On November 10, 2008, the Canada Revenue Agency ("CRA") released a new Form T661 and Guide to Form T661 reflecting changes to the scientific research and experimental development ("SR&ED") tax credit filing requirements. The new filing requirements represent one of the biggest changes to the SR&ED program since the introduction of the reporting deadline. Form T661 can be used immediately and is mandatory for taxation years ending after December 31, 2008, making the claims process simpler for some claimants and more complex for others. These changes are relevant for both tax professionals and technical personnel involved in the preparation of the claims.

Background

The purpose of the revised form is to simplify the SR&ED claiming process by having companies disclose more information about their projects when filing a claim. This additional disclosure can help the CRA's automated risk evaluation system to ascertain which claims require more detailed review. As a result, the information provided on the new form will determine the length of time it takes for claims to be processed and which files will require additional attention. 

Consequently, the changes to the filing requirements will result in a more difficult and lengthy claim preparation process for some claimants, including those whose claims involve more than twenty SR&ED projects, large projects that span a number of years, processes and/or projects involving shop-floor SR&ED, or projects to improve existing products.

Companies that will be in a beneficial position to deal with the program changes are those that have spent ample time and effort to differentiate the technical issues from the business risk issues in their SR&ED projects, and to employ a process of recognizing eligible costs by project. In addition, companies would do well to collect and assemble appropriate supporting material at the time of filing their claims. Support documentation shows the connection between eligible work and costs claimed. Gathering and compiling all relevant project information at the time of filing will ensure the claims will be ready immediately for review by the CRA audit staff and, consequently, will facilitate well-timed responses to subsequent CRA requests for supplementary information. 

Companies may face complex CRA reviews if they do not have clear procedures in place to manage their SR&ED claims preparation or adequate documentation to support the projects and costs claimed. Claimants will find it advantageous to begin claim preparation well in advance of the filing deadline so as to comply with the new filing requirements. Companies that do not have a clear procedure for identifying SR&ED and associated eligible costs early might find themselves scrambling to assemble the required information to file a complete claim before the filing deadline. The importance of such a process to facilitate the timely gathering of relevant information for SR&ED claims cannot be over-emphasized.

Major changes to Form T661

• All claimed SR&ED projects must be described, and must now be declared as either pure or applied research, or experimental development.
• The questions regarding the scientific or technological nature of the projects now differ depending on whether scientific research or experimental development was performed.
• For each project, one specific field of science from a defined list must be identified that most closely reflects the nature of the work undertaken.
• Claimants must identify where the work occurred for each project (i.e. laboratory, R&D centre, commercial production facility).
• Claimants must abide by strict word limits with no opportunity to insert graphics (350 words to explain the technological advancement or scientific knowledge sought, 350 words to explain the obstacles to overcome, and 700 words to summarize the work performed).
• All information, including answers to the questions about the technical nature of the projects, must be input directly into the electronic form, as the separate SR&ED project description no longer exists.
• A claimant must disclose the person(s) who assisted the claimant in completing Form T661 and, for each project, the person(s) who prepared the description of the project, together with the name, position, title, and experience or qualification of three key people involved in each project.
• The claimant must disclose whether the SR&ED work was performed on behalf of another party. If other companies or partnerships are involved in the SR&ED claim, their SINs or BNs must be included.
• Claimants must select from a list the types of evidence that are available to support each project.

How do the changes affect SR&ED claimants?

The claimant must describe clearly and concisely the science or technology that was the foundation of the SR&ED project, particularly in light of the new word limitations that have been imposed. Larger business objectives/initiatives should be omitted from the claim. 

The word limits will make it difficult for companies claiming large projects that include many trials, as there likely will not be sufficient space to provide all of the trial data that was required in the past. Companies that claim shop-floor projects, or that have incremental improvements requiring significant efforts to achieve, will also have a challenge in succinctly explaining how the complex advancement, the variety of technology limitations, and the range of obstacles impeded their progress. Process-based claims will also face the difficulty of explaining in few words the main interactions between the underlying technologies. In fact, these word limitations could actually reduce the overall comprehension of the projects by the CRA, which may lead to greater use of the "30-day letter," in which the CRA formally asks for additional information under a 30-day time constraint.

Scientific and engineering staff should be familiar with how to highlight effectively the scientific or technological aspects of SR&ED within any business project, while avoiding discussion of the business objectives/initiatives.

The CRA uses the information provided in Form T661 to determine which claims can reasonably be processed as filed, and which claims require further review. The CRA has announced that it is hiring more reviewers, possibly providing it with the capacity to conduct audits more frequently or to spend more time reviewing the more specific claims that are now required.

It is now more important than ever that claimants maintain well-organized claim preparation procedures to ensure that claims meet the new criteria and properly describe the activities claimed. The scientific or technological clarity and conciseness of the information provided will be essential in determining how quickly a claim will be processed and how much time and effort will be required to support the claim during the review.

Contact your Collins Barrow advisor for help in dealing with your SR&ED claims. Our SR&ED team has developed processes to identify qualifying projects, gather the relevant costs and technical documentation required, and expedite the CRA's review, audit and assessment of your claim.