No one wants to be subjected to a CRA SR&ED review, but chances are you will go through this experience every few years. Being prepared and knowing what to do to maximize the probability of success is key. This article covers the most important steps to take and what to expect in 2025 when the CRA comes knocking on your door.
A CRA SR&ED Review is synonymous with a CRA SR&ED Audit. The CRA calls them a review, while many taxpayers call them an audit because the steps that the CRA goes through are very similar to other CRA audits.
Purpose of an SR&ED Review
The purpose of the CRA SR&ED review is to verify that what was claimed complies with the SR&ED program rules. The CRA follows their policy and guidelines which is based on the tax law. These guidelines are very detailed and part of the reason SR&ED consultants are often engaged. It is challenging for companies to keep up to speed on these guidelines and the changes that are occurring. Let’s get into what to do when a taxpayer receives a letter from the CRA with some questions about the SR&ED claim.
If a claim is selected for review, a letter will be received within 90 days of submitting the SR&ED claim. This letter will outline what the CRA would like more details on. There are multiple levels of a review, so it is important to read the letter carefully. Generally, the reviews are either a financial review or a full review which includes both technical and financial aspects. A financial review will ask about specific payroll, materials or contractor information. The CRA may ask for copies of receipts, proof that a claimed employee is domiciled in a specific province or any other financial information. They may even ask for information that is part of a tax return that is not specifically SR&ED, such as proving that a company is a Canadian Controlled Private Corporation.
A full review encompasses both a technical and financial review. The technical review focuses on a project’s SR&ED eligibility. The CRA technical reviewer is a person who typically has a great deal of knowledge in the field of science that is being claimed. Similarly to creating an SR&ED project, the technical reviewer focuses on technological uncertainty rather than the business or other challenges faced by the company.
Triggers for an SR&ED CRA Review
Most companies ask what they can do to avoid a review. As a taxpayer participating in a government incentive program, one should expect to be reviewed every few years. However, I know some companies that have a review every second year and others that are reviewed once a decade. Typical triggers for a review include:
- Filing an amended tax return
- A significant increase in the SR&ED claim over the prior year, but salary expenses have not increased significantly
- Claiming all or almost all of salaries as SR&ED-eligible
- The SR&ED claim contains a very high percentage of contractor vs. employee expenses
- The SR&ED claim is very large (ie. > $1M)
Preparing a Defendable SR&ED Claim
Preparing a good SR&ED claim is the first step in defending the claim. It is the taxpayer’s role to defend their claim and show the CRA that what was claimed complies with the SR&ED program. If the claim is poorly prepared, has errors or omissions or is inaccurate, the CRA review will be far more challenging. Especially if a company elects to prepare the claim internally without the assistance of a professional SR&ED consultant, one must be certain that the claim is prepared in conformance with the SR&ED guidelines.
Just because a claim for a prior year was accepted by the CRA does not mean that it will withstand the scrutiny of a CRA SR&ED review. Many claimants who have been submitting SR&ED claims for years without being subjected to a review are surprised when the CRA reviews the claim and applies a significant haircut to the claim. Also, it may be tempting to claim projects which one “feels” qualify for SR&ED but do not. This can be dangerous because the CRA can apply penalties.
There is some debate about whether to collect the documentation to support a review when preparing the SR&ED claim. The advantage of having all the documentation available is that if the CRA were to select the claim for a review, little additional effort would be needed. In addition, a company would feel more confident of their claim if they have all the documentation in one place. However, others feel that if the probability of a CRA review is low, why go through the effort of collecting the documentation if it is not needed. Is it not enough to know that the supporting documentation is available if the CRA were to ask? Whichever approach one takes, it is important to ensure that the claim is adequately supported with contemporaneous documentation.
Preparing for the CRA’s SR&ED Review
Effective preparation is the key to any successful negotiation. In the case of a CRA SR&ED review, effective preparation and anticipating the possible questions will most likely lead to better results.
- Understand the CRA questions. Be certain that you understand exactly what the CRA is asking. In the letter requesting the information, the CRA will detail the information they are seeking. If you are uncertain about what they want, reach out to the CRA reviewer and ask.
- Collect documentation. If the CRA has asked for a specific piece of information, be certain to have it on hand. If the CRA has a more generic request, such as showing that a person has spent time working on an SR&ED project, collect time sheets, proof of the work they have done and supporting documentation of the effort they put into the SR&ED project. The more documentation, may it be logs, photographs or any other type of documentation, the better.
- Decide who will attend the meeting. While it may sound simple to decide who should attend the meeting, it is a very strategic decision. If the CRA is conducting a full review it is best to have the people identified as the technical contact and financial contact attend the review meeting. If the CRA is reviewing a specific project, the key person involved with that project should also be in attendance. However, there should not be too many people involved. If there are too many people, it is often an undue drain on company resources, and it is more challenging to curate the conversation effectively. If the company has engaged an SR&ED consultant, it is advisable for the consultant to be present. The consultant often offers significant insight into framing questions and guiding the conversation.
- Prepare a presentation. Often preparing a formal presentation will provide superior results. The exercise of pulling together the presentation forces the company to be organized and allows the presenter to rely on the prompts of the presentation to reinforce their talking points. It also shows the CRA how seriously the company is taking the review and often will lead to a shorter review process.
- Discuss key points. It is important to prioritize the key points that the company would like to convey to the CRA SR&ED reviewer. Each point should be supported with facts and communicated clearly so the CRA reviewers understand. Remember that the CRA reviewers may not have the same level of expertise the company does in the specified field of science that the company is doing R&D. Demonstrate to the CRA reviewer that the key points offer answers to the questions they have asked.
- Conduct a dry run. By role playing and conducting a dry run, the probability of being prepared for questions, highlighting key aspects and coordinating a response are improved. There is no need to perfect a mock CRA review meeting, but it is helpful to try to think of what questions the CRA will ask and how the company will respond. If the company has engaged a consultant, suggest that the consultant play the role of the CRA reviewer in the dry run.
Common CRA SR&ED Review Questions and How to Answer Them
The burden of proof showing that what has been claimed for SR&ED can be supported lies with the company. Here are just a few examples of typical CRA questions and suggestions on how to answer them:
Financial CRA SR&ED Review Questions
Q: Prove that person x resides in province y
A: The simplest document to provide is the T4 slip for the employee. There are times when an employee resides in a province but works the majority of their time in a different province. Generally, the province in which the employee is paying tax is the one where they reside for SR&ED purposes.
Q: Show that person x spent y time on SR&ED-related activities
A: There are so many ways to answer this question, and the CRA has different expectations from different types of companies. For example, if a medium-sized company is conducting biotech research, the CRA will want to see detailed time sheets. If a startup is developing software, they may be satisfied with a month-by-month apportionment of time for SR&ED vs. non-SR&ED activities. Generally, the larger the company and the larger the SR&ED claim, the more detailed tracking of SR&ED time is needed.
Q: Provide the invoice for the material.
A: While the request to provide an invoice seems simple, the CRA may be looking for specific information. For example, was all the material used in SR&ED activities, was tax included or not, does the invoice date line up with the fiscal year and timeline of SR&ED activities? Be certain to look at all the details of the invoice to ensure they coincide with the SR&ED claim.
Q: Provide the contractor invoice.
A: This is a typical question when the CRA would like to confirm that the contractor is (a) Canadian and (b) is not also claiming SR&ED for the same work. The CRA may also ask to see the agreement with the contractor to ensure that the company claiming SR&ED has the appropriate terms to allow them to claim SR&ED. It is also key to understand if the contractor is arm’s length or non-arm’s length, more information available here.
Technical CRA SR&ED Review Questions
Each SR&ED claimant has unique technology and reasons for making an SR&ED claim. The CRA’s goal is to determine whether the project claims qualify for SR&ED. Oftentimes, this will result in a yes or no answer. If the CRA feels that the project does not meet the SR&ED qualification criteria, they will deny the project and possibly the entire claim. Therefore, it is critical to show that the project qualifies for SR&ED. This blog dives into the details of SR&ED qualification.
Contemporaneous SR&ED Documentation
Contemporaneous is a fancy word for creating at the time it happens. The CRA reviewers would like to see the documentation that was created during the SR&ED work, not created after, to answer the CRA’s questions. In other words, capture the documentation and supporting material through the year to support the SR&ED claim. For instance, it is a bad idea to create time sheets after the fiscal year because the CRA is asking for them if no time sheets ever existed.
Even if you are uncertain if the work qualifies for SR&ED, try to capture as many details as possible about the project. It can be writing notes on a notepad, whiteboard sketches, project planning, team meetings or almost anything that is contemporaneously recorded. Your goal is to prove to the CRA that documentation was created while doing the SR&ED work.
Accurate SR&ED Accounting
One quick way for a CRA review to go South is when the numbers don’t add up. The CRA does not want to hear that a mistake was made or that something was omitted. The SR&ED guidelines provide clear instructions for accounting for SR&ED. This is another area where SRE&D consultants are very valuable. The consultant can often claim every last penny owed to the company but not claim items which are not allowed.
Hiring an SR&ED Consultant to Support the Review Process
There are a number of companies that elect to file the SR&ED claim without engaging a consultant and are subsequently selected for an SR&ED review. If you have not been through a review before, it can be a daunting process, and more importantly, there is a lot of money on the line, so you want to give it your best chance of success. The challenge with hiring a professional SR&ED consultant after being selected for a review is that it will take the consultant a significant amount of time to prepare themselves, and therefore, the cost may be significant. The consultant will dig into the claim, understand where the strengths and weaknesses are and provide guidance on how best to navigate the CRA SR&ED review process. That is why we always recommend hiring an SR&ED consultant from the start so that they can ensure the claim is strong, and if you are selected for a review, they already have a solid understanding of the claim and can support the review process.
CRA reviewers
A vast majority of the time, the CRA reviewer gets it right. The CRA is not perfect and there are times where the CRA reviewer is wrong, but for the most part, the CRA reviewers, coupled with the process the CRA follows, ensure that there is fairness and consistency in the SR&ED program.
It is important to treat the CRA reviewers with as much respect as you would any other colleague, supplier or teammate. Generally, CRA reviewers have less industry experience but are more technical and theoretical. Your goal is to work with the CRA reviewer so that everyone is on the same page and has a common understanding of what was claimed.
Summary
An SR&ED review can be a daunting task. Many companies feel it is quite painful going through an SR&ED review, but it does not have to be. Submitting a good SR&ED claim that you are confident can be supported with contemporaneous documentation and answering the CRA’s questions with sufficient technical detail can be done quickly and effectively.
