A Step-By-Step Application Guide

Step 1: Understand the Basics of SR&ED

What is my Timeline?

There are two things to keep in mind regarding your SR&ED timeline:

• How long it takes to prepare the associated forms, and,
• The due date for the last day to amend your taxes.

One key point regarding the SR&ED program is that it is a tax credit. It is directly linked to the taxes that you file at the end of your own fiscal period, regardless of if they are corporate or personal. The CRA treats SR&ED applications with respect to each individual fiscal period—you cannot combine applications that span multiple years into a single year. It doesn’t matter if you have a single project that you have been working on for five years or five separate projects all of which took one year each. You will ultimately file SR&ED applications for each fiscal period in which you were conducting work on the project.

According to the experience of the InGenuity Group, preparing an SR&ED application requires anywhere from a few days (if you are well organized and collected information during the year) to a few months (if multiple interviews are required and you are only just now looking for information). Realistically, it takes between two to four weeks to fill out an application for an organization familiar with the process.

You need to submit all associated SR&ED forms with your corporate taxes (T2s), either:

• With the original submission, which is due 6 months from your fiscal year end, or,
• As part of a Tax Payer Requested amendment (TPR, also known as an “Amended T2”), which is due within 18 months of your fiscal year end.

Service standards were updated in 2018 to differentiate between claims selected for review and those that were not. This provides more accurate return estimations.  For more information, consult the CRA Success Rate and Average Processing Times page⁶.

Remember to file early in case there are issues with the submission and additional information is required. Do not wait until a few days before the filing deadline!

What Forms (Schedules) Are Required?

Because SR&ED is a tax credit, it appears as part of your corporate taxes (T2s). To make an SR&ED application, you must submit additional Schedules on your federal tax return. The information provided on these Schedules helps the government determine whether or not your project meets the requirements of the SR&ED program. Once you have prepared all of the related Schedules, submit them (via mail or electronically) along with your original or amended T2 and wait for the results. Talk to your accountant (or an SR&ED expert) if you have questions about how to file or amend your tax return.

For an SR&ED application, there are two basic schedules that you will need to complete and submit with your taxes:

• T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim⁷
• T2SCH31 Investment Tax Credit – Corporations (2014 and later taxation years)⁸

The first portion of the T661 focuses on the financial aspect of claiming SR&ED. The form allows you to fill out all expenses associated with the SR&ED project during the fiscal period of interest. You should include the total cost for all SR&ED projects here, including salary costs, subcontractor expenses, and material costs.

Any Federal or Provincial Tax Forms

Secondary tax forms are used to calculate the tax credits received by the applicant. These forms—such as Schedule 31 (Federal Investment Tax Credit)⁸ —are filled out and populated automatically by most commercial tax software packages.

Note. Prior to beginning your application, please ensure that your tax software is compatible with your province’s form. You can check common SR&ED software’s compatibility here.

Provincial R&D tax credits are also calculated on these sheets (e.g., Ontario uses Schedule 566 for the Ontario Innovation Tax Credit¹⁰ and Schedule 508 for the Ontario Research and Development Tax Credit¹¹. Regardless, you MUST INCLUDE THESE FORMS or the CRA may deny your application on a procedural point (that is, they will deem the submission as “incomplete”).

Please view our interactive map for a comprehensive list of all Provincial R&D Tax Credits.

1a) T661 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim

The first portion of the T661 focuses on the financial aspect of claiming SR&ED. The form allows you to fill out all expenses associated with the SR&ED project during the fiscal period of interest. You should include the total cost for all SR&ED projects here, including salary costs, subcontractor expenses, and material costs.

1b) T661 – Part 2 (Project Description)

Part 2 of the T661 is project-specific and focuses on the technology and eligibility of the various projects your company performed during the year. The T661 is your only chance to describe all of the work conducted during the fiscal period in question, and you must complete this within a strict word count limit—1,400 words maximum.

Each project requires its own T661 Part 2 form, though applicants are allowed to define SR&ED projects as broad or narrow as long as they each meet the requirements of the program. Some companies are able to describe all of the work they conducted within a single project while others will require multiple projects. Regardless, this is where you must include the Technical Narrative. This includes the technological uncertainties encountered, the work performed to meet your technological objective, and the technological advancements achieved.

Step 2: Gather Supporting Documentation

Companies that are proactive – that is, those who incorporate good documentation processes into the project – are able to collect documentation throughout the project and potentially submit their SR&ED application along with their other tax forms at the end of their fiscal year. Reactive companies, on the other hand, start the SR&ED application process after the project has come to a close. Each type must approach their application and the collection of documentation in a different manner.

Step 2.1: Supporting Documentation

In theory, gathering documentation is the first step in preparing your SR&ED submission; however, the reality is that most companies either (a) do this last or (b) don’t do this at all. Gathering documentation is absolutely critical to your success – the CRA will send you a written notice that they will want to review your work onsite and you will have 30 days to prepare for it. (You can ask the CRA for up to two additional 15-day extensions if you need them.) The only way to ensure you can be prepared is to do so in advance.

