For two days, Joshua Simpson attempted to learn everything there is to know about SR&ED in an SR&ED crash course. As a recent graduate with a background in geology, becoming familiar with the ins-and-outs of the tax world in only a couple of days would prove a formidable task. Armed with only a smile and a slick pair of spectacles, he embarked on his path. In this week’s post, we reveal the tales of his adventure.
SR&ED: More Than Just Taxes
The first thing I learned about the SR&ED program is that it is a huge source of funding for businesses in Canada, providing 3.47 billion dollars to innovative companies in 2011 alone. Some companies rely heavily on the assistance the program provides, even building it into their annual budgets. Considering the amounts of money at stake, and its importance to stakeholders in Canada, it seems superficial to define SR&ED as merely a tax incentive program.
More broadly, SR&ED represents Canada’s commitment to innovation and entrepreneurship. Beginning in 1985, the program has been assisting Canadian businesses for many years, but like most government programs it has experienced several changes over time. My early research revealed a history of both conflict and collaboration between stakeholders and the CRA.
The early years saw little collaboration, as the CRA was flooded with claims from taxpayers. During the mid 1990s, problems arose due to the quality of claims and a lack of resources at the CRA. Claims took long to process, and audits of research dating as far back as the 1980s were difficult. Industry’s faith in the program waned. Clearly, more communication was needed.
In 1998, a joint CRA-industry Steering Committee was established in order that the CRA and stakeholders could collaborate more effectively. The committee, in addition to other collaborative efforts, resulted in many positive changes including more consistency with respect to the processing of claims, as well as a greater understanding of SR&ED by industry. However, the collaborative climate has changed in recent years. The joint committee has been disbanded, and industry is again expressing its concerns. The Taxpayers’ Ombudsman attempted to address these issues, but was unable to provide any concrete recommendations. The government is officially committed to revitalizing the program, but the current regulations consist of dozens of complex guidelines, some more than 15 years old! Check out our new Facebook Timeline for more SR&ED history!
First Encounters with SR&ED
Most people are unfamiliar with the SR&ED program. When I first heard the term, SR&ED was little more than an acronym to me, with four letters instead of the usual three. My interest peaked upon hearing its meaning – SR&ED stood for Scientific Research and Experimental Development. “I like science!” I thought, remembering all of the interesting experiments I had done in my university labs. However, my research showed that the devil is in the details, and scribbling in a lab-book (while useful) won’t be enough to put together a successful claim.
The T661 Form
Where to begin? A quick Google search led me to the CRA’s website and the mysterious “T661”. I had no idea what a T661 form was, let alone how to fill one out. I vaguely remembered stumbling my way through a Schedule 11 in order to apply for tuition credits during university, perhaps it was similar?
The T661 form is the central component of any SR&ED tax credit claim. Digging a little deeper revealed the complexity of a T661. It wasn’t just about crunching numbers; a year or more of scientific progress had to be summarized in only a few paragraphs. Moreover, complex technical procedures had to be explained in a simple and logical manner, so that any CRA reviewer, regardless of education or background, would be able to understand the taxpayer’s innovation. I now understand one of the main sources of the SR&ED controversy. Interpreting what actually constitutes eligible research and development can be very difficult, especially when there is a lack of communication between government and industry.
A Geologist’s Conclusion
After a 48-hour SR&ED crash course I found that the SR&ED program rocks, but don’t take your tax credits for granite.