Its no secret that tax audits are becoming more difficult. The CRA is centralizing their operations and attempting to replace skilled local personnel with more junior (and less expensive) staff working in remote processing centres. They are harder to get hold of. They don’t accept email and often staff either don’t answer voicemail – or don’t answer it for days.
While this is difficult for all small business taxpayers, innovative companies performing eligible scientific research or experimental development are affected particularly. In fact the current government predicts SR&ED tax incentives will decline by almost 18% in 2017. Since the level of innovative activity in our major technology hubs hasn’t declined, this is almost certainly the result of stricter interpretations of eligibility and more onerous documentation requirements.
The SR&ED tax credit program requires that companies document their hypotheses to address technological uncertainties within their experimental development projects. For the most part this is not really realistic. Companies are typically focused on improving new and existing products. Resolving technological uncertainties is really more of a by-product of experimental development than an explicit goal.
Just as challenging however, is the fact that small innovative companies don’t actually use activity-based costing systems. In spite of this, a successful SR&ED claim requires some form of activity-based costing.
We can help companies build effective, activity-based costing systems in support of SR&ED, using existing and naturally-generated records like project management software and source code repositories for software.