Supporting documentation is any written evidence that can provide proof of the work, expenses, and activities you list in the technical narrative as part of your SR&ED application. Supporting documentation can include white boards, pictures, emails, project summaries, and any other relevant artifacts.

The T4088 – Guide to Form T661² provides examples of evidence to support the SR&ED work claimed (found on page 39 of the PDF version and reproduced in the following table) that will help you identify evidence you can use to support each of your SR&ED projects.

The left side of the following table lists different types of supporting evidence, while the top of the table lists the parts of your SR&ED application you will need to support. For each part of your application, check off the supporting evidence that’s available to you. The shaded boxes indicate evidence that is not commonly used to support the corresponding part of your submission.

Examples of Evidence to Support the SR&ED Work Claimed

Lines 270 to 282 – Evidence to support your claim

On these lines of the T661 you need to indicate what evidence you have to support your SR&ED claim. Tick all items on the following list that apply:

• Project planning documents (Line 270).
• Records of resources allocated to the project, time sheets (Line 271).
• Design of experiments (Line 272).
• Project records, laboratory notebooks (Line 273).
• Design, system architecture, and source code (software development) (Line 274).
• Records of trial runs (Line 275).
• Project progress reports, minutes of project meetings (Line 276).
• Test protocols, test data, analysis of test results, conclusions (Line 277).
• Photographs and video (Line 278).
• Samples, prototypes, scrap and other artifacts (Line 279).
• Contracts (Line 280).

If you have items or documents to support your claim that are not listed, tick the box at line 281 and use 15 words or less to describe them on line 282.

General Notes Regarding Documentation

If possible, make sure that all notes/documentation are contemporaneous (i.e., the document was created at the time you were doing the work, not after the fact). Note that you will not have to submit this documentation with your application, but it should be available in the event of a review.

Aside from your technical narratives, supporting documentation is the most important element of your submission, even though you do not submit it. Having a good process in place to capture all relevant documentation to support your technical narrative makes it much easier to complete your SR&ED application.

We offer an evaluation rubric for your supporting documentation, but it is only available to master-level subscribers. Visit our subscription page to upgrade.

The guide also lists important questions that you should answer in Part 2 of the T661. These questions provide a framework for the technical narrative you will need to create on lines 242, 244, and 246 of the T661. Answer these questions before creating your technical narrative for each SR&ED project.

Step 2.2: When Should I File My Claim?

The general process for amendment is identical to applying with your original tax submission; however, it is critical to note that the amendment for a given tax year must be completed a maximum of 18 months after the end of the fiscal year in which you incurred the expenses. For individuals, this deadline is 17.5 months.

It is almost always advantageous to prepare the SR&ED filing with the original tax submission. While it is true that you have additional time to pull everything together should you put it off, the longer you wait to submit, the longer it will take for the government to process your refund. The CRA has internal quality deadlines that outline how long it takes to process a given application. Generally, applications that have been immediately filed are processed within about 60 days, while amended applications are sometimes in the queue for about 180 days¹³. The sooner you receive the refund, the sooner you can reinvest it back into your company.

A – Proactive Applications

In this ideal scenario, the company incorporates the SR&ED application process into its R&D project. This enables the collection of all pertinent documentation and consideration of SR&ED eligibility through each step of the project. For more information concerning the relevant documentation for SR&ED applications, refer to our article on SR&ED Supporting Documentation – Getting from Point A to Point B. These applications are processed by the CRA in as little as 60 days from the receipt of the submission¹⁴.

B – Reactive Applications

In this scenario, the company is seeking to submit an SR&ED application retroactively for a previously completed project. The company must search for any relevant documentation to complete and support their application. For more information on which forms of documentation should be collected, see our Information Sources and Their Importance article. Reactive applications take longer to be processed by the CRA with a service standard of 240 days from receipt of the submission for refundable applications; they are often processed in under 130 days⁶.

Example

A natural health products company has a fiscal year end of December 31st, 2016. They’ve spent the year developing a health product that will be eligible for the SR&ED program. They, like all other Canadian Controlled Private Corporations (CCPCs), have to pay any taxes owing within three months of their year end. The company must also officially file their tax returns with the government within six months of its fiscal year end. The company has a choice:

1. Proactive (Immediate). If they have been proactive with their SR&ED record-keeping and are ready to file, they can include the necessary SR&ED forms with their T2s by the corporate filing deadline (June 30, 2017). They will likely receive their refund within 70 days.
2. Reactive (Amended). If they require additional time to collect supporting information, the company can file their T2s by the deadline (June 30, 2017). The company then has 18 months from its fiscal year-end (or until June 30, 2018) to complete the SR&ED forms and send them to the government along with their amended T2 documents. If the company misses this deadline, they waive their chance to receive the SR&ED refund they are entitled to.

Step 3: Scope Your SR&ED Project

This next step is crucial for you to actually identify whether or not your project qualifies for an SR&ED Investment Tax Credit (ITC). We will go over what the CRA is going to ask about your project in determining whether or not it will qualify. Be sure that you know what they will ask and how you will answer their questions precisely – otherwise, your project will not qualify and your only hope then may be to appeal the decision, which can be costly and time-consuming. (Plus, there’s no guarantee that you’ll win if your case goes up to the Tax Court of Canada.)

