The Importance of Documentation in the Context of Obtaining Government Tax Credits or Incentives
The federal and provincial governments, in Québec among others, offer assistance programs in the form of credits or other incentives, for example, for innovation or scientific research and experimental development (SR&ED). These credits or incentives aim to support innovation efforts of numerous corporations operating in different business sectors.
Whichever program is chosen, the authorities require that contemporaneous documentation (evidence) be produced and maintained in order to demonstrate that the expenditures and activities claimed are eligible. If such documents cannot be provided to the authorities upon request, a corporation could be denied the tax credits or incentives it is claiming.
Documentation can take many different forms. The following summarizes some good practices to adopt in order to meet the criteria of a given program and that the disbursements have indeed been incurred.
Demonstrate the Eligibility of Activities
To demonstrate the evolution of innovation efforts, maintaining records of the work performed chronologically is strongly recommended. For example, for the purposes of the SR&ED tax credit program, the federal authorities request that corporation records be kept, among other things, to demonstrate experimental activities.
In other contexts (such as tax credits for the development of electronic business (CDAE) or for the production of multimedia titles (PTM)), contracts and statements of work represent good evidence.
Whichever documents are available, they must enable the authorities to make an informed judgment on the eligibility of the activities and expenditures related to the request. A best practice to recommend is to prepare and keep such documents progressively as one taxation or reference year passes by, which will demonstrate the eligibility of the work in a contemporaneous way.
Different types of documents exist and can be used to make such demonstration: follow-up and/or milestone reports, minutes of technical meetings, Gantt charts, Jira, contracts, invoices, statements of work, emails, technical drawings, photographs, prototypes, samples and timesheets, to name a few.
The documentation must be dated to show the work progress throughout a given reference period.
Supporting the Claimed Expenditures
In order for a corporation to claim wages and/or other expenditures, they must have been incurred/paid. Payroll records, salary journal, RL-1 and T4 slips, proofs of payment or any other document can be used to attest payment of such expenses. In addition, an employee must be assigned and work from the place of business as of the claimant.
Records should be maintained which will accurately determine the time spent on given activities, as above mentioned. Although such method should be recommended, a percentage, based on supporting documents allowing you to justify such an approach, could also be accepted.
In the context of a contractual relationship, a given agreement’s wording is of importance in order to determine who is entitled to a credit (SR&ED and PTM, for example).
While it is usually clear that one corporation may use another to do the work on its behalf, and that the applicant may be entitled to the incentive in question, other criteria must be taken in consideration: who owns the intellectual property, who assumes the risks in the event of cost overruns, who controls the work in progress, is it a service or an acquisition-of-good agreement.
The contract wording thus becomes very important; it is recommended to include certain clauses before finalizing an agreement. In addition, detailed statements of work are a best practice to use to correctly establish the context of the contract and the parties’ obligations. Invoices and purchase orders are also useful additional information.
c) Other Expenditures
Depending on the assistance or tax credit program, certain expenses such as payments to universities or research centres, materials and overheads may also be claimed.
Contracts, invoices, purchase orders and the selected valuation method for general expenses must be kept as supporting documents.
Other Assistance Programs
A financial institution or other organization called upon to finance tax credits, as well as government assistance programs which are administered by the respective authorities, will often require more detailed information and documents before making a given payment.
For example, business plans, budget forecasts, materialized or future contract agreements (letters of intent) will be commonly requested. Tools and reference documents exist and must be given the importance needed in order to provide them in a comprehensive and contemporary manner.
Other tax credits or other programs are in place to finance, among others, the integration of information technologies, innovation, commercialization and export.
Whether the purpose is to obtain a tax credit (SR&ED, CDAE, PTM, IT integration), government assistance (innovation, job creation, marketing, export, etc.) or funding, due attention should be given to the documentation that will be submitted as evidence in order to increase chances of acceptance.
Each competent authority will have its own valuation and acceptance criteria. Understanding the requirements of such programs is essential.
For further information, please contact Michel Lefebvre, Leader SR&ED and tax incentives, or your trusted Mazars advisor.
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