SR&ED Audit Guide: What CRA Looks For and How to Prepare

SR&ED Audits: The Elephant in the Room

Filing an SR&ED claim is only half the battle. The other half, the part that keeps CTOs and CFOs up at night, is the possibility of a CRA review.

The Canada Revenue Agency reviews a significant portion of SR&ED claims each year, and the results can be financially devastating. A full claim denial on a $300,000 refund is a $300,000 hit to your cash flow. Even a partial reduction, CRA allowing 60% of your claimed amount, means you are refunding money you have already spent or budgeted around.

But here is the truth most consultants will not tell you: SR&ED reviews are not random bad luck. They are a predictable, manageable part of the process. Companies that understand what triggers a review, prepare documentation proactively, and know how to respond to CRA inquiries consistently retain 90%+ of their claimed amounts.

This guide is the most comprehensive SR&ED audit preparation resource available. It covers what triggers reviews, what CRA examines, a 25-item preparation checklist, dos and don'ts during the review, and how to appeal if your claim is reduced.

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What Triggers a CRA SR&ED Review?

CRA does not publicly disclose its exact selection criteria for SR&ED reviews, but decades of practitioner experience reveal clear patterns. Understanding these triggers helps you either avoid unnecessary scrutiny or prepare for it.

1. First-Time Filers

If you are filing an SR&ED claim for the first time, your probability of being reviewed is significantly higher than for repeat filers. CRA wants to verify that new claimants understand the program requirements and are submitting legitimate claims. This is not punitive, it is due diligence.

What to do: Accept that a review is likely and prepare your documentation accordingly from day one. Your first claim sets the precedent for all future claims.

2. Claim Size Relative to Revenue

Claims that represent a disproportionately large percentage of your company's revenue or R&D budget draw attention. If your company has $500,000 in revenue and files a $400,000 SR&ED claim, CRA will look more closely than if a $10 million revenue company files the same claim.

What to do: Ensure your claim is defensible and proportionate. This does not mean you should under-claim, it means every dollar claimed should be well-documented.

3. Significant Year-Over-Year Increases

If your SR&ED claim jumps from $100,000 to $400,000 in a single year without an obvious explanation (like a major hiring spree or new product line), CRA may flag the increase for review.

What to do: If your claim increased significantly, prepare a clear explanation. Document the business reasons, new product development, expanded R&D team, pivot to a more research-intensive area.

4. Industry-Specific Targeting

CRA periodically focuses review resources on specific industries. Software and IT companies have faced increased scrutiny in recent years as CRA seeks to distinguish genuine R&D from routine software development. Other industries that periodically receive heightened attention include food processing, construction, and environmental services.

What to do: If you are in an industry CRA is currently scrutinizing, invest extra effort in documenting your technological uncertainties clearly. The bar for "routine engineering vs. eligible R&D" is higher under scrutiny.

5. Consultant Red Flags

Certain SR&ED consultants have reputations with CRA, some good, some problematic. If your consultant has a history of filing inflated claims, your claim may receive additional scrutiny by association.

What to do: If you use a consultant, choose one with a solid reputation and low claim reduction rates. Ask for references and their historical claim success rate.

6. Random Selection

CRA does randomly select claims for review as part of their quality assurance process. You cannot avoid this, it is simply part of the system.

What to do: Always maintain audit-ready documentation, regardless of whether you expect a review. Random selection means any claim, any year.

7. Previous Claim Adjustments

If CRA reduced a prior claim, your subsequent claims are more likely to be reviewed. CRA wants to see whether you corrected the issues identified in the previous review.

What to do: Carefully address all feedback from prior reviews. Document how you improved your processes and documentation in response to CRA's comments.

8. Missing or Incomplete T661 Sections

A T661 form with incomplete project descriptions, missing financial schedules, or vague technical narratives is more likely to trigger a review than a complete, well-prepared filing. Our T661 form guide walks through every section line by line so nothing gets missed.

What to do: Complete every section of the T661 thoroughly. Leave nothing blank or vague.

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The CRA Review Process: What to Expect

If your claim is selected for review, understanding the process helps you respond effectively and minimize disruption.