Project identification is perhaps one of the hardest tasks when it comes to claiming SR&ED. There are dozens of policy documents defining what is and what is not SR&ED. In essence, though, each project will have to meet the requirements of the SR&ED program individually.

Step 3.1: Ensure you understand the distinction between commercial and SR&ED Projects

First, it is important to understand the difference between commercial (or business) and SR&ED projects. The CRA defines a company project as “project with a commercial purpose.” The purpose of an SR&ED project, on the other hand, is:

“…for the advancement of scientific knowledge¹⁶ or for achieving technological advancement. Paragraph (c) of the definition of SR&ED¹⁶  recognizes, and in fact requires, that the experimental development¹⁶  be done for the purpose of achieving technological advancement in the context of creating new or improved materials, devices, products or processes¹⁹.”

Also worthy of note is that the CRA said in the now archived Eligibility of Work for SR&ED Investment Tax Credits Policy – 2015:

“An SR&ED project usually occurs as a subset of a company project. Therefore, not all of the work performed within a company project will necessarily fall within the scope of the SR&ED project. Also, it is possible that the same company project contains one or more SR&ED projects, some of which may involve experimental development¹⁶, and some of which may involve basic research¹⁶ or applied research¹⁶.”²³

While the policy this came from has been replaced, the definition remains valid and pertinent.

Each business project will have its own set of internal goals. Common examples are to service more customers, or to develop a new feature for an existing product/service. Depending on this goal, it may be possible to apply your scientific or technological knowledge base (e.g., routine programming), and there is little doubt that you will be able to achieve the desired capability. If this is the case, then your knowledge base is sufficient to resolve the problem, and SR&ED does not apply. The Canada Revenue Agency considers this type of work to be routine testing (i.e. not directly in support²⁴ of any of the following):

• Basic Research: Work undertaken for the advancement of scientific knowledge without a specific practical application in view,
• Applied Research: Work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
• Experimental Development: Work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing materials, devices, products or processes, including incremental improvements thereto.

On the other hand, if your knowledge base is insufficient to solve the problem, or there are reasons to suspect that routine testing activities are insufficient, then SR&ED may apply. In situations like this, the work to be done represents a scientific or technological uncertainty¹⁶ and may be a potential SR&ED project.

After establishing a) a scientific or technological uncertainty, and b) a hypothesis, it is worth a closer examination to see if the project as a whole meets all of the remaining required elements. These elements are as follows: Systematic Work¹⁶ (incl. experiment¹⁶ and/or analysis¹⁶,) and Scientific or Technological Advancement¹⁶.

The workflow below is a great visual tool to help understand how this process can be applied in your specific SR&ED environment.

Splitting Projects

There are upsides and downsides to dividing larger SR&ED projects into smaller, bite-sized applications. Whether you split projects ultimately depends on circumstances, the size of the project, and the number of people working on the SR&ED application. Key considerations for splitting projects include:

• Loss of additional eligible support activities;
• Need for other documentation; and,
• Fragmenting of internal projects.

The danger of having a large project that encompasses everything is that it becomes difficult to fully explain the project within the limited word count. As we will discuss later, there are three text boxes for describing your project. The total word count for the three sections is only 1,400 words. This limitation can lead to discussing large projects using vague terms and technical jargon, which are both red flags for the CRA. Having several smaller projects means that you can go into detail describing your process and allows you to describe more minor mistakes/missteps (which help contribute to the required technological uncertainty); activities that would have been glossed over and treated as unimportant in larger projects. These are necessary details to include and are easier to quantify.

There are advantages and disadvantages to splitting SR&ED work into multiple projects:

Step 3.2: Ensure you understand CRA requirements for eligibility SR&ED project

How does a project qualify for the SR&ED program? The CRA (2021, August 13) has put together an Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives¹ page that clarifies this; however, in general, the CRA will ask five questions of your project to see if it does indeed qualify:

1. Was there a scientific or a technological uncertainty?
2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
4. Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
5. Was a record of the hypotheses tested and the results kept as the work progressed?

You may also want to have a look at the CRA’s SR&ED Program policies³¹. If your project involved any software development, you may also want to watch the CRA’s webinar (published 14 December 2017) on the subject, if applicable. (The webinar is more than an hour long.)

3.3 Estimate Project Costs – Perform a Cost Benefit Analysis

Do a quick check of your finances – does it make sense to put in the effort of applying? Run your numbers through the advanced calculator on our website. For details on how to generate the amounts, see Step 6.

When examining your financial statements, look for any costs that are SR&ED-eligible (details below). These expenditures can include the salary costs for engineers and scientists working on the project, material costs for testing/prototype objects that were destroyed/manipulated during the testing, and subcontractors that were hired to perform SR&ED on your behalf.

Note. These costs should tie in clearly to the technical narrative in Step 4.

