In this post we lay out the basics of SR&ED record keeping. CRA is very stringent on what costs and projects are eligible for SR&ED and what constitutes evidence for these costs.
This is not an exhaustive list, but it will set the foundation to get you started on the right foot.
SR&ED – Documentation
Claiming the SR&ED tax credit is a multi-step process that requires careful examination and record keeping, specially if it is your first year of claim. If CRA chooses to review your claim, you must be ready to defend every dollar on the return or expect them to disallow it. Therefore, the best form of preparation is documenting your supporting evidence throughout the project.
Supporting the costs claimed
CRA makes an interesting case when it comes to documenting proof of SR&ED eligible costs. They refer to this proof as contemporaneous documentation. This simply means that instead of waiting until the end of your project to collect what you believe are eligible costs, you must instead document costs as your project progresses. In fact, CRA considers satisfactory proof to be proof that is:
- Signed
- Dated
- Specific to the work being performed
What your recordkeeping should look like:
Aside from the usual financial information that you may need to provide such as general ledgers, financial statements, journals, and vouchers, CRA may also request:
Cost breakdowns per project for each project being claimed in the return
What cost allocation method you have chosen if you are working with multiple projects, some of which may not be SR&ED eligible
Time sheets that will support salary expenses eligible for the credit
Contracts and agreements eligible for the credit
Supporting schedules which reconcile the T661 to your financial statements
Other items to keep in mind:
The CRA provides an extensive list of items which can be used as supporting evidence, but by now means is it exhaustive. The items below can give you an idea of what constitutes evidence for the claim:
Project planning documents
Timesheets showing allocation to the project eligible for the credit
Design of experiments
Project records
Design, system architecture, and source code (software development)
Records of trial runs
Minutes of project meeting
Prototypes and samples
Photographs and videos of the project or testing
Take-away:
SR&ED is a complex return that requires attention to detail and an understanding of what constitutes sufficient proof. However, complexity does not necessarily equate to difficulty and a strong set of record keeping policies which immediately identify and retain eligible costs can make defending a return a minimal hassle.
If you are unsure about whether you have a SR&ED eligible project or would like to understand better how to make your claim audit proof, our experts are here to help. Book a consultation with us today!