Scientific Research and Experimental Development (SR&ED) audits are a standard part of the Canadian Revenue Administration’s (CRA) program. Whether it’s a partial review or full audit, you can generally expect to experience a project assessment once every four to five years as a claimant. As the SR&ED is the largest source of research and development (R&D) funding in Canada, with more than $3 billion in tax incentives distributed annually, this auditing process ensures SR&ED projects maintain eligibility.
How to Streamline Your SR&ED Audit
If the CRA decides to audit your SR&ED claim, they will issue a request for information (RFI). If you receive an RFI, it’s not a cause for concern. With thorough preparation and adherence to program guidelines, your business can facilitate a smooth review while avoiding pitfalls that can jeopardize its SR&ED claim.
Understand Your Audit Requirements
To fully prepare for your SR&ED review, it helps to know which documents and information the CRA expects. Your Research & Technology Advisor (RTA) may schedule a meeting by phone. You should ensure that all audit requirements are outlined in writing, as it helps safeguard what you prepare in case there are any communication lapses. This includes:
- A review meeting agenda
- A criteria list of expected supplementary information or documentation
- A clear assessment citing the reasons for your SR&ED audit, including whether it’s a financial review, technical review, or both
1.) Don’t Delay Your Response
Claimants have 30 days to respond to an RFI, but it’s good practice to answer this request as soon as possible. Complying early helps instill confidence in your organization from the CRA’s point of view, lowering your risk profile. This diligence also builds in extra flexibility if more information is required.
To ensure an efficient audit response, treat the SR&ED review as any other significant project. Assign a project manager to map out the deliverables, scope, budget, and timelines for items you’ll need to support your claim, which can include:
- Work tracking and timesheets
- Contracts and a resource allocation breakdown for materials and equipment
- Documentation of your processes, test protocols, and approach
- Experimental designs
- Summary research reports
- Communication transcripts, recordings, emails, and notes relevant to your project
2.) Present a Clear Technical Narrative
The materials you prepare for the CRA must demonstrate your project’s credibility and eligibility to receive SR&ED support.
Make sure that your reports concisely illustrate:
- The specific scientific or technological uncertainty you’re addressing, which should be clearly distinguished from routine development
- That your efforts led to hypotheses to reduce this uncertainty
- How your approach is consistent with a systematic investigation, which includes testing your hypotheses through experimentation and analysis
- That your strategy aims to achieve scientific or technological advancement
- A detailed testing record of progress
To demonstrate these clear, scientific objectives, make sure to focus on key, quantifiable steps and measures. Avoid language and semantics that imply commercialization, including:
- Context related to your business strategies and goals
- Non-technical language such as”feature” or “product”
- Industry-specific jargon and buzzwords
3.) Leverage External Support
The more thorough you are in documenting and reviewing your project’s progress, the more difficult it can be to view it through an unbiased lens. Bringing in an outside SR&ED expert offers a fresh set of eyes. The SR&ED consultant can:
- Spot details that may misrepresent your project’s narrative and progress
- Leverage their experience to identify red flags, aligning your audit response to their deep understanding of CRA expectations
- Provide an up-to-date proficiency in SR&ED policies and relevant legislation that could impact your claim
Involving a professional SR&ED preparer doesn’t just give you better peace of mind through the auditing process; this support can also help you improve your methods to stay prepared for any future reviews. An experienced consultant may even identify new opportunities that can scale the size of your claim.
4.) Hold a Mock Review
Holding a “mock audit” helps ready your team to field any questions the SR&ED advisor may have during the official review. This trial run can ensure continuity in how staff members describe their roles while mitigating unexpected questions about topics such as:
- The project’s description and progress details
- The staff members qualifications, scope of work, time, and resource allotment
- Subcontractor support and project partnerships
- Materials and equipment used and other overhead costs
This preparation also offers an opportunity to correct any inconsistencies between talking points.
5.) Avoid Future Risk
The best way to avoid audit issues is to prepare proactively, and managing an SR&ED audit is an excellent opportunity to optimize your workflow.
Stay ahead of the curve by incorporating audit preparation into your project management efforts, such as by:
- Ensuring that you have a system in place to record all technical and financial documentation
- Establishing employee consistency with record maintenance
- Keeping audit-ready working documents to respond to any Requests for Information from the CRA
- Monitoring changes to SR&ED policies, regulations, and legislation to ensure ongoing compliance
With the right preparation and attention, you can have greater confidence in your project’s continuity no matter when its eligibility comes under CRA review.
Contact Easly if you have any questions about this process.