CRA Doubles Size of Vancouver SR&ED Audit Team

The Vancouver contingent of SR&ED auditors has doubled from 2012 levels. At the same time, the amount of incentives being assessed is declining. With more staff, auditors are becoming more demanding so claims that are poorly documented are very likely to be reduced.

For startups and first-time claimants this can be difficult. Even experienced claimants routinely confuse business projects with SR&ED projects:

Company project versus SR&ED project

A distinction must be drawn between a company project and an SR&ED project. “Company pro-ject” is a generic term referring to undertakings by a company to have an impact on its business; for example, building new facilities or expanding facilities, developing new products and product lines, changing business practices, upgrading processes and facilities, and engineering projects. A company project is a project with a commercial purpose, whereas the purpose of an SR&ED project is for the advancement of scientific knowledge or for achieving technological advancement. Paragraph (c) of the definition of SR&ED recognizes, and in fact requires, that the experimental development be done for the purpose of achieving technological advancement in the context of creating new or improved materials, devices, products or processes.
An SR&ED project usually occurs as a subset of a company project. Therefore, not all of the work performed within a company project will necessarily fall within the scope of the SR&ED project. Also, it is possible that the same company project contains one or more SR&ED projects, some of which may involve experimental development and some of which may involve basic research or applied research.

For companies engaged in eligible SR&ED activities, there is a need to look seriously at the processes around documenting those activities. The onus is on claimants to document what was done, why it was eligible and how much it cost. Companies document business projects (if they document anything). Most have difficulty defining SR&ED projects – as distinct subsets of company projects – and therefore can’t effectively allocate costs to SR&ED.

In order to identify SR&ED projects, claimants must learn to distinguish between “routine development” or “standard practice” and eligible experimental development (“ED”). As you can probably see from the discussion of ED below, it requires a certain subtlety that often escapes developments caught up in the pressures of product development cycles.

Experimental development (“ED”) versus standard practice

There is a difference between experimental development work and development work based on standard practice in established fields of engineering or technology.
Standard practice is the application of techniques, procedures and data that are generally ac-cessible to competent professionals in the field. In terms of development work, standard prac-tice refers to directly adapting a known engineering or technological practice to a new situation when it is reasonably certain that the known technology or practice will achieve the desired ob-jective of the project. Under these circumstances, there is no technological uncertainty. Also, although development usually involves carrying out work in a systematic manner, what sets SR&ED apart is adopting the scientific method to reduce or resolve technological uncer-tainty. Development by standard practice is therefore not SR&ED. However, departing from standard practice does not necessarily mean the work is SR&ED. The work must also meet the definition of SR&ED in the ITA. So even though work can be scientific or technological in na-ture, it may not necessarily be SR&ED.

Ideally companies that rely on SR&ED incentives can learn to distinguish eligible SR&ED from routine development. While a company’s own development staff should be suitably skilled and understand standard practice in their field, often the nuance of some of these concepts is very difficult. To reduce the risk claimants can hire consultants who work on a contingent basis, or take advantage of the CRA’s Pre-Claim Project Review service.

My firm can assist companies by reviewing their project descriptions, identifying ‘contemporaneous documentation’ and using existing documentation as a basis for claiming SR&ED. For companies that prefer a ‘reduced risk’ model we can refer a full service firm or recommend the CRA’s PCPR service.

Published by Rob Farrow

accountant, entrepreneur, former chef, occasional artist, angel investor, business advisor, corporate tax specialist