Phase 1: Notification (Week 0)

CRA contacts you (or your authorized representative) by mail or phone to notify you that your SR&ED claim has been selected for review. This notification will specify:

• The fiscal year under review
• The type of review (desk review or site visit)
• The name and contact information of the assigned Research and Technology Advisor (RTA) and/or Financial Reviewer (FR)
• A list of documents CRA wants you to provide

Important: This notification is not an accusation of wrongdoing. It is a standard verification process. Stay calm and professional.

Phase 2: Desk Review vs. Site Visit

CRA conducts two types of SR&ED reviews:

Desk Review (Less Intensive)

A desk review is conducted entirely by correspondence and phone. The RTA requests specific documents, reviews them off-site, and may call with follow-up questions. Desk reviews are typically used for:

• Smaller claims (under $200,000)
• Claims with minor questions or clarifications needed
• Follow-up reviews on previously reviewed companies

Timeline: 2-6 months from notification to resolution

Site Visit (More Intensive)

A site visit involves the RTA (and sometimes an FR) visiting your office or facility. During the visit, they will:

• Interview key R&D personnel (CTO, lead developers, engineers, data scientists)
• Review documentation on-site
• Tour facilities and see prototypes, equipment, or development environments
• Ask detailed technical questions about each claimed project

Site visits are more common for:

• First-time filers
• Large claims (over $500,000)
• Claims where desk review raised additional questions
• Companies in industries under heightened scrutiny

Timeline: 4-12 months from notification to resolution

Phase 3: Document Request

Regardless of review type, CRA will request documentation. Common requests include:

Technical Documentation:

• Detailed technical narratives for each project (beyond what is on the T661)
• Project plans and timelines
• Design documents, architecture diagrams, and technical specifications
• Lab notebooks, experiment records, or development logs
• Evidence of technological uncertainty and systematic investigation
• Records of failed approaches, pivots, and experimental results
• Published papers, patents, or conference presentations related to R&D

Financial Documentation:

• Payroll records for all employees claimed
• Timesheets or time tracking records showing R&D time allocation
• Contractor invoices and statements of work
• Material purchase invoices
• General ledger entries related to R&D costs
• T4 slips and payroll summaries

Organizational Documentation:

• Organizational chart showing R&D team structure
• Job descriptions for claimed employees
• Employee resumes or CVs demonstrating technical capability
• Corporate tax return (T2) and financial statements

Phase 4: Technical Interview (Site Visits)

During a site visit, the RTA will interview your technical staff. These interviews typically last 1-3 hours per project and focus on:

• What was the specific technological uncertainty?
• What existing knowledge or methods were considered and why were they insufficient?
• What hypothesis or approach was formulated?
• What experiments, tests, or investigations were conducted?
• What results were achieved? Did initial approaches fail?
• What new knowledge or capability was gained?
• How did you document your work during the project?

The RTA is a technical professional, usually an engineer or scientist. They understand technology and can tell the difference between genuine R&D and routine development. Be honest, specific, and technical.

Phase 5: Resolution

After completing the review, CRA will issue one of three outcomes:

1. Claim accepted in full: Your entire claim is approved as filed. This is the best outcome.
2. Claim partially reduced: CRA allows some projects or expenditures but reduces others. You receive a proposal letter detailing the reductions and the reasons.
3. Claim denied: CRA denies the entire claim. This is relatively rare but can happen, particularly for first-time filers with weak documentation.

If your claim is reduced or denied, you have the right to respond and appeal (covered below).

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The SR&ED Audit Preparation Checklist: 25 Essential Items

Use this checklist to prepare before you file your claim, not after CRA contacts you. Proactive preparation is the single most effective strategy for surviving an SR&ED review.

Technical Documentation (Items 1-10)

1. Project-level technical narratives
Write a detailed narrative for each SR&ED project covering the five criteria: technological uncertainty, hypothesis, systematic investigation, advancement, and documentation. These should be more detailed than what appears on the T661 form.

