Scientific Research & Experimental Development (“SR&ED”)
Over the years our governments have tried to encourage companies to improve productivity and encourage investment in technology using a variety of tax incentives. By far the largest and most successful of these programs – the Federal Scientific Research & Experimental Development (“SR&ED”) tax credit program – was introduced in 1985 and is still the most important incentive.
In 1998-99 the BC and Saskatchewan governments introduced their own SR&ED programs – piggybacking on the federal program. In 2009 Alberta entered the game and for a while both Saskatchewan and Alberta offered refundable credits to all corporations – including public companies. Saskatchewan has since reneged on refunds to public companies, but at a 15% provincial rate, their incentive is particularly attractive.
Starting in 2011 the federal government began signalling its intent to ‘tighten up’ the program (see RECENT HISTORY).
Companies that wish to avail themselves of this incentive will need to allocate sufficient resources to ensure that their documentation meets the new and more rigorous standards.
The SR&ED Audit – Q&A
WHEN SHOULD CLAIMANTS CREATE TECHNICAL DOCUMENTATION?
(and when should they assemble it?)
Preparing for an “SR&ED” (Scientific Research and Experimental Development) tax audit should really begin well before your company receives notification that your claim is under review. In fact your company should begin assembling supporting documentation at the same time that you decide to perform eligible SR&ED.
As we’ll see later on from the audit letter itself (see Section 3 on page 2 of the letter), there is an expectation that the documentation was developed at the time the work was being performed. It has been our experience that claimants like to assemble that information only after they receive notification of audit. Presumably they do this in the hopes that they won’t be audited. There are 3 serious problems with this approach:
The chances of being subject to an audit have increased significantly in recent years. It is our belief that claims prepared on a contingent (i.e. success-based) basis receive special attention from CRA. Regardless of the engagement terms, the doubling of SR&ED audit staff means that an SR&ED audit is far more likely.
- Documentation assembled after the fact may not have existed before the audit letter was issued – and therefore can’t be construed as ‘contemporaneous documentation‘. If this is apparent to the auditor, the CRA might elect to deny your claim in its entirety for lack of ‘acceptable’ documentation.
- The CRA generally provides 30 days of lead time to assemble supporting documentation. However they don’t communicate by email, but by letter or fax. This effectively reduces the available time to respond by a week or so – and as you’ll see, the amount of documentary evidence requested is considerable – particularly if it wasn’t identified before the claim was filed.
WHAT KIND OF DOCUMENTATION DOES THE CRA EXPECT?
The CRA expects claimants to develop ‘contemporaneous’ documentation detailing plans to overcome technological uncertainties and achieve the desired advancement.
Note that the suggested format presupposes sophisticated activity-based costing – from small businesses that are often challenged maintaining rudimentary books and records on a timely basis.
MAPPING SR&ED TO PRODUCT DEVELOPMENT – WHAT IS THE CHALLENGE?
The Income Tax Act requires that SR&ED activities be “related to a business of the taxpayer”.
In fact 95% or more of SR&ED claims relate to the experimental development of new and improved products or processes – which clearly relate to a business. However even the most sophisticated claimants have difficulty distinguishing between the new features of the product or process and the technological advancement required to deliver these ‘new features’.
We offer a full range of SR&ED services to claimants of any size – from startup to multinational
- technical writing
- claim preparation
- audit defense
- documentation support
- tax structuring specifically for SR&ED claimants
- amended corporate tax returns
- SR&ED file reviews