The 10 Commandments of a Successful  SR&ED Audit

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

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

“SR&ED tax credits audit: It’s all in the attitude”

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

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

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

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

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

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SR & ED Audit : what do we do ?

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

The SR&ED audit meeting

Claiming means selling

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

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

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Atmosphere and attitude

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

Two groups are in the room :

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

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

Who will be there?

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

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

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

The agenda

The agenda is rather standard :

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

Your presentation.

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

The presentation of each project is always the same:

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

The meeting ends

So what do we do ?

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

Thereafter

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

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

Conclusion

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

Feel free to call us for advice, or support.

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

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

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

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

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

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 ?

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?

SR & ED Audit : what do we do ?

The audit by the CRA is certainly THE crucial moment in the claiming process for SR & ED tax credits. We can avoid an audit, but we can certainly minimize the negative impacts. In earlier articles in this series, we have established that first of all, the announcement of a SR & ED audit must begin by asking the right questions and understanding the stakes You must then select who will be there.

Let’s move to the third step: How to prepare your team for the audit meeting.

« No one meets with the CRA R&D tax credit auditors without being prepared, not knowing their role and what will happen »

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 Prepare why?

Do your people know what to say? How to tell it? Let us be clear. We don’t talk about hiding information or defraud the tax. However, it is essential to use the time we have available to convince the CRA without wasting time on irrelevant subjects. We must therefore organize our meeting efficiently.

• This is not a meeting like any other. No one is accustomed to this kind of meeting. This is not about selling a product, or understanding the needs. This is about convincing a listener of the merits of our claim, that we satisfied the eligibility criteria project. The what?This is precisely why we must prepare everyone attending the meeting.
• This is about “meeting the tax guys”. For many employees, this prospect is horrifying. They never had to meet an auditor before.  It’s already tough for many employees to meet with clients. But this is even worse. It’s official. Why are they there? Will I be sued or go to jail if things go wrong? They do not know what’s coming. The unknown is scary. That is why we must demystify it. We must show them what will happen, what is the agenda, who are the CRA auditors and reduce their anxiety about this unknown situation.
• We do not know how they will react in real time. We must guide them, make them practice to deliver the relevant content. This is the best way to make sure that the staff provides the important arguments quickly and directly during this meeting. Under pressure, some people shut off, or become very anxious and lose the thread of their argument. Others, however, will unpack tons of useless information and give the impression of an attempt to “drown the fish”. Guiding all those who will attend limits these kind of risks.
• Everybody at the meeting must to know what it is going on, what his/her role is, what he has to say or not and how to say it. Otherwise, he represents a free electron, a potential source of problem or wrong quote that may affect the decision of the auditor.

How to prepare?

« ALL presenters must prepare and practice their part at least twice »

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Good staff preparation extends over at least two meetings so that everybody becomes familiar with the progression of the meeting. ALL presenters must prepare and practice their part at least twice.

• In the first preparation meeting, everyone is informed of what is coming, of their role and duties they have to deliver before the second practice meeting. We introduce them to the CRA visitors, their vision and agenda. We also ask them for a very preliminary presentation of their projects. We offer a presentation template (eg. a PowerPoint presentation containing extracts from the T661 descriptions, etc.) and a summary of the costs claimed for their project. We discuss the strengths and weaknesses of their projects in order to obtain their views.  A well exposed weakness can often be resolved by discussing with the senior technical resource involved in the project.
• Between the first and the second meeting, presenters must re-read the descriptions submitted in the T661 form,they must find all relevant documentation to illustrate their point. They should also reorganize the presentation in “their own words.”
• Finally, the second meeting is more efficient. The presenters are ready. We must now listen and criticize the content and the format. We guide them to prevent from putting themselves into trouble. We help them deliver their best arguments, their best reasoning, their best examples.

This preparation is done in a logical role play game. Presenters must express themselves in their own words, as if they were in the meeting. Someone (eg. your consultant) plays the role of the CRA advisor. This is necessary to give presenters the feeling of the meeting, the right frame of mind and to avoid the pitfalls.

Demonstration or prototype: Will this demo add to the argument? Does it bring important clues? Is it visual enough to keep the auditor’s interest? The additional preparation and presentation time of a demo is rarely justified by real benefits. If there is no gain, just drop it.

Conclusion

YOU MUST PROPERLY PREPARE for the audit meeting with the CRA. The claimed money is then on the table and if the CRA is there, it is likely they are here to challenge one or many activities you claimed.

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

What do you think ? Have you lived through 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 ?

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

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 ?

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?

2. 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!

3. 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.

4. “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.

5. 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 …

6. 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.

7. 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.

8. The main shareholders of your company are claimed as SR & ED for more than 30% of their time ?
9. 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.

10. 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 ?

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.

Partagez ce Tweet SVP

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 ?