Step 4: Write Technical Narratives for Each Project

Other sections of The Guide linked in this Step:

• Tips for Writing Compelling SR&ED Applications

One of the most important—and often most difficult to complete—areas of the entire SR&ED process are the technical narrative sections. The technical narrative tells the story of your R&D work for the one-year fiscal period for which you are submitting an application. What you describe and how you describe it are critical to the success of your submission.

Before tackling your technical narrative, ensure that you understand what activities and costs are eligible by reviewing the following policy:

Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives (Last Updated by CRA August 13, 2021)
T4088 – SR&ED Expenditures Claim – Guide to Form T661 (Last Updated by CRA December 14, 2020)

Before beginning your writing exercise, please read Tips for Writing Compelling SR&ED Applications.

We must caution you against reproducing the text of your application two years in a row on two separate applications. The CRA will discover this and deny your claim. You must describe the work that occurred in the current reporting period.

Step 4.1: Extract Key Information from Contemporaneous Documentation

Over the year, you will have pursued your project. Either explicitly in your notes or through interviews, you’ll be able to identify key information.

In our experience, we’ve found that it doesn’t always make sense to follow the standard technical narrative format as structured by the CRA (T661) – it’s easier to write out the ideas in a linked fashion, then insert them back into the document in the correct section.

Much like creating a novel, there are many methods such as the Snowflake Model³² (designed by a software architect) used to help organize the information prior to drafting a final version. Thus, while this post will reference major Revenue Canada SR&ED forms (including the T4088³³ and Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives¹) we deliberately do not follow the T661(20e)³ format.

To help illustrate this, we’ve created a generic project involving computer vision technologies. Answers specific to this project are given in blue below.

A – Identify the Overarching Technological Objective of the Project

Indicate the overall goal of the project. This field can also be completed using the project title. Be sure to reference the technological objective. This objective can be fairly broad and not focus too much on specific details, but it should frame the rest of the project (i.e. Why are you undertaking this R&D venture?)

Objective: The objective of this project was to design and create a computer vision system capable of real-time processing and analysis of stitched high-resolution video images.

B – Specify the Technological Objectives/Goals

What were the specific technological objectives/milestones of this project? Be sure that you have clearly defined, quantifiable objectives against which you can measure your success.

Objective 1: We required that the system be capable of processing all incoming images (1280×720 minimum resolution) with a minimum frame rate of 30fps. The processing algorithm would have to be optimized to work on standard desktop hardware (i.e. no server or supercomputer was required).

Objective 2: […]

Objective 3: […]

Note: We recommend clearly itemizing the objectives. Often one technological objective will be more critical; this should appear first. Groups of three tend to work well.

C – Specify Limitations in Technology / Knowledge Base (the “Uncertainties”)

The current Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives states:

“How can you determine when new scientific or technological knowledge is needed? It is needed when it is unknown (or uncertain) whether a given result or objective can be achieved, due to an insufficiency in the available scientific or technological knowledge. This is referred to as a scientific or technological uncertainty. Note that the available knowledge is the combined scientific or technological knowledge of the resources within your business and those sources that are reasonably available to you publicly³⁶.”

What is a “technological uncertainty”? The CRA defines technological uncertainty in their glossary as:

“Technological uncertainty means whether a given result or objective can be achieved, or how to achieve it, is unknown or uncertain due to an insufficiency of technological knowledge³⁷.”

Thus, you must also define what your knowledge base was in regard to your objectives. This is defined as:

Scientific or technological knowledge base consists of the combined knowledge of the resources within the business and those sources that are reasonably available publicly.

The resources within the business include both:

• its personnel’s scientific or technological knowledge, education, training, and experience;
• its technical capabilities represented by its current products, techniques, practices, and methodologies (for example, trade secrets and intellectual property).

Publicly available sources could include:

• scientific papers;
• journals;
• textbooks;
• internet-based information sources;
• expertise accessible to the business (for example, through suppliers, recruiting employees or hiring consultants or contractors).

The scientific or technological knowledge base may vary from business to business because:

• their internal resources are different;
• some of the public sources of knowledge may not be reasonably available to all businesses³⁸.

What prevented you from easily meeting your objectives? This can include software architecture limitations, hardware limitations, a lack of access to proprietary documentation, no research papers in this area, and so on.

Financial limitations can be a factor, but they should never be the primary driver of an SR&ED claim. Focus on the technological shortcomings of what exists.

Objective 1: The primary difficulty with regards to the first objective was with respect to processing efficiency. Real-time high definition video feeds consume a very high volume of data (~10MB/s). Traditional and existing analysis/processing techniques are not able to keep up with this data rate, and still maintain 30 fps without extensive hardware upgrades (i.e. multiple networked computers). As existing video analysis techniques are very mature technology, it was uncertain if a brand new algorithm could be developed to deliver the desired processing power.

Objective 2: […]

Objective 3: […]

Our team has extensive experience in relation to [explain why you are competent in this area of science or technology]. The team was led by an [engineer/scientist] with [#] years of experience. Despite our internal resources and consulting external resources, we were unable to resolve the above uncertainties.

Note. This is the most difficult section in SR&ED and where most claims fail! You must show that you had established your knowledge base and that there was insufficient information to overcome identified technological uncertainties.

