On May 3, 2011, the Canada Revenue Agency (CRA) issued a revised Form T661, for scientific research and experimental development (SR&ED) claims. The changeover period is short – the current form will not be accepted after July 31, 2011. There is some minor rewording of questions on the new form, but the main change is the addition of a new section, Part 6. (Parts of the current form presently numbered 6 through 8 become 7 through 9). The new Part 6 consists of a table for information on every project being claimed, not just the 20 largest. For each project, the information required is:
- Project title or ID
- Salary or wages costs for the tax year
- Cost of materials consumed or transformed in SR&ED
- Contract expenditures
Four more publications were released by the CRA at the same time, but they are all related to, or made necessary by, the new T661 form. There is a revised Guide to Form T661 and a “Clickable Form T661” — the latter is a version of the form with hypertext links to the relevant sections of the Guide. There is a revised example of a completed form using the new Form T661. And finally, there is a new version of the Application Policy on Filing Requirements, 2004-02R5, to accommodate the changes in Form T661.
These revised publications reflect the CRA’s recently resolved policy that technical information for only the twenty largest projects (in terms of dollar value) must be submitted with a claim for SR&ED tax credits. The form indicates that claimants should “complete and maintain at their place of business” Part 2 information for all projects included in the claim. Unfortunately, although this information is placed prominently at the beginning of the revised Application Policy on Filing Requirements, the final example still states that the CRA will not accept any information relating to projects missing Part 2 information after the reporting deadline. This is expected to be resolved in a further revision of the paper.
Continuing emphasis on evidence requirements
The other topic central to these new publications is increased focus on documentary evidence. This is consistent with the new policy papers issued as phases 1 and 2 of the CRA’s policy review project (see our Newsletter dated February 11, 2011. It is becoming clear that claims not completely supported by evidence are increasingly at risk of being disallowed, even where the eligibility of the work is not an issue. Although some CRA reviewers have in the past demonstrated tolerance for incomplete documentation records, it cannot be assumed that this will continue. With the CRA’s guidelines now in place, and particularly with the new policy documents being developed, it is possible that a reviewer will reject any aspect of a claim for which no evidence is available.
This increased focus is not limited to such matters as what work was done, what salary and capital costs were incurred, or even what technological challenges were addressed and hypotheses considered. As discussed in the paper on Salary and Wages Policy, the CRA may also ask to see contemporaneous evidence supporting such matters as how a particular employee was ”directly engaged” in SR&ED as well as how allocations are made between projects for the completion of Part 6 of the T661 form. Initial intentions for the use of a particular equipment, as well as its actual use over its useful life, may also need to be substantiated. For experimental work in a shop-floor environment, we recommend that a system provide for information gathering at the start of each project, for example to directly record time attributable to SR&ED for each employee.
Any deficiencies in the supporting evidence cannot be remedied at claim time, since the focus is on evidence that was generated contemporaneously with the work being done. It is therefore important to establish a process for gathering adequate records for all work that may be SR&ED-eligible at the inception of the project. Deloitte professionals are available to assess your reporting practices and identify any risk areas requiring remediation.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.
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