As a result of the complexity of the SR&ED program, many seemingly simple questions can be quite difficult to answer. Today we answer a common question about the T661: Do you include HST when calculating your SR&ED expenses for contractors?
How does HST work?
Businesses generally keep track of both the HST they collected and the HST they paid during the reporting period. When an invoice comes in, the cost is split and recorded in two separate accounts: one account for the expense and one account for the HST that was paid on the purchase. The HST that was paid out can then be reclaimed if the company is a GST/HST registrant.
The primary vehicle used to reclaim HST is the Input Tax Credit (ITC). ITCs can only be claimed on purchases for “consumption, use, or supply in your commercial activities”. There are also certain restrictions on ITCs for companies that are worth more than $10 million annually. These restrictions apply to goods and services such as road vehicles, energy, telecommunications services, and meals and entertainment. However, large companies can still claim ITCs on energy costs which are directly attributable to SR&ED related activities (see the Ontario Ministry of Finance website for more info).
The total amount of GST/HST that the company paid on purchases is used to calculate their ITCs which are entered on line 106 of their return. Next, the amount that was paid is subtracted from the amount of HST that was collected during the reporting period to determine whether the company will receive a refund or will have to make a payment.
Claiming HST for SR&ED Contractors
When claiming SR&ED, Line 340 of the T661 allows you to claim “the amount you paid or that was payable to arm’s length contractors who performed SR&ED work on your behalf”. A common question is whether this expense includes the HST that was paid to contractors.
The simple answer to this question is no, you do not include HST when claiming SR&ED contractors (Click Here to Tweet This). The reason for this is that the government doesn’t want companies to double dip in the HST honey pot, since they should have already claimed this HST separately on their GST/HST return. As a result, the amount entered on Line 340 should be the amount paid to SR&ED contractors less the amount of sales tax.
Still have questions about the T661? Contact us for more information and assistance.
Ontario Ministry of Finance. “Prepare for Ontario’s HST: Restricted Input Tax Credits”. Retrieved 2102 09 25. Web: http://www.fin.gov.on.ca/en/taxtips/hst/01.html.
Canada Revenue Agency. “How to Calculate Your ITCs”. Retrieved 2102 09 25. Web: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/bspsbch/itc-cti/hwt/menu-eng.html.