project 2? Let us prepare a table of the efforts detailed by activity. He does not see technological uncertainty in Project 1? Let us retrieve the report of the consultant who explains it in detail, or prepare a demonstration of the prototype to illustrate the problem, etc.

6- Build a preliminary presentation

This presentation of the project must answer the 5 questions for each project. It is this preliminary presentation that will be presented to your employees at the first preparatory meeting. They will be responsible for working on it and adapting it to their presentation.

In conclusion, an audit meeting can not be taken lightly. This is a very important moment when the money claimed is on the table. You must organize yourself to defend.

In a future article we will explain what to demonstrate to the CRA advisor as your main argument.

What do you think ? Have you experienced audits where you had no idea of your strengths and weaknesses until the “train was on you”? How did you prepare yourself (or not)? What were the results? What lessons have you learned? Why ?

Did you like your reading? Tell us. What should be added? What topics are you interested in? You did not like this reading? Say it to us. What less have you appreciated in this text?

Jan

2017

Finding SR & ED in IT : Where do we start ?

IdentificationMichel Rheault, M.Sc.No Comment

Where do we find SR & ED in IT?

Finding SR & ED in IT. It is becoming increasingly difficult to define SR & ED activities because of the evolving requirements imposed by the CRA. But before putting any effort into producing a document, documenting and making a claim, you need to know how to identify areas where there is good potential to claim SR & ED credits.

In this category of articles (Identification) we explore various ways to find SR & ED “nuggets” to explore. We also look at some examples of projects in different fields of technology. Today we study the field of computer science. If you are in the chemical, mechanical, manufacturing or other sectors you should take a look … if you change a few words this applies to you too also.

« When claiming R&D tax credits, forget about functionalities, focus on the technology and ways to go beyond its limits »

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Software development is certainly one of the most popular technology sectors in the SR & ED projects claimed. According to recent CRA statistics, more than one-third of claims come from computer development in various forms (software, gaming, multimedia, internet, etc.).

What limits identifying SR & ED projects?

The main obstacle to identifying potentially eligible projects is … the computer scientist himself. Indeed, most experienced developers tend to see their job as a full-time problem solver with the consequence that they see no limits to what they can develop – there is almost no insoluble projects provided they are allowed enough time to solve the situation, of course. This view is too general. We must focus on more specific and more demanding challenges.

A second obstacle to identifying SR & ED projects is that they all use roughly the same development tools, which themselves vary with time and patterns. How does our project in Java differ from the neighbor’s project in Java? Here the focus is not put in the right place. Regardless of the tools, this is what you do with it and how you develop it that really matter. Look at the limitations of your tools. Have you tried to overcome, to go beyond them?

At the other extreme, non-computer scientists see software development as a variant of magic and mistakenly believe that any computer development should be claimed, especially if it is expensive. In reality it is necessary to look for the portion of the project where the computer scientist meets a technological challenge. It is therefore a subset of the project that can be claimed. And the best positioned to define these subprojects are the IT professionals themselves, not the promoters nor the accountants.

The expert should describe the technological challenges. And the best way to identify SR & ED eligible projects is to change the perspective. Instead of seeing an application project to manage customer data, rather looks at the development and integration of technologies into a platform that synchronizes several tools, several components and in a very unique and original way.

Examples in computer science

Let us now look at some examples from computer projects: There is often a potentially eligible SR & ED project when developing a technology that offers:

A solution or a kernel to connect heterogeneous (varied) components;
A new architecture on at least one of its technological dimensions. Especially if we have not found any equivalent capable of linking these components while satisfying several constraints;
An integration of several technologies that have never been done according to our research. Or that integrate one or many MORE, (more speed, more integrity, more efficiency, etc.);
A unique technological component (specifying how technologically unique it is);
A generalized solution for several tools or technological platforms not compatible with each other. This is called a generic solution;
Work on the design and development of a platform that solves several technological problems;
A technology bridge between very incompatible remote generation technologies (eg, connecting an AS-400 to the web or interfacing a COBOL application with cellular applications);
Systematic research of solutions to solve problems of performance, data integrity, stability of platforms, etc. ;
A solution that even your supplier(s) advised you against, or recommended not to do because “it’s impossible”;
A solution that meets several incompatible criteria, constraints or standards (eg performance and integrity of the results, etc.);
A revolutionary concept for synchronizing, integrating, sequencing or maximizing technologies.

Conclusion

In conclusion, there is no secret, forget the features and focus on the technology and on ways to go beyond its limits.

Do you have any tricks to better identify potential SR & ED projects in computer science or elsewhere?

