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Get into the habit of keeping detailed records if you’re targeting SR&ED

Date: June 28, 2022

There are generous incentives on offer under the government Scientific Research & Experimental Development (SR&ED) program but businesses need to be able to supply the Canada Revenue Agency (CRA) with the right evidence in order for a claim to be successful.

Making an unexpected discovery and carrying out R&D activity are two very different things — and only one is eligible for tax incentives.

That is because R&D is a systematic project with an end goal — to achieve an advance in science or technology. And to prove that a project was carried out in this way, whether it was successful or not, you need to keep detailed records.

There is no one-size-fits-all to R&D record keeping, but the more a business can do, the more accurate its claim will be and the faster it can be processed.

It’s in your best interests too, as you don’t want any qualifying costs to be missed off a claim and to get back less than you’re entitled to.

So if you are just about to embark on an R&D project, consider getting into the habit of record keeping now. From the outset, it is worth noting down what advances you are hoping to achieve, putting it in the context of the current state of knowledge and technology internationally. This demonstrates your intent in making an advancement — which is very different from stumbling on something new.

Consider whether or not the work you are doing will develop technical knowledge in the industry you work in or if the work contributes towards a common technological or scientific goal, such as innovation in the machinery being used. A SR&ED claim might also consider whether there are scientific uncertainties to the work you are doing and, if there are, you will need to keep records of that.

Documents you should keep track of include copies of meeting notes and correspondence relating to the research, contracts (including work given to third party companies), invoices, bank records and the tax you have paid to the CRA.

At the very least, a SR&ED claim should include payroll records and example invoices for materials, subcontractors and software, plus copies of expense claims for reimbursed expenditure. The more accurate the records are, the more robust the financial aspects of a claim, and the easier it is to deal with any CRA enquiry.

Larger companies, or those with previous tax incentive claims, may be expected to keep better R&D records. You do not necessarily need a new book-keeping system. Your record keeping can be supported by timesheets and materials invoices posted to a job costing system that tracks single projects.

When it comes to making a claim, you will be glad you prepared well and have a papertrail that will ensure all qualifying costs are included in the submission.

Richard Hoy is President of specialist tax consultancy Catax Canada. You can reach him at richard.hoy@catax.com.

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