2. Contemporaneous R&D records
Gather all records created during the R&D process, not after the fact. This includes commit histories, Jira tickets, Slack discussions, design documents, meeting notes, and experiment logs. CRA places high value on contemporaneous evidence.

3. Evidence of technological uncertainty
For each project, document specifically what was uncertain and why. Include references to the state of the art, literature reviews, or expert consultations that demonstrate the problem could not be solved with existing knowledge.

4. Records of failed approaches
Document approaches that did not work. Failed experiments, abandoned prototypes, and reverted code branches are powerful evidence of systematic investigation. If everything worked on the first try, it probably was not SR&ED. See our SR&ED eligible project examples for scenarios that demonstrate what genuine R&D looks like across industries.

5. Design documents and architecture decisions
Collect design docs, architecture decision records (ADRs), technical RFCs, and any documents where your team proposed and evaluated technical approaches.

6. Source control history
Prepare a summary of relevant Git activity, branches, commits, PRs, and code reviews, for each claimed project. Annotate key commits that correspond to experiments, breakthroughs, or pivots.

7. Test results and benchmarks
Compile test results, performance benchmarks, and experimental data that demonstrate the systematic investigation process. Before-and-after comparisons are particularly valuable.

8. Technical presentations and internal demos
If your team presented R&D progress internally (sprint reviews, technical talks, demo days), gather those slides and recordings. They are excellent contemporaneous evidence.

9. Literature and prior art references
Document any academic papers, patents, open-source projects, or industry publications you reviewed as part of establishing the technological uncertainty and state of the art.

10. Separation of R&D from routine work
Clearly delineate which aspects of each project involved genuine R&D versus routine engineering, maintenance, or feature development. CRA reviewers specifically look for this distinction.

Financial Documentation (Items 11-18)

11. Employee time tracking records
Maintain time tracking that allocates each R&D employee's hours to specific projects. This can be formal timesheets, Jira time logging, or any systematic method. CRA frequently challenges time allocation during reviews.

12. Payroll records and T4 summaries
Have complete payroll records for all employees whose salaries are included in the claim. This includes gross salary, benefits, and any bonuses.

13. Employee list with roles and R&D percentages
Prepare a clear list of every employee included in the claim, their role, their total salary, and the percentage of their time allocated to eligible SR&ED work.

14. Contractor invoices and statements of work
For each contractor included in the claim, provide the contract or statement of work, all invoices, and evidence that the work performed was eligible R&D (not routine development).

15. Material and supply receipts
Collect receipts for all materials and supplies claimed. Note: materials must have been consumed in the R&D process. Materials that become part of a product sold to customers are not eligible.

16. Overhead calculation documentation
If using the proxy method (55% of salaries), have your calculation clearly documented. If using the traditional method, provide detailed overhead allocation records.

17. Government assistance records
Document all other government funding received (IRAP, provincial grants, etc.) and confirm that those amounts have been properly deducted from your SR&ED expenditure calculations. Double-dipping is a serious red flag.

18. General ledger R&D account reconciliation
Reconcile your SR&ED claimed amounts to your general ledger. CRA will compare your claim to your financial statements, and discrepancies create immediate credibility issues.

Organizational Documentation (Items 19-25)

19. Company organizational chart
Provide a current org chart showing the R&D team structure, reporting lines, and how R&D functions relate to other business functions.

20. Job descriptions for claimed employees
Have written job descriptions for every employee included in the claim. These should clearly describe R&D responsibilities.

21. Employee resumes and qualifications
Prepare resumes or CVs for key R&D personnel. CRA wants to verify that the team has the technical capability to perform the claimed R&D.

22. Project authorization records
If your company has formal project approval processes (project charters, steering committee approvals), include these. They demonstrate organizational commitment to R&D.

23. Board meeting minutes or strategic plans referencing R&D
Minutes from board meetings or strategic planning sessions that discuss R&D investments and priorities provide high-level corroboration of your company's R&D activities.

24. IP records
If your R&D resulted in patents, patent applications, trade secrets, or other IP, document these. IP creation is strong evidence of technological advancement.

