Canadian corporations report that the CRA is continuously increasing its audit presence and is enforcing SR&ED policies by drilling down into project micro details. If you have been claiming SR&ED tax credits, there is a strong probability that you are either recovering from a recent audit or soon to be heading into one. Each SR&ED audit has its own variations in interpretation of application policies, and as such, the outcome of an audit remains unpredictable. There are preparation steps that can be applied to help corporations better control the direction of the audit. Clear concise information will assist the auditors to comprehend the technology and mitigate the risk of project misinterpretations.
Here are five critical steps that will guide a claimant to increase the probability of a positive outcome when going through an SR&ED Audit:
Audits begin with a very slow pace of introductions, general descriptions, factory tours all of which can consume hours. Many claimants believe that this is critical in getting the auditors to understand their general business. This may have been true years ago, but not under today’s audit conditions. Claimants can spend hours talking about unrelated topics such as their quality control, customer base and product from believing that this will contribute to the CRA’s decision. However, nothing can be further from the truth. Claimants believe that they are discussing the core meeting content and as such spend much of their energy and time discussing these points. In reality, this is just a prequel to the meeting. Do not spend time over explaining non pertinent content.
Focus quickly on the top reasons why claims get rejected. The routine development work assessment is a very common go-to argument that CRA auditors will eventually focus upon. To counter this argument before it arises, a claimant must be very clear and concise in explaining what the baseline technology level is and how it cannot be applied to achieve the objectives, thereby overcoming the technological uncertainties described. A claimant must demonstrate the technology gap between the existing available practices and the development work claimed.
There is no escaping the CRA audit without providing a detailed set of support documents demonstrating that an experimental process was performed in a systematic fashion clearly focused on resolving the technological uncertainty. The use of general support documents such as design sketches, design features and general emails do not prove that the company was engaged in SR&ED. Verbal testimony to explain such documents was permissible once upon a time, however in today’s audit environment, the lack of bullet proof support documents will lead claimants out of the program.
Don’t do this. Applying arbitrary time percentages to claimed hours was common preparation practice many years ago, however it simply does not work anymore. Even if the experiments are clearly explained and demonstrate in no uncertain terms that they require heavy manpower, without any tangible time tracking evidence, an SR&ED claim is heading towards zero very quickly.
Expand on your technological advancement: to simply explain that some of your experiments did not work does not constitute a technological advancement as defined by SR and ED. It is critical to demonstrate in no uncertain terms what new knowledge was gained. This can be demonstrated by providing test data correlations between the test variables and demonstrating the acquisition of new knowledge.
Following these 5 steps is no easy feat. There are heavy manual employee workloads involved in preparing for an audit that deliver on the 5 points above, and yet still there is no guarantee that an auditor’s opinion will be favorable.
We are pioneers of Artificial intelligence applied for R&D. We work with claimants, consultants and accountants to enable companies to meet the program criteria by automation of a Virtual R&D Center that dramatically reduces employee time requirements. Our platform applies artificial intelligence to manage product development and to create scientific support documents ready for a team to conduct their analysis and reveal new knowledge from their testing. Companies that figure out how to increase their compliance while lowering the compliance burden will have the highest probability of navigating successfully through an SR&ED audit.
To Learn more about Artificial Intelligence systems for R&D, contact us for a free a consultation.