What To Do: Time Tracking in SR&ED
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Properly tracking time spent by employees on SR&ED and non-SR&ED work is essential for any successful SR&ED claim; however, what method is most successful for time tracking?
Ensuring your SR&ED claim is supported by contemporaneous documentation is crucial to whether it is filed as accepted, reviewed or denied. Keeping up with the time spent on an SR&ED project can be difficult, especially when it is a project that spans multiple claim periods or that involves multiple team members; however, ensuring your time tracking records are sufficient may be the difference between your claim being rejected, or accepted. In this article, we discuss the Canada Revenue Agency’s (CRA) requirements for time tracking and their recommendations for capturing that time in proper documentation.
What is Required for Time Tracking?
In the CRA’s SR&ED Salary or Wages Policy document, the agency does not directly specify what is required for time tracking. In fact, Karl Lavoie, a CRA media spokesperson, says that “the CRA does not prescribe the manner in which time spent working on SR&ED activities should be recorded.” 1 Instead, the CRA provides “a list of potential sources of supporting information that could be used by claimants to support an allocation of labour expenditures to an SR&ED project.” 2
According to the policy document, the objective of producing these sources of information is to provide key facts including:
- The names of the employees performing the SR&ED work.
- Confirmation of employment (hire and termination dates).
- Verification that the individual is an employee and not a contractor.
- Identification of specified employees.3
The document continues:
In addition, appropriate allocation methodologies can be used to determine the number of hours an employee spent working in SR&ED. When appropriate and effective controls are in place, … [certain documents] may provide the information required. In some cases, more than one source of supporting information may be required to evaluate whether the labour allocation is reasonable or not.4 [Emphasis added.]
Sources of Information
The sources of information can take the form of development plans, supervisor summaries or other naturally generated information, such as contracts and meeting minutes. However, another source of information the CRA recommends using is time sheets. As the policy document notes:
Individual time sheets that allocate time to SR&ED and non-SR&ED work are a good source of supporting information. Time sheets can be used to show the reasonableness of an SR&ED labour claim. Time sheet codes may be based on business projects that do not align to SR&ED projects. In such cases, other evidence may be required to support the SR&ED labour allocation.5
For instance, if one were to use time sheets, another source of information that could be used to validate the SR&ED claim would be a development or project schedule plan. This is specifically useful because:
The resource-planning element of a project schedule plan may identify the resources associated with specific work to be undertaken in the claim period. Where the work relates to the technological or scientific objectives of the SR&ED project and the plan can be compared to actual results or other controls, one may be able to rely on these planning records to allocate labour to an SR&ED project.6
Supervisors’ summaries may also provide a means of identifying time spent on an SR&ED project. As the policy document notes:
Project managers or technical supervisors often prepare periodic weekly, monthly or quarterly summaries. The summaries document the amount of SR&ED undertaken by the R&D teams for a given period. A person who has direct involvement in managing the work of SR&ED personnel should prepare such summaries. It is expected that the summaries would identify the significant SR&ED and any non-SR&ED work undertaken during the period in question. To be effective, the summaries should be updated regularly.7
As an aside, and as already noted, you may be able to rely on additional naturally generated information that substantiates the amount of SR&ED work on a project. These documents include:
- Contracts
- Planning documents.
- Project specifications.
- Project objectives and milestones.
- Descriptions of problems to be solved.
- Resource allocation records and budgets.
- Written correspondence with customers and suppliers.
- Minutes of meetings.
- Supervisor summaries.
- Project, laboratory, or personal notebooks.
- Progress and final project reports.