25. Previous CRA correspondence
If you have been reviewed before, keep all correspondence from prior reviews. CRA expects you to have addressed any issues raised previously.

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Common Red Flags That Trigger Deeper Scrutiny

Even during a review, certain findings will cause CRA to dig deeper. Avoid these red flags.

Red Flag 1: Vague Technical Narratives

Statements like "we developed a new platform" or "we improved our software" without specific technical detail are red flags. CRA wants to know what was technically uncertain, what approach was taken, and what was learned. Generic descriptions suggest the work may not have involved genuine R&D.

Red Flag 2: No Evidence of Failure or Iteration

If every project in your claim succeeded on the first attempt, CRA will question whether genuine technological uncertainty existed. Real R&D involves dead ends, failed experiments, and pivots. If you have no evidence of these, your claim looks like routine development dressed up as R&D.

Red Flag 3: 100% R&D Time Allocation

Claiming that a developer spent 100% of their time on eligible SR&ED work is a red flag. Even dedicated R&D employees attend meetings, handle administrative tasks, and do some routine work. Realistic R&D time allocations for software developers typically range from 40-80%.

Red Flag 4: Excessive Contractor Claims

Large contractor claims relative to internal salary claims draw scrutiny. CRA wants to verify that contractor work was genuine R&D (not routine development outsourced for cost reasons) and that the contractor costs are reasonable.

Red Flag 5: Misalignment Between T661 and Financial Statements

If your T661 claims $1 million in R&D salaries but your financial statements show total payroll of $1.2 million, CRA will question how 83% of your payroll is R&D-eligible. The numbers must tell a consistent story.

Red Flag 6: Claiming Well-Understood Technologies

If your technical narratives describe work using standard frameworks, well-documented APIs, or established methodologies without explaining why the specific application involved uncertainty, CRA will push back. Using React to build a standard web application is not SR&ED. Building a novel real-time collaborative rendering engine that pushes React beyond its documented capabilities might be.

Red Flag 7: No Contemporaneous Documentation

If all your documentation was created after the fact specifically for the SR&ED claim, CRA will notice. Contemporaneous records, documents, messages, and records created during the R&D work, carry far more weight than retrospective narratives.

Red Flag 8: Inconsistent Interview Responses

During site visits, CRA interviews multiple team members about the same projects. If the CTO describes the project one way and the lead developer describes it differently, CRA will question the accuracy of both accounts. Ensure your team is aligned on the key facts before any interview.

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What to Do During a CRA Review: The Dos

Do: Respond Promptly and Professionally

When CRA contacts you, respond within the requested timeframe (typically 30 days). Delayed responses do not make reviews go away, they make CRA reviewers less patient and more skeptical.

Do: Designate a Single Point of Contact

Assign one person (usually the CTO or a designated representative) to manage all CRA communications. This ensures consistent messaging and prevents contradictions.

Do: Prepare Your Technical Staff for Interviews

Before any site visit, brief your technical team on:

• What CRA will ask (the five eligibility criteria)
• How to describe their work in terms of uncertainty, hypothesis, investigation, and advancement
• What to say when they do not know the answer ("I would need to check our records and get back to you")
• The importance of being honest and specific

Do: Provide Organized, Well-Indexed Documentation

When CRA requests documents, provide them in an organized, clearly labeled format. A well-organized submission signals competence and credibility. A disorganized document dump signals the opposite.

Do: Bring Evidence of Failed Approaches

If a site visit is scheduled, prepare examples of experiments that did not work, approaches that were abandoned, and technical problems that required multiple attempts. This is your strongest evidence of genuine R&D.

Do: Be Specific About Technological Uncertainty

"We were not sure if it would work" is not specific enough. "We needed to determine whether a transformer-based NLP model could accurately classify customer support tickets across 14 product categories with less than 200 labeled training examples per category, given that published benchmarks show transformer models typically require 1,000+ examples for reliable fine-tuning" is specific.

Do: Keep Records of the Review Itself

Document every interaction with CRA during the review, phone calls, meetings, document submissions. If you need to appeal later, these records are essential.

