Success Factor
As with all matters related to tax, some rules are fairly straightforward, others can be quite complex.
When in doubt, it’s always best to consult a tax professional.
Understand CRA’s 18 month deadline
A SR&ED application must be sent to CRA within 18 months of a company’s tax year-end. There is no leeway to be late (on this 18-month deadline). Even if you file on time, but a form is missing or important information is missing, your entire application may be disallowed by CRA.
Procrastination or inaccuracy can cause you to lose out on SR&ED benefits.
Know how to correctly identify a SR&ED project
Hint: it’s usually not the same as the “company project”.
If your company is creating or improving a product, your “company project” will include all the effort of designing, developing and launching that product. Within that effort, you may need to do some R&D, or experimenting. This is the “SR&ED project”, and it is often a subset of the overall “company project”.
Know what is routine and what is R&D
It is often difficult to identify where routine development ends and experimental development begins. This can lead to one of two problems;
- Your SR&ED application is too low - not including all your qualifying work and expenses leaves money on the table. You’re missing out.
- Your SR&ED application is too high - an “aggressive” claim risks attracting negative attention from CRA. This can result in delays or a denial of your entire refund, and flags your company for future possible scrutiny by CRA. Too risky.
This dilemma is especially true for software and IT claims, which are commonly the most contentious of all SR&ED claims audited by CRA.
Know how to write a good project description
The project description is a key part of the SR&ED application. There are many ways to write a poor project description. A common misstep is to describe your experimental work as solving problems by “trial and error”. These words in a project description will most likely raise a red flag with CRA, and an audit is sure to follow.
Keep supporting records or documentation
Each SR&ED project should have records that document what work was done, by whom, when, for how long, as well as how the work was done. CRA is looking for records that were created at the time the work was done. Documents may be informal, and even handwritten or a drawing, but records of some sort need to exist.
Keep proper time sheets
Keeping weekly time sheets recording the time spent by each person doing SR&ED work is a best practice. Being able to show them to CRA, in the event of an audit, is the best way to support salary expenses that you are claiming.
Question: “But we just learned about SR&ED and we haven’t been keeping time sheets. Can we still apply for SR&ED?”
Answer: CRA does not discourage companies from applying for SR&ED, even if they have not yet started keeping proper supporting documentation, especially if the company is applying for SR&ED for the first time.
Understand CRA’s key terms
A few useful terms:
- all or substantially all means “90% or more”
- analysis is “the detailed examination of information to differentiate the various parts of a whole, determine their attributes, or explain their relationships”
- experiment means “the test of a hypothesis under controlled conditions”
- hypothesis is “an idea, consistent with known facts, that serves as a starting point for further investigation to prove or disprove that idea”
- uncertainty (obstacle) means “whether a given result or objective can be achieved or how to achieve it, is not known or determined on the basis of generally available scientific or technological knowledge or experience”
- systematic investigation or search is “an approach that includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results”
© Banhall Consulting LTD. All Right Reserved
Designed & Developed by Choquer Creative