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.