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What NOT to Do During a CRA Review: The Don'ts

Don't: Volunteer Information Beyond What Is Asked

Answer CRA's questions directly and completely, but do not offer information about other projects, years, or issues they have not asked about. Volunteering information can open new lines of inquiry.

Don't: Argue with the RTA

If the RTA challenges an aspect of your claim, do not become defensive or argumentative. Listen, take notes, and respond factually. If you disagree, you will have the opportunity to respond formally in writing.

Don't: Fabricate or Embellish Evidence

If you do not have documentation for something, say so. Fabricating records is fraud and carries severe consequences. CRA reviewers have seen every trick, they will notice if documents appear to have been created after the fact.

Don't: Let Uncoached Staff Speak to CRA

Well-meaning employees who do not understand SR&ED terminology can accidentally undermine your claim. "Yeah, we just used the standard approach" might be an accurate description of their experience, but if the "standard approach" was actually a novel combination of techniques, that statement damages your claim. Prepare everyone who may be interviewed.

Don't: Ignore the Financial Reviewer

Many companies focus on the technical review and neglect the financial side. The Financial Reviewer is checking that your salary allocations, contractor costs, and overhead calculations are accurate and reasonable. Ensure your financial documentation is as strong as your technical documentation.

Don't: Miss Deadlines

CRA sets deadlines for document submission during reviews. Missing them can result in your claim being assessed without the supporting information, which almost always means a larger reduction. Make sure you also track the original SR&ED claim filing deadline to protect your claim for each fiscal year.

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How to Appeal If Your Claim Is Reduced

If CRA reduces your claim, you have several avenues for recourse. Do not accept a reduction without exploring your options.

Step 1: Review the Proposal Letter

CRA sends a "proposal letter" detailing the proposed reductions and the reasons. Read this carefully and identify specifically which projects, expenditures, or criteria CRA is challenging.

Step 2: Respond to the Proposal Letter (Within 30 Days)

You have 30 days to respond with additional information, clarification, or arguments. This is your first and most important opportunity to reverse the reduction. Many reductions are reversed at this stage when the company provides additional documentation or clearer explanations.

Step 3: Request a Second Review

If the RTA maintains the reduction after your response, you can request that a different RTA review the claim. This is informal but can be effective if you believe the original reviewer misunderstood your technology.

Step 4: File a Notice of Objection (Within 90 Days of Reassessment)

If CRA formally reassesses your taxes to reflect the reduced claim, you have 90 days to file a Notice of Objection. This escalates the dispute to CRA's Appeals Division, which conducts an independent review.

The Appeals process typically takes 6-18 months but has a reasonable success rate. Many claims that are reduced at the initial review stage are partially or fully restored on appeal.

Step 5: Tax Court of Canada (Last Resort)

If the Appeals Division upholds the reduction, your final recourse is the Tax Court of Canada. This is a formal legal proceeding and requires legal representation. It is expensive and time-consuming but appropriate for large claims where significant money is at stake.

Key statistic: Tax Court cases involving SR&ED have a mixed success rate, but companies with strong contemporaneous documentation win more often than they lose. The quality of your records is the single biggest factor.

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How GrantOps Makes Your SR&ED Claims Audit-Ready From Day One

The best time to prepare for an SR&ED audit is not when CRA calls. It is when you start your R&D work. GrantOps builds audit readiness into your SR&ED process from the beginning.

Contemporaneous Evidence Collection

GrantOps connects to your GitHub, Jira, Slack, and other development tools and continuously captures R&D evidence as it happens. When CRA asks for contemporaneous records, you have them, automatically organized by project, timeline, and eligibility criteria.

CRA-Aligned Technical Narratives

The AI generates technical narratives that are specifically structured around CRA's five eligibility criteria. Every assertion in the narrative is linked to supporting evidence from your development tools. This is not boilerplate, it is evidence-backed documentation.

Defensible Time Allocation

Instead of asking developers to estimate how they spent their time months after the fact, GrantOps calculates time allocation from actual development activity, commits, PR reviews, ticket resolution, and code reviews. This data-driven approach is far more defensible than retrospective estimates.

