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13
Sep
2016
Does your R&D tax credit consultant hide information from you ?9 Questions to select your SR & ED consultant

9 Questions to select your SR & ED consultant

ConsultantNo Comment

9 Questions to select your SR & ED consultant

SR & ED consultants are not typical service providers. Throughout the claiming process, a SR & ED consultant will access your private and highly confidential information about your core technology. He will develop an intimate knowledge of your business and several of your key employees.

In addition, these consultants must accompany you, guide you and train you. Gone are the days when to give « carte blanche » to the consultant. You must take charge of your claim. It is your money we are talking about.

Cashing in the credit does not demonstrate the value of your consultant. Only one claim out of four or five is examined by the CRA.

The most important question is whether you trust the consultant and if you believe in its ability to maximize your SR & ED claim. The best SR & ED consultants remain at your side throughout the process, and especially in the case of an audit.

« Cashing in last year’s SR&ED tax credits does not demonstrate the value of your R&D consultant »
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You cannot select the first consultant who calls you. It is very important to take the time to select the one that suits you and your business. Here are 9 important questions to ask your candidates. These issues should also generate other relevant sub-questions:

  1. How many SR&ED claims have you processed this year ?

This question may seem obvious but experience and knowledge of the most recent changes to the program have a direct impact on how to prepare your claim.

With the sub-questions “What proportion of these claims were audited for the technical side ?” and “how many audits have you successfully defended in the last year ? “You look for experience but also someone who is up to work with you in case of audit.

  1. What is your area of expertise?

Beware of generalists who are good at everything. Good at everything is great at nothing. The approach varies with the claim domain. It is very important that your consultant understand the current and standard practices in your industry. He is then better to identify how your R & D activities go beyond this standard practice, whether in engineering, software development, or science life.

Ask them how they address the technical aspects of the claim. Do they understand your technology and will they be able to clearly identify the uncertainties and advancements ? If they do not have a good understanding of the complexity and scope of your innovation, how will they identify the eligible activities of your projects ?

« Gone are the days when you gave a blank check to the R&D Consultant. You must take charge of your claim »
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  1. Who will prepare the application?

Will the senior you meet during the sales meeting be those that prepare the file or if they will instead use less experienced junior employees ? Is it an employee of the consulting firm or a sub-contractor? Most accounting firms, for instance of the “Big Four” and others, use subcontractors to deliver their SR & ED files. If they use junior or external personel, question the internal quality assurance process to ensure that a senior consultant reviews the details of the files before leaving their offices.

To each his specialty

Who will prepare the tax side of your claim ? Some consultants are actually engineers or computer scientists that deliver both the technical and accounting aspect. Although the forms (T661 and others) seem simple to complete, it is filled with subtleties that only accountants or tax specialists may know. Reviewing forms in details made us repeatedly identify errors and underestimated credits.

Who will write the technical report? The reverse is also true, some accountants believe they save to their customers by writing technical descriptions themselves. Unfortunately, this increases the risk of the claim. Reviewing descriptions has often allowed us to identify the weaknesses of the claim submitted which correspondingly increased the risk of being selected for an audit.

« Do you really trust your consultant and believe in its ability to maximize your SR & ED claim ? »
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  1. What is your approach to preparing a file? Ask to see how it goes.

Each claim should start with a good analysis of the technical aspect and conclude with the accounting. It’s not the other way around. Ask for the time and effort required by their resources to understand and prepare the technical aspect of your case. Also ask the efforts required from your resources.

Turnkey or revision? This is not the same value.

Who will do the work? Some consultants write your full descriptions, only asking you to revise them. This is a turnkey service. Others are paid to review your descriptions. These are not equivalent services and fees must reflect that!

  1. What happens in case of audit?

The consultant who prepared your claim will he be there to defend you upon audit ? How is is guaranteed ? You do not want a newcomer that “discovers” the contents of your file the day before the audit meeting.

You do not want to discover you will be alone to defend yourself only a few days before the audit. Some consultants specialize in “Accepted as Filed” claim only to disappear when it comes to meeting the CRA …

  1. What are your fees based on?

The SR&ED services are quite complex and specialized. Ask how and when the consultant is paid : at delivery? upon reception of the notice of assessment? upon reception of the credits checks?

Several consultants are paid a percentage (%) of the results. They are paid after you get your credits. This is a good source of motivation for your consultant. Is the percentage applied to refundable and non-refundable credits?

