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As discussed in our January 27, 2010 blog posting, the first step in taking advantage of the Canada Revenue Agency’s (CRA’s) SR&ED tax credit incentives is to determine if you are performing qualified SR&ED work. Once you’ve established that, the next step is to produce documentation and evidence to support that eligible work was done and that eligible expenses were incurred. After eligibility is determined, documentation is the primary issue CRA addresses in any review. Luckily, this process is not as onerous as you might think.
Since every business is different and every project is different, there are no set rules or checklists of what is acceptable documentation. What you have depends on your unique situation. What is for sure is that during the course of doing any type of experimental project, you will generate documents and evidence that will lend support to your SR&ED claim.
For example: Let’s say you are working on new software development. Ideally, you might have a time tracking system in place that would tell you what activities are being done and how much time is being spent. If you don’t have such a system, you will still have things like the system architecture and source code that was developed. This can be used to help you determine who worked on the project, what they did and how much time it took. Maybe your programmers keep day timers or have personal planners or calendars. These can also tell you what and when work is being done. Maybe you have all your old emails where your IT staff are corresponding back and forth when issues come up or to report on progress. These can be used to help establish time lines as well.
CRA focuses its review attention on substantiating time spent by R&D staff on eligible project work. CRA understands very well that not all companies will have a formal time keeping system but still need to be able to justify that time was spent on doing eligible SR&ED work. How will your company do this? Allocations of time are a start. Those time allocations still need to be justified though and this can be accomplished in many ways. The simplest way is to have your key development people keep a weekly activity log that estimates time spent on various activities. This does not need to be as detailed as a weekly timesheet but it does need to capture what was done at a high level.
Another example of naturally occurring documentation would be if you have built any sort of experimental model, prototype, or test unit. That unit is evidence of work done. You could have drawings or notes of your design that you did prior to building the unit or you might have dated photographs or even scrap piles in your yard or shop of units that that were destroyed during development. That is all evidence.
Your everyday accounting records are also a good source of documentary evidence. Invoices from outside contractors will show what and when work was done. Invoices from suppliers will tell you what materials were purchased and from these you can determine what was used in your project work.
Obviously, the earlier in the process you begin documenting your SR&ED project work, the easier it will be to support your claim. But you don’t have to create all sorts of cumbersome systems to do this. By simply working with the systems you already have in place and using the information you are already generating, you should have no trouble supporting your SR&ED claim.
If you would like more information, please contact myself, any member of our SR&ED Advisory Team or your local MNP advisor. We’d be happy to work with you and help you take advantage of this great tax incentive program.
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