D – Discuss the Work Performed

According to the T4088, you should:

“[D]escribe, in a clear and concise manner, how you attempted to overcome the scientific or technological uncertainties that you identified at line 242. Describe the work done in chronological order. In doing so, clearly demonstrate the systematic nature of the investigation or search. This includes describing;

• the hypotheses³⁹
• designed to reduce or eliminate the uncertainties;
• experiments and/or analysis conducted to test the hypotheses;
• the results obtained; and,
• the conclusions⁴⁰.”

The Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives describes the required methodology/process required for SR&ED, a systematic approach:

It is important to distinguish between a systematic approach to carrying out work and the approach that is a systematic investigation or search called for in the definition of SR&ED. The latter approach includes:

• Generating an idea consistent with known facts, which serves as a starting point for further investigation towards achieving your objective or resolving your problem. Your idea may be expressed as a possible solution to a problem, a proposed method or an approach. This can be referred to as a hypothesis.
• Testing of the idea or hypothesis by means of experiment or analysis. The idea can evolve and change as a result of testing.
• Developing logical conclusions based on the results or findings of the experiment or analysis.
• Keeping evidence that is generated as the work progresses⁴¹.

Outline the work which was performed to overcome technological uncertainties. Include descriptions of what did/did not work and show how they link to the objectives and uncertainties. As well, clearly demonstrate the systematic nature of your approach and quantify the results wherever possible.

1: To address the hardware bottlenecks and prior to the start of this project, we conducted a comprehensive study of existing computer vision techniques to determine how they compared against our requirements. We identified several open-source projects as well as two commercial software programs which were directly related to the material; however, the commercial software was proprietary and did not meet our speed requirements; as such it would be very difficult to modify the software, and infeasible to contract out the changes. Preliminary tests with the open-source software revealed acceptable performance levels for single object recognition, but they could not track multiple objects. All analysis/measurement functions were also absent. As such, we concluded we had to conduct all the work in-house with the open-source projects as a baseline. (<- This background can also appear in the Uncertainties section. It depends on how much space is available to you.)

To expand our knowledge base and ensure we could meet our objectives, work proceeded on developing a parallelization scheme for the open-source project to allow images to be chunked into manageable pieces. Some documentation was available for this in the form of white papers, but they had not been designed for this kind of graphical project, so considerable experimental development had to be completed. Our initial builds of the device incorporated [Method A], but it did not scale well to higher resolution images due to [Problem A] and only resulted in a 10% improvement over the serialized code. We believed this was due to [explain why this failed to meet your objective.] To address this, we attempted to re-work the mathematical models behind the processing code itself. We attempted 4 different approximation algorithms and permutations of the different algorithms [Examples of algorithms here], before finalizing a final parallelization code which resulted in a 50% improvement over normal serial code on a traditional quad-core desktop workstation. 

2: […]

3: […]

At the end of the reporting period, work was [ongoing / considered complete / etc.]

There are a handful of terms that those writing technical narratives commonly use that mean something different to the CRA. Master members can see a full list of “red flag words” on our Advanced Writing Tips page.

E – Define the Advancements

You must articulate the advancements in your knowledge base. According to the T4088, you should:

“[F]ocus on how the work you described at line 244 advanced the scientific or technological knowledge base that existed at the onset of the project. In other words, describe the information or the knowledge generated that advanced your understanding of scientific relations or technology⁴².”

To supplement the T4088, the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives defines technological advancements as:

“the generation or discovery of knowledge that advances the understanding of science or technology. The type of knowledge in this context is conceptual knowledge, such as theories or prediction models, rather than just factual knowledge, such as data or measurements⁴³.”

How did you advance your knowledge base during the reporting period? Compare them to the knowledge base level at the start of the period. Was there an improvement? If so, by how much? Please note that incremental improvements are still eligible. What did you learn as a result of your success or failure to meet the objectives?

Specifically, explain, how have you “advanced your understanding of scientific relations or technology⁴⁴?” Note that “Achieving the novelty, innovation, uniqueness, feature enhancement, or increased functionality of the product or process may not in itself demonstrate scientific or technological advancement. Advancement should move the scientific or technological knowledge base of your business to a higher level through an increase in the understanding of scientific relations or technology⁴⁵.”

Advancement 1: We created a new parallelization scheme which was specifically designed for graphical analysis. Elements incorporate both CPU and GPU power, and the process results in a 50% improvement over traditional serial methods (on a desktop machine). The new method achieves this by incorporating [Method C] using [Algorithm #5], which had never been combined in this fashion before.

Advancement 2: […]

Advancement 3: […]

Step 4.2: Compile the Answers

Once you have written all the elements of your technical narrative using as many quantifiable metrics as possible, it is time to weave them back into the T661 Form. You must answer each of these questions and remain within the stated word limits. We’ve written about word limits in our post “SR&ED Technical Narratives: The Truth About Word Limits.”

Step 4.3: Critical Review – Read As Though You Were The CRA (Technical)

The CRA believes in processes as they have a checklist that they use to assess the technical completeness of an SR&ED application. This list of guidelines was created based on the experiences of former CRA employees.

