The ideal SR&ED claim.

As we have started to do a major re-think of the SR&ED program and our approach to it, we have come to think the best value we can give is to teach people good habits and sensible approaches to qualifying their work for research tax credits. This is really working out well as we spread the word. Clients who approach the claim as a partnership with a benevolent, but shrewd and wary government, have increased their claim count, improved their refunds, and have faced increased CRA reviews with confidence and certainty.

Knowing HOW creates it’s own incentives to do the job right.

We’re going to be placing articles on various know-how topics here on a regular basis, so check back often for updates.

Many people have asked me how to document their claim. I think it frustrates them to reply “What have you got?”.

While the government allows for many forms of documentation in their “evidence to support your claim” category, there are many practical reasons to address the reasons for this evidence, and how the government will interact with you in the case of a review. A review is not bad at all when you are prepared, and can actually help form good acquaintances within the SR&ED division that will recognize your style of work when the next review pops up.

First of all > always prepare for a review.

A claim should never be submitted until you have assembled the documentation to prove your eligibility. The documentation should be gathered throughout the project, and should be sufficient to assess the work done for eligibility.
Even if you have had claims “approved as filed” in the past, this is not an endorsement of your work or a general comment on the eligibility of your work. It simply means the government gave your claim a pass without a detailed examination.
You have to be prepared to prove your claim in a review. As a repeat claimant your submission WILL eventually be selected for a review. Responding to the request for information or an in person meeting immediately proves to the government that your claim is not a “Hail-Mary”. This is very good, because in their view, if you do not have the documentation assembled, then what was the basis for your claim. Seems fair.

Second > maintain records on 8-1/2″ x 11″ pages

While documentary evidence of your claim can take many forms, an effort should always be made to maintain a detailed chronology of your effort in a format suitable for faxing.
The government can only receive documents by fax, mail, or courier. So if your documents only exist as digital photographs, spreadsheets, and proprietary 3D design formats, when the request comes to supply the documentation, you will be scrambling to assemble documentation from all these formats, and possibly from over a year and a half back in time.
Based on my experience this will become a major trial, possibly delaying your response to the point the government becomes concerned over the legitimacy of your claim.
Keep the other stuff too, and make a note of what the additional evidence is, and where it is stored, in your chronology. It’s really too simple.

Third > keep detailed time records

AT A MINIMUM, you should record the time your staff spends on SR&ED and what their activities were on a monthly basis. It’s better if you do it once a week. Spending 5 minutes a week detailing the time and effort is a breeze. Refer to your chronology to remind you what was done. Don’t wait until the end of the year. At that point the best you will do is an estimate, which is generally frowned upon, and documenting 52 weeks of work by 5 employees takes days and days. It’s so easy to do, and it’s like writing yourself a government cheque once a week.

Fourth >  Make specific documents for each stage of the project

An SR&ED project is not discovered by reviewing the work done over the year. You do not “find” eligible work hidden in the day to day efforts of your company, it has to be planned.
A properly documented project follows the scientific method:

  1. You make an observation about some aspect of your work or your products and you ask yourself a question like “Why isn’t this process capable of producing the product with less waste?”
  2. You propose an answer to the question. This is your hypothesis. A good hypothesis follows a form similar to “If I ____ then ____ will result.” But it needs to deal with a specific and testable proposal, where the answer is not known to qualified people in the related field of technology. So “If I work harder, then I will make more products” is not a good hypothesis, but “if I run my process with a water soluble lubricant then I will improve the finish on my products” may be. It is testable, presumably nobody does this and it’s not been tried before, and you are seeking a specific answer “will it improve the finish?”.
  3. Design your experiments and test your hypothesis. This is often the bulk of the work in any project. It may include a quantity of work that is generally indistinguishable from routine work. If routine work is done to design and test your hypothesis, and ONLY for that reason then it may be claimed as supporting work.
  4. Records your results and observations. Did it work? This is not an opinion! It must be quantifiable data that can be analyzed to prove or disprove your hypothesis. If a better finish is what you are attempting to achieve, then describe how you are able to assess a finish in quantifiable terms, and then demonstrate how the experimentally processed product compares in finish to your conventional method.
  5. Document your conclusions and any additional observations you make during the experiments. While you may be happy with the results of the experiment, the objective of SR&ED must be to advance technological knowledge. Your conclusions must describe what you have learned that you did not know before. Your experiment may succeed. This is good. It may also fail. But in both cases you should be able to draw conclusions from the experiment about what you have learned.
    At this point you may have made some observations that make you question your original hypothesis. Record this finding, and try and propose a new hypothesis that incorporates this new knowledge. You may have thought of this process as “trial and error” in the past. The difference is: Trial and error describes an ad-hoc process, while the scientific method is a targeted approach that eliminates one uncertainty at a time and is certain to advance your knowledge. Science never makes an error when conducted using the scientific method. It might not solve your problem directly, but it will always advance your knowledge.

    To sum up. Document each of these phases of the work, and who did what to ensure a reviewer can assess your eligibility. Without these proofs, they will have to err on the side of caution, and your claim will be reduced or disallowed.