Triggers for an SR&ED CRA Review

Although the CRA does randomly select claims for review, there are some factors that can increase your review risk. 

Filing an Amended Tax Return

Submitting SR&ED with your filing of your corporate tax return (a “joint filing”) reduces the chances that the CRA investigates further. This is motivation to stay up to date and current with your SR&ED filings. If you have to file an amended corporate tax return, it is not a guarantee that it will be reviewed, but it does increase the odds by up to 40%. 

Large or Sudden Claim Increases

If you have an unexplainable increase in your SR&ED claim (i.e. $100K to $200K with the same number of staff on payroll, same number of contractors, etc.), that is a huge red flag. If the only thing changing is the percentage of an employee/contractor’s time that is eligible for SR&ED, that typically warrants further investigation. It might be completely valid if the first year of business you were in growth mode and had very few eligible expenses, and then year 2 was a lot more technical problem solving, but it likely will need to be explained to the CRA. 

Questionable Project Eligibility

In the past few years, the CRA has put more focus on ensuring the technical merit of projects, rather than penny-counting expenses. The most important aspect of any SR&ED project ($5K or $500K) is the technical uncertainty of the project, and the steps taken to address that uncertainty. If the technical descriptions of the project do not adequately show that there was a clear uncertainty, addressed through systematic investigation, it is likely the CRA will need to ask further questions. If the claim describes the work to be routine, maintenance, standard investigation, normal operating procedure, etc., the CRA will likely come asking questions. 

Unbalanced Expenses

The CRA wants to see a full picture of the costs associated with the technical challenges faced. So if expenses don’t “add up” this can raise red flags. For example, a manufacturing company claiming $100K in salaries for testing, but not claiming any material costs for that testing. 

High Contractor Expenses & Low Salaries

Having disproportionately high contractor costs, relative to low or no salary costs, can be a red flag for the CRA. It is also concerning to the CRA if year-over-year contractor costs spike significantly.

Claiming 100% of Salaries

The risk of review increases if multiple employees are documented as spending the vast majority of their time on SR&ED eligible activities. Founders (or business owners) can only claim 75% of their time as SR&ED eligible, but if that percentage threshold is being reached for some or all of the founders, the claim will likely raise some red flags. Any good business requires technical and non-technical employees, and the CRA isn’t blind to that. 

Very Large SR&ED Claim

This one really makes sense. The CRA doesn’t want to give $1M+ without asking a few questions. Large claims, typically above the $1M threshold, will be at a much higher risk of being reviewed. 

Complicated Grant Funding

If a company also receives several complex, stacking grants, the CRA might be more motivated to take a closer look. This is to make sure that there is no double-dipping on government funding. Keep clear records of all government funding and involve an expert to ensure you are meeting all requirements for each funding source. 

Being Unlucky…

All jokes aside, claims are often randomly selected based on factors that the CRA has never (and I assume will never) make public. Any time a SR&ED claim is submitted, there is a risk of a review, and it might be for none of the above reasons.