According to the CRA, they audit about 25% of all claims filed every year, but in our experience, it’s closer to 20%. Irrespective of the exact number, there is no cause for concern. If you take some time to prepare yourself and your team, having an SR&ED claim audited need not be a nightmare.
If the CRA decides to audit your SR&ED claim, they will send you an RFI (request for information). When receiving an RFI, there’s no need to be worried. By adhering to program guidelines and preparing thoroughly, you’ll be able to easily avoid pitfalls that may jeopardize your SR&ED claim while facilitating a smooth review.
The following steps will help you get ready for an SR&ED audit:
Contact your SR&ED Consultant
Although SR&ED consultants will routinely check on the progress of your claim with the CRA, they aren’t always copied in on the letter you’ll receive. Your consultant should be the first person contacted as soon as you receive the RFI.
Once you have connected with your SR&ED consultant, the preparation and review process will typically look as follows:
- Once the CRA has sent their request for information, you have 30 days to respond.
- The consultant will arrange a time and date with the CRA for a meeting on site.
- The CRA will confirm the meeting’s day/time with a letter that will also include questions to be addressed and an agenda for the meeting.
- Arrange to meet with your SR&ED consultant before the audit to prepare for the meeting with the CRA and to review the letter.
- Meet with the CRA and submit the documentation requested.
- The CRA will then review the documentation and can take as long as they want to.
Review the Claim
To prepare for your Review, meet with your team members who were involved in the SR&ED work and your SR&ED consultant.
If there are team members that did a major part of the SR&ED eligible work but no longer work for the company, we advise that you contact them where possible to attend a meeting to review the project’s details.
During the preparation meeting, we recommend you review the SR&ED program’s specificities to refresh your memory on what qualifies and what doesn’t. Specifically, look at the technological obstacles and advancements that the team overcame.
It’s also a good idea to review all supporting documentation as this will enable you to easily and quickly present it to the auditor as and when needed.
Answer the CRA’s Questions Directly
Assume that the auditor has not fully studied your claim when you go into your CRA Review. Although they will have typically have read your file beforehand, they will ask general questions about the claim to confirm that the written technical report matches your verbal summary.
When asked questions about the claim, answer these as directly as possible by only providing the required information. Although this may seem obvious, the auditor will follow a standard procedure to make sure that the claim meets the 5 SR&ED eligibility criteria before they proceed. If you provide additional information or details not required for the SR&ED claim, the CRA may potentially apply it out of context to motivate reasons for amending or denying your claim. To make the process as straightforward for the CRA as possible, simply respond to the questions the auditor asks.
Focus on the Technology
Most executives of technology companies sell the reliability and simplicity of their products to investors and clients, and this is their default mode of operation. The SR&ED program’s purpose is however to encourage companies to take technological risks rather than funding the building of successful products.
Auditors are therefore more interested in the frustrations and failures that happen during development. It is crucial to show that your SR&ED work could not have been resolved by using routine processes and standard technology. When speaking with the auditor, maximize conversations that underline attempts at technological advancement.
Auditors are only interested in establishing whether a claim meets the SR&ED criteria. They will therefore only focus on the technological advancement, whether the team overcame technical obstacles or challenges and whether this was done via a systematic process.
Always Be Proactive
If you are proactive and work with your SR&ED consultant from the start, you will always be well prepared for a review. Bringing in your consultant as soon as your project starts will ensure you have the proper time tracking standards and documentation in place. This increases the probability that the claim will be supported fully when it goes to review.
An SR&ED claim being reviewed should be taken as a learning opportunity:
- Work with an SR&ED consultant to implement CRA recommendations.
- Enhance your time tracking and documentation for future claims.
- Recording the questions the auditor asked will enable you to address them in future claims.
What Happens When The CRA Decides To Do An SR&ED Audit?
The SR&ED (Scientific Research and Experimental Development) tax credit program is a Canadian federal incentive program to help companies perform technological or scientific research.
