SR&ED stands for Scientific Research and Experimental Development. It’s the name for the largest and most important corporate tax incentive program in Canada. It’s also the most complicated and difficult to understand. Many companies that have been claiming for years and years still entertain flawed misconceptions about the program.
Many business owners and professionals mistakenly believe that any approved claim is a decisive indicator of eligibility. It is just not true. Equally true, and this may come as a surprise, a denied claim is not necessarily an indicator of ineligibility. You may be banking on your SR&ED approval – a denial could pose a real blow to your firm, or come as a huge surprise.
Let’s explore how to really determine if your SR&ED claim was eligible, and if similar claims in the future may be found to be eligible or ineligible.
1) Your claim was accepted as filed. You think that means your activities were eligible. Wrong! “AAF” simply means that CRA chose not to review your claim. That could be for a number of reasons, such as:
- Your claim was well-written and appears to be eligible, and the expenses appear to be reasonable. A review was waived.
- Your claim was conservative for the size of your company, so the risk of approving the claim was low. A review was waived.
- Your claim was not actually reviewed due to lack of CRA resources.
- Your claim has been approved, but CRA still has 365 days to launch a full technical review on your claim. As such, your approval is still not truly guaranteed. You may be surprised to get a Request for Information in the mail, or a request/call for an on-site visit.
2) Your claim was selected for full technical review and your claim was denied. You now think that your work is INELIGIBLE.
- Your claim could be legitimately ineligible for a variety of reasons. CRA may have used the “standard practice” argument (a term that is in fact no longer part of the SR&ED glossary), or in other words, the work appears to be consistent with methods and knowledge that are available in the public domain, and as such, an advancement in technology is not recognized. Always seek out a second SR&ED opinion in this scenario.
- The work described in your claim could have been eligible, but CRA finds that the work was unsubstantiated (ie. poor documentation) so the claim was denied. In this case, your documentation methods may require improvement. Alternatively, CRA might have been too strict on what types of documentation are acceptable. Seek out a second opinion.
- Your work could have been eligible, but presented or described in a poor manner, by focusing on product features, functions, enhancements, or business issues instead of focusing on new technological knowledge. Your case could be re-written or clarified during the rebuttal stage. Talk to a professional.
- Your work could have been eligible, and an advancement in technology actually achieved, but CRA finds that the firm did not follow a rigorous SR&ED Plan, or did not follow the scientific method, and therefore the work appears to be random or unsystematic.
- Your work could have been eligible, but you could have claimed ineligible expenses, such as foreign subcontractors or legal expenses or rent, which are proscribed.
- You could file with the Tax Court of Canada to find out if they uphold the denial. If TCC overturns the denial, then CRA is likely to concede to future approvals.
3) Your claim was selected for financial review and approved.
- Your technical descriptions were adequate and the work appears to be eligible, but there are red flags on the financial side. Your claim could be very large, or could include errors, such as missing HST numbers, or salaries that don’t match CRA’s records. There is no determination of technical eligibility. There may be adjustments to the value of the claim
4) Your claim was selected for FTCAS (First Time Claimant Advisory Service)
- You are claiming for the first time, OR, you haven’t claimed for the last 3 fiscal years. Your claim description appears to be eligible and the costs appear to be reasonable. CRA wants to visit you anyway to provide education on the program. Your claim will not be negotiated or denied, but there is NO determination of eligibility.
- Your next claim could still be selected for full technical audit or financial audit, and you should be ready with good documentation next time.
5) Your claim was selected for full technical review and approved.
- This is the most definitive way to actually know that your work is deemed eligible by CRA.
- Similar work in the future could still be denied if a new reviewer is assigned who then forms a different opinion.
- Similar work in the future could be denied if documentation is not adequate, or ineligible expenditures are claimed.
As you can see, an approval is not the same thing as eligibility. And a denial is not the same thing as ineligibility. SR&ED is an area of specialty. There is a great deal of policy lurking behind this program that takes up less than 1 page in the Income Tax Act. A professional can help you make sense of the program if you have become confused by approvals and denials over the years.
Article written by Julie Bond