It all has to do with what you know at the start and what you remember at the end. These are two things that always get negated as time passes, for different reasons.

Any development project that may have SR&ED, is generally not such a simple endeavor where every detail can be broken down at the start, into nice set of work breakdown structures.

The reality is that “You don’t know what you don’t know”.

And in fact, the entire discipline of project management itself has changed where it is simply recognized that surprises are bound to occur along the way, and they will need to be dealt with. Every aspect of the project cannot be accounted for up front. Whether your development approach is SDLC or an agile methodology, all the details, even some important ones, may not be known up front.

And the fact of the matter is that you cannot worry about what you don’t know. The list would be endless. But there is one overriding question that lingers in the back of your mind as you trudge forward.

“Will it work?”

In any stage that it is working, there is no need to care about all the subtleties of why. A full understanding of the why, does not always matter. As long as it works reliably, it is all good.

None-the-less, there are always somethings that could upset the applecart. And no one is really sure what those things are going to be. But when something does not work, you generally have to understand why. Now it matters because you need to ensure that it does not impact any related parts of the development; and of course, it matters because your project needs to advance.

And there you have a key hallmark of uncovering SR&ED:

Things are not working as they were expected to, and you need to understand why it is so.

So it begins a discovery process. Trying to figure out why. Trying to figure out what is wrong with the method, the technique. Trying to understand what is different about this particular application. Searching to devise a technique, a method, an approach that will resolve the situation.

Now you are doing SR&ED. It is clearly visible.

But unfortunately, it is common that no one captures all of that core SR&ED activity because of the focus on resolving the issue. And when the project ends, your attention quickly moves on to the next project or issue which you must deal with. And soon enough, you quickly start to forget all those things that you uncovered. That new knowledge that you created. And you begin to forget that you did not know what you did not know.

And so your SR&ED claim is also at risk of fading away.

It is really like accomplishing any other complex task. Learning how to walk perhaps. Or riding a bike. Once you have accomplished the learning and it is behind you, it is so hard to recollect and imagine the details of the struggles that got you through.

What it comes down to, If you want to establish a successful SR&ED claim, it is important not to let the key SR&ED activity be forgotten and fade from your memory banks. And establishing a case by looking at things retroactively becomes harder, as some things begin to seem like they were obvious, even though they were not at the time.

All technology companies are quick to gravitate to the SR&ED program. And why wouldn’t they? It has the greatest reach of any form of government funding. And for Canadian controlled private corporations, you need have no revenue, nor any income. For any start-up, this is the usual starting point. So where do you sign up?

As much I wholly endorse the program, and have seen many companies both survive and benefit from it, it is not a free-for-all. The key obstacle is that determining what work is eligible is not a black and white process. The criteria themselves may be simple enough to understand. But the application of that criteria is a whole different story. Both the interpretation and judgement of the work will come with a degree of subjectivity.

So the program itself can be great.

But it can also be both time consuming and disruptive. And after the best has been pulled out of you, it may be a big letdown.

So when should you just not bother?

When You Can Do Better

There may be government funding that may be more favorable to your situation. It may be hard to believe, I know. But there are many programs that target very specific industry segments. And although the programs may offer less on percentage basis, they may offer more in terms of how much of the work counts. And whether you meet the eligibility criteria may be a simpler process.

When It is Not Possible to Make a Case

You may be in one of the identified fields of technology, and you may in fact be creating new technology. But a successful SR&ED claim is not just about filling in the boxes. It is about making a case for the nature of the work that you have done. And making a case hinges on the ability to identify the risks and uncertainties in the work and how they were dealt with. If you cannot dawn this mindset, stop now.

When There is No Evidence

You may have a very solid case and may in fact dazzle CRA. But there must be evidence. CRA is wary of smart people who can present a great narrative. And the type of evidence that CRA seeks is always the type of stuff that your development team does not capture. If you operate in super agile mode and there isn’t SR&ED evidence to scrape together, CRA will be a doubting Thomas.

When Someone Else Has First Dibs

If you are doing contract work, the company that has contracted you to do the work is first in line to make an SR&ED claim. Two claims cannot be made for the same work. Before you decide to put the time and effort into creating a claim, you need to be sure that your customer is not making the claim themselves. And CRA will look closely at the contract itself to decide for themselves.

When There is Off-Shore Development

SR&ED is a program to support the advancement of knowledge in Canada. If your project straddles between your Canadian efforts and efforts outside of Canada, things get murky. Which means that it can get a lot harder to prove what was done where.

When You are Not Paying People

The whole SR&ED benefit that is paid out to you is dependent on the expenditures that were incurred and paid. If there is no accounting being done for the efforts that your company has put in, and there is no salaries payable that are being recorded in the books, there is no SR&ED claim.

When You are Not Willing to Have an Audit

The SR&ED department is completely separate from the regular financial review department within the CRA. So we are not talking about a CRA financial audit. We are talking about a CRA SR&ED audit. The fact is that a large percentage of SR&ED claims are audited. Hence you must prepare the claim with the mindset that you will need to defend it. If you do not adopt that mindset, you will inevitably set yourself up to be easy picking for a CRA reviewer.

SR&ED is a great program and is better than what many other countries offer. But you can’t hack your way to a successful claim. If you can’t put the right amount of underpinnings in place, don’t bother. Everything will come crumbling down.

Entrepreneurs often think of government funding when they need additional financing for their business. Usually it is the case that all other avenues of financing are not willing to put out the welcome mat, and simply turn a cold shoulder. So what else is an entrepreneur to do?

There must be something there, amongst that myriad programs trotted out in every annual budget. When no one else is willing to help or even listen, the government must certainly have a way to lend a helping hand.

Well there is good news and bad news.

The good news is that government and quasi-government sources are generally a good source of information resources. They do want you to succeed and grow, especially since it is hard to get that real financial support that you really need. So providing you with an unbiased and rich set of information resources on how to succeed, is excellent value in itself.

But when it comes to the money, there is some bad news. Things are not what you expect. In fact it is almost deceptive. The number of funding programs that exist seems to be inversely proportional to the number of applicants who actually meet the criteria of the program.

While it is understandable that there must be qualifying criteria for any source of funding, the government has a knack for setting things up, so it is narrower than what first meets the eye. It almost becomes a PR stunt; i.e. the more programs that they have to talk about, the better it makes them look. And the fewer companies that qualify, the easier it becomes to manage from a fiscal policy. Are you in the right geographic area? Are you in the right industry? Are you working on the right type of project? Are you the right size of company?

Relying on government funding reminds me of using that extended car warranty. When it finally comes time to use it, you suddenly find out: there is quite a long exclusion list that applies; a vehicle inspection that is needed; all the maintenance records need to be reviewed; there are restricted suppliers who can supply parts….

You get the idea. There are criteria. And then there is the process of applying that criteria, which just does not seem to favor you much at all.

Getting an exact match between you, your financial need, and the government programs is a muddied process at best. You may believe that you have found the answer to this onerous task when you come across those website selector tools. With a nice list of those who have received funding, they will assure you that they will rapidly line you up with all the programs that apply. Well if believe in magic, it might be worth a try.

The reality is that various government programs come and go. The criteria are very specific. To seize the opportunities, you need to have an alert system that triggers you to drill deeper and take action. It seems a natural extension that you would have your accountant keep tabs and advise you when something comes up. But it is often the case that your accountant may not have strong enough insights into key parts of your business, or the ability to recognize the government programs that are a fit. If that is the case, you are sure to miss out.

If you like to do things yourself, you must be sure to do the following:
-Review the government websites regularly
-Listen to the annual provincial and federal budgets
-Have a dialogue with several government agents (i.e. FedDev, IRAP, BDC et al)
-Regularly talk to colleagues who are in a similar business

The key is to be able to recognize and pursue programs that apply. And then to present your situation in the most favorable way, to match with the criteria that are used. Good programs where you can get real money tend to have a line-up form quickly, and not everyone will get funded.

If you have had a chance to watch or play Wheel of Fortune, you know that each game starts with an unknown phrase with a set number of letters. It is a puzzle-type of game, where the category of the phrase is given; and then individual letters are chosen by the player. As more letters are chosen, the phrase begins to take shape. As the game progresses, strategies can be used to make the next letter picked a revealing one. At some point, even before all the letters are revealed, it is possible to deduce what the phrase is. Game over. The puzzle has been solved.

As much as Wheel of Fortune is America’s game, SR&ED is Canada’s game for every company that engages in the development of technology-based products.

Being able to effectively compile an SR&ED project report is the end game. If you get this done right, you will maximize your SR&ED refund. And there is nothing like an SR&ED refund. It just gives that incredibly good feeling of found money.

But at the beginning of any development project, who really wants to think about the SR&ED component of the project? It seems counterproductive. After all, SR&ED is not what defines the success of the project. It’s just a nice tax incentive that you really don’t want to miss out on.

So at the beginning, it seems best just to take the Wheel of Fortune approach. The phrase to be solved is blank. And I have never seen anyone guess the phrase starting with a completely blank puzzle. And so it is with the SR&ED pieces of information that will eventually make up the SR&ED claim. You don’t exactly know what they are going to be.

But as your development moves on, those tough-to-solve problems which need to be overcome, will emerge and take shape. And here is where the important part of the game comes along. If you can leave some kind of trace of the technological uncertainties that you are uncovering, it’s value to the SR&ED claim will only grow as you move forward.

On Wheel of Fortune, when a player guesses a letter that is a part of the phrase, Vanna does her job – she turns the letter around. Or rather, in our high tech world, she taps the blank to have the letter appear. And oh how so many people have marveled at Vanna’s job. She turns the letter. That’s it. Of course the implication is, anyone could do that.

But of course, it is such a crucial part to the whole process. The letter must be turned so that it is recorded. Can you imagine if no one recorded the letters as they were guessed? And just went ahead and proceeded, with the foolish thinking that they will remember. Of course they wouldn’t remember. As the game moves on, the whole mental effort and strategy is bound to shift several times. And what was very memorable when it happened, starts to get hazy as things go on.

Your SR&ED process is not so different. When information that will contribute to the SR&ED claim is uncovered, someone needs to do Vanna’s job. Capture a record of it somehow. If you don’t, the details will most certainly start to fade.

When you get to the end of your project, you can compile your SR&ED claim. How onerous the process will be, will be directly related to how much of the puzzle is showing in the traces that you have left. If no one has done Vanna’s job, you will have the equivalent of staring at a phrase full of blank letters within a certain category. You are out of luck. If you are fortunate enough to have a few letters showing in the puzzle, as happens in Wheel of Fortune’s bonus round, you might have a chance depending on the letters. And of course, if you solve the puzzle, you get the money. My suggestion, play to win and record what matters.

I recently had to go to traffic court to serve as a witness to a traffic accident. Although the case never actually made it to the trial, there were a number of traffic violation cases which served as a source of entertainment during my wait. It was particularly interesting to watch the cases and the variety of defenses.

Purely by coincidence, a friend of mine was the court recorder. So I had a chance to chat about the different effectiveness of the defense representation. The insights were somewhat surprising. There were defenses mounted by lawyers and there were those mounted by paralegals, but I couldn’t tell you who was who. My guess would have been that it was the lawyers who were the ones that were winning. But as it turns out, it was the paralegals who ruled. They knew the Highway Traffic Act inside and out better than anyone.

The whole experience resonated with me and the comparability to the SR&ED audit process. Many first time claimants believe that they are prepared for an audit. The best that I could acknowledge is that they may be ready for an audit. But being prepared is a completely different matter. I would argue that one can only be prepared if they have actually been through the process. It’s a bit like learning to swim. You can understand all the steps. But it’s not until you get in the water that you find out how it really works.

The SR&ED process is not like any audit that you have ever participated in. Whether it be a financial tax audit, or an ISO audit, there is no comparable. The audit process is part of CRA’s business model. Make no mistake about it. It is about the money.

CRA does not mandate any special process to follow in the pursuit of SR&ED. Your regular development processes are just fine. Or so they say. The reality is that you will walk through those regular processes as you seek to show where the qualifying work occurred. During the discussion, the CRA reviewer will be the most engaged listener that you have ever met. And in fact, they may be quite keen about all the work discussed. Unfortunately, in the back of their mind, they are building a case, mostly against you.

The main difficulty is that you are unable to ascertain whether you are winning or losing. Generally, it is an arduous task to recall large amounts of project details that may have occurred on the order of 12 month ago. Hence a great amount of effort is exerted to put together the picture as the auditor continues to probe. And as you are driving yourself to a pretty good level of mental fatigue, you are often putting things in everyday language, that is in fact implicating you in the case of non-SR&ED.

Your great epiphany only comes at the end of the project review, when that highly engaged, highly empathetic auditor presents his opinion against you. And then it is impossible to recover. It behooves you to take an SR&ED audit as a serious threat to your claim. No one enjoys the unexpected persecution. Review your claim with someone who has been through the process. This will help you to sooth the process and maximize your chances. It still is not an easy process, but it is better to have a life vest if you have never been in water before.