When a company files a claim for a research and development project, they’re confirming their SR&ED project is eligible based on technological advancement and research conducted by the company. Once a claim has been submitted, it is typically processed in less than 120 calendar days.
The financial and technical staff at the CRA will scrutinize a claim and either request more information or process it. When a claim is processed, it is either approved, or CRA may decide to audit the claim.
Does My Project Qualify?
Before a company files an SR&ED, it’s crucial that it first understands what is required to qualify for a tax credit. The CRA provides this credit to companies that contribute to technological advancement or faces technological uncertainty.
The first step is to look at what your company does regarding technological advancements, like creating new and improved processes or materials. If the business takes risks to improve your technology beyond qualified personnel’s knowledge or contributes to overcoming technical challenges, you may be eligible to claim SR&ED tax credits.
The following areas must be met to be eligible for a claim:
- Technological Uncertainty: the difficulty of resolving unknown problems with the help of expert professionals.
- Technological Advancement: Experimenting with and researching technological development that will generate new information.
- Technical Content: the articulation of a scientific hypothesis, and the description of major developmental milestones of the technological advancements.
- Supporting Documentation is generated at the time of development and reflects the above.
Why Does the CRA do Audits?
SR&ED Claim Reviews are crucial to ensure that the tax system is efficient. As all Canadian taxpayers are audited every 3 to 5 years, there is no cause for panic! Although many SR&ED claimants are not audited for longer than this period, you should expect an audit at some stage. To successfully go through an audit, the taxpayer must be and with sufficient resources and be prepared.
Being selected for a CRA audit doesn’t mean that a taxpayer is suspected of any wrongdoing. It is simply part of a due diligence procedure implemented by the CRA side.
Most first-time claimants receive a First-Time Claimant Advisory Service (FTCAS). It is important to demonstrate compliance during the review.
Existing claimants that have not been reviewed by the CRA regarding the SR&ED program for a while may receive a Claimant Advisory Service (CAS).
The CRA Audits starts an audit by issuing an initial request for information (RFI). If they are sent accurate, timely responses that address their inquiries appropriately, it will in most cases result in a completed audit. If the CRA auditors however request an on-site meeting or issue subsequent RFIs, there’s no need for concern.
Claims are often rejected if the company did not provide enough information, or if the information is not submitted timeously, or the information did not convey the claimant’s position accurately. There are also cases where the claimants and the CRA have a difference of opinion.
Causes Of Incomplete Claims
- Although this list is not exhaustive, the CRA may review your claim if:
- The claim was incomplete.
- The claimant did not contact or meet with the CRA promptly to provide the RFI.
- The SR&ED schedules were filed, but T2 schedules were absent.
- No response to a request by the CRA for further information.
- Previous audits affected this year’s claim.
How Future Funds Are Affected By CRA Audits
If your claim will be audited, you can rest assured that your future potential funds will still be protected. The CRA uses professional staff who assess the technology being created carefully when they determine eligibility. Year by year audits are seen as independent and don’t affect claw back past funds or future funds, even if you in previous years were found to be ineligible.
Fund Turnaround Time
Once a claim has been submitted and no further requests for information are received, the CRA will quickly start processing the claim. Most claims are processed within around two months before funds are released.
If problems arise however, processing time can typically be extended by up to 365 days.
- Refundable claims typically take up to 120 days to process.
- Non-refundable claims typically take up to 365 calendar days to process.
- Adjustments on refundable claims requested by a claimant can take up to 240 days.
- Adjustments on non-refundable claims requested by a claimant can take up to 365 days.
- Claimant requested adjustments on non-refundable claims can take up to 365 days to process
Find Out How Much Money You Can Recover From The CRA
Book a free consultation with one of our SR&ED tax credit experts.
Fill out the form to schedule a conversation, where we can help identify:
- What projects qualify and which R&D expenditures are eligible
- An estimate of the total return you can expect
- How to maximize the size of a claim & and to optimize for the success of that claim
- Potential eligibility for additional Government funding programs
- If you are already claiming, we will analyze your past claims to determine if anything was missed
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