SR&ED Audit troubleshooting
In 2010, G6 received a call for help from a Mississauga electronics designer and manufacturer. The company had just gone through a terrible audit with a CRA SR&ED tech reviewer regarding the company’s 2009 claim. The tech reviewer stated that most of the manufacturer’s claimed work used generally available knowledge and represented routine engineering, not SR&ED. The reviewer felt that there was SRED work present in only one of the five manufacturer’s projects.
The CRA tech reviewer followed up the audit meeting with what is known as a “30 day letter” in which the reviewer proposed to allow ½ of one project of the 2009 work if the customer would self-assess and withdraw the other 4 ½ projects from consideration as SRED.
G6 met with the manufacturer, reviewed the work submitted in the claim, and we reviewed the technical staff’s presentation to the CRA and also their notes on the feedback received from the tech reviewer in the poor initial audit meeting. After careful analysis, we formed our own independent technical opinion that there was, in fact, SRED content in all 5 projects submitted, and that 90% of the project expenses claimed were valid.
G6 was able to schedule a follow-up meeting with the CRA tech reviewer to present evidence that the projects submitted were indeed sred. We demonstrated that the state-of-the-art componentry used in the manufacturer’s designs behaved in non-linear and unpredictable ways in response to various environmental, voltage and current load conditions. This meant that the manufacturer’s engineering required substantial testing and experimentation of individual components’ performance envelopes to incorporate them successfully into the manufacturer’s product designs. The CRA tech reviewer accepted these new arguments and therefore he was willing to change his mind and he ruled that each of the manufacturer’s projects comprised SR&ED content. This excellent secondary result meant that the bulk of the claim’s value was then approved and paid out.
We have worked each year with the manufacturer since that 2009 fiscal year claim to strengthen their SRED reporting and to increase the quality and amount of technical evidence captured as they are performing their engineering and design work. This SRED planning and prep work has allowed us to also increase the value of their subsequent 10 claims, each of which has been successfully accepted as filed by the CRA. The manufacturer has received over $500,000 in SR&ED credits on these claims.
Lessons learned regarding preparation for SRED audits
- Focus on strengthening the technical merit of your SRED projects
- Contemporaneous evidence, which is dated materials gathered during the year as the SRED work is being carried out, is the gold standard. These pieces of evidence can be photos (yes, they are worth 1000 words!), whiteboard captures, meeting notes, design documents, lab/engineering notebooks and email.
- In your SRED technical materials, focus on the technological unknowns and your prototyping activities. Do not get caught up in describing product functionality, merit, or innovation.
- SRED projects must be carefully constructed to incorporate only work which is experimental development and directly supporting work. Engineering, testing, computer processing and data analysis are support activities and are not themselves experimental development. This means that to be included, this support work must be required to carry out the testing of the hypothesis that supports the overall project.
- An independent technical expert like G6 Consulting will strengthen the quality of your SR&ED submissions
- If you have negative audit opinion from the CRA or you have received a 30-day letter from the CRA you disagree with, contact G6 without delay. We may be able to re-visit the materials covered and achieve a more favorable decision and outcome.