Pre-Compiled Audit Packages

For every SR&ED claim, GrantOps generates a complete audit-ready evidence package that includes:

• Technical narratives for each project
• Timeline of R&D activities with linked evidence
• Financial calculations with supporting data
• Employee time allocation analysis
• Evidence of technological uncertainty (failed experiments, abandoned approaches, technical discussions)
• Source control summaries annotated by project

If CRA requests documentation, you export the package and send it. No scrambling, no reconstructing, no panic.

Continuous Monitoring

GrantOps does not just generate documentation at year-end. It continuously monitors your development activity and flags potential SR&ED-eligible work throughout the year. This means no eligible projects slip through the cracks and documentation stays current.

Start free — get audit-ready SR&ED documentation automatically.

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Frequently Asked Questions About SR&ED Audits

What percentage of SR&ED claims are audited?

CRA does not publish exact audit rates, but industry estimates suggest that 20-30% of SR&ED claims receive some form of review in any given year. The rate is higher for first-time filers, large claims, and claims from industries under heightened scrutiny. However, many of these reviews are desk reviews (document requests) rather than full site visits.

How long does an SR&ED audit take?

Desk reviews typically take 2-6 months from notification to resolution. Site visits take 4-12 months. If you file a Notice of Objection, the appeals process adds another 6-18 months. In total, a contested claim can take 2+ years to fully resolve.

Can CRA audit previous years' SR&ED claims?

Yes. CRA can reassess any SR&ED claim within the normal reassessment period, typically 3-4 years from the date of the original assessment. In cases of suspected fraud or misrepresentation, there is no time limit. Always retain your SR&ED documentation for at least 7 years.

What happens if I cannot produce documentation CRA requests?

CRA will assess your claim based on the available evidence. If you cannot support a claimed expenditure or project with adequate documentation, CRA will likely reduce or deny that portion of the claim. This is why proactive documentation is essential, you cannot produce records that were never created.

Should I hire a lawyer for an SR&ED audit?

For routine desk reviews and site visits, a lawyer is usually unnecessary. Your CTO or an experienced SR&ED advisor can handle the interactions. However, if your claim is denied or significantly reduced and you plan to file a Notice of Objection or proceed to Tax Court, legal representation is strongly recommended.

Does getting audited mean CRA thinks I did something wrong?

No. SR&ED reviews are a normal part of CRA's administration of the program. Many claims are selected randomly or based on statistical profiles, not because of suspected fraud. Treat the review as a verification process, not an accusation.

Can I still claim SR&ED in future years if my current claim is audited?

Absolutely. Being reviewed does not affect your ability to file future SR&ED claims. In fact, a successful review (claim accepted in full or with minor reductions) can actually reduce the likelihood of being reviewed in subsequent years, because CRA has already validated your claiming patterns.

What if the CRA reviewer does not understand my technology?

This happens more often than you might think, particularly for cutting-edge technologies. If the assigned RTA does not have expertise in your specific technology area, you can:

• Request a more specialized reviewer
• Provide educational materials about the technology domain
• Use analogies and diagrams to explain complex concepts
• Offer a technical demonstration

Be patient and avoid condescension. The RTA is trying to understand your work, help them.

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Summary: The SR&ED Audit Survival Framework

1. Prepare proactively: Treat audit readiness as a year-round practice, not a response to a CRA notification
2. Document contemporaneously: Create and preserve R&D records as the work happens, not months later
3. Be specific: Generic descriptions of R&D work are the number one cause of claim reductions
4. Track time rigorously: CRA challenges time allocation more than any other aspect of SR&ED claims
5. Separate R&D from routine work: Clearly distinguish eligible R&D from standard development, maintenance, and support
6. Respond promptly and professionally: Treat CRA reviewers as professionals doing their job
7. Know your appeal rights: If your claim is reduced, you have multiple avenues for recourse

The companies that consistently retain 90%+ of their SR&ED claims are not lucky. They have systems in place that generate audit-ready documentation automatically, track R&D activities in real time, and align their claiming practices with CRA's expectations.

GrantOps gives you that system — start free and get audit-ready SR&ED documentation automatically.