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What Happens When The CRA Decides To Do An SR&ED Audit?

Many people mistakenly believe that a “business as usual” project can sometimes qualify for Scientific Research and Experimental Development (SR&ED) funding, but this is not true. Tax credits given via the SR&ED program are aimed at projects Canadian companies undertake where the goal is to be innovative and make new discoveries in technology and science. There is however often work that is SR&ED eligible within a company project. As the difference is not always clear, getting the most SR&ED tax credits funding can be tricky.

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

 Written by: 

Bryan Watson  

Partner, Flow Ventures

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Find Out How Much Money You Can Recover From The CRA

Book a conversation 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

 

CLIENT CASE STUDIES

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Warren Wilansky
CEO, Plank
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  Montréal, Québec
Learn how we helped an award-winning digital design studio utilize the SR&ED cycle to grow their team from 5 to over 24 employees

"For over 17 years we have relied on Flow’s expertise in government funding applications, strategies and best practices. We have always been extremely happy with the results of their diligent work."


17 Years

Of SR&ED claims filed

380%

Growth in employee count

100%

Claims accepted as filed