The first review of the application is mainly to see if all expected information is there.

• Are all boxes completed?
• Is documentation appropriate and indicated as available for review?
• Is the project continuing or new?
• Is the time frame reasonable for what is described?
• Key individuals – Do the technical narrative and qualifications match? Is there a mismatch on the titles? (i.e., Marketing, Quality Assurance group)
• Are the expenses in line with effort? (Note: This is not a financial assessment but an assessment to see if the value would trigger a technical review.)

Content Analysis

If the application is reviewed at the Taxation Centre, the application will be sent to the Tax Services Office (TSO) for further review by a Research and Technology Officer (RTO) or Research and Technology Advisor (RTA). The RTO looks to see if there appears to be indications of ineligible activities or expenses outside of the SR&ED definition, whereas the RTA looks to see if the work is, in their opinion, eligible. If any issues or questions arise, the RTA will visit you and do a technical audit. They will look at the following questions:

Technological Uncertainties

• Is the uncertainty clearly technical?
• Is it clear why this uncertainty is a relevant problem?
• Do these uncertainties clearly fit with the advancements indicated?

Technological Work

• Is it clear that there was experimentation/testing?
• What uncertainty was being addressed?
• What were the results of the tests? Of the work?

Technological Advancements

• Is the appropriate technological level clear?
• Are the lower-level advancements indicated?

Cohesiveness

• Is the relationship among the three sections clear?
• Do ideas from one section flow to the other?

Non-SR&ED Activities

• Are there hints of activities or expenses that are excluded or beyond the scope of the program?
• Duration of project – Is it too inclusive?
• Words or phrases including marketing, users, quality, locations outside of the country, the involvement of non-traditional and/or non-technical titles of individuals, products, commercial use, debugging, etc.
• Are there indications on the website or news reports that would hint toward the above status of the project? Most often this is estimates of availability. Is this explained in the text? (e.g., plans to test at a special non-Canadian location that was changed to a Canadian site).
• Was there work outside of Canada?

Overall Impression

• Would the non-technical readers feel comfortable that this is a technical application or that it is a routine submission wrapped in technical jargon?
• Are the technical explanations sufficient for a non-specialist?
• Would the advances and uncertainties be understood by a specialist?
• Is it clear that this was not just a product improvement or an evolution?

Step 5: Finalize Costs for Each Project

Step 5.1: Calculate the SR&ED Expenditures

Part Three – Section B of the T661 form is for “Calculation of allowable SR&ED expenditures (to the nearest dollar)⁴⁶.” This section requires figures relating to the following information:

• SR&ED portion of salary or wages of employees directly engaged in the SR&ED
  • Line 300 – Employees other than specified employees for work performed in Canada
  • Line 305 – Specified employees for work performed in Canada
    • Line 306 – Subtotal (add lines 300 and 305)
  • Line 307 – Employees other than specified employees for work performed outside Canada
  • Line 309 – Specified employees for work performed outside Canada
• Line 310 – Salary or wages identified on line 315 in prior years that were paid in this tax year
• Line 315 – Salary or wages incurred in the year but not paid within 180 days of the tax year end
• Line 320 – Cost of materials consumed in performing SR&ED
• Line 325 – Cost of materials transformed in performing SR&ED
• Contract expenditures for SR&ED performed on your behalf:
  • Line 340 – Arm’s length contracts (for contract expenditures made after 2013, no amounts for purchasing or leasing capital property can be included)
  • Line 345 – Non-arm’s length contracts (for contract expenditures made after 2013, no amounts for purchasing or leasing capital property can be included)
• Lease costs of equipment used before 2014:
  • Line 350 – All or substantially all (90% of the time or more) for SR&ED
  • Line 355 – Primarily (more than 50% of the time but less than 90%) for SR&ED.
• Line 360 – Overhead and other expenditures
• Line 370 – Third-party payments
• Line 380 – Total current SR&ED expenditures (add lines 306 to 370; do not add line 315) (Corporations may need to adjust line 118 of schedule T2SCH1)
• Line 390 – Capital expenditures for depreciable property available for use before 2014
  (Do not include these capital expenditures on schedule T2SCH8)
• Line 400 – Total allowable SR&ED expenditures (add lines 380 and 390)

Salary or Wages

There is more information about the salaries and wages for SR&ED in the CRA’s SR&ED Salary or Wages Policy⁴⁷.

Line 300/305 – Salary Information

Total the amount of money spent on all technical employees directly engaged in the R&D activities performed this year, and enter this on line 300/305. you should prepare these calculations on a secondary spreadsheet to show and prove the breakdown of costs to the CRA if a financial review is required. You need to split these costs between ‘Specified Employees’ (i.e. individuals who own more than 10% of the company), and ‘Non-specified Employees’ (all other employees).

Specified Employees are capped by a calculation based on the fiscal year’s Yearly Maximum Pensionable Earnings (YMPE). Each Specified Employee can claim a maximum of 5 times the YMPE. For example, for the fiscal year 2012, this would have been 5 X $50,100 = $250,500. Note that this doesn’t place a cap on the total salary paid to a specified employee, just the amount that you can claim for SR&ED. There is no cap on the costs incurred by Non-Specified Employees.

