The most recent statistics published by CRA are for the April 1, 2023 to March 31, 2024 government year. These statistics provide some insights and opportunities.
SR&ED stats
Overall, just over 21,500 SR&ED claims were processed. It is important to keep in mind that CRA does not check all claims filed for compliance. This means some companies become complacent, and when CRA does carry out a review of their SR&ED claim, the company is not ready and typically may lack the support and documents that CRA will want to examine.
In terms of total percentage of SR&ED tax credits processed, roughly 40% of all claims submitted were in the area of software development and 40% were in the area of manufacturing and engineering. The remaining 20% of claims were related to medical sciences, agriculture, civil engineering and earth sciences.
The point here is that there are areas of R&D that are overlooked. Software development has permeated every industry. In the past, retail and wholesale companies rarely filed SR&ED claims, but with the advent of online sales, digital customer engagement and supply chain management, more SR&ED claims are being filed in these industries. Similarly, the need for housing in Canada coupled with environmental concerns has led to innovations in civil engineering such as 3D house printing and modular homes.
The most surprising statistic overall, however, is the amount of SR&ED tax credits approved has increased by roughly $1B from $3.2B to $4.2B over the past years. This is roughly a 30% increase and as the number of claimants have not increased significantly over the past few years, the average size of the claim is the reason for this increase. What this means is that CRA will be concerned companies are perhaps over-claiming. When this happens CRA may increase the number of reviews they carry out to ensure compliance.
CRA’s assessing policies
CRA’s reviews roughly 12-15% of all SR&ED claims filed in a year. Effectively, this means you have a good chance of receiving at least one CRA review in a 3-5 year period. CRA’s typical review includes both a technical review and financial review. CRA employs technical experts (computer science/software; engineers and life science professionals) to assess the eligibility of a SR&ED project. Obviously this is a crucial part of the review. If the project is not eligible, then the project claim will be rejected.
Many companies are not adequately prepared for a CRA review. CRA will focus mainly on the baseline technology of the project (i.e. is the technology already available in the public domain) and what are the technological uncertainties and that give rise to the SR&ED project? To meet the criteria for technological uncertainty, document all obstacles, limitations, and deficiencies overcome during the project. The following diagrams illustrate the traditional timeline of a R&D or SR&ED project versus how CRA perceives a SR&ED project.
If after a review you receive a letter from CRA denying all or part of the SR&ED tax credit claim, you have the opportunity to submit additional information in the next 30 days. Practically, we have found once CRA sends a written letter denying the claim, it is an uphill battle to change their opinion. However we have had some success escalating a rebuttal within CRA by engaging the manager or other senior CRA officials.
If you have exhausted all avenues with CRA, you can always file a notice of objection and ultimately take your claim to court.
SR&ED documentation
Apart from project eligibility, documenting SR&ED work is another contentious area. Businesses are commercially driven and historically do not document R&D efforts well. In order to both protect and maximize your claim maintaining SR&ED documentation is a good strategic move. It is easy for CRA to say that while the project seems eligible there is no documentation to support the problems encountered, tests undertaken or overall work done. In this situation, the SR&ED claim can be reduced or denied outright.
The good news is that you don’t need a lot of documentation and RDP’s Innovation Connection Program will identify and track SR&ED work done in real time.
In this way your SR&ED is protected on a CRA review, you will maximize your claim as costs are tracked in real time, and it is simply a good business practice to document your know how, in case key R&D staff leave the company.
RDP has assisted numerous companies in successfully navigating a CRA review of their SR&ED claim. If you have any questions on claiming SR&ED or need assistance with a CRA SR&ED review, please don’t hesitate to contact us.