Among the companies that invest in government funding initiatives, many do not receive the full value of their application due to the complexity of post application requirements, which can make or break your application. However, a full understanding of these requirements can ensure that the time and resources that your company has dedicated to the initial application provide a maximum return on your investment. The following is the second article in a four part series that goes behind the scenes of major Government Funding processes, including Grant Reconciliation and SR&ED reviews, to examine some key post application requirements that can help ensure that you acquire the full value of your application.
The possibility of an SR&ED ‘audit’ process, officially referred to as an SR&ED review, can be a roadblock when companies are deciding whether or not to file for Scientific Research and Experimental Development (SR&ED) tax credits.
However, it is important to remember that the CRA is not requesting a review of your entire company, but is only looking at documents and information relevant to the SR&ED claim. Furthermore, since the intention of an SR&ED review is to work with your company to gather the information needed to determine claim eligibility, a review gives your company the opportunity to provide additional documentation to support the eligibility of the work claimed in accordance with the type of review that the CRA requested.
This article explains what to expect from the review process by examining the various requirements for the different types of SR&ED reviews conducted by the CRA.
You’ve Submitted Your Claim; Now What?
Upon submission, your claim undergoes a risk assessment which determines whether the claim will be accepted as filed, or selected for a review. Currently, the CRA’s service standards for processing SR&ED claims are 120 days for refundable claims, 365 days for non-refundable claims, 240 days for refundable claim adjustments, and 365 days for non-refundable claim adjustments.
If your claim is selected for review, this is not a cause for concern but rather a call to action; a review does not mean that the work you claimed is automatically ineligible or outright rejected, but rather, it means that the reviewer requires additional information to clearly determine the eligibility of the work claimed in accordance with the Income Tax Act. In this case, there are 4 types of reviews the CRA may conduct.
What are the Different Types of Reviews?
1. Request for Information (RFI)/Desk Review
When it is determined that further information is needed during the risk assessment, according to the CRA “sometimes it may be possible to resolve simple issues without a site visit by asking the claimant questions about their SR&ED or requesting some additional information. If more information is needed, the [reviewer] will work with the claimant to explain what is needed and why. This will usually be confirmed by a written request”
Briefly: An RFI is formal letter from the CRA requesting additional information about your claim and may include requests for documents to prove the costs and support the work associated with your claim. These documents will be used to ‘spot check’ different pieces of your application, and may include information regarding the cost of materials consumed or transformed during your SR&ED project(s), documentation on salaries, or time sheets and trial logs.
Providing a prompt response for all the information requested is crucial to claim acceptance and, in some cases, may be sufficient to resolve any concerns that the reviewer has with regard to eligibility. The standard due date for submitting a response to the request letter is 30 days from the date of the letter, however your company may request two additional extensions of 15 days.
2. First Time Claimant Review (FTCAS)
First-time SR&ED claimants that are selected to receive the mandatory FTCAS, will be notified by a letter from the local CRA office to arrange a visit. According to the CRA, the focus of the FTCAS is to “educate claimants in terms of eligibility and documentation requirements, and increase predictability in subsequent claims.”
Briefly: A CRA representative conducts an educational meeting that goes over many aspects of the SR&ED program, and often reviews your documentation, logging strategies and operations to ensure that your company is meeting CRA standards for future SR&ED claims.
While this process is not formally considered a review, it is nonetheless important and your company should be prepared with the relevant information to provide the reviewer with a good presentation of your SR&ED efforts/systems. Regardless though, at the end of the meeting the reviewer will notify you that your claim has been accepted as filed.
3. Technical Review
According to the CRA, the two main aspects of a technical review are “to determine if the claimed work meets the definition of SR&ED as given in subsection 248(1) of the Income Tax Act” and to “determine the extent of the eligible work.”
Briefly: The Research and Technical Advisor (RTA) that has been assigned to review your claim will work with your company to answer five questions that have been established by the courts to provide a logical order for the assessment of SR&ED:
Q1: Was there a scientific or a technological uncertainty?
Q2: Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
Q3: Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
Q4: Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
Q5: Was a record of the hypotheses tested and the results kept as the work progressed?
This information, gained through discussions and review of relevant documentation, allows the reviewer to determine the overall eligibility of the claimed project and the extent of the SR&ED work. The types of documentation could include any project records that help to support the above 5 questions, such as test notes, pictures, emails, etc.*
4. Financial Review
According to the CRA, “The review of expenditures associated with claimed SR&ED work is called a financial review and is done by Financial Reviewers (FRs).” The role of the FR is to “review the expenditures and ITC claimed” as well as “gain an understanding of how the claim was put together and examine the financial documentation and other relevant information.”
Briefly: The FR looks to understand the methods and support of cost allocations for labour, materials and contractor payments. These reviews focus, not surprisingly, on documentation; financial reviews require that your company speaks to the dollar amounts spent on your claim.* The FR may also look for the extent of SR&ED eligibility if a technical review was not conducted.
In general, RTAs and FRs work to co-ordinate the review process as a team and often make joint on-site visits, information requests, or interviews.
Overall, being aware of the review process before your SR&ED claim is submitted can help your company substantially minimize the resource investment in order to yield a valuable return and support ongoing innovation efforts.
* Specifics of the type of documentation that should be available for review will be covered in more detail in the next part of this series.
Coming up: Government Funding: Behind the Scenes – Part 3: How to Prepare for SR&ED Reviews. Find out more about what the review process involves and what your company can do to prepare, while minimally impacting your business to get the most out of your SR&ED resources and increase return on investment.