The Onus of Documentation: Separating Fact From Fiction

We have previously discussed how to keep contemporaneous documentation in our posts titled “Why do I need contemporaneous documentation for SR&ED?” and “SR&ED supporting documentation – getting from point A to point B.”

In this article will review the CRA’s understanding of “documentation” and highlight the consequences for falling short in this aspect of your SR&ED claim.

CRA’s Understanding of SR&ED Documentation

As described in the T4088, the guide to Form T661 provided by the CRA, the best evidence that a claimant can provide with regards to their SR&ED endeavour is “contemporaneous documentation.” ¹

This usually pertains to thorough and methodical reports which are dated, signed, and specific to the work performed. This does not just refer to formal and compiled reports which are pre-dated to match the works performed, but rather any supporting document whatsoever that was signed and filed on the same day as the work performed. The CRA describe contemporaneous documentation as “documents created at the time when the SR&ED work was done, and produced as a result of performing such work,” ² which can include “dated documents generated before, during, or immediately after the claimed activities, including planning documents and summary reports, records, and supporting evidence for the claimed work.” ³

While that may represent a significant increase in time dedicated to the daily tracking and compiling of all paperwork and reports related to the SR&ED work, it can mean avoiding a review after the claim has been filed. We, along with most industry experts, advise claimants to assign at least one person or a set team of personnel as SR&ED trackers. Such personnel, aside from their usual responsibilities, would be tasked with pursuing, collecting, collating, and filing everyday reports and supporting documentation. This information would then immediately be added to the project’s or organization’s SR&ED file.

This is why automated time tracking and other supporting software is promoted for use in SR&ED projects, as it sidesteps the need to exhaustingly document and prove the exact time spent by each member of personnel.

Consequences of Ignoring or Undercutting Documentation

One of the best examples to show the importance of contemporaneous documentation is the case of R I S Christie v. Canada, which was contested in the Tax Court of Canada in 1998.⁴ This particular case was lost by the taxpayer in the TCC, but won on appeal in 2004 in the Federal Court.

R I S Christie conducted SR&ED to develop a new concrete-forming medium, which eventually received a patent. The CRA argued that a patent did not automatically constitute an eligible SR&ED claim, particularly since there was no documentation to suggest that a systematic method had been used in the formation of the hypotheses involved, nor were there comprehensive records of scientific trials and their results. While there was a 39-page document to illustrate the technical issues faced at each level of the investigation, the document did not make up for the lack of supporting documentation proving a systematic method of investigation or analysis.

As evidenced by the judgment of Gaston Jorré of the TCC in Les Abeilles Service de Conditionnement Inc. v. The Queen,⁵ the lack of contemporaneous documentation alone is not a condition for SR&ED to be denied recognition, and can be replaced by oral evidence provided by the testimony of key, expert personnel involved in the original work. However, in the case of R I S Christie, the primary engineer had passed away prior to the trial, and the remaining business partner was in poor health, and so no direct oral testimony from key personnel was available.

In the end, the Federal Court factored in the remaining available documentation as well as the status of key personnel to “hold that, on a balance of probabilities, systematic research was undertaken.” ⁶ As such, this victory represents an exception when there is a lack of supporting documentation, rather than the rule.

The Onus Of Documentation: The Verdict

In the face of previous judgments, industry experts still recognize that Gaston Jorré’s judgment in the Les Abeilles Service case, is an exception, as judges more often side with the CRA’s decision in the face of absent contemporaneous paperwork.

Finally, the advantage of contemporaneous documentation is that it safeguards the organization’s incentives and future R&D in the face of unpredictable events – such as the loss of key personnel.

It is in the best interests of any company to spend some time every day recording their SR&ED activities rather than battling it out in courts for years to come. For example, something as informal as project brainstorming scribbled on a sheet of paper during a relaxed meeting between key technical personnel should be dated, signed, and filed away on that day.