On October 31, 2013, the Canada Revenue Agency (CRA) published a new version of the T661 form used to describe projects and claim expenses for scientific research and experimental development (SR&ED). These changes follow the announcements made in the March 2013 federal budget.
Simplification of project data
Some changes were made to Part 2 (Project Data). Certain ancillary matters have been eliminated such as the place where the work took place and the purpose of the work (e.g. creation of new processes and materials, or their improvement, etc.) The most important change, however, in this part is the amalgamation of Sections B and C (description of experimental development projects and those of scientific research, respectively). Henceforth, the descriptions of both types of projects must respond to the same three questions. The difference between “SR” and “ED” is slowly disappearing, with the question being asked only for statistical purposes.
Reorganisation of the questions in Section B
The new T661 form presents the three sections for describing each project in a different order, though each section is subject to the same limitations as before in terms of the number of words. One more now begin by describing the “Scientific or technological uncertainties” in 350 words, then the experimental “Work” in 700 words (which reflects the relative importance of this section), and finish with the “Scientific or technological advancements” in 350 words. The first and third sections have been inverted. Without being a drastic change, this new organisation of project descriptions is more logical and natural in a usual development cycle, because the project starts with meeting a technological barrier that leads to work in order to overcome it. Ultimately, this work results in technological advancements corresponding to an increase in the knowledge base that existed at the beginning of the project. Note that the contemporaneous evidence to support any project for which a claim is made must permit corroboration of the work performed with 1) the resources involved, 2) the hours worked, 3) the salaries paid and ultimately, 4) the tax credits claimed. The trend that we are observing is that the CRA’s tolerance for a lack of documentation has dropped significantly.
Information about claim preparers
Information concerning the expert consulting firms that participated in the preparation of the SR&ED request will now be provided. The business name and number of the preparer will be required as well. The details about these firms’ fees will also be provided, including the type (fixed rate, hourly rate, contingency fee basis), the specific rate and the total amount paid or expected to be paid. The CRA may impose a $1000 penalty if the information is missing or incorrect. The collection of this information will permit the establishment of official statistics on the use of SR&ED consultant services. Recall that the Globe and Mail reported in 2011 and 2012 that a third of the $3.5 billion in SR&ED credits was “diverted” to consultant firms. Although there were some consultants who required fees between 30% and 50%, this assertion does not apply universally. The Jenkins report estimates the costs of compliance (including internal costs) at 14% for small and medium businesses and at 5% for large businesses. The data collected will confirm these facts as well as the findings of investigations conducted by the Quebec Technology Association (AQT) and the Canadian Institute of Chartered Accountants (CICA) indicating that the average rates charged are reasonable, according to the businesses which use their services. Additionally, the SR&ED expert consulting firms of good repute welcome these tighter controls which permit the detection and removal of those who abuse the system. The use of the new form will be mandatory for all SR&ED claims which are submitted starting January 1, 2014.