- Organizational charts.8
The policy document additionally stipulates that “an allocation of labour based on naturally generated information must give the CRA a reasonable level of assurance that there is minimal risk of material error in the labour expenditure being allocated to an SR&ED project. The claimant should be able to show support for the claim in the documents and other information.”9
In fact, Lavoie notes that the lack of proper documentation is something the CRA repeatedly is confronted with:
One of the challenges the CRA experiences when reviewing SR&ED time tracking is that it often lacks sufficient detail and/or documentation. The time spent working on SR&ED activities must be clearly distinguished from time spent working on non-SR&ED business or activities. Dedicated time codes for SR&ED and non-SR&ED activities are very helpful in addressing this problem.”10
What Does the CRA Recommend for Time Tracking?
In the CRA’s SR&ED Salary or Wages Policy document, section 13.5 describes the use of supporting documentation required in relation to the labour allocation method depending on the R&D environment; however, the agency does not go further and recommend a particular time tracking software to use. This is potentially a result of Treasury Board of Canada Secretariat rules prohibiting the federal government from endorsing third-party vendors on their own communications products.11
It is important to note that “The use of an allocation method in determining SR&ED labour expenditures will generally be acceptable to the CRA, as long as there is supporting information to establish the reasonableness of the method.” 12 Lavoie supports this statement and clarifies that “companies that provide sufficient documentation to verify time spent working on SR&ED and non-SR&ED activities can be successful in obtaining their tax credit.”13
Distinct, Well-defined SR&ED Projects
In distinct, well-defined SR&ED projects, where personnel and resources are assigned to specific projects, the policy document notes that:
Controls to identify and segregate non-SR&ED work, such as negative time reporting, provides an indication that the labour allocation is reasonable. Supporting information in this setting may include a development plan that can be used to verify job functions. Where labour resources are used in many projects and in both SR&ED and non-SR&ED, labour allocations can be made based on such things as:
- Resource allocation or utilization summaries.
- Project cost control systems.
- Supervisor summaries.
- Gantt charts.
- Time lines.14
Dedicated R&D Environments
In dedicated R&D environments, “where a defined group of personnel are focused exclusively on R&D for new products or processes, usually to the exclusion of all other business activities of the business, […] a negative time reporting system that captures non-eligible labour expenditures can be quite effective.”15
Supporting information in these environments can include such things as:
- Supervisor summaries.
- Resource allocation or utilization summaries.
- Gantt charts.
- Time lines.
- Time sheets.16
Early Stage or Start-up Businesses
If an early stage or start-up company performs R&D to develop new products or processes, it may be the case that, in some situations, personnel will be focused on one SR&ED project. If so, the CRA recommends that “the simplest approach may be to identify employees working on non-eligible work and subtract that portion of labour expenditures from the total labour expenditures.”17
The policy document goes on to note that, “the claimant should be able to distinguish allowable SR&ED labour expenditures from the total operating costs of the business. Additionally, the claimant should be able to give information supporting the allocation of personnel to an SR&ED project.”18
Documents that may be used as supporting information include:
- Job descriptions.
- Development plans.
- Gantt charts.
- Supervisor summaries.
- Time sheets.19
Shop Floor SR&ED
Shop floor SR&ED involves “creating new, or improving existing, materials, devices, products, or processes in the field or at a commercial facility.” 20 In order to successfully track the time spent on shop floor SR&ED, the policy document states that:
Shop floor SR&ED can involve a variety of employees from different parts of an organization. An SR&ED project of this nature could involve shop floor supervisors, engineers, machine operators, mechanics, and welders. Individuals may report their time using time sheets, a time clock system, or other methods. Because of the variety of employees involved in shop floor SR&ED, it is advantageous to claimants to develop a process to collect information at the start of a project, otherwise difficulties may be encountered in supporting the time an employee spends performing SR&ED work.21
Summary
While the CRA does not advocate a particular method of keeping track of time on SR&ED and non-SR&ED work, ensuring that proper documentation is kept for each SR&ED project may be the key to your claim’s success. The documentation should clearly show the time that was and was not spent on SR&ED for each individual who is included in the claim. It is beneficial to keep multiple documents that can substantiate the time spent on SR&ED, as this can support your claim and prove how much time was spent on SR&ED projects, which will help your claim be accepted.