An overview of the steps to prepare and file an SR&ED claim are discussed below. The discussion is not comprehensive, but a number of key points are reviewed. The 10 steps are:

1.  Deciding to Make a Claim
2.  Deciding What Projects to Claim
3.  Writing the Technical Report
4.  Documenting the Costs associated with each SR&ED Project
5.  Filing the Claim
6.  Desk Check
7.  Science Review
8.  Financial Review
9.  30-day Letter
10. Notice of Assessment & Receiving a Cheque

Steps 1 through 5 typically take a couple of months to complete, although, when the filing deadline is close, it has been completed in a couple of weeks.

We start by helping you, as a prospective Client, qualify your possible projects in terms of having a viable claim with a benefit large enough to justify your efforts and the cost of professional assistance. This leads to a contract being signed on the understanding that, after a detailed review, a decision not to file the claim may be made by either you or us - either because your projects are found to be unlikely to satisfy CRA's Project Requirements or because the probable benefit is less than initially estimated.

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Based on a list of possible projects that you prepare, the SR&ED projects to be claimed are defined. This is the most critical step in the process, and is where we provide the most value to you. You know what projects you have done, but it requires objective and experienced advice to identify how to define and present SR&ED projects to maximize the claim.

For example, for software projects, it is essential to distinguish between your projects (typically oriented towards your customers' needs) and the SR&ED project (which has to be based on the technology that is the foundation of your projects). In our experience, this is a difficult distinction for most clients. The key to maximizing the claim is to find a way to combine the possible SR&ED projects into a single project. This is often possible where there is a systemic relationship amongst projects (such as when they are all part of developing a new platform). The combined project will always involve more costs (and thus more benefit) than the sum of the costs of the individual projects.

Let's look at a real-life example. A client was in the process of developing an integrated software platform based on some newly-available technology. As the platform was being developed, they used part of it to satisfy the needs of one of their customers (on a fixed price contract). This spin-off of the platform was repeated several times at different stages of partial development. The client proposed each of the spin-off projects as separate projects to be claimed. After detailed discussion, it was decided to claim the development of the platform itself as a single multi-year SR&ED project, for which the spin-off projects were treated as beta tests of various parts of the platform. The amount claimed (successfully) was considerably larger than the costs of the separate projects.

Another challenging area for software projects is to distinguish between standard development (which cannot be claimed) and experimental development (which can). Standard development is generally defined as a linear development process with pre-defined activities and only minor 'bumps' along the way. On the other hand, experimental development is an iterative process, which includes significant failures - which leads to the observation that SR&ED claims are the only area of business activity where it pays to have failed! (Application system design issues are usually regarded as standard development, however innovative or complex they may be.)

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The project has to be written up in a Technical Report that accompanies the filing of the claim. The content of the Report has to satisfy the requirements of the SR&ED program. It is important to understand that the objective of the Report is NOT to describe the project, but to satisfy the CRA reviewer that the project qualifies.

The information required for the Report is defined in the following Section 'Information Requirements'. In addition to specifying the technological objectives and outcomes, the Report emphasizes the development process to demonstrate that it is experimental and not standard. There is an emphasis on defining options considered and explaining failures. These details are rarely immediately available and take time for you to assemble.

The start and end date of each project has to be specified. A project starts at the point at which the need for experimental development has been identified. So, for example, if a challenging technological objective has been defined, the project does not start until research has failed to identify a known solution. The end date occurs when a solution has been shown to work within the parameters defined in the technological objectives.

Regardless of who writes the Report, it is a document that you must be prepared to explain (and sometimes defend) to a CRA reviewer. You have to approve the Report before it is filed.

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The costs that can be claimed for an SR&ED project include labour, overhead, capital, leasing and material costs. These costs may be offset by revenue that is directly attributable to the project. (Revenue that may be regarded as product sales, and fixed-price development contracts, are not treated as revenue to an SR&ED project.) When all the costs have been documented, you should review them carefully and approve them, before they are passed on to the accountant who will be filing the claim. The following represent some introductory comments about costing.

• Time can be measured in hours or days or, sometimes, even weeks. This depends on the time recording system you are using. (For an initial claim, CRA will permit any reasonable way of determining the time spent.)
• If individuals work 90% or more on the project, CRA allows them to claim 100% of their time.
• Only one level of project management is permitted.
• The rate to be applied to the time spent is calculated using T4 gross income and dividing by the number of working time periods in a year (excluding holidays).
• Bonuses are treated separately, and may be included in overhead.

1. 'Proxy' overhead costs are calculated as 65% of all employee labour (but not subcontracted labour). Proxy costs do not have to be defended but are capped by total actual expenses, subject to the types of expenses that are permitted.
2. 'Standard Accounting' is a specific statement of those additional expenses that were the direct result of the project. Certain expenses, such as rent, are not permitted.

