Companies that are claiming SR&ED tax credits without reviewing their practices to create support documents are simply taking a risk of claim rejection that they may be unaware of. Many companies have been ‘Approved as Filed’ and ask themselves why change anything if things are going nice and smooth year after year. Being approved as filed every year without a review may seem like a well put together claim, however it creates a sense of complacency that ultimately gets met with a harsh reality. See the CRA’s clear policy on support documents: Documentation and other evidence to support your SR&ED claim.
And we’re not just talking about any type of general design or email documents that demonstrate that the company was working on a project. This type of documentation does not substantiate SR&ED. The support documents applied to support an SR&ED claim must have specific characteristics that can substantiate the experimental process and that can meet the benchmark ‘Five Questions’ test. General documents that demonstrate product development activities will be assessed as routine work, and subsequently rejected.
SR&ED support documents should consist of a collection of dated experimental records that capture each experimental detail focused on resolving the technological uncertainties. The T661 descriptions should represent a summary of these records.
Clearly define the technological obstacles that the company is facing in each experiment and capture the ideas or hypothesis that are being formulated and tested. This will help defend against the popular routine work rejection assessments.
Capturing experimental details in SR&ED projects will lead to new knowledge. The details captured should be formulated into elaborate test records and analytical documents that can be analyzed by the team to reveal new techniques or methods.
Avoid computing employee hours by % estimations. Employee time estimations represent one of the leading causes of claim rejections. Have a timesheet management system in place.
General Employee Timesheets or estimations are much less convincing as time records that are integrated into the experimental test records. Experimental records should directly track the employee hours creating a direct link between resolving technological uncertainties and employee’s time.
This may seem like a monumental documentation task, and it is. Simply put many companies do not have the resources to create such detailed tracking and analysis of their development activities. In fact companies that attempt to be fully compliant will dedicate employee resources that can almost nullify, or even surpass the tax credit benefit. These companies are at risk of abandoning the SR&ED program, and rightfully so. This is the current state of the SR&ED program reality, in particular for small and medium sized companies under audit. They may be better of focusing their resources on their core business than chasing tax credits without bullet proof support documents.
There is good news; new artificial intelligence R&D systems are emerging that assist R&D teams in creating and analyzing detailed scientific support documents. These systems can perform the documentation tasks at a fraction of the time of manually creating such documents. Companies adopting such Intelligent Automation systems are at an advantage over companies that work manually with word processors, spread sheets, general ERPs, and standard project management systems. Companies that figure out how to increase their compliance while lowering their administration cost for such compliance result in a higher tax credit subsidy ratio than their competitive counterparts, giving them a product innovation superiority.
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