Documentation for SR&ED

The Scientific Research and Experimental Development (SR&ED) claim process requires supporting documentation for the Canada Revenue Agency (CRA) to administer and review these claims. The most frequent issue we face as SR&ED consultants is:

WHAT IS THE BEST WAY TO DOCUMENT AND TRACK SR&ED?

Good documentation practices can solve all kinds of business problems by helping you keep track of deadlines, reduce bugs, improve operational planning or accelerating the onboarding new staff. But the most direct benefit is that a system can literally pay for itself by supporting your next claim under Canada’s Scientific Research and Experimental Development (SR&ED) tax credit program.

This article discusses the importance of and common issues with recording work for SR&ED with a particular focus for software/IT centric research and development (R&D).  We also have pieces outlining some suggestions to improve your ability to document within a few common task-tracking and workflow management tools such as:

 

Our comprehensive Step by Step Process to improving your SR&ED claim documentation can also provide helpful tips on how to better document SR&ED in JIRA, Trello and Zenhub/Github.

Jira

Use Jira and struggle with documenting SR&ED?

Trello

Use Trello and want to document SR&ED better?

Git

Do your Git-based repos need better SR&ED tracking?

 

While Appendix 2 of the CRA official guide to the SR&ED claim form suggests that documentation is somewhat optional - stating from that “the lack of documentary information should not discourage you from making an SR&ED claim”–in practice the CRA regularly rejects claims if work cannot be substantiated with the available evidence. Having a comprehensive, contemporaneous (in other words “real-time”) system for tracking work ensures that in the event of an audit you have tangible evidence to present to the CRA showing that SR&ED did in fact take place. Specifically, you should have pieces of evidence for the following: technological advancements sought, technological uncertainties encountered, work done towards reducing those uncertainties, start and end dates for your project, and people involved.

It’s important not only to support the argument that there was SR&ED, but also to back up the dollar amount of your claim with good records of work. Since wages are typically the single biggest expense category, this means timesheets (or some alternative time-tracking method) are the most important kind of evidence.

While there is no singular method, system or software that is bulletproof, what we hope to provide are broad-based ideas and solutions on how to achieve a better SR&ED documentation process.

3 parts to a SR&ED compliant documentation process:

  1. It establishes the potential eligibility of work as SR&ED. In other words, you know or think it could be possible SR&ED work.
  2. It establishes the extent of work identified in Question 1 as SR&ED. In other words, you can track it back to the actual SR&ED expenses which in the case of sofware is represented in time spent.
  3. It is contemporaneous in nature and reinforces consistent logging. In other words, there is an element of correctness, control and accuracy because its done as close to real-time as possible.

 

1.Establishing Eligibility of Work in Documentation

Whatever your documentation approach is, it should generally include the following 6 pieces of information to comply with SR&ED policy guidelines for establishing the eligibility of work in the first place:

  1. The technological advancement sought (to establish that your problem is strictly within a science/technology domain, and therefore potentially eligible.
  2. The state-of-the-art technologies and public domain knowledge available to you when work started (to establish the science/technology baseline, a critical barometer for judging advancement).
  3. The technological uncertainty (to establish the inherent shortcomings or deficits in existing science/technology that force you to perform experimental development to resolve a problem).
  4. Ideas or hypotheses tested during experimental development.
  5. Work done in an attempt to resolve technological uncertainty.
  6. Results of your tests/experiments and next steps.

It typically suffices to communicate and record the first 2 items at the project level. For the latter 4 items in the list, ideally each standalone work entry should include all of these things, but you can cut-down on overhead by keeping weekly or biweekly supervisor summaries to wrap up sprints, a brief summary that chronologs the work done, the testing methods used, the challenges faced, and estimates the hours committed by team members will go a long way.

 

One common pitfall we see is that firms present only the outcome of their SR&ED work (i.e. a commercial product), but don’t have any evidence of iterative experimental development or prototyping. Unfortunately, showing off the final result of SR&ED fails to demonstrate how your work was a systematic investigation or search i.e. NOT trial-and-error. Be mindful that the SR&ED program is meant to incentivize and reward activities with a risk of failure in an attempt to advance a science or technology field, rather than the outcome of the effort, therefore it is largely irrelevant whether or not you ultimately succeeded in that effort. Though it is not always easy to do so, especially in a for-profit business operation, the closer you can align your R&D processes with those espoused by the gold standard scientific method (question, hypothesis, test, analysis), the stronger your overall SR&ED claim will be in the eyes of the CRA.

 

If you don’t track the design, prototyping, development, testing and analysis work that was done along the way, the CRA may conclude in a worst-case scenario that you filed your claim under false pretenses‒for all they know, your final version was a hole-in-one, a stroke of luck, not something that was the result of a rigorous scientifically informed approach. That being said, the CRA doesn’t mandate a specific documentation methodology, as they understand that documentation conventions and best practices differ across industries and between companies. Their expectation is that you will have put into place whatever process makes sense for your business, and so long as the natural outcome or byproduct of said process is documentation that contains information necessary for an eligibility/extent assessment, it will typically be accepted. For instance, in software development companies it suffices to retain high-quality development and or code commit logs. Likewise, in manufacturing or the life-sciences, keeping reasonably detailed log books as well as evidence of scrapped prototypes or photographs of early tests will go a long way (digitizing them helps even more so, as the SR&ED auditor can quickly search for important information).