Example. Consider the following situation: The CTO of a technology company is paid $300,000 in 2012 (excluding bonuses and pensionable benefits). The following table outlines how much can be claimed for SR&ED if the employee had spent, 20%, 50%, or 75% of their time on SR&ED activities during that year.

Lines 307 and 309 – Work Performed Outside Canada

The majority of the SR&ED-related work not only must be paid to taxable Canadian employees, but it also must be performed predominantly in Canada. If an employee performs a portion of his/her work outside of the country (perhaps at an international office or off-site), you can claim a maximum of 10% of the employee’s salary for the given tax year for the time spent outside of Canada.

Note on Salary and Wages

There is more information about the salaries and wages for SR&ED in the CRA’s SR&ED Salary or Wages Policy⁴⁷.

Cost of Materials

The CRA defines “materials for SR&ED” as “… all the raw materials, substances, or other items that compose the body of a thing at a given moment in the SR&ED process⁶².”

There is more information about the cost of materials for SR&ED in the following CRA policies:

• Materials for SR&ED Policy⁶³
• SR&ED During Production Runs Policy⁶⁴
• SR&ED while Developing an Asset Policy⁶⁵

The “Cost of materials in the tax year” section, (under box 754) in Part Six – Project Costs on the T661 is based on a total of lines 320 and 325⁵⁸.

Line 320/325 – Materials Consumed and Transformed

Record the cost to the company (excluding any taxes/HST costs) of subcontractor work (for individuals or corporations) hired to perform SR&ED. Consult our post on “Am I Eligible for SR&ED?” for the requirements and suggested contractual agreement. Information on these specific companies will be provided later, but for now, you simply need to record the total cost of all contracts.

Separate non-arm’s length and arm’s-length as necessary. Note that non-arm’s length contractors add to your total SR&ED expenditures, but you will NOT receive an ITC for their costs. Arm’s-length costs will be placed on Line 541 later on.

Contracts for SR&ED

The CRA defines “on behalf of a claimant” as,

“… a situation where the SR&ED work is contracted out to another party under circumstances where the claimant (the payer) typically maintains ownership of the SR&ED work performed.

Whether the payer requested the contractor to perform SR&ED on behalf of the payer under the terms of the contract is a key element for determining an amount as being a contract payment. This determination is made on the basis of the terms of the contract read as a whole and by reviewing all the facts surrounding the particular situation⁷².”

There is more information about the cost of materials for SR&ED in the following CRA policies:

• Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy⁷³
• Assistance and Contract Payments Policy⁷⁴
• SR&ED while Developing an Asset Policy⁷⁵

The “contract expenditures for SR&ED performed on your behalf in the tax year” section, (under box 756) in Part Six – Project Costs on the T661 is based on a total of lines 340 and 345⁷⁶.

SR&ED contracts for Lines 340 and 345 should not be confused with “third-party payments.” A third-party payment is defined by the CRA as “a payment made by a claimant to an entity to be used for SR&ED carried on in Canada, that is related to a business of the claimant and the claimant must be entitled to exploit the results of the SR&ED.” Whereas, a “contract payment” is defined as,

• “an amount paid or payable to a claimant by a taxable supplier in respect of the amount for SR&ED:
• for, or on behalf of, a person or partnership entitled to a deduction for the amount as a current expenditure or as a third-party payment to a corporation; and
• at a time when the claimant and the person or partnership (the taxable supplier) are dealing at arm’s length; or
• an amount for an expenditure of a current nature (other than a prescribed amount) payable by a Canadian government, municipality or other Canadian public authority or by a person exempt from Part I tax, for SR&ED to be performed for it or on its behalf⁷⁷.”

The key distinction between a “third-party payment” and an “SR&ED contract” is outlined in the T4088 as “payments to an approved association, university, college, research institute, or other similar organization are considered to be third-party payments. In some cases, a payment to a Canadian corporation resident in Canada could also be considered a third-party payment. Third-party payments refer to amounts paid for SR&ED not directly undertaken by you or on your behalf⁷⁸,” therefore a contract payment occurs when the work was carried out directly on your behalf, whereas a third-party payment occurs when the work was not carried out directly on your behalf. The image of the table below gives more information on how to differentiate between SR&ED contract and third-party payments.

Line 340/345/370 – Subcontractors and Third-Party Payments

Record the cost to the company (excluding any taxes/HST costs) of subcontractor work (for individuals or corporations) hired to perform SR&ED. You will provide information on these specific companies later, but for now, you simply need to record the total cost of all contracts.

Separate non-arm’s length and arm’s-length as necessary. Note that non-arm’s length contractors add to your total SR&ED expenditures, but you will NOT receive an ITC for their costs. Arm’s-length costs will be placed on Line 541 later on.

Overhead and Other Expenditures

Line 360 – Overhead

Select 0 if using the Proxy method, as the allowance covers this line. If using the Traditional method, this is where you add up all of the related expenditures relating to overhead costs (such as administrative, utility, travel, etc.) which are incremental to the performance of SR&ED. See the Table on Page 19 of the T4088⁸³ or our post on eligibility for more details.

