SR&ED audits may seem intimidating, but they’re fairly common. In fact, due to the high number of applicants, SR&ED audits are a large part of the program. It is not unusual to experience a partial review or full audit every 4-5 years as a claimant. This is to verify projects’ eligibility and to ensure that there aren’t any discrepancies or purposeful fraud happening in these applications.
So long as you’ve done everything right, an audit shouldn’t be a problem. Here is how to prepare for an SR&ED audit.
Request for Information
An RFI is a Request for Information. If the CRA is auditing an SR&ED claim, this is the first thing they will do. If you receive this notice, it’s time to start preparing. Prep work should be thorough and support your claims. A lack of preparation or a lack of documentation could jeopardize an otherwise eligible SR&ED claim.
Don’t wait to respond to an RFI or request with the CRA. Answer requests as soon as is reasonable. Compliance like this lowers your risk profile and will ensure an audit doesn’t go on longer than needed.
You can ask that all audit requirements be made clear in writing. Doing this will help you prepare and ensure you’re aware of what the expectation will be of you. You don’t want any communication lapses. This written document should include a criteria list of expected supplementary information and documentation and a clear reason for the SR&ED audit, whether it’s a technical review, a financial review, or both.
Speaking with a consultant can be incredibly beneficial if you aren’t experienced with SR&ED claims and audits. Someone who deals daily with SR&ED audits can review your audit response, outlining any potential red flags or issues that may persist. For example, you want to avoid language that implies commercialization, business strategies and goals, and industry-related buzzwords or making. These are all irrelevant to an SR&ED audit.
After you have more information in writing about what’s being asked of you, delegate to an SR&ED consultant the duty of assembling the items you need to support your claim. You may opt to do this yourself, although it can be time-consuming.
Some of the items to procure and prepare to include:
- any sort of work tracking and timesheets
- related contracts
- resource allocation breakdowns for materials
- documentation for processes and test protocols
- experimental designs
- summary research reports
- general communication and correspondence (transcripts, recordings, emails, and notes)
To prepare for an SR&ED review, meet with the primary team members involved in the SR&ED project. Bring everybody together to attend a meeting to review the project’s details.
SR&ED Audit Requirements
Understand that an SR&ED auditor is singularly interested in whether your project is eligible or not for the program. They want to understand the frustrations, failures, and limitations that underline a project’s scientific or technological advancement attempt. An auditor will want to know how technical obstacles or challenges were overcome and whether a systematic investigation or search was used. This is the discussion you will have and where you want to be most prepared.
In an SR&ED audit, you may feel like you’re being made to re-litigate your claim. For this, you must present a technical narrative that demonstrates a project’s eligibility.
- Identify the scientific or technological uncertainty you faced, distinguishing it from any routine work.
- Illustrate the hypothesis you developed around this uncertainty.
- Show how your approach is consistent with a systematic investigation, including testing your hypothesis through either experimentation or analysis.
- Demonstrate your strategy sought either a scientific or technological advancement.
- Submit a detailed record of the project’s progress.
An auditor will ask you several questions. Some will be general, and others will be specific. Answer every question directly and only provide the required information. Any elaboration or unnecessary details you provide could be applied out of context and used to amend or deny an SR&ED claim.
Be helpful throughout the auditing process, and try not to get nervous or let it negatively affect you. At some point, every SR&ED claimant will be selected for an audit. The reason for an audit isn’t because any wrongdoing was suspected. It’s simple due diligence on the part of the CRA. You must prepare and be available for questions, clarifying why your project’s eligible under the existing SR&ED criteria. Do that, and your audit will go splendidly!