ENTAX can help in designing various systems, processes and software to better document SR&ED within your different systems as this upfront consulting is included in most of our engagements.

 

2. Establishing Extent of Eligible Work in Documentation

If you take away only one message from this article, it should be that you absolutely need to track time in some form. In most cases, salaries and wages make up the bulk of expenses in a typical SR&ED claim, meaning that evidence supporting your wage allocation is critical. In order to ensure CRA acceptance of claimed expenses, documentation must show who was working on the tasks, and when that work started/ended. These can take many forms, such as hourly timesheets, sprint retrospective reports, time tracking proxies such as story points associated with tasks, or some percentage-based calculation of time spent. Most of the more popular Agile-based issue tracking systems such as JIRA, Trello or GitHub do not directly track time so its important to understand the limitations and best method of tracking extent of eligible work. At ENTAX, we’ve helped many clients implement tracking systems on JIRA, Trello or Gitbhub and we’ve also included a 5 Step Process to easily track SR&ED in JIRA, Trello or Github.

In situations where substantially all or all employees are engaged in SR&ED, you might be able to get away with negative time tracking (i.e. no employee spent more than 10% of their time doing ineligible work), but this requires that you have very strict controls in place to determine what is, and what is not, SR&ED time.

 

3. Contemporaneous and Consistent Documentation Standards

The CRA expects that SR&ED documentation is contemporaneous, that is, generated at the same time that work was done. Attempts to retroactively generate documentation after end of tax year are not only prone to factual errors and omissions due to unreliable human memory, but ultimately counterproductive if the CRA calls you out on it, which could result in a substantial clawback or wholesale rejection of your claim (and possibly your company being flagged in the tax system for increased audit scrutiny in future).

Consistency is another critical aspect of documentation. Even if you manage to capture all of your SR&ED work, a system which constantly changes up keywords, project names, and abbreviations will definitely cause confusion and you risk rejection of eligible tasks by auditors simply because the language used to describe work was inconsistent and they couldn’t identify tasks as being in the same logical grouping or category of work. Simple changes like defining acronyms in documents, and/or maintaining a glossary of terms used to describe SR&ED work will make a CRA review much smoother.

 

We linked Appendix 2 of the T4088 Guide to filing SR&ED above, and eagle-eyed readers will have noticed that the section includes a table that outlines what evidence can be used for what aspects of a claim. The chart (below) isn’t exhaustive by any means, but it does give claimants an idea of what is and is not considered good evidence by the CRA (the dark boxes indicate that the evidence does not support the given aspect):

 

 

Conclusions and Recommendations

One again, the single most important kind of evidence when defending your SR&ED claim is time-keeping info. If you don’t want to implement an hourly timesheet then an alternative time-tracking system–even if it’s just weekly or biweekly estimates of time spent per project (including meetings)–will make a claim much stronger. Reasonably detailed task tracking can be useful to inform a reasonable heuristic for deriving time spent on eligible versus ineligible tasks, but will always draw more scrutiny than explicitly recorded per-individual work logs with time information. A general rule-of-thumb: the more vague your accounting methodology gets, the more scrutiny you will draw.

Dedicated task-tracking software is a boon here. We’ve prepared some further advice about how to get the most out of a few of the more popular project management tools with our Step-by-Step Guide to Better SR&ED documentation:

 

In terms of the tracking of goals and obstacles, a system to capture meeting notes, supervisor summaries, and other discussions about the planning, ongoing status, and of issues encountered over a project’s lifecycle are key. Even something as simple as a bullet-point collection of meeting notes or minutes makes excellent evidence in this regard.

 

Whatever changes you do make, try to make them minimal and gradual–radical changes to your workflow can cause problems or result in non-compliance, and a patchy recording system is almost as bad as no system at all. One excellent way to accomplish this is to nominate one person in your company to be an Internal SR&ED Champion who is responsible for enforcing and auditing SR&ED compliance throughout the year. 

 

Consider contacting us for a FREE, no-obligation consultation on how to best document SR&ED using your existing processes or tools. 

Jira

Use Jira and struggle with documenting SR&ED?

Trello

Use Trello and want to document SR&ED better?

Git

Do your Git-based repos need better SR&ED tracking?

 

HOW CAN WE HELP?

ENTAX can help you with documentation of SR&ED claims by providing upfront education about the SR&ED program, as well as through process consulting. We are available to prepare claims on your behalf, as well as to review your claims prior to filing to ensure that you have the strongest claim possible.

We’ve also made a few, FIRST IN CANADA, software tools to assist with the gathering of technical information, SREDTrak for Jira, and SREDBot for Slack. As specialists in SR&ED, we can offer a number of different options and services to ensure that your SR&ED claims are optimized and defensible to the CRA.  Please contact us for a no-fee initial consultation on how we can improve your SR&ED claim processes today.

Ryan did excellent work for Aquatic Informatics. He provided valuable insight into the process, great advice on technical details and delivered reliable follow-through. I would strongly recommend Ryan and hope to work with him again in the future.
D. FERGUSON, VP FINANCE, AQUATIC INFORMATICS