Notes on Third-Party Payments

The T4088 guide notes “special rules apply to contributions made by farm producers to agricultural organizations (also known as check-offs) to qualify as third-party payments⁹⁹.” There is more information about this in Section 8 of the Third-Party Payments Policy.  You can also visit our page SR&ED and Agriculture: Hidden Tax Credits from Levy and Check-Offs.

Total current SR&ED expenditures

Line 380 enter the total of lines 306 to 370 but do not include the figure from Line 315.

Example. Lines 306 to 310 equal $100,000. Lines 320 to 370 equal $50,000. Therefore, in Line 380, $150,000 should be entered. 

Capital Expenditures

NOT AVAILABLE AFTER DECEMBER 31, 2013

Total allowable SR&ED expenditures

Line 400, enter the total of Lines 380 and 390 (<- Line 390 not in use after 20131231).

Example. Line 380 equals $150,000 and Line 390 equals $200,000, therefore Line 400 should equal $350,000.

Step 5.2: Review CRA SR&ED Application Checklist (Financial)

The CRA provides the following questions to examine the financial completeness of an SR&ED application (consult Part 8 of Form T661¹⁰¹.)

To ensure your claim is complete, make sure you have:

• Used the current version of the form.
• Entered the method you have chosen for reporting your SR&ED expenditures in Section A of Part 3.
• Completed Part 2 for each project.
• Filed a completed Schedule T2SCH31 or Form T2038(IND) to claim ITCs on your qualified SR&ED expenditures.
• Filed a completed Form T1145¹⁰², T1146¹⁰³, T1174¹⁰⁴, and/or T1263¹⁰⁵ including any required attachments, if applicable.
  • T1145 Agreement to Allocate Assistance for SR&ED Between Persons Not Dealing at Arm’s Length¹⁰⁶
  • T1146 Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm’s Length¹⁰⁷
  • T1174 Agreement Between Associated Corporations to Allocate Salary or Wages of Specified Employees for Scientific Research and Experimental Development (SR&ED)¹⁰⁸
  • T1263 Third-party payments for scientific research and experimental development (SR&ED)¹⁰⁹

Part Six of the T4088 lists the typical project costs¹¹⁰. Expenditures should be allocated on a project-by-project basis. Typical project costs will include:

• Salaries or Wages (Box 752)
  • This is based on a total of lines 306 to 309 from Section Three – Part B (see above).
• Costs of Materials (Box 754)
  • This is based on a total of lines 320 and 325 from Section Three – Part B (see above).
• Contract Expenditures (Box 756)
  • This is based on a total of lines 340 and 345 from Section Three – Part B (see above).

Step 6: Complete T661 with Technical and Financial Information

This is the financial section of the application that allows you to calculate the total expenditures that you can claim for the period. Many of the entries in the T661 are relatively straightforward, and the CRA has produced an excellent ‘Guide to the T661‘ (the T4088)¹¹¹. We will provide commentary on both the T661 and T4088 in the following section to make the filing as easy as possible.

Print off a copy of the T4088¹¹² and cross-reference the rest of this document (starting on page 6).

Note. It’s important to have your accountant review this section to ensure that you are not making any errors as it relates to other parts of your taxes.

Part 1 – General Information

This section is fairly straightforward. Here are some notes:

Line 115 – Contact Person for the Technical information

The person listed here should be the primary technical contact for the company and familiar with the SR&ED process. This will be the person the CRA contacts if a technical review is requested, and it is usually best to list a senior project manager in the company who can then direct and assign personnel as needed. Ensure that the contact information (phone number/fax) is correct, as incorrect numbers can delay the processing of your SR&ED application.

Lines 151 and 153 – Company Partnerships

Fill out this section only if you are conducting SR&ED jointly with another company. Do not include hired subcontractors in this section unless your signed agreement strictly states that you will be splitting the SR&ED tax credits associated with the project.

Part 2 – Project Information

This part constitutes the description of the work performed.

This is the technical, descriptive part of the application. Copy and paste your technical narrative into this section. Watch out for word and line limits (you can consult the information on word count limits in “Tips for Writing Compelling SR&ED Applications”).

Note that each separate SR&ED project will need its own T661 Part 2 form, and thus each will have its own associated word count limits. You can combine related projects into a single narrative submission, but this has both advantages and disadvantages as discussed earlier in Step 3.

We have included more information on what should be written in Lines 260 and 261 in our “Qualified Personnel in SR&ED (Lines 260 & 261)” article.

Below is an example using the text from Step 4.1 combined into the relevant sections to give an idea of what should be written for Lines 242, 244 and 246.

Line 242 – What scientific or technological uncertainties did you attempt to overcome?

The primary goal of this project was to design and create a computer vision system capable of real-time processing and analysis of stitched high-resolution video images.

We required that the system is capable of processing all incoming images (1280×720 minimum resolution) with a minimum frame rate of 30fps. The processing algorithm would have to be optimized to work on standard desktop hardware (i.e. no server or supercomputer were required).

The primary difficulty with regard to this objective was with respect to processing efficiency. