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.

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 ?

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