Among the companies that invest in government funding initiatives, many do not receive the full value of their application due to the complexity and resource needs 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 third 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.
In the last section of our four-part ‘Behind the Scenes’ look at Government Funding, we discussed the different types of SR&ED reviews that the CRA conducts. In this article, we take a closer look at how to prepare key documents and employees for a site visit, and discuss crucial aspects of the SR&ED review process.
1. Preparing for a Review
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. Instead, 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, you will be contacted by the CRA to arrange a site visit at your company.
- Arranging a Site Visit: The Research and Technical Advisor (RTA) will usually call you to set up a visit. Occasionally, the CRA could send a letter as the first point of contact to confirm the relevant pieces of the claim and their expectations for the site visit.
- Get it in Writing: Asking for what the CRA is looking to see and/or discuss will help you prepare by providing you the purpose, agenda, and estimated duration of the site visit.
- Replying to RFIs: If a Request for Further Information (RFIs) is made by the CRA prior to the actual review, it is important that a response is provided promptly and clearly (if not offered, ask for the request in writing, so that the expectations of the CRA are clear). Providing a prompt response to RFIs is crucial for a successful SR&ED claim and, in some cases, may be sufficient to resolve reviewer concerns regarding claim eligibility without a site visit.
2. Preparing Documentation
Documenting it All
- Tying it all together: By demonstrating that your company has developed an efficient documentation system to maintain an ongoing record of all SR&ED activities, labour and resources, you can address some common key concerns of the CRA by tying together the financial and experimental parts of your claim.
- Organize the documentation chronologically or group by major parts of your project: The goal of documentation is to tell the story in a logical order, on paper, which correlates with your description of the project.
- What is contemporaneous documentation? Contemporaneous project documentation refers to documents created at the time when the SR&ED work was done, and produced as a result of performing such work.
- Why is contemporaneous documentation important? Contemporaneous documentation is crucial for meeting SR&ED eligibility criteria, as it provides direct evidence of work done in accordance with the CRA project requirements and supports the project's start/end dates relative to the scope of the project.
- What are the different types of contemporaneous documentation? Technical records may include trial runs, test protocol/data, experimental designs/sketches, samples and prototypes, lab notebooks, photos, videos, audio recording, and analysis of test results/ observations and conclusions. Meanwhile, financial documentation may include contracts, time sheets and records of resources allocated for materials, machinery, and equipment.
Avoid Irrelevant Documentation
- Although having all relevant documentation on hand is important, taking the time to prepare the most critical documents which directly address the concerns of the CRA, while avoiding reference to irrelevant documentation, can save both the reviewer and your employees much valuable time and prevent further confusion.
3. Preparing Your Team
The Role of the SR&ED ‘Leads’
- The SR&ED lead takes center stage when defending the claim, so it is vital that he or she has a strong understanding the projects performed that year. Although multiple employees may be involved in a review, having too many people in the meeting can make it difficult to provide clear explanations.
The Role of the Reviewer
- The reviewers work as a team during technical and financial reviews to co-ordinate the review of SR&ED claim and, as such, often conduct joint site visits and RFI’s.
- Research and Technical Advisor (RTA): The RTA’s role is to determine if the claimed work meets SR&ED eligibility from a technological perspective in accordance with the Income Tax Act and to determine the extent of the eligible work.
- Financial Reviewer (FR): The FR’s role is to understand the methods and support of cost allocations for labour, materials and contractor payments.
What is the Reviewer Looking For?
- Employees involved in the SR&ED projects claimed should be available during the review and be prepared to:
- Demonstrate their relevant qualifications and time spent on the claimed SR&ED work.
- Identify the extent of the work performed relative to systematic investigation requirements.
- Provide details of any contracts, partnership agreements and payments to qualified third parties that performed or supported SR&ED.
- Clarify ownership of intellectual property generated.
- Explain how equipment was used.
- Describe the materials consumed, overhead costs and other work/items directly attributable to the SR&ED claim.
- Scientific or Technological Uncertainty is foundational for SR&ED eligible projects and applies when a given result/objective to be achieved or the means to achieve it cannot be known or determined on the basis of generally available scientific or technological knowledge or experience. There is a difference between a Technical Problem and a Technological Uncertainty. While Technical Problems are solved by identifying and applying existing solutions, a Technological Uncertainty involves investigating the problem with new data or information, to develop a solution when previous technological knowledge is not available such that Experimental Development is required to overcome the issue.
- Eligible SR&ED projects are conducted through a Systematic Investigation or Search which includes defining a problem, advancing a hypothesis towards resolving that problem, planning and testing the hypothesis by experiment or analysis, and developing logical conclusions based on the results.
Tips for Speaking with Reviewers:
- Prepare point form notes on the project(s) you worked on for your reference during the actual review. This is to ensure you do not miss key elements and avoid irrelevant information.
- Focus on the technology and the processes that are being claimed. Try to avoid high level, or full project descriptions.
- Focus on describing unique challenges that the project presented rather than experience related limitation.
- Reference what is typically done and show how you went over and above this.
- Focus on technical aspects as opposed customer complaints.
- Be prepared to discuss how you identify SR&ED projects and how the claim is put together.
- Make sure you know what activities apply and what ones don’t.
Coming up: Part 4 - What Happens after the SR&ED Review and Grant Reconciliation?