Other consultants require a deposit to start or when the claim is submitted to the tax authorities. Are these fees refundable in case of failure of the claim? Do these fee include efforts required for the defense in case of audit? When the fees are paid before reception of the credits, the presence and motivation of the consultant during the audit can be questioned. Some will charge extra for additional audit efforts.

How many years do you plan to use this provider? Do you plan to increase your R & D spending in the years to come ? The contract duration and extent of anticipated credit can impact on rates, the consultant is often willing to concede some annual fee in exchange for a longer contract on a higher claim.

  1. What are the services included to support documentation?

The CRA increasingly emphasizes the need of a comprehensive and contemporaneous documentation for the project. This requires a structured and continuous support throughout the year for the preparation of your documentary evidence.

Several consultants are nothing more than report writers. Ask them if they includes a support service for the production of evidence. Or is this service available for an extra fee? In todays environment the year’s end review only of your documentation is not enough to ensure that your documentation will satisfy the CRA.

  1. Can you provide customer references?

All consultants can provide references of satisfied customers. Ask them for references of clients, including some which were audited. Call them, do not ask them only if their credits were accepted (the consultant will obviously send you to his successes…), but also question them :

  • If consultants behaved professionally,
  • If they knew what they were doing,
  • If these customers felt well treated,
  • What was the caliber of the audit support (if there was)?

  1. What is the reputation of the consultant with the CRA?

The consultant will probably answer that he has a good reputation (!). You still have to ask him to demonstrate his skills to de-escalate a disagreement with the CRA.

In recent years, conflicts with CRA about SR & ED are more common. A good consultant should:

  • Maintain a good relationship with the CRA and particularly the RTAs and FRs.
  • Push your file to the manager and director of your local tax services office (TSO), when required.
  • Know the administrative and fiscal processes available for a review of the case or to appeal a decision.

If you have already been in contact with the CRA in your claims history, you should know that technical advisors are relatively stable, financial reviewers are changing more often:

  • Ask the consultant what he knows about your RTA.
  • Call the CRA Reviewer who was in charge of your file and ask him what he thinks about the consultant you are about to hire,

These are the initial questions you should ask your SR & ED consultants candidates. Feel free to add additional questions to reassure you.

And you, how did you choose your advisor? What questions would you have asked him (in cases where the relationship is less well)?

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7
Sep
2016
Write SR&ED reportMistakes when writing your SR & DE descriptions

Mistakes when writing your SR & DE descriptions

Write-UpNo Comment

Writing your SR & DE descriptions: 4 common mistakes

Claiming a SR & ED project cannot be botched up. Let’s look at some common mistakes of descriptions positioning. In future articles we will see how to write a SR & ED project description.

Having the right documents

If you present your products or services to prospective clients, you prepare your best arguments and adapt them to their needs. You bring your promotional flyers, not your financial statements or invoices. It is very important to make new sales.

« It seems that the CRA still has a lot to do regarding the R&D tax credit. Too many claimants have not had their lesson yet ! »
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Financing your R & D projects is just as important for a forefront, innovative company like yours. It is often essential to the pursuit of your development activities. For many SR & ED credits are the difference between a profitable year or not. Is this the case for your business?

Each professional service has its own requirements for supporting documents:

  • The contractor requires plans and permits to build your house.
  • The accountant wants contracts and invoices to prepare your financial statements.
  • The pharmacist requires a doctor’s prescription before you deliver medicine.

So why so many businesses attempt to finance their technology with the CRA by presenting sales documents? Would you leave the country without your passport?

The right angle for your report

Over the last twenty years we read thousands of technical descriptions to claim SR & ED tax credits. Many of these descriptions did not meet CRA requirements. Why, in 2016, do we still see product and not technology descriptions ?

Like all claimants, I think there are too many audits by the CRA. But in reality, it seems that the CRA still has a lot to do. Too many claimants have not yet had their lesson!

The SR & ED project description in the T661 will be read by a technology expert (IT, telecom, mechanical, chemical, etc.). It must meet certain standards. Even if your past claims have been accepted, do not take this report lightly. It is often the last safety net that can prevent an audit.

The most common errors:

This is not a sales or marketing report. This is not just a technical report. This is not a bunch of technical buzzwords. Let’s look at some of the most common errors encountered:

1- Marketing Description

Too often the descriptions are more like a salesman’s car sheet : It emphasizes the characteristics of the product, its qualities and the feelings it inspires:

  • This is the perfect car,

    SR&ED project description errors
    R&D or SR&ED
  • It is beautiful and yellow,
  • It goes fast (0-100km / h in 6 seconds …)
  • It’s smooth driving is remarkable,
  • Its leather seats are comfortable,
  • It is equipped with diode headlights,

Transposed into a T661 it looks like this:

  • We have developed a unique technology on the market,
  • It allows you to trace a product in the database in 0.5 seconds
  • With an error rate of less than .01%,
  • We used MySQL XYZ because it contains a function that will be useful in our delivery,
  • We have selected the ABC language for producing dynamic web pages.

Do you recognize some of your SR & ED project descriptions?

What is wrong here? It merely describes the characteristics of the solution. It’s like describing the beautiful yellow car. This is NOT what the Research and Technology Advisors (RTA) is looking for. He wants to know why this is R & D according to you. So you have to be technical about it. Open the hood and show what you have done !

2- Technical or product specification

Other writers understand the need to be technical. They prepare a sort of technical specifications of the product to be delivered.

“We want to deliver a technology that:

  • Will be two times faster than the existing version,
  • Will include an integrated database editor,
  • Complies with the XXX user interface standard, etc.

What is wrong here? It merely describes what the technology will deliver, without specifying the anticipated or encountered challenges or uncertainties. The RTA wants to know where the R & D is according to you.

3- Business Project:

Several descriptions show the efforts of a company to improve its business, for example, to develop new products or new product line, to modify or upgrade equipment, processes or facilities, or to start engineering projects.

On the T661, this may look like this:

  • We are the only (or first) to offer these features that speed and add to the accuracy of scanning through over 10 million records database…
  • This will give us a unique competitive advantage in the market

What is wrong here? It describes the business project, or the commercial development, but without identifying where experimental development is happening. The RTA is looking for engineering challenges, technology constraints that make the development uncertain and difficult.

4 R & D or SR & ED?

Some writers describe very well the activities of research and development. For example, to expand the range of products, we need :

  • To increase the cache size,
  • To optimize and speed up the processing by doubling it so that we reduce the response time by 40%.

This is a technical description of your R & D project that suggests problems and uncertainties. But the RTA wants more than that. He wants clarification on the limits of the existing technologies to see where you tried to exceed those limits. He wants you to express what new knowledge you have learned or searched for during your systematic experimental process. Only then he will recognize the probable existence of a SR & ED process.

You must demonstrate that you understand the difference between R&D and SR&ED and that you have distinguished the SR & ED portion in your project from to your more common ones (R & D). If your systematic SR & ED process is documented properly, then the RTA will accept activities that are part of this SR & ED project if they are commensurate with the needs and they directly support the attempt to achieve technology progress.

We have illustrated four very common positioning errors. It is important to understand why they are inadequate before rewriting these projects.

In future articles we will move on to actually writing SR & ED descriptions. We will give you tips and techniques to boost your texts to satisfy the new CRA requirements.

And you, what does this demonstration inspire you ? Have you seen or encountered these situations? How did you overcome them?

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30
Aug
2016
Only bring the relevant personelWho do you prepare for the SR&ED Audit ?

Who do you prepare for the SR&ED Audit ?

AuditNo Comment

Who do you prepare for the SR&ED Audit ?

What to do when audited ?

The audit by the CRA is certainly THE crucial moment in the claiming process for SR & ED tax credits. We can avoid an audit, but we can certainly minimize the negative impacts. In the first article of this series, we have established that upon the notification of an audit of your SR & ED claim you should ask your CRA advisors why was your claim selected? What are the stakes ?

Let’s move on to the second step: Who do you invite to the audit preparation ?

Why prepare?

There is at least one to two weeks between the notification and the audit meeting. Use this time to gather and prepare your team for this meeting. Too often clients have delayed the preparation until the day before the meeting. The day before is too late. There is not much left to prepare.

On the day of the R&D audit meeting you bring and you prepare only the staff relevant to our argument.
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There are plenty of good reasons to prepare an audit meeting your SR & ED claim. This preparation is essential because:

  • That is a lot of money for you

Your claims reflect who you are. For example $ 50,000 after tax for SMBs is often the difference between a loss and a profit by year end. In addition, the projects questioned are often those which represent the most money. Furthermore, if the project is not approved this year it will be even harder to claim next year.

  • It is far behind

The audit covers the activities that took place last year, sometimes two or more years ago … Some employees left, the memory of those remaining is far from being perfect. Who will explain in detail what happened then ? It’ll take you a good deal of collective “brain squeezer” to restore the whole story. And even then !

  • This is your opportunity to convince the CRA

If your claim is audited there is something wrong in the eyes of the CRA. The text did not convince them. So here you have a second opportunity to convince them of the merits of your claim.

« The day before it is too late to prepare »
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Prepare who?

You bring in only the staff relevant to our argument. For example, in a software project, it is unnecessary to bring the four programmers who contributed. The leader of the team, if he is technical, should testify for the major technological challenges encountered.

  • Normally one person is enough to submit the technical side of a project, another may explain the costing for all the projects.
  • The president or head of R & D should be present, prepared and available throughout the entire meeting.
  • You used technical subcontractors and they are important to explain the challenges met during the project ? So we must invite them to the preparation.

Please note, subcontractors are a double-edged weapon in an audit meeting. They should explain their small contribution to the project. But you must maintain your position as the technology guru of the project. Ideally, the presentation of your subcontractors should be like: “we asked them to do this in this context,” not “they were asked to solve the technical problem.” Because if they explain that they have solved the only uncertainty of the project, this does not strengthen your technological leadership in this project … and you probably would be better to do without them.

  • You think today’s employees will not be able to explain the technical problems and uncertainties met during the development process ? We must then consider calling some former employees who were at the core of the project.

It will cost you one or two days of their time and it is usually possible to get their new employer’s collaboration. It is possible, of course, if you’re still on good terms with this former employee …

  • Beware of the balance of power at the table. If the CRA sent two people they might feel insecure when they see six or seven people on your side.

If all these people are required for your argument, so plan their appearance and departure. In this way, for example, you’ll never be more than double them. And everybody in the room will have a useful role at that time.

  • You have used a R&D preparer service ? This is the best time to measure their professional utility.

What do they really know about what’s coming? How many audits did they live through? In what role? Do they know the CRA advisor who will be in front of us? What can they say about him? Do you know about their own reputation with the CRA? What preparation do they have to offer? How many representatives does the consultant plan to bring?

  • You do not have a R&D consultant or you doubt their competence to support you? We are here to support you, obviously, even if you worked with another consultant. The most important thing is to get you the best support available and for you to feel strong with your team at your claim’s most crucial moment. It is your money, once again.

A good R & D consultant is essential for the preparation of the audit meeting and for the resulting negotiations. But he must be low-key during the meeting, acting like a guardrail along a mountain road: useful only when necessary. The CRA advisors clearly prefer talking to your employees … rather than your R & D consultant. The only exception is if the consultant knows the advisor VERY WELL. Again, the consultant may be used to reduce tension, to direct the discussion to the relevant (and favorable) arguments, but he will never become the star of the show.

In the next article we discuss how to prepare your team for the audit meeting.

What do you think ? Have you been in audits where you had no idea what was coming until the “train was on you”? How have you prepared (or not)? What were the results? What lessons have you learned? Why ?

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24
Aug
2016
Write-up your hypothesisHow to document SR & ED

How to document SR & ED

DocumentationNo Comment

How to document SR & ED: a low cost, simple method

How can we meet the intensified documentation requirements of the CRA? What is done in practice in the industry to document projects for SR & ED ?

A simple answer lies in the T 4088 guide for the T661 :

” It is important to maintain supporting evidence (for example, information, records, documentation) to substantiate that the scientific research and experimental development (SR&ED) work was performed and allowable expenditures have been incurred. (…) In fact, contemporaneous documentation that is dated, signed, and specific to the work performed are the best supporting evidence that you can provide. ”

This is fine in theory, but in practice, how do you generate and maintain contemporaneous evidence to meet the CRA prescriptions?

Do you realize the increasing level of risk you submit your claim to if you do not set up a contemporaneous system of documentation for your SR&ED activities?

« R&D Tax Credits : Two pillars: – Continuous documentation system and Leaning on your key project employees »
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Background

The position of the CRA regarding the documentation has evolved over the last decade. It was a secondary issue at the time, but now the implementation of a contemporary evidence record keeping has almost become an additional criterion. In recent years, it became the fifth question to determine if there is SR & ED. The reasoning behind this is that proof recording has become a defining characteristic of the SR & ED. So, if there is insufficient documentation, then not only the job is not supported, but it must not be SR & ED.

In the context of the budget constraints of recent years, the recovery mentality has thrived within the CRA. The documentation was a potentially faster way to put the claims aside when the program workload increased. The documented evidence has become, for the CRA, a great way to reach a significant recovery (or rejection) rate of the claimed tax credits. All that was needed was to move from a “seems reasonable” to a “prove it” position .

Contemporaneous documentation

The requirement of contemporary documentation implies that information produced later (eg. the year-end reports) has less value to the CRA. The CRA is seeking for documentation that was produced naturally in a project and which should be sufficient to support an SR & ED.

Some claimants believe that this means that any paperwork related to the project should satisfy the CRA. It does not work like that.

The true meaning of this requirement is that the generation of supporting documents is a characteristic of a SR & ED project. Once again, here is the reasoning of the CRA: If the documents produced in the normal flow of a project are not enough to support a claim, the project is not only unsupported as SR & ED, but it is not SR & ED.

So we must demonstrate to the CRA that throughout the year you quickly identify your eligible projects, and that you manage them as SR & ED project, segregated from your other development projects.

A simple documentation system at low cost

We cannot expect that small claimants will keep detailed laboratory notebooks dedicated to their research, and that they will acquire equipment and scientific experts in the literature that such an approach seams to require.

Therefore here is a simple and effective approach to implement your contemporaneous documentation.

The core of this system rests on two pillars: That is :

  • Continuous documentation system
  • Leaning on your key project employees.

We need to create a system to capture the eligible activities during the year, and to:

  • Be regularly used by employees because it is not heavy and bulky,
  • Facilitate the year-end form preparation (T661), and
  • Meet the requirements of the CRA.

Here is the solution :

1- Train your development staff to recognize the eligible activities by :

  • Attending to the CRA public seminars.
  • Training all project management staff and R & D teams.
  • Refreshing memories and updating about new items.

2- Set up a formal early projects tagging system as soon as the development team meets it’s first major issues.

  • The development teams may use filters or tags to identify SR & ED activities and archive the results.

3- Motivate the staff to save potentially eligible activities

  • Remind them of the importance of the program for the company – reducing taxes, increasing liquidity, creating and maintaining jobs, etc.
  • Transfer some of the results of the SR&ED tax credits claims to the R & D projects budget so they equip themselves or they initiate interesting new research
  • Set up an individual incentive bonus program for their contribution to the success of claims.

4- Require “birth certificates” from the development teams at the beginning of a project

  • The birth certificate is a condensed early overview that identifies:
    • The main constraints and technological challenges;
    • The potential technological uncertainties;
    • The desired technological advances;
    • The potential approaches or hypothesis – proven and unproven.
  • The certificate is used as a starting point for the T661 form.
  • Archive birth certificates or include them in your regular management reports.

5- Check the system and enforce compliance

  • Appoint a technical leader to work with the controller
  • Identify projects with good claim potential and for each one write a plan of the work to be done
  • Have regular project monitoring meetings and keep the minutes and resulting actions
  • Regularly review the documentation files

6- Produce regular reports of progress of work following the birth certificates:

  • Take note of :
    • Problems,
    • Hypotheses raised,
    • Progress results,
    • Problem solving processes,
    • The major events.
  • Collect and archive these reports regularly (weekly, bi monthly, etc.).
  • Include various reports such as:
    • Test results report for the SR & ED
    • Design review reports
    • Reports on major events,
    • Regular reports on specific situations,
    • Draft T661, etc.

7- Keep a complete copy of each key prototype including its performance data, its production and test environments.

8- Develop a system to segregate eligible activities from routine ones:

  • Set up a separate R & D department
  • Discriminate technology issues from those of stemming from new product development
  • Set up a codification of projects with sub-codes to identify SR & ED
  • Record the experimental activities and link them to the project plan in your project management system
  • Make sure to record the time spent per employee per activity, especially for eligible activities.

9- Follow the costs:

  • Plans and reports on the actual resource allocation;
  • Detailed timesheets for the SR & ED activity;
  • Periodic supervisors reporting.
  • Keep up to date, for each employees and subcontractors:
    • Name and contact information
    • The number of hours or the proportion of their time spent on eligible activities per project
    • The link with the payroll system and the G / L
    • Each qualifications for this project:
      • Their technical role
      • Training / Experience
      • Years of experience
      • Arrival / Departure dates in the project
      • Feedback, special contribution, etc.
    • Identify and document the indirect and support activities necessary for the SR & ED:
      • Equipment and material preparation
      • Experimentation and results analysis
      • Recording measures, calculations and graphs
      • Identifying the eligible support activities
      • Direct supervision of SR & ED activities
    • Document the cost of materials consumed and / or transformed
      • Review the definition of materials consumed or transformed (when using the traditional method)
      • Note the materials sold or converted to commercial use
    • Keep copies of the signed contracts for outsourcing and customer contracts involved in your projects for SR & ED

10- Keep any other information as back-up, when applicable

Conclusion

Such a system generates several important benefits:

  • A better monitoring of the R & D
  • An early screening claims
  • A better understanding of R & D by all
  • A reduced risk of missing eligible projects
  • An increased likelihood to meet CRA requirements
  • An increase in the value of SR & ED claims

And you, what are your experiences and discoveries in documenting your SR & ED? Do you need help to set-up such a documentation system for your claims?

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17
Aug
2016
Minimize your R&D audit risk10 questions : Risk of SR & ED audit

10 questions : Risk of SR & ED audit

AuditNo Comment

10 Questions: Assessing the risk of SR & ED audit

« How safe are you with your next SR&ED tax credit claim ? You can minimize the likelihood of an audit »
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Face the reality

How safe are you with your next tax credit claim for scientific research and experimental development (SR & ED)? What makes you so sure ?

It’s a fact: There were more SR & ED audits and requests for information by the Canada Revenue Agency (CRA) in the last few years. Yet the law and the main circular CRA documentation has not changed. So why is it so ?

Why ?

Several factors explain this increase in audits :

  • The CRA hired more research and technology advisors (RTAs),
  • Interpretation of information circulars is more restrictive,
  • The claim evaluation process is more rigorous.

Furthermore,

  • Each year, 20% to 30% of the files are audited on average,
  • Most new claimants are met by the CRA the first year,
  • In recent years, the CRA has hunted down taxpayers and R & D consultants with exaggerated claims profiles.

This will not happen to me …

Many comfort themselves with ” wishful thinking ” such as:

  • We have not been audited for several years,
  • We got all our claims without problems, we have the “recipe”
  • After the last audit, two years ago, they were granted the full amount claimed,
  • It is a small credit, less than $ 100,000, this helps my chances of slipping under the radar.

Sorry to contradict you but that’s not the way it works.

10 SR & ED audit risk factors :

Several items can significantly increase your risk of being audited for SR & ED. Here are ten of the most frequent risk factors:

  1. You claim the same project SR & ED for over two years?

After two or three years the objectives and technological uncertainties should be resolved. Why is this project still being claimed SR & ED?

  1. You have not been audited for over three years?

On average, one should expect to be selected for an audit every three to five years, and even more frequently if there were problems at the last audit. From the fourth year your audit likelihood significantly increases every year. It will soon be your turn, even if your descriptions are amazing!

  1. The last audit was only financial, in fact, your final audit of the technical aspect dates … well, actually you do not remember.

See the previous answer. Don’t buy into by the fact that you were visited or answered financial questions. Research and Technology Advisors (RTAs) are very busy and they may very well postpone your technical audit for a year or two … only to come back the next year to review the last two or three years.

  1. “We were assessed and paid, so it was accepted. “

Look closely at the assessment notice you received from the Federal: what is written ?  Is it that your SR & ED claim is accepted or that it is granted without revision, and subject to further revision ? The CRA reserves the right to return a year back or two, and even more if fraud is suspected.

  1. At the last audit, the audit technical report included recommendations. Did you follow them ?

At the conclusion of a technical audit, the RTA issues a scientific investigation report underlining its concerns and areas for improvement. Were you advised about nonconformities ? If you do not correct these situations before your next audit, you risk being penalized without any recourse …

  1. Your claimed expenses increased by over 25% in one year ? or more than 50% over two years?

Several financial factors will trigger an audit. The quick increase in costs claimed is the most common of them.

  1. At your last audit meeting was your RTA was it very old?

Several RTAs have retired in recent years. If such is the case with yours, the new one might have a brand new perspective on your claim.

  1. The main shareholders of your company are claimed as SR & ED for more than 30% of their time ?
  2. Several of your resources are claimed 100% of their time as SR & ED ?

These last two questions are clues to low cost segregation – or unsupported “optimization”. This kind of indication often deserves a visit to validate your methods to discriminate your SR & ED costs from the regular development costs.

  1. Who wrote your technical descriptions? Was it a new writer ?

A new writer often introduces the claim under a new light. The reader had developed an understanding. Seeing the new presentation can launch new questioning.

Even if your SR & ED claim is selected for an audit, you still can get all your credits. But it must then go through an extra process which in fact you could have done without.

You cannot avoid a SR & ED audit. However, you can minimize the likelihood of an audit.

What do you think ? Are you sure you will get all your credits without audit this year? Why did they come last time ?

