Getting selected for a SR&ED audit can send many claimants into a state of panic, especially if it’s their first audit. The fact is that there is an element of randomness in CRA’s audit selection process. It’s impossible to predict whether you’ll be audited and your claim can get selected no matter how well your technical narrative is written or how much documentation you’ve produced.
Nonetheless, there are ways you can anticipate and prepare for an audit and be confident that you’ll pass.
Large Claims Are Common Targets
The larger your claim, the more likely it is you’ll be audited, especially for first time claimants. If your claim is less than $100,000 you may not be reviewed. Over $500,000 it’s reasonable to expect it will be audited to allow the claim reviewer to learn more about your company, the types of projects you develop and provide any feedback on your SR&ED processes such as how you document your projects and your expenses. Bottom line: the bigger your claim the better you should prepare for an audit.
Issues with your Technical Narrative
Another reason that increases your chances of getting audited (or even rejected!) is writing an ineffective technical narrative that doesn’t focus on answering SR&ED criteria (i.e., technological advancement you were trying to achieve, obstacles and a description of the systematic experimentation you had to do to overcome those obstacles). If your answers to the questions on lines 240,242 and 244 of the T661 are unclear or don’t address the SR&ED program’s criteria, your claim risks getting rejected (even if it’s a valid project) or selected for an audit.
Don’t wait for the audit interview to try to explain why your projects are eligible.
Lack of Supporting Documentation
The lack of documentation might also provoke an audit. It’s not uncommon for CRA’s technical reviewers to ask for some supporting documentation to help them understand your project better and to verify the quality of the documentation. This can happen before an audit and an audit may not necessarily follow; however, if the documentation you send upon a reviewer’s request is inadequate or non-existent, it can increase your chances for an audit.
NOTE: On lines 270-282 of the T661, there is an area where you must indicate the types of documentation you have available for each project. It’s important to be able to back up each claim you make here; in other words don’t pretend you have more documentation than you do. The best strategy is to think about what documentation you should be keeping throughout the year.
So, while no one wants to be selected for an R&D audit, there is no cause for alarm if you have a well written claim and a well prepared set of backup documentation. Even if you claim is small to mid sized, it’s always important to write your technical narratives by answering the specific SR&ED criteria (e.g., leave out ineligible activities like graphic design and user features) and properly document your project.
We’ll have more tutorials coming up in the next few months that will help you with these last two areas, so keep an eye out for those and subscribe to our feed.