This blog was originally written by Dmitry Brusilovsky, CEO, SRED Unlimited.
SR&ED stands for the Scientific Research and Experimental Development tax credit program, which is available to companies operating in Canada in a variety of industries who invest and engage in experimental development in Canada. Click here to see a list of some industries to which SRED might apply.
Consultant is defined as “an expert or professional in a specific field and has wide knowledge of the subject matter.” So an “expert” in SR&ED will have a “wide knowledge of the subject matter”.
Malcolm Gladwell in his book Outliers poses the idea that 10,000 hours makes someone an expert. Seth Godin and others argue that 5,000 hours is sufficient. But simply putting in the time does not, in and of itself, make one an expert. An expert also needs to demonstrate competence. In terms of SR&ED, competence means having submitted over 500 SR&ED claims and had them “Accepted as Filed” (ie: no changes/challenges/reductions).
Naturally, as one develops “wide knowledge of the subject matter”, one becomes an expert. An SR&ED consultant will become intimately familiar with the following areas:
- SR&ED Relevant section of the Income Tax Act.
- All technical and financial policy documents, in addition to the SR&ED Glossary and Claim Review Manual.
- The processes and procedures in their local tax office and all the local Research and Technology Advisors (RTAs)
- How to compile research related to the technology baseline (“knowledge base”), review supporting documentation, and ask questions that tease out the correct information.
- Unwritten, undocumented “red flag” words and/or terms which the CRA uses to screen for “risky” applications.
- Tax Court of Canada rulings since the inception of the program (particularly, Northwest Hydraulics) and other cases that highlighted key concepts, such as SR&ED and business context, or the importance of answering and providing sufficient information.
One can learn all of the above points without hands-on experience (ie: understand the theories), aside from point 4, for which hands-on experience is a MUST. Writing/preparing/submitting SR&ED claims requires an additional level of insight into the programs (ie: experiential learning).
Expert SR&ED consultants should have background knowledge and experiences in technology, accounting, and/or law. In particular, be cautious about trusting anyone claiming to be an SR&ED consultant without the technical knowledge as this is highly important not only in their understanding of the scientific research and its experimental development but also how applicable this is to the SR&ED policies and qualifications and how to clearly document and communicate the work performed to the CRA. A good background in technology is necessary to understand the terminology and science behind scientific and experimental innovation, and to be able to explain it in a way that is understandable to the CRA and meets their criteria. Technical knowledge allows a consultant to not only glean necessary details about standard versus non-standard industry practices from clients, but also determine which projects may or may not be deemed eligible.
The advantage of hiring an SR&ED consultant is for their in-depth understanding of innovative industries, and their ability to help claimants understand the program, and communicate to claimants how their work does or does not meet these requirements.
A competent and experienced SR&ED Consultant should:
- Have expert understanding of the SR&ED related section of the Income Tax Act.
- Have expert understanding of “basic” SR&ED eligibility criteria.
- Have a background in computer science, engineering, or other areas of science.
- Be able to communicate with clear, precise English.
- Have accounting and editing experts as part of their team to ensure your claim is as complete and understandable as possible.
- Have relevant details on their LinkedIn page, including industry connections and their past and current experience.
The right SR&ED Consultant will also provide guidance on the type of documentation required throughout the year to back-up your claim, saving you time and effort and stress at tax time. Many companies are intimidated by and may avoid filing an SR&ED claim simply because of the paperwork involved – which is a shame.
SRED Unlimited empowers companies to take control of their SR&ED process with the SRED Toolkit, which will help companies easily compile records the CRA needs as back-up, keep them organized, and make them easy for auditors to follow. Should an auditor have questions or an audit occur, we help you prepare for the auditor’s questions or visit, and walk with you through the process.