It’s become very apparent lately that the CRA is really cracking down on documentation when evaluating SR&ED claims. Based on recent meetings with CRA and based on conversations with other practitioners we have noticed that the CRA is asking for more documentation and for better documentation. This has forced us and our clients to ensure that everyone is keeping much better track of their current documentation and has forced us to help our clients recover information from their past to satisfy CRA’s needs.
So how well are you documenting your SR&ED work?
Are you documenting the steps you’re taking? Have you been keeping track of not only the time you’ve been putting in, but the specific activities you’ve performed during that time? How well are you keeping track of the questions you’ve asked or the problems you’ve encountered? How well have you documented the steps you’ve taken in an attempt to solve these problems? What are you doing to keep track of each experiment, each result, the analysis of each result and the conclusion you came to after analyzing the result?
As you attempt to answer the questions above, you’re probably thinking, if I document all of this, then I won’t have time to actually do the work we need to do. Or, if my employees spend all their time documenting their work, then the amount of time the spend on work will double.
Well just like anything to do with your taxes, the CRA is requesting that you have back up documentation to support the SR&ED tax credits you are requesting on your claim. If you want to claim your phone expenses you need to keep the receipt. Similarly, if you want to claim SR&ED tax credits you must be able to prove you did the work. No longer is just an end result, and end product, or a testimonial from an employee good enough. Rather, the CRA is looking for documented proof that you performed SR&ED.
How do I know what to document and what not to document?
If you have to ask this question, then perhaps you’re not doing SR&ED work. In addition to cracking down on documentation the CRA is requesting that claimants follow the experimental method and thus have formed a hypothesis (or at least documented the asking of a question) at the outset of their SR&ED activities. Similarly, it appears that the CRA is attempting to remove any “retroactive” SR&ED discovery. For example, let’s say you started a software project, and only afterwards you discovered that you actually advanced technology. Unfortunately, though, you didn’t document the process from when you began to when you discovered you actually did advance technology. The CRA is now deeming that this is a routine activity. The CRA is basically saying that if you didn’t follow the experimental method through a documented process then you didn’t do SR&ED. In other words, if you can’t repeat exactly the steps you took from A to Z, then how is it actually experimental, how is it that anyone else can learn from it (externally or internally), and how can the CRA justify giving you a tax credit for work you would have, essentially, done anyway.
If I have to document everything then what’s the point in claiming any more?
So now that you know the way the CRA is doing things, what are you going to do about it? Are you going to stop claiming SR&ED tax credits or are you going to be proactive and take appropriate action? There are very efficient methods to document your engineering, software, or pharmaceutical claim and we have clients that are excellent at it. They’ve adopted methods we’ve demonstrated for them into their normal course of work and not only are they documenting their work, but they’re leaving a record of what was done for future employees and creating archives of internal records so that they can be collectively more intelligent. Documenting your work not only will help you with your SR&ED claims, but it will help you be a better company. If you have any questions about this, be sure to contact us and ask us how we can help you become a better documenting company for SR&ED purposes and how we can help you become a better company.