What Happens During a SR&ED Audit
CRA reviews a significant percentage of SR&ED claims each year. Understanding the review process, what triggers it, who's involved, and what they look for, helps you prepare a defensible claim from day one.
Why does CRA review SR&ED claims?
The SR&ED program distributes billions of dollars annually in tax credits. CRA has a responsibility to verify that claims meet the program's eligibility requirements. Reviews are not necessarily adversarial: they are a normal part of the process, especially for:
- First-time claimants
- Claims that significantly increase from the prior year
- Claims with a high ratio of SR&ED expenditures to total revenue
- Claims in industries CRA has flagged for closer scrutiny (software is one of them)
- Random selection as part of CRA's regular audit program
Being selected for review does not mean CRA suspects your claim is fraudulent. It means they want to verify it. Preparation is what determines the outcome.
Types of review
CRA conducts SR&ED reviews at different levels of depth:
Desk review (most common)
CRA reviews your T661 submission and supporting documents without visiting your premises. They may request additional documentation by mail or email. Desk reviews are typically focused on clarifying specific aspects of the claim: project descriptions, expenditure calculations, or supporting evidence.
Site visit (on-site review)
A CRA team visits your office to interview technical staff, review documentation, and examine evidence first-hand. Site visits are more common for larger claims, first-time claimants, or when the desk review raises questions. They typically last one to three days.
Comprehensive audit
A full audit examines both the technical eligibility and the financial aspects of the claim in detail. These are less common but can be triggered by significant discrepancies, inconsistencies, or patterns across multiple claim years.
Who you'll meet during a review
Research and Technology Advisor (RTA)
The RTA evaluates the technical eligibility of your claimed projects. They have a science or engineering background and will assess whether your work meets the three SR&ED criteria: technological uncertainty, systematic investigation, and technological advancement. The RTA will likely want to speak directly with the developers or engineers who performed the work.
Financial Reviewer (FR)
The FR examines the financial accuracy of the claim: salary allocations, contractor costs, materials, and overhead calculations. They verify that the expenditures claimed are reasonable, properly documented, and correctly attributed to eligible SR&ED activities.
What the RTA looks for
The technical review focuses on whether each claimed project genuinely involved SR&ED. The RTA will typically:
- Read your project descriptions closely. Weak or vague descriptions that don't clearly articulate the technological uncertainty are the most common red flag.
- Interview technical staff. The RTA will ask developers to explain the challenges they faced, what approaches they tried, and what they learned. These interviews matter enormously: the people who did the work need to be prepared.
- Request supporting evidence. Source code, design documents, test results, meeting notes, and other artifacts that corroborate the project narrative. Dated evidence is far more credible than undated summaries.
- Evaluate the "state of the art". Could the problem have been solved using publicly available knowledge? The RTA may research whether standard solutions existed for the challenges you claimed as uncertainties.
- Check for routine engineering. The RTA distinguishes between skilled engineering work (applying known solutions) and genuine SR&ED (investigating unknown solutions). This is the most common area of disagreement.
How SRED AI helps
SRED AI generates project narratives directly from your pull request history, creating a clear link between your T661 descriptions and the actual code artifacts that support them. This evidence index, showing which PRs, commits, and code reviews relate to each claimed project, is exactly what RTAs find most convincing during reviews.
What the Financial Reviewer checks
- Salary and wage allocations. Are the hours claimed for each employee reasonable? Do they align with the scope of the SR&ED projects described?
- Contractor and subcontractor costs. Are third-party costs properly documented with contracts, invoices, and deliverables?
- Materials consumed. Were materials claimed actually consumed in SR&ED activities, or were they used for production or commercial purposes?
- Overhead and proxy calculations. Are overhead amounts calculated correctly using the prescribed proxy method or the traditional method?
- Time tracking records. Is there documentation supporting the percentage of time each employee spent on SR&ED vs. non-SR&ED activities?
Common reasons claims are denied or reduced
- Work classified as routine engineering. The most frequent technical denial. The RTA concludes that the work, while skilled, used standard techniques to achieve a predictable result.
- Insufficient documentation. No contemporaneous evidence to support the project description. Without dated artifacts, the claim relies on after-the-fact testimony, which is less persuasive.
- Vague project descriptions. T661 narratives that describe the product or business outcome rather than the specific technological challenges and investigation.
- Overclaimed hours. Time allocations that don't pass the reasonableness test. If an employee claims 80% of their time on SR&ED but their role involves significant non-R&D responsibilities, the FR will reduce the claim.
- Ineligible expenditures. Costs that don't qualify (capital expenditures, market research, routine quality control, social sciences work).
How to prepare your team
If you're selected for a review, preparation can make the difference between a fully accepted claim and a significant reduction:
- Brief your technical staff. Developers who will be interviewed should be able to clearly articulate what was uncertain, what they tried, and what they learned. Practice explaining technical work in non-jargon terms.
- Organize your evidence. Prepare a package for each claimed project: the T661 project description, supporting documents (code, design docs, test results), and a timeline of activities. Make it easy for the RTA to follow the story.
- Reconcile your financials. Ensure you can explain how each employee's time allocation was determined. Be prepared to provide time tracking records, project assignments, and payroll records.
- Align your advisor. If you used a SR&ED consultant to prepare the claim, make sure they brief your team and attend the review. They understand CRA's language and can help translate between your technical staff and the reviewers.
- Don't overstate or understate. Be honest and precise. Exaggerating the uncertainty undermines credibility. Downplaying the work sells your claim short.
How SRED AI helps
SRED AI produces audit-ready evidence packages with each T661 draft: a chronological timeline of development activity, indexed references to pull requests and commits, and project narratives grounded in actual code artifacts. When the RTA asks for evidence, your package is already assembled.
What to do if your claim is denied
A denial is not the end of the road. You have several options:
- Request an informal pre-assessment review. Before the final determination, you may have an opportunity to provide additional information or clarification.
- File a Notice of Objection. If you disagree with the assessment, you have 90 days to file a formal objection. An independent appeals officer will re-examine your claim.
- Appeal to the Tax Court of Canada. If the objection is denied, you can appeal to the Tax Court. This is a more formal and costly process but may be worthwhile for large claims.
- Strengthen future claims. Use the feedback from the review to improve your documentation and project descriptions for subsequent years.
Timeline of a typical review
- Notification. CRA contacts you (usually by letter) to inform you that your claim is under review. This may happen weeks or months after filing.
- Document request. CRA requests supporting documentation for some or all claimed projects.
- Review period. The RTA and FR review your submission. For desk reviews, this may take 4-8 weeks. Site visits are typically scheduled 2-4 weeks in advance.
- Interview or site visit. If required, CRA meets with your technical and financial staff.
- Preliminary findings. CRA shares their proposed adjustments, if any, and gives you an opportunity to respond.
- Final assessment. CRA issues the reassessment notice reflecting any changes to your claim.
The entire process can take anywhere from a few months to over a year, depending on the complexity of the claim and CRA's workload.
Stop reconstructing what your team built
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