Documentation Best Practices
By keeping accurate and up-to-date documentation, businesses can easily use this financial support to help fund the growth of their organization.
Good documentation practices can solve all kinds of business problems by helping you keep track of deadlines, reduce bugs, improve operational planning or accelerate the onboarding of 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:
- 4 Steps to Better SR&ED Documentation in Jira
- 3 Steps to Better SR&ED Documentation in Trello
- 3 Steps to Better SR&ED Documentation in Git-based repos
Our comprehensive Step by Step Process to improve your SR&ED claim documentation can also provide helpful tips on how to better document SR&ED in JIRA, Trello and Zenhub/Github.
While Appendix 2 of the CRA official guide to the SR&ED claim form suggests that documentation is somewhat optional – starting 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 SR&ED Compliant Documentation Process
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It establishes the potential eligibility of work as SR&ED
In other words, you know or think it could be possible SR&ED work.
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 software is represented in time spent.
It is contemporaneous in nature and reinforces consistent logging.
In other words, there is an element of correctness, control and accuracy because it’s done as close to real-time as possible.
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:
- The technological advancement sought (to establish that your problem is strictly within a science/technology domain, and therefore potentially eligible.
- 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).
- 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).
- Ideas or hypotheses tested during experimental development.
- Work done in an attempt to resolve technological uncertainty.
- 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.
By investing in research and development through the SR&ED program, businesses can reduce their income taxes payable while benefiting from the innovative products and services they will produce. This incentive provides businesses with the resources to help them take their innovative ideas and turn them into reality.