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Dec

2016

Measure the gap in technology

DocumentationMichel Rheault, M.Sc.No Comment

How to identify and measure the gap in technology

The Canadian Revenue Agency (CRA) is increasingly demanding documentation of your SR & ED activities. It is no longer enough to define a technological uncertainty and some deviation from standard knowledge. The CRA now requires to measure this gap.

There is not always a tool or measure ready to prove our point to the CRA advisor. This stems from the very nature of SR & ED work. We try to push boundaries, often undefined or unexplored. We must therefore use our creativity to create our measuring instruments.

« There is no limit to cuts in R&D tax credits that the CRA can apply to a project that is not well defined, documented and measured »

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Do not focus solely on the uncertainty of the product. Rather look at what is limiting the technological objectives, the methods and technologies required to resolve these uncertainties. Think how to measure the gap between these uncertainties and the standard practice.

No method is universal. And it is not a three pages’ article that will establish THE method. We are there, obvioulsy, to help you. But there is a minimum to meet the requirements of the CRA. Here are some suggestions to better identify and measure the gap to current technology and the progress of your work:

1- Define the technology adequately.

First of all, let’s start with the technologies involved. It is very easy to ill-define the technology, which can prevent us from defining our true uncertainty, what we are trying to add to it. For example, if I define my technology as the database management system, or the hydraulic pump system, the CRT can easily argue that this system has existed for a long time and that there is no technological challenge in designing a new pump.

Be more specific: what measured target does one want to reach or exceed? For example, in the management of the database, are we interested in how to improve the performance by 25% of the “blob” type of unstructured data? We need to measure our target before, during and after our experimental process and from several angles relevant to our experience (speed, number of records per second, transaction success rate, amount of data lost, etc.).

Same thing for the pump, instead of considering the whole pump, concentrate, for example, on the component under study, which limits the expected results. For example, this may be filtration, or holding the pressure.

« R&D Tax Credits : Be creative when measuring the unknown »

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2- Evaluate existing knowledge at the outset

We have then to connect with the rest of the planet. Are we the only ones or the first to see these limits or to try to overcome them? What are the known or studied approaches, how do we commonly solve the limit (s) encountered?

Example: List, summarize and count the number of:

– Research on this subject on Google,

– Relevant articles,

– Patent research on the subject,

– Alternative methods formulated elsewhere,

– Technologies similar for our needs and limitations,

– Components or solutions with potential to be explored,

– Analysis of external experts or technology providers,

– University studies,

– Etc.

3- Specify the relevant limits of technology or knowledge.

When the target technology is well positioned, it is necessary to specify why this part of the technology is of interest to us. This brings us back to specifying the technological limits we want to exceed. This technology has certain properties, allows certain transformations, etc., but it also has its limits, which can be translated into measurable units such as a maximum number of transactions per second, or a pressure per square centimeter, and so on.

By the way, when it is properly defined, this uncertainty may lead us to rename the project and its challenges according to technological objectives or methodologies rather than uncertainties of the product.

4- Quantify the objectives Vs standard practice

Also, the CRA requires that our technological objectives be quantified and clearly identified early in the project. Wherever possible, we must therefore measure our technologies at the beginning and our performance objectives. Let us compare them over time to existing performance standards or new ones that we will formulate. Let us keep track of them.

Example: Performance Targets 1: XXXXX

– Date

– Target

– Measuring units

– Conditions under which the test was carried out

– Measured performance

– Finding, uncertain variable 1,

– Finding, uncertain variable 2, etc.

– Results, Comments and Conclusions

5- Link research steps to specific uncertainties and measure the progress

Finally, parallel to these examples we define an experimental development process, its essential activities, and its stages. We clearly identify where we are trying to resolve uncertainties and what alternative assumptions are being analyzed. We then define relevant criteria and measure them. The existence of such measures clearly differentiates experimental SR & ED work from routine work.

Conclusion

In conclusion, there is no limit to your creativity to define original methods of measuring your technological progress. Similarly, there is no limit to cuts that the CRA can apply to an experimental project that is not well defined, documented and supported by adequate measures. The choice is yours.

And you what do you think about this ? Do you have any tips or ideas to share on measuring the progress of your work?

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Nov

2016

Understanding the CRA reports

InterpretationMichel Rheault, M.Sc.No Comment

Understanding the CRA reports

After producing SR & ED tax credit claims for more than 20 years, we have developed our understanding of the analysis process, language and key conclusions that the CRA can come up with. In this article we share this understanding to clarify what happens between the time you submit your SR & ED claim and when you receive their conclusions.