• Alternative sources of funding, such as an IRAP grant.
• Wage subsidy programs for employees working on the project (which would be reflected as a reduction in the employee's chargeout rate).

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There is a CRA Form T661 which is used to claim SR&ED expenses. There are also other T2 schedules impacted by the use of a T661. They are filed as part of your T2 corporation tax return.

For CCPCs, if the T661 is filed at the same time as the tax return, the CRA standard for providing the refund is 4 months (and they usually achieve their standard). CRA has also introduced a fast-tracking system by which companies entitled to a cash refund may receive that refund within a few weeks of filing – if a desk review indicates that it satisfies specific criteria (which CRA have not revealed). If the T661 is not filed with the tax return, it is treated as an amendment to the return for which the processing standard is 8 months (and it could stretch to a year).

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The T661 is filed at the CRA Surrey Tax Centre (with the Report placed on top of the T2 corporation tax return). The T661 and the Report are then assessed, and, if it satisfies the unspecified criteria, a cheque is issued. Otherwise, the Tax Centre passes it on to the SR&ED Department that is located in downtown Vancouver.

CRA initially reviews the claim, and may accept it at this point, subject to the current CRA policy regarding claim size, consistency with earlier claims, as well as other risk factors. If it is not immediately accepted, it is assigned to a science reviewer and (in a separate group) to a financial reviewer. These reviewers may be satisfied by a request for additional information (via telephone or letter) – or they may decide to do on-site reviews.

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The primary purpose of a Science Review is to determine if the projects claimed qualify according to the rules and regulations of the SR&ED program. It involves an on-site visit by a CRA Research and Technology Adviser, which should be attended by your project manager, usually with at least one of their technical staff. (On occasion, CRA will hire an external consultant to conduct the Review.)

Science Reviews do not occur with every claim. There is usually one in the first two years of claiming, and after that they are sporadic. They will usually re-occur with a significant increase in the size of a claim or with the start of a new major project.

If this is the first such visit, the Adviser will review the SR&ED program to ensure that you understand it. The Adviser will ask you questions about the projects to determine if they qualify - in the Adviser's opinion. (It cannot be assumed that the Adviser has read the technical report carefully before the Science Review.) At the end of the Review, the Adviser will indicate satisfaction, the need for further documentation or explanation, and/or areas of concern.

The Adviser generally will not want to talk to us as consultants. So our role is that of facilitator (rather than co-defender). Nevertheless, it is important for us to attend in case there are any perceived problems with the claim.

You should listen carefully to the Adviser, and respond honestly to the questions. However, if the Adviser expresses any concerns, you should NEVER agree with any of them. The responses should be of the form "interesting", "we will have to think about that", etc. After the Review, we will contact the Adviser and debate any issues. If there are any disagreements about the qualification of a project, the Review is only the first step in the process of resolving the disagreements. Of course, if the Adviser is satisfied, there may be no need for any further contact.

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The purpose of a Financial Review is to confirm that you actually spent what you claimed, and that what you claimed are acceptable charges. It typically involves an on-site visit by a CRA Financial Adviser, who generally will look at financial and corporate records, invoices, T4s, and the physical presence of capital assets. At the end of the Review, the Adviser will indicate satisfaction, the need for further documentation or explanation, and/or areas of concern. Financial Reviews occur with most claims, although, after the first claim, they may only involve a telephone request for copies of specific documents.

There is no need for us to attend a Financial Review. As with a Science Review, you are advised to co-operate fully with all the requests of the Reviewer. (In most situations, it is perfectly reasonable to promise to produce some requested document at a later date.) You should NEVER agree with any concern or disallowance of a cost, responding with "interesting", "we will have to think about that", etc. After the Review, we will contact the Adviser and debate any issues.

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In most situations, if there are any issues with the science or the costs claimed, we will resolve them in discussions with the Advisers and you after the Reviews. At the conclusion of the discussions, the Financial Adviser will issue a letter that identifies how much of the claim is acceptable, outlines the reasons for disallowing any portion of it (if any), and summarizes the Investment Tax Credit ('ITC'). The Client is given 30 days to respond. Extensions are granted if reasonable.

In rare situations, it is necessary to appeal the amount allowed by CRA. CRA have a defined appeal procedure. This procedure includes:

• Requesting a review by a second Science Adviser.
• Filing a Notice of Objection.
• Legal actions involving different Courts of Law.

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Thirty days after the '30-day letter' has been issued (or earlier if notified that you accept the letter), the Financial Adviser notifies the Surrey Tax Centre of the approved ITC. The Tax Centre issues a Notice of Assessment ('NOA') to the Client, a copy of which should be faxed to us. If a cash credit is involved, the NOA will be followed within two weeks by a cheque for both the federal and B.C. portions of the ITC.

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