Based on stats of 2018 Sr&ED claims, of all the claims that had been selected for a review, less then 20% were approved at 100% of the requested expenditures. This means that it is more likely then not that your claim will be reduced if ever it is selected for a review. For this reason, If your company is filing an SR&ED claim, then it should take all measures possible to avoid being selected for a review.
Whether your company has been claiming SR&ED tax credits for years or is filing for the first time, here are some quick tips that you and your team may want to keep in mind when preparing your next SR&ED claim.
Although there is never a 100% guarantee of acceptance, these tips will certainly stack the odds to get your claim accepted as filed with little to no hassle.
1. Avoid Unnecessary Fluctuations From Previous Year Claims
Because the CRA can not process a full detailed review for each submitted SR&ED claim, the initial screening undergoes a first risk assessment scanning in a Bird Eye’s view manner. Obvious contrasts to previous year claims is one risk variable looked at in assessing a claims risk profile. Drastic changes to claimed expenditures whether upwards or downwards has the potential to stand out in a quick bird eye view and thus any significant change should undergo an SR&ED risk mitigation process to support the change and protect protect your SR&ED claim.
2. Focus on The Technology & Not the Innovation of your product
The CRA’s intent in supporting SR&ED is to encourage the creation of technology.
Companies often mistake innovation for technology as though they were one in the same, and although there is a relation these are completely different in meaning as far as the SR&ED program is concerned.
Technology is synonymous to “knowledge of techniques”, whereas innovation can be seen as synonymous to novelty. Innovation can often be the result of advancements in technology but it does not mean that all innovations are derivatives of underlying technological advancements. Most technology to date hasn’t lead to any actual innovation in it’s practical sense. That’s because technology is not a tangible entity, rather it is the knowledge in terms of techniques, methods, implementation strategies which is at the heart of what is considered technology. Generally speaking simply learning that even a marginal modification to a technique fails or doesn’t work within a specific context(i.e. controlled environment) is in and of itself an advancement in technology(i.e. gain in knowledge). A basic example like deriving a runtime porting technique for an algorithm from C into javascript in order to minimize server loads and have the client machine provide the required CPU cycles but that experiments show that it only allows for half the size of the dataset to be processed and takes 3 times longer to complete a computational turnaround compared to an other approach is in and of itself a gain in knowledge, hence an advancement of the technology. Not to say that this alone is sufficient to demonstrate or defend an SR&ED claim of a material size, but its important to understand that these incremental gains in knowledge throughout a company’s fiscal year cumulatively will lead to a significant milestone in the company’s technological knowledge base of techniques and methods used in the development of the product or process of the business.
3. Clearly articulate the 5 Criteria for eligibility in Project Descriptions
Eligibility starts with satisfying this 5 point checklist before ever considering the associated expenses of your claim.
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis
- Was a record of the hypotheses tested and the results kept as the work progressed?
The CRA reviewers use these criteria very strictly as their arsenal to accept or reject claims, since a project can be deemed SR&ED if and only if the answer is “yes” to each of the listed 5 questions.
The technical narrative for each project of your claim must clearly demonstrate and articulate these 5 points in a manner that would be difficult to counter argue by anyone qualified in the field of science or technology being claimed.
4.Optimize the number of SR&ED projects in proportion to expenditures claimed
We often encounter company’s that rely on a single project description to justify hundreds of thousands and even millions of dollars in SR&ED expenditures. This sort of shortcut in claim preparation places all the risk on a single project and sets up company’s to have hundreds of thousands to millions of dollars lost with little to no recourse. Because it is more material for a CRA reviewer to challenge a $2,000,000 refundable claim with 1 project versus a $800,000 refundable claim with 10 project, the odds are that in the case of a review the $800,000 claim will more likely then not result in a higher accepted refund versus the $2,000,000 claim on a single SR&ED project.
Although it may be tempting to get the most bang for your buck especially when relying on internal resources to prepare technical SR&ED narratives, it would be wiser to mitigate the risk by proactively substantiating the claim at the pre screening stage and have adequate technical narratives that justifies the work while clearly demonstrating the 5 eligibility criteria for each project. A safe rule of thumb to follow would be to have at the very least 1 and ideally 2 SR&ED project descriptions for each $100,000-$150,000 in SR&ED expenditures.
5. Keep your claimed R&D expenditure Ratio below a specific threshold
The CRA has access to all your financials including your company’s total payroll, revenues, gross margins and overall expenditures. If you’re claiming a high percentage of your total payroll in comparison to other expenditures (marketing,sales,administration, etc..) then this can also trigger scrutiny if not adequately assessed while taking into context the industry in which your company is operating.
6. Don’t Skip A Year Not Making an SR&ED Claim if you have qualified activities
The CRA’s workload managers are the first stage of assessment that decide whether or not your claim will be accepted as filed or passed on for further review.
For many companies preparing SR&ED claims at the end of the year is an after thought and procrastinate the process to the point of missing deadlines and not filling at all. If you go one or more years without making an SR&ED claim, then this year to year delta can potentially lead the person assessing the risk to ask why this is the case and seek to look into the matter further. Unless there has been drastic expenditure shortages in payroll expenditures, and as long as your company’s payroll had qualified technologists,scientists or engineers working on product development, then there is a high likelihood that there’s been SR&ED activities in the year in question. It is critical to put the effort in identifying potential Sr&ED activities that could have taken place in the year and put the effort to make an Sr&Ed claims on those expenditures.
Conclusion
These measures described above have helped mitigate the risks of our SR&ED claims being scrutinized for the last 12+ years with a near 99% success rate.
Need help preparing your SR&ED reports or optimizing your claim ? Get a Completely Free No Obligation Diagnostic on your past or current claim and See how SredMAtica can benefit your bottom line. Get in touch with an Sr&ed Specialist today for a quick 15min introduction