SR&ED : Test your knowledge (3)

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

How deep is your knowledge of the SR&ED ?

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

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

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

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

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

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

How to recognize routine work and standard practice

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

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

And then, IT IS OFTEN TOO LATE.

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

1- A horror story

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

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

Experience

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

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

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

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Google

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

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

Troubleshooting

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

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

Domain completely defined

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

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

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

2- How do you answer to this ?

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

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

Exceeding the limits

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

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

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

Recommendation

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

3- Conclusion:

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

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

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

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

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

Thank you

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Quiz : R&D Tax credit  (2)

Test your knowledge of the SR&ED tax credit – 10 questions abour R&D

We already published a similar test and many asked for more. So here is an other one for all of you, experts.

So, you think you are an expert in SR&ED ?

The R&D Tax credit is one of the most complex areas of the Income Tax Act. Do you think you are an expert in R & D credit? Do you need help from anyone? Let’s see how true this is. Test your knowledge with this short 10 question quiz.

1. In order to claim the credit, a company must have a full technical and accounting documentation about the claimed years.
2. Process improvements cannot qualify for the research credit.
3. In order to receive a credit, a company’s research efforts and activities must be incremental, that means increasing year-over-year.
4. Quality control activities always qualify as SR&ED.
5. In a CRA technical audit, answering the three criterias of advancement, uncertainties and work done is not enough anymore. You need to answer the five eligibility questions.
6. Wages and compensation of officers and directors cannot be included within the research credit.
7. The SR&ED Investment Tax Credit earned in a tax year can be carried back and applied against tax otherwise payable in any of the 3 previous tax years or can be carried forward 20 years.
8. The probability of having an audit can be greatly reduced by improving your project descriptions, the reasonability of costs claimed and the coherence of your claim.
9. A claim preparer’s invoices are claimable as SR&ED eligible expenses.
10. The same project can be claimed as SR&ED over many years without changing the advancements sought or the uncertainties.

In conclusion, you have a comment or suggestion about this quiz? Want to share your results with us? We want to hear from you! Please leave a comment below.

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

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

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

5 questions to qualify your SR & ED work

The Scientific Research and Experimental Development (SR & ED) Vote is Canada’s highest paying tax program. First, qualify your projects for this program. Let’s take a look at how the Canada Revenue Agency (CRA) assesses your work.

This page consists of excerpts from the “Eligibility of Work for SR&ED Investment Tax Credits Policy”. This policy is taken from the CRA website.

In addition, we provide you with a link to other pages from our blog for a practical view about answering these questions.

In general

Determining whether there are SR & ED activities means that there is:

“systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is [Note (a)] (c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,“

Note (a) Basic research and (b) Applied research are rarely applicable in the real world.

All that sounds complicated, is it? CRA now uses five questions to qualify your projects.

“To qualifying your projects  you need a systematic research in a technology area and documented experiments or analyzes”

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Determine the eligibility of your projects : Five questions for SR & ED

The Canada Revenue Agency (CRA) uses the following five questions to determine whether your work meets the definition of SR & ED. You must respond positively to the 5 questions to qualify your SR & ED activities.

1- Was there a scientific or technological uncertainty?

Scientific or Technological Uncertainty: The probability of achieving a given goal or result, or how to achieve it, can not be known or determined in advance based on experience or scientific or technological knowledge usually available.

2- Has the effort been to formulate hypotheses specifically aimed at reducing or eliminating this uncertainty?

A hypothesis is an idea, in accordance with known facts. It serves as a starting point for a comprehensive study to prove or disprove this idea.

3- Was the overall approach adopted consistent with a survey or systematic search?

This includes the formulation and testing of hypotheses through experiments or analyzes.

Investigation or systematic research is an approach involving:

• defining a problem,
• the formulation of a hypothesis to solve the problem,
• planning and carrying out experiments or analyzes to verify the hypothesis, and
• the development of logical conclusions based on the results.

4- Has the global approach been undertaken for the purpose of achieving scientific or technological progress?

Scientific or technological advancement is the generation of information or the discovery of knowledge that contributes to the understanding of scientific relationships or technology.

5- Finally, was the history of the hypotheses tested and the results retained as work progressed?

A record of assumptions, tests and results should be kept during the work. For example, it is expected that the work will be recorded during the year to clearly indicate why and how it fits into the overall project.

In conclusion, these questions are essential to qualify your SR & ED projects. Check them BEFORE preparing your claim.

We are honored by your visit on our blog page. Note that the index of our blog (on 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 did you like least about this text?

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.

1. New knowledge is always an advancement, so even learning what will not work is an advancement.
2. Improvements to existing products can qualify for the research credit.
3. Qualified research expenditures for prototype development include material cost, consultants cost and labor cost.
4. SR&ED begins when you have exhausted all known standard practices.
5. A custom product developed to meet customer specifications is usually claimable.
6. Expenditures of a capital nature for capital property acquired for use in R&D qualify for SR&ED tax incentives.
7. All technological innovation development activities automatically qualifies to SR&ED
8. User acceptance testing is a claimable SR&ED activity.
9. Market Research activities are claimable as SR&ED when they are part of a SR&ED project.
10. 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?

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

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

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

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

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

5. The archeology of retroactive claims is not an exact science.

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

7. 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.

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

9. 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.

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

11. 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?

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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?

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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 ?