Did your SR&ED claim invite CRA to the door?

So your SR&ED claim attracted a site visit by CRA, did it?

Site visits were not as common a few years ago as they now are. But CRA found out that the honor system of filing was being used by dishonorable people. There was one nationally active SR&ED claims preparation firm that routinely filed bogus claims. I worked on an SR&ED claim of one of their clients a year after that firm had filed for the client. I examined that prior claim and discovered that the eligible costs were overstated by about 400%.  It was an uphill battle trying to convince CRA that the client was honest and simply had signed the claim because he was busy and signed where he was told to sign, trusting the “professional”.

Why would an SR&ED claims consulting firm inflate a claim?

If the firm was charging a fee based on the size of the claim, then the motive may seem obvious.  And if the firm was charging a fixed fee or an hourly based fee which got rather high, then it’s plausible that cheating on the claim was a way to make the high fee look not so high.

Do contingency fees tend to result in fallacious SR&ED claims?

Some CRA employees seem to think that a fee based on the size of the claim is incentive to cheat. I disagree. I am involved in managing a SR&ED preparation firm (getsred.ca) which usually charges a percentage of the benefits the client receives from the claim, and this is incentive to be careful. Since fees are only receivable on successful claims, this means that the firm is active in defending claims before CRA: communications, attending meetings, appeals, etc.  Those activities burn up resources faster than preparing a claim does, and what might have been a profitable filing effort can rapidly turn into a loss. Guess what…. Claims that are realistic tend to encounter less pushback from CRA than claims that are from someone’s imagination. So the incentive is there to file honest, realistically evaluated claims.  There is a further advantage, and that is that honest filing preserves the reputation of the firm at CRA. And that can’t hurt clients.

SR&ED Reviews

A few years ago, CRA decided to hire a lot of new staff and review a higher portion of claims than they had been reviewing. So if you have filed a claim, there is a good chance it will be reviewed. Sometimes the review is simply part of their FTCAS (First Time Claimant Advisory Service) program. If you are having only an FTCAS visit, it usually means your claim has been accepted as filed and will be paid out after the FTCAS visit has occurred. More often though, the site visit is occurring because there are issues with the technical write-up or because CRA wants to verify the expenses claimed or both. Verification of expenses is usually a painless process provided that the claim was filed in accordance with the SR&ED legislation.

The SR&ED Technical Review

Technical reviews can be a problem. I’ve been involved in many. One of the problem features of these reviews is that often the RTA (that’s what CRA calls its technical reviewers) is an expert in some field to which the claimed project is peripheral, so they have enough knowledge to ask some sensible questions, but sometimes they just don’t seem to see the technological challenges of the project. Some RTA’s are able to grasp what is going on, but an easy tactic is for them to say “I just don’t see it.” This is particularly true if they break the project work into small steps and examine each step and declare that there is no SRED in each of those steps. Of course, the courts have determined that SRED can be in the project as a whole rather than in each of the steps.

One of the requirements of SRED is that there be new knowledge created. To some RTAs this means discovering Why. If the claimant can’t explain why something occurred, there is no new knowledge. The trouble is that whatever is put forth as the answer can meet with another Why.  Pretty soon engineering devolves into physics and then cosmology and then philosophy if an RTA doesn’t exercise the care to not sound like a three year old: “Why? ….. Why? ..... Why?”  I don’t want to create the impression that all RTAs are obstreperous or downright thick. Some of helpful and most are quite intelligent.  And the majority are affable.  The meetings are usually friendly and enjoyable. But an RTA’s friendliness is not proportional to his acceptance of your claim. When you are milking the cow, it doesn’t hurt to stroke her, does it?

Have a professional with you in your CRA site visit.  And be prepared to focus on proving Yes answers to the five questions RTAs like to ask.