How to track Financial Documentation for SR&ED

The Scientific Research and Experimental Development (SR&ED) Program is a federal tax incentive program that encourages Canadian business to reach technological advancement by conducting systematic investigation when they are faced with technological uncertainty. The Canada Revenue Agency (CRA) administers the program and issues your company with a tax credit of up to almost 70% of the cost of your R&D.

As SR&ED consultants, one of the most frequent questions we get from our clients is about the financial part of the SR&ED documentation that is required by the CRA. Supporting information and records are required to prove the work performed and the expenditures made so that you’ll receive your tax credit promptly.

The challenge is, however, that if this is your company’s first time filing, you may not be fully aware of all of the CRA’s documentation requirements.

Supporting evidence is key. The CRA is looking for signed and dated documentation that delivers clear information on expenditures that took place during, and not after, your SR&ED work. In addition, you have to support your claim with contemporaneous documentation of your research and development processes as well as any challenges that did arise in the process.

Types of Financial Records

A good rule of thumb is to keep and record absolutely everything involved with your SR&ED projects.

Records for your SR&ED expenditures should not only include an electronic accounting ledger, but also all company financial statements, records, journals, vouchers, and paper and electronic source documents , invoices, proof of payment, timesheets, and payroll records throughout the tax year. Records can also include plans, experiments, progress reports, and communication between team members. Connecting your day-to-day correspondence to these expenses can provide ease for a financial review if it becomes necessary.

The Format of your Financial Documentation

To make an SR&ED claim that passes muster, you need to keep copies of all of your invoices and receipts. In fact, documents that were originally produced in one format ought to be stored in that format, unless they are reproduced. In other words, if you’ve received a paper receipt or electronic receipt, it’s best to retain those original documents.

There are ways to convert paper documents to an electronic form. Electronic image formats are acceptable if they are accurate, display the exact same information as the original, and match the original in terms of clarity, resolution, and hue.

It’s also critical to remember that, in case of an SR&ED claim review, a logbook has to be kept with information about how paper documents are captured in electronic images. For each electronic copy these logs should include:

• The date the image was captured
• The signatures of the individuals responsible for both authorizing and performing the production of the image
• A description of what has been captured in each image
• A notation as to whether the source documents for each image were destroyed after imaging, and the date these actions took place

To know if your business system meets CRA record-keeping requirements, understand that the CRA needs to be able to easily evaluate your electronic data files, their internal controls, and the overall reliability of your documentation. The more that you build transparency into your systems before your SR&ED project begins, the less likely you are to run into problems down the line.

Keeping Audit Trails for Business Transactions

Think of the process of preparing an SR&ED claim as simultaneously preparing a viable audit trail. An audit trail is a clean and clear series of records linking everything you do during your SR&ED project to everything you pay for and settle in your accounting spreadsheets and financial statements.

All supporting evidence and contemporaneous documentation listed above needs to be included, but you should also include:

• E-commerce and point of sale data
• Transactional invoices, web and confirmation logs, and emails
• Digital signatures and other security-based interactions
• Electronic data interchange (EDI) records and acknowledgments
• Stock inventories
• Information stored on income tax and GST/HST return software