Get off the couch and produce the evidence for your SR&ED claim!

There’s been a lot of buzz about the CRA “raising the bar” for SR&ED claims.  (See http://www.cata.ca/Advocacy/SRED/updates/sred_update_July10.html to view the hype).   In reality, I think the CRA is just playing a card they’ve always had — i.e. to require claimants to demonstrate the validity and SRED-ability of their claims with supporting documentation and evidence.  If you have a valid claim this should be a no-brainer to collect and archive at the time you prepare your claim.  Unfortunately many companies disregard this simple step.

Evidence supporting a claim shouldn’t be difficult to collect.  The CRA provides some guidance in their “Guide to Form T661″ (see appendix 2).  The claim form has a checklist addressing the following items:

  1. Project planning documents
  2. Records of resources allocated to the project, time sheets
  3. Design of experiments
  4. Design documents, computer‑aided design (CAD) and technical drawings
  5. Project records, laboratory notebooks
  6. Design, system architecture, and source code (software development)
  7. Records of trial runs
  8. Project progress reports
  9. Minutes of project meetings
  10. Test protocols, test data, test results
  11. Analysis of test results, conclusions
  12. Final project report or professional publications
  13. Photographs and videos
  14. Prototypes, samples
  15. Scrap, scrap records
  16. Contracts
  17. Others

This list seems daunting and somewhat confusing.  Just remember the following:  (1) You don’t need to check every box; and (2) Use some common sense.   This is an area where I frequently help my clients, and I think they’re frequently surprised at how straighforward this can be.  As you know if you’ve read my previous posts, I’m an advocate for keeping time records.  Well, that’s one of the key pieces of evidence you ought to be able to produce (and archive) for your project (item #2).    And if you have a software project, item #6 can always be produced.  Also, I frequently encourage my clients to archive screen shots or Camtasia videos of their system — that’s a candidate for item #13.  If you have subcontract work that you’re including in your SR&ED claim, include the contracts in your archive for the SR&ED claim (that’s item #16).

The body of evidence supporting your claim will quickly grow.  I don’t think there’s an “acid test” for the proper amount of supporting evidence, but I’ll tell you this:  If you make a reasonable attempt to locate and archive evidence for your claim, you’ll be miles ahead of a lot of companies who expect to receive SR&ED credits!

Even if you feel you’re not in a position to assemble your SR&ED claim yet, you should get in the habit of archiving project evidence.  The paperwork to make a claim is simple, but hunting down evidence at year-end (or when you finally get around to making a claim) can be daunting:

  • Time sheets
  • Requirements docs, Design docs
  • Project plans, schedules, etc..
  • Screen shots
  • source code (and checkin history)
  • Meeting minutes
  • Contracts, e.g. w/subcontractors
  • etc..

If you’re a start-up and aren’t paying market salaries (or any salaries for that matter), developing this habit  will help establish bonafides for various purposes, and records of sweat equity can be used to put the real expenditures into context when you actually make a claim.  It will help if you want to attract VC or angel investment.    In fact, any time you’re asking for other peoples’ money, this type of evidence will be useful!  This will demonstrate your discipline.  Furthermore, archival information about a project is fundamental to good project management and project estimation for future projects.

Remember — keeping records is easy compared to many of the other challenges you face as an entrepreneur.  The relatively small investment you make in this area will pay big dividends as  your company grows

Project planning documents
Records of resources allocated to the project, time sheets
Design of experiments
Design documents, computer‑aided design (CAD) and technical drawings
Project records, laboratory notebooks
Design, system architecture, and source code (software development)
Records of trial runs
Project progress reports
Minutes of project meetings
Test protocols, test data, test results
Analysis of test results, conclusions
Final project report or professional publications
Photographs and videos
Prototypes, samples
Scrap, scrap records
Contracts
Others