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10
Aug
2016

Opinion before claim

News about R&DNo Comment

Two services before claiming

The CRA announces a second pre-claim SR&ED evaluation service. There are notable differences between the two services.

Pre-Claim Consultation (PCC)

The Pre-Claim Consultation (PCC) “will let you know if your work is SR & ED” before submitting your claim. The consultation will focus on the work in progress. The reviewer will provide a written report confirming the existence of eligible work, but no decision on the scope of work or eligible expenses. The CRA will provide “advice and recommendations”, including what documentation to keep.

Prerequisite:

The CRA does not specify the eligibility criteria for this service but it will determine if you qualify.

In practice :

Some already criticize this new service because it offers little benefit for applicants. A positive report is not binding on the CRA, but a negative almost excludes admissibility of the work evaluated.

« The CRA announces a new PRE-CLAIM SR&ED tax credit evaluation service »
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Pre-Claim Review (PCR)

With the Pre-Claim Review (PCR) CRA will provide certainty that your claim will be accepted as filed and an assessment of the scope of work and eligible expenses. PCR is not available to:

  • New applicants
  • Work under a formal litigation or objection
  • Applicants claiming more than 20 projects for the current year

Prerequisite:

Having already participated in:

  • a Pre-Claim Consultation (PCC)
  • a First-Time Claimant Advisory Service, or
  • an SR&ED review,

In practice :

It seems that this will be a periodical regular audit performed while the work proceeds. This might be interesting for companies claiming very large projects and in need of certainty of their future claims.

The PCC is a pilot program. It will be deployed across the country in the coming months and will be accessible to a limited number of participants.

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3
Aug
2016
Finding SR&EDUnderstanding the CRA and its requirements

Understanding the CRA and its requirements

InterpretationNo Comment

Understanding the CRA and its requirements

« The CRA has adopted a more rigorous approach to defining what can be claimed as SR & ED tax credit »
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In recent years, the CRA has adopted a more rigorous approach to defining what can be claimed as SR & ED. As a result, there are more audits, disputes and objections. This increases the challenge of the claims process.

Here is an approach and a strategy that significantly increases the chances of success of your claims.

 Our philosophy and winning strategy

Our strategy is to demonstrate to the CRA auditors that your claim meets their requirements. This means your projects and related activities have been selected to meet the tax laws and optimal controls are in place.

The CRA auditors see your claims as more credible, leading to faster conclusion of your claim. More importantly, you improve your relationships with the tax authorities while increasing predictability of your file.

Our success is due to the quality and competence of our resources, of course, but also to our deep understanding of the changing requirements of the CRA.

The requirements of the Canada Revenue Agency (CRA)

The CRA has raised the bar regarding the interpretation of eligibility of SR & ED activities and increased its controls. Specifically we have seen significant developments regarding:

  • Evolution of the basic definitions, which also often vary from one adviser to another and from one regional office to another. These new definitions include in particular:
    • Uncertainty and advancement,
    • The direct and support activities,
    • The systematic research by experimentation or analysis.
  • The supporting documentation for each SR & ED project must:
    • Be detailed by highlighting the assumptions and conclusions drawn from each experiment,
    • Show a systematic approach,
    • Be contemporaneous and supportthe chronology of the SR & ED activities.

You usually claim credits on your technological developments and new requirements to satisfy the changing needs of your customers. Funding for these SR & ED activities is essential to :

  • Maintain or even accelerate your development, and
  • Ensure a smooth adaptation in your markets.

In conclusion, the CRA has evolved in its interpretation of the program criteria and you must adapt to it before being surprised.

What do you think ? Do you believe in this convergence approach with the CRA ? Or are you more in favor of the guerrilla ? Why ?

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27
Jul
2016
Do not panic ! Stay relax.SR & ED Audit : what do we do ?

SR & ED Audit : what do we do ?

AuditNo Comment

Issues with the SR & ED audit ?

That’s it ! You received the fateful call (or letter)! Your SR & ED claim is selected for an audit!

The audit by the CRA is certainly THE crucial moment in the claiming process for SR & ED tax credits. We can avoid an audit, but we can certainly minimize the negative impacts. In the first of a series of six articles on the audit of a SR & ED claim, we begin with the announcement of the visit.

The questions BEFORE the audit meeting

That money is important to you, whether it is $ 50,000 or $ 500,000. Furthermore, they often audit two or even three years at a time. That’s a lot of money on the table !!!

What do you do now ? You have three choices:

  • Panic,
  • Stand pat,
  • Get ready for that audit meeting.

These are two bad choices and good one. Are you ready to face it?

This is YOUR money and YOUR R&D tax credit claim. Ask for more information. You can not be overprepared.
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Understanding what is coming

First of all, you must ask the right questions to prepare appropriate responses. Most of these questions are answered in the letter or call announcing the audit. If the answers are not there, you have the right as a taxpayer to get satisfactory answers to these questions. Call back the signatory and ask these questions BEFORE the meeting.

What type of meeting is it?

  • Is it a first-time claimant advisory service (FTCAS) meeting where the claim is pre-approved ? Then the CRA personnel assigned to your claims wants to meet with you and explain the program.
  • Is it a courtesy, a review or an audit meeting ? The name can vary but the goal remains the same : take a deeper look into one or more aspects or the totality of your claim.

Who will be there?

  • The Financial Reviewer (FR) only or the Research and Technology Advisor (RTA), or both?
  • Are these the same advisors that your encountered at your last  audit?
  • How long have they been in charge of your claims?
  • If the Financial Reviewer comes alone, does this mean that the technical claim is accepted ? or will the Research and Technology Advisor come at a later meeting?
  • Who do they want to meet? The technical manager of the project(s), the head of the costing ? A particular employee ? Why them ?
  • Do they know your R&D consultants ? Some consultants are better perceived by the CRA than others. Will their presence at the meeting be favorable or not for your claim? Yes, you can ask them.

What is the purpose of the meeting – what are the issues?

  • You have the right as a taxpayer to informed in advance about the issues, the main reasons for this meeting. What will be under review ? What are the issues to be resolved ? Again, do not satisfy yourself with generalities like “a little everything “ or “the uncertainties”. What uncertainties are they talking about? Why this one does not seem eligible? What are the issues ? The costs ?  Their magnitude? Why ? The level of claimed resources? The documentation ? etc …
  • Knowing their preoccupations you will better prepare you will give them the right answers to their questions. The process will simply be even clearer and faster. Is the problem a specific project ? Or the link between the costs and activities claimed ? What are, according to you, the stakes with this project?
  • If a subset of projects is selected, does this mean that all the others are accepted? or is it a test before auditing the others?

Do they need additional information BEFORE the match?

Normally you must be prepared to provide basic information (costs schedules per project, prototypes, team structure, etc.) during the meeting. They expect to see all the documents you have checked in lines 270-282 of the T661 form. You can demonstrate cooperation by asking if they need additional information BEFORE the meeting.

The additional information request is often a clue to what is being sought. But one must know the issues as see by the auditors to clarify your position on these.

  • They ask detailed schedules per activity by resource? There is probably an issue with the scale of efforts claimed. They may be looking for a cost-cutting logic.
  • They ask for architecture, analysis documents or plans? There are possible issues with the technological uncertainties. How can you show that the challenges sought were beyond standard practice? What was standard practice at that time ? The “normal” way to proceed? What extra did you do and why?

How long is planned for the meeting?

It takes up to half a day to review a standard project. A longer meeting may indicate that the CRA advisors want to go further, they are skeptical about one or more of the projects. Ask them what they expect from this meeting: more technical information, demos, prototypes, etc. ?? The set-up of a demo or prototype can be heavy in preparation but it rarely brings results in convincing the CRA. You have a right to know if this is what they expect, and whether it will help to convince them. What is their agenda of the meeting?

Clear answers to these questions and others are necessary for you to prepare for the audit meeting.

Go for more information, this is YOUR money and your claim. You can not be too prepared.

In the next article we will see why it is essential to prepare for the audit meeting.

What do you think ? Have you experienced circumstances where you had no idea of what was coming until the “train was on you”? How did you react when receiving the call audit? Why ?

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19
Jul
2016

Administrative Review – SR&ED

News about R&DNo Comment

New: request for administrative review – SR & ED

The CRA wants to improve the timeliness and consistency of the administrative review process for SR & ED.

The CRA has announced a new form, the RS532 , which will be used to request an administrative review of a claim SR & ED.

The applications will be centralized at a ” National SR&ED Administrative Review Intake Centre ” but the Deputy Directors of the regions will have the responsibility to decide whether they confirm the decision or not.

 

« This is not a second technical review, but rather to ensure the examination was in accordance with R&D tax credit policies.»
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The question is whether this new protocol will achieve the goal of accelerating the administrative review process.

Note: This is not a second technical review, but rather a review of all information available to the CRA to ensure that the request was examined in full accordance with current policies and procedures.

 

Demande de revision EN

 

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