CRA Reviews are inevitable.
When you submit a SR&ED claim, there is always the possibility that the CRA will want to review that claim in more detail and ensure you meet the requirements of the program. The CRA has re-named this process so that it is much less intimidating: it is now called a “CRA Review.”
Some companies that we’ve spoken with are so afraid of being reviewed by the CRA that they don’t submit a SR&ED claim. (Yes, they leave potential tax credits on the table). The purpose of this post is to educate you about the CRA Review process so that you are very familiar with what to expect and can make more informed decisions about the claim process.
Before we begin, it’s important to note that being selected for a CRA Review doesn’t mean that your company and financial statements will be fully audited – only the information that you provided for your SR&ED claim will be reviewed.
The SR&ED Claim Process
After you submit your SR&ED claim, the CRA reviews and processes this information internally. The CRA processed about 23,000 claims in 2012 alone, and to make it as efficient as possible, they use a computer scanning system. This system scans and looks for errors or inconsistencies in your claims. Once your claim has been scanned, your organization will receive a Notice of Assessment letter notifying you that your claim has been “accepted as filed,” or that they would like to conduct a “detailed technical and financial review.”
Three Kinds of CRA Reviews
Many people don’t realize that there are actually three kinds of CRA Reviews:
- Desktop review
- Financial only review
- Financial and Technical review
If your claim goes through a desktop review, it means that someone manually read through your tax form to ensure its accuracy. After they’ve conducted a desktop review, sometimes they ask for more information on the technical side.
A ‘financials only’ review is when a member of the CRA goes through your financial claim. They do not review the technical report included on your tax form, but simply calculate the financials and confirm accuracy.
The final type of review is a detailed financial and technical review. This is much more involved as a representative of the CRA visits you on site to review both the technical and financial documentation to support your claim and interview key technical staff. It is important to note that you will want to have your SR&ED claim preparers present for this onsite meeting to discuss your claim. (We’ve heard horror stories of companies whose consultants flee at the mention of a review. Find the right preparer and don’t let this happen to you!)
First-Time Claimant Advisory Service
There is a new service that was introduced at the beginning of 2014 for first-time claimants: the First-time Claimant Advisory Service. After you’ve submitted your first claim, the CRA may request to meet with you to make sure that you have all the information necessary to successfully claim your next SR&ED claim. They make recommendations based on your current claim and it is NOT considered a review or audit. (We’ve discussed the details of this new service in a previous blog post here)
Common CRA Review Triggers
Some claim factors can trigger a higher risk for audit than others. Here are some common triggers:
Large claim (especially for those over $250K)
Poor documentation and record keeping
High subcontractor expenditures
High capital expenditures (for 2013 and earlier as it is no longer eligible in 2014)
If the owner is also a subcontractor
Have submitted a claim in the past which was denied
(If you are concerned about any of these potential triggers, we’d be happy to go through your specific situation and discuss the details.)
While we wanted to inform you that CRA Reviews are common and should not be feared, it is important to keep in mind that being selected CAN add months to the SR&ED claim process (meaning you’ll have to wait a few extra months until you have the tax credit confirmed and cash* in your bank account).
Work with a qualified and experience SR&ED claim preparer who will be able to guide you through every step of the process so you do not need to worry about this. They will ensure that your claim is fully supported and will be on hand to defend your claim, should it go to review.
If you’re prepared and your claim is accurate, there is nothing to worry about.
*for CCPC claimants only.