Everyone wants to know how to maximize an SR&ED claim, reduce the time it takes to prepare the claim, and avoid a CRA SR&ED review. That is the goal. Claim what you are entitled to, prepare the claim efficiently, and avoid creating unnecessary review risk.
Because I have spent a lot of time analyzing risk in SR&ED claims previously with Venbridge and now with Grow Financial (SR&ED financing), there are a number of key areas every claimant should understand. It is impossible to know exactly what triggers a CRA SR&ED review. The CRA does not publish a simple checklist that says, “if you do this, you will be reviewed.” However, if you look at enough SR&ED claims, which I have done, a pattern starts to emerge.
The CRA is looking for reasonableness. They are looking for consistency. They are looking for claims that are properly supported. And, in my opinion, they are looking for claims where something does not quite make sense.
A CRA SR&ED review can be a financial review, a technical review, or both. These reviews are independent of other CRA audits, such as HST audits, payroll audits, or general corporate tax audits. An SR&ED review focuses specifically on the SR&ED claim.
That being said, it is important to remember that the CRA has a lot of information. They have payroll data, GST/HST data, corporate tax data, prior-year tax filings, financial statements, and the SR&ED claim itself. The SR&ED claim does not sit on an island.
Typically, when people refer to a “full SR&ED review,” they mean a financial and technical review. In that situation, the CRA will usually have a Research and Technology Advisor, known as an RTA, and a Financial Reviewer, known as an FR, involved in the review. The RTA focuses on whether the projects are eligible under the Act. The FR focuses on whether the amounts claimed are eligible and properly supported.
It is a lot of work preparing for an SR&ED review. There are typically multiple rounds of questions. The first set of questions comes when the claim is selected for review. During the review meeting, there are additional questions. After the meeting, there are often more questions. This can be very time-consuming.
So the practical question is not, “How do I guarantee the CRA will not review my claim?” You cannot guarantee that. The better question is, “How do I reduce unnecessary SR&ED review risk?”
Triggers for a CRA SR&ED Review
1. Very large SR&ED claims
A very large SR&ED claim increases the likelihood of a CRA SR&ED review because the larger the refund or tax credit, the more risk there is for the CRA. This does not mean a large SR&ED claim is wrong. Many companies do a significant amount of R&D in Canada and are entitled to large SR&ED claims. But the larger the claim, the greater the probability of review.
Large is relative, but a claim over $1 million is going to attract more attention than a claim for $75,000. For large filers, especially companies claiming SR&ED expenditures near or above the enhanced expenditure limit, the CRA will often look more closely at the claim. This is not surprising. Think about it from the CRA’s perspective. If a company is claiming a very large amount, the CRA has a responsibility to ensure the work qualifies and the expenditures are correct.
Conversely, very small filers, which often qualify for the enhanced 35% tax credit rate, are generally reviewed less often. This does not mean small claims are never reviewed. They are. But the overall risk is usually lower because there are fewer tax credit dollars at stake.
The practical point is simple: the bigger the claim, the better the claim needs to be. If you are filing a large SR&ED claim, the technical narrative should be clear, the costing should reconcile, the documentation should be organized, and the claim should be easy for the CRA to understand. A large claim is not the problem. A large, poorly supported claim is the problem.
2. SR&ED claim inconsistent with the tax return
An SR&ED claim that is inconsistent with the company’s tax return, financial statements, payroll records, or accounting data increases the likelihood of a CRA SR&ED review. This is one of the most preventable review triggers.
There are times when the data in the T661 does not appear to match other parts of the corporate tax return. Sometimes there is a reasonable explanation. Sometimes there is not. But either way, it can create a question.
A simple example is capital expenditures. With the return of SR&ED capital expenditure eligibility for qualifying property under the new rules, companies may claim capital equipment used for research and development. If a claimant purchases capital equipment for SR&ED and claims the expense, but the capital asset register does not show the equipment, that inconsistency could flag the claim for at least a financial review.
Another common example is contractor expenses. If a company claims $100,000 in contractor expenses on the SR&ED claim, but Schedule 135, which is the income statement, shows only $60,000 in contractor expenses, the CRA may ask questions. There may be a valid answer. The expense may have been recorded in another category. It may have been accrued. It may have been capitalized. It may have been split across accounts. But the CRA is going to want the numbers to make sense.
Most inconsistencies that trigger a review are financial inconsistencies. The technical narrative usually does not directly tie to other portions of the corporate tax return. The financial claim does.
A common year-end issue is an invoice received close to the fiscal year end. The company believes the invoice qualifies as an SR&ED expense, but the invoice is not paid until after year end. This can be fine, as long as the expense is properly accrued in the fiscal year.
The overall point is that accurate accounting and attention to detail are critical when filing a quality SR&ED claim. A few small details can easily create a CRA SR&ED review.
3. Claiming close to 100% of labour expenses
Claiming 100% or close to 100% of labour expenses as SR&ED increases the likelihood of a CRA SR&ED review unless the allocation is clearly reasonable for the company, stage, industry, and work performed. The CRA is looking for reasonableness.
This is one of the most important ideas in SR&ED. A claim does not become stronger because the percentage is higher. It becomes stronger because the percentage is accurate and supportable.
Early-stage companies with very little revenue are more likely to spend a large proportion of their labour on R&D. In some cases, almost everyone is working on solving the core technological problem. That can be completely reasonable.
But as companies mature, the percentage of labour that qualifies for SR&ED typically goes down. A mature company usually has bug fixes, customer support, implementation work, routine engineering, maintenance, sales requests, operational work, and product improvements. Some of that work may be technical. Some of it may be important. But not all technical work is SR&ED.
This is especially true in software. A developer can be very talented and still spend most of their time on work that is not SR&ED. Building features, fixing bugs, improving the user interface, migrating systems, writing tests, and implementing known solutions are not automatically eligible.
That being said, this is not true for every industry. In biotech, for example, a company may work for many years on a challenging scientific problem and continue to claim most of its labour expenses in SR&ED. The same may be true in certain medical device, clean technology, hardware, or advanced manufacturing projects.
So the issue is not whether 100% labour is impossible. It is whether it is reasonable. If a company claims nearly all labour as SR&ED, the claim should clearly answer the obvious question: what was everyone doing, and why was almost all of it eligible? If that question is not answered, the CRA may want to ask it themselves.
4. Poor technical narrative
A poor technical narrative increases the likelihood of a CRA SR&ED review because it makes it difficult for the CRA to understand the uncertainty, the work performed, and the advancement claimed. This is probably the best sign that an SR&ED claim needs to be looked at. More info from the CRA here.
Writing a good SR&ED narrative is not as simple as asking an LLM to create a technical narrative. An LLM can help organize thoughts, but it cannot magically know the actual uncertainty, the actual work, the failed attempts, the iterations, and the technical learning.
The CRA is looking for very specific information. They want to know what scientific or technological uncertainty you attempted to overcome. They want to know why standard practice was not enough. They want to know what work was done. They want to know what was tested. They want to know what you learned.
They also do not want a lot of other information. The number of internally prepared SR&ED claims that include padding, marketing language, business history, product descriptions, customer stories, and irrelevant technical details is amazing.
Often, a dead giveaway that an SR&ED claim is not what it seems is that the narrative includes details that are not relevant to the SR&ED work. Understanding what is SR&ED and what is not SR&ED is critical to avoiding a CRA review.
What is interesting is that there is no perfect length for an SR&ED technical narrative. I have seen very short narratives that are direct, clear, and well written. I have also seen longer narratives that include the perfect amount of detail. Length is not the issue. Relevance is the issue.
A strong technical narrative should make the CRA’s job easier. It should clearly identify the uncertainty, explain the work, connect the experiments to the uncertainty, and describe the advancement. A weak narrative creates questions. And when the CRA has questions, they may select the claim for review.
5. Combining unrelated work into one SR&ED project
Combining unrelated technical challenges into one SR&ED project increases the likelihood of a CRA SR&ED review because it makes the claim harder to assess and can make routine development look like eligible work. This is an area where a lot of companies get into trouble. More info from the CRA here.
Some claimants try to put all SR&ED-eligible work into a single project. Sometimes this works. Often it does not.
If all the challenges are in the same field and are technically connected, combining them can be the right approach. For example, if there are four related security challenges that all relate to the same architecture, threat model, or system limitation, there may be no issue combining them into one project. In fact, it may be better to have one strong security project than four weak standalone projects.
On the other hand, disparate challenges often should be written as separate projects. If a software company has one challenge related to database performance, another related to machine learning accuracy, another related to mobile device synchronization, and another related to payments infrastructure, those may not belong in one project.
When unrelated work is combined, the narrative often becomes a list of challenges, a list of work done, and a list of achievements. That type of structure can become confusing quickly. The CRA needs to understand the project. What was the uncertainty? What work was done to resolve it? What was learned?
If the project contains too many unrelated uncertainties, that becomes harder to answer. A good SR&ED project should be organized around a common scientific or technological uncertainty, not around the company’s product roadmap.
6. Large proportion of contractor expenses
A large proportion of SR&ED contractor expenses increases the likelihood of a CRA SR&ED review because contractor claims usually require more evidence than employee labour claims. Many startups use contractors rather than employees to build proof-of-concepts, prototypes, MVPs, or the initial version of a solution.
This can be a great way to scale a business. There are larger contractor firms that can offer part-time services across several roles. A startup may get access to a part-time designer, project manager, and a team of developers. This can allow a company to access talent it could not afford to hire full time.
There is nothing wrong with using contractors. The problem is that contractor SR&ED claims often have more risk.
First, the contractor must be performing SR&ED work on behalf of the claimant. Second, the work must generally be carried out in Canada. Third, the company needs documentation showing what the contractor actually did.
This is where a lot of claims become weak. An invoice that says “software development services” is not very helpful. An invoice that says “development work for platform” is not much better.
The CRA may want to know who performed the work, where they were located, what work they performed, how the work related to the SR&ED uncertainty, and whether the claimant had the right to claim the SR&ED.
With employees, the CRA already has a lot of information from payroll remittances and the corporate tax return. With contractors, the CRA may only see a name, a business number, and an invoice amount. Therefore, the threshold for asking questions can be lower when a large portion of the claim is made up of contractors.
For medium to large SR&ED claims, having a large proportion, or 100%, of labour-like SR&ED expenses as contractors can absolutely increase review risk. Again, this does not mean the claim is wrong. It means the claim needs stronger support.
7. Increase in SR&ED claim size compared with the prior year
A significant increase in SR&ED labour expenses compared with the prior year increases the likelihood of a CRA SR&ED review if the increase is not clearly supported by changes in projects, staffing, technical uncertainty, or business activity. There are many valid reasons why SR&ED-eligible expenses may increase from one year to the next.
A company may start a new project. A technical challenge may become more difficult. More people may be hired. A prototype may fail and require a different technical approach. The company may shift from implementation work to experimentation. All of that can be valid.
But the question the CRA will ask is whether the increase is reasonable. For instance, if total R&D labour expenses remain constant, but the SR&ED claim doubles in size, the CRA may ask questions. There may be a perfectly reasonable explanation. Maybe the team spent more of the year on eligible uncertainty and less time on routine work.
But the CRA may want to check that the company is not simply becoming more aggressive in its cost allocation. This is not about materials, capital, or contractor expense increases. This point is specifically about internal SR&ED labour expenses.
Typically, if the number of SR&ED projects increases and the claim is well prepared, an increase in the proportion of SR&ED labour expenses may not trigger a CRA review. It may also be a small claim, which reduces the likelihood of review.
But if there is a major year-over-year increase, the claim should explain why. Do not make the CRA guess. If the claim increased because the company performed more SR&ED, make that obvious.
8. Claiming the same project for too many years
Claiming the same SR&ED project for multiple years increases the likelihood of a CRA SR&ED review if the current-year uncertainty is not clearly different, unresolved, or advanced from the prior year. Claiming the same project for multiple years is not automatically a problem.
The caveat is that it is industry-dependent. Pharmaceutical research may take many years to resolve a scientific issue. Manufacturing companies can take two to three years to solve a complex technical problem. Hardware and clean technology projects can involve repeated prototyping, testing, and redesign over multiple fiscal years. Software companies can also have projects that span multiple years.
But after a period of time, the CRA may wonder why the same challenge has not been resolved. Often, a project spans two fiscal years simply because R&D does not start exactly at the beginning of the fiscal year and end exactly at the end of the fiscal year. That is normal.
But assume a software development project spans three to five years. At some point, the CRA may ask to review the project because many software development uncertainties are resolved in a matter of months, not years. The issue is whether the same uncertainty is really still uncertain.
A common mistake is copying the prior-year project description and making only small changes. That can create the impression that the company is claiming the same work again.
A better approach is to explain the evolution of the project. What was resolved last year? What remained unresolved this year? What changed in the technical environment? What new scale, performance, integration, data, security, or reliability issue emerged? What did the team test in the current year?
Generally, it is better to have clear, independent projects than one vague ongoing project that never seems to end.
9. Weak documentation
Weak SR&ED documentation increases the likelihood of problems in a CRA SR&ED review because the company may not be able to prove what work was done, why it was eligible, or how the costs were calculated. Documentation does not make work eligible. But it can make eligible work much easier to defend.
This is an important distinction. A company can have excellent documentation for work that is not SR&ED. That does not make it SR&ED. A company can also have eligible SR&ED work with poor documentation. But if the CRA reviews the claim, that company may have a difficult time proving it.
The best documentation is created during the work. Not six months later. Not after the CRA sends a review letter. During the work. More details on how to do that here.
Good documentation may include technical notes, test results, Git commits, Jira tickets, pull requests, architecture diagrams, lab notes, prototype results, design documents, failed approaches, meeting notes, contractor statements of work, and payroll allocation support.
Different industries will have different documentation. A software company may rely heavily on Git, tickets, test logs, architecture notes, and technical discussions. A manufacturing company may rely on trial records, machine settings, material usage, defect rates, and engineering notes. A life sciences company may rely on lab notebooks, protocols, observations, and analysis.
The format is less important than the substance. The documentation should help show what was uncertain, what was tried, what failed, what changed, what was learned, and who did the work.
If the company cannot show that, the claim becomes harder to defend.
10. No recent CRA SR&ED review
A company that has claimed SR&ED for several years without a CRA SR&ED review may face increased review risk simply because the CRA periodically reviews claimants to ensure claims are being filed consistently and correctly. Every taxpayer should expect a CRA review at some point.
Think about it. The federal and provincial governments provide billions of dollars in SR&ED incentives. It is the CRA’s responsibility to ensure that claims are being adjudicated consistently and fairly.
Sometimes a review may have very little to do with the specific claim itself. It may simply be that the claimant has not been reviewed for an extended period.
In other words, your time may be up.
This is not meant to scare anyone. It is just practical. If you claim SR&ED every year, you should prepare every claim as though it may be reviewed. That does not mean being defensive. It means being organized.
A good claim should be understandable the day it is filed. It should also be understandable six months later when the CRA asks questions and the person who worked on the project is busy, unavailable, or no longer with the company.
That is one of the reasons we focus so much on claim quality.
What the CRA is really looking for
The CRA is not only looking for mistakes. They are looking for claims that need to be tested.
There are many interrelated factors that can increase review risk. A large claim with strong documentation may be fine. A small claim with a poor narrative may still be reviewed. A contractor-heavy claim may be fine if the support is excellent. A labour-heavy claim may be fine if the allocation is reasonable.
The problem usually starts when multiple risk factors appear together. For example, a company claims nearly 100% of labour, uses mostly contractors, has a weak technical narrative, and the SR&ED labour doubled from the prior year. That claim may still be valid. But it has risk.
Another example is a company claiming a large capital expenditure where the asset does not clearly appear in the accounting records and the technical narrative barely explains how the equipment was used in SR&ED. Again, there may be a valid explanation. But the CRA may want to ask questions.
This is why SR&ED claim preparation is not just about filling out forms. It is about preparing a claim that makes sense technically, financially, and practically.
How to reduce the chance of a CRA SR&ED review
Avoiding an SR&ED review is another way of saying that you should submit a high-quality SR&ED claim. That means the claim should be accurate, reasonable, and supported.
It should not be inflated. It should not be padded. It should not include routine work just because technical people did the work. It should not include vague project descriptions that could apply to almost any software, manufacturing, or biotech company.
The claim should answer the key questions clearly. What was the uncertainty? Why was it not routine? What work was done? What failed? What changed? What was learned? Who did the work? How much time was spent? How were the costs calculated? Do the numbers tie to the tax return?
If the CRA can understand the claim quickly, the claim is in a better position. That does not guarantee there will be no review. No consultant can honestly guarantee that. But a well-prepared claim reduces unnecessary review risk and makes the review easier if one happens.
Conclusion
It is easier to trigger an SR&ED review than many claimants expect.
There are many interrelated factors the CRA may consider, including claim size, tax return inconsistencies, high labour allocations, weak narratives, contractor expenses, year-over-year increases, repeated projects, documentation gaps, and the length of time since the last review.
With a quality SR&ED claim and a strong SR&ED consultant, preparing for a CRA review should not be overly time-consuming. However, even when the review goes well, it still takes time away from employees who should be focused on their jobs, customers, and building the company.
Avoiding an SR&ED review is not about being timid. It is about filing a high-quality claim.
SR&ED experts understand the nuances of what should be claimed, what should not be claimed, and how to explain the work in a way that is clear to the CRA.
That is the real goal.
Claim what you are entitled to. Support it properly. Make it easy to understand.
That is how you reduce CRA SR&ED review risk.
FAQ
What triggers a CRA SR&ED review?
Common CRA SR&ED review triggers include large claim size, inconsistencies with the tax return, claiming close to 100% of labour, poor technical narratives, unrelated projects grouped together, large contractor expenses, major year-over-year increases, repeated multi-year projects, weak documentation, and no recent CRA review.
Does a large SR&ED claim automatically trigger a CRA review?
No. A large SR&ED claim does not automatically trigger a CRA review. However, larger claims generally have more review risk because more tax credit dollars are involved.
Can claiming 100% of labour trigger an SR&ED review?
Yes. Claiming 100% or close to 100% of labour can trigger review risk if the allocation is not reasonable for the company’s stage, industry, projects, and actual work performed.
Are contractor expenses a CRA SR&ED review risk?
Yes. Contractor expenses can increase CRA review risk because the CRA often needs more information to confirm who performed the work, where it was performed, what was done, and whether the work related to eligible SR&ED.
Can the same SR&ED project be claimed for multiple years?
Yes. The same SR&ED project can span multiple years, but the current-year uncertainty must still be clear. Repeating the same project description year after year can increase review risk.
How can a company reduce CRA SR&ED review risk?
A company can reduce CRA SR&ED review risk by filing a clear, accurate, well-supported claim with a strong technical narrative, reasonable labour allocations, proper contractor documentation, and financial amounts that reconcile to the tax return.