These are personal interpretations and under no circumstances can you use this text to discuss with the CRA. It is also possible that I am wrong for some very specific aspects. But I remain convinced that the vast majority of the observations that follow are correct.

« We send the R&D tax credit claim, it is accepted, we cash our credits and it’s over. But it does not work like that »

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1- The Claims Analysis Process

A first sorting is performed upon receipt of your SR & ED claim at the CRA processing center.

The majority of claims for SR & ED tax credits are « Accepted as Submitted », which is what we all want. This means that they were not identified as “at risk” files based on financial criteria (eg.: % increase in amounts claimed, history of conflicting claims, etc.).

Other files are selected for a more detailed analysis (eg.: randomly selected files, unverified claims for more than 3 years, etc.)

The files thereby identified and those potentially « at risk » are subjected to a more detailed analysis, an examination at the local CRA office (desk audit).

2- The desk audit

The purpose of the desk audit is to identify whether there are technical or financial issues that could warrant further analysis or even an audit.

The texts are read by senior RTAs to identify risks, weaknesses and issues such as: low SR & ED potential, uncertainty about uncertainty, confusion between the business plan and the SR & ED project, work claimed for three years or more, activities not clearly described, experimental production claim (EP or CP + EP), etc.

These claims are also reviewed by Senior FRs who apply other risk indicators such as employee claimed at 100%, the specified employee claimed, a relatively high percentage (%) of expenses claimed versus Total expenses of the company, etc.

At the end of these analyzes, one of the following three conclusions is sent to the claimant:

– « Accepted as Submitted »

– « Supplementary request for information »

– « Audit Meeting Request »

If the claimant does not respond within the specified time frame (normally two weeks to one month) or if the information received is insufficient to determine eligibility, then an « Unsubstantiated » conclusion is issued for the project. This means that there is insufficient evidence to validate activities that may be eligible for SR & ED. In the case of a « Request for Additional Information », if the information is insufficient but the RTA believes that it is possible to obtain better evidence, the conclusion may be converted into an « Audit Request ».

3- Following the audit meeting

The audit meeting (s) shall normally be held at the claimant’s premises.

If the oral or written information submitted by the applicant does not meet the definition of SR & ED, then a « No Eligible Activities » conclusion is drawn for this project.

If the written or oral evidence submitted shows that some work may be eligible but there is insufficient evidence to validate the SR & ED activity, then an « Unsubstantiated » conclusion is drawn for this project.

If evidence is found that corroborates SR & ED, then one of two conclusions can be drawn:

– « Some Eligible Activities » because there is evidence of SR & ED for certain activities in addition to oral testimony, but other activities still do not meet the SR & ED definition.

– « Accepted as Submitted » is the conclusion sought by all.

These conclusions per project are normally reflected in the technical report issued by the RTA as a result of his audit activities. This report is often presented to the taxpayer at the same time as the notice of assessment. Sometimes you have to ask the person responsible for the file, usually the FR. These conclusions must be justified, that is, explained in sufficient detail to understand the issues that have not been resolved with the meetings and the documentation submitted.

4- Understand what is written on the Notice of Assessment

It is important to read the SR & ED notice of assessment (and the letter or technical report sometimes accompanying this notice). It is easy to “read” only one thing: it is accepted without paying attention to detail. We get our credits and it’s over. But it does not work like that.

When the written conclusion in the notice of assessment is « Accepted as Submitted » this means that the claim has been accepted without having been revised in detail. But there are sometimes two very significant complementary texts:

The CRA often adds a phrase meaning « May be Subject to Subsequent Audit ». The CRA reserves the right to reverse this decision. This is often the case where federal credits are non-refundable, but this can happen for refundable credits. When the CRA gives this indication, it frequently comes later to audit two or three years at a time.
The RTA can accept a project requested but warn you of his expectations at the next opportunity. He may recall, for example, that an eligible project « Must be accompanied by dated and detailed documentation ». When you see this type of remark, consider this as a serious warning. The CRT has overlooked for this time, but at the next request for information or audit meeting, when he requires to see this support material, and if he does not find it, he will treat it rigorously, stating that you have been notified in writing.

5- Conclusion

The CRA uses several words to close a claim. It is important to read and understand the language of the CRA in these short sentences often included in the technical report or notice of assessment. Without that, you may be faced with big surprises.

Do not hesitate to ask your consultant, your FR or your RTA as soon as they are received. Again, this article is a personal but enlightened interpretation of the terminology encountered in written exchanges with the CRA.

And you ? Do you have other examples or interpretations to supplement these? What were your experiences with this?

Did you like your reading? Tell us so. What should be added? What topics are you interested in? You did not like this reading? Tell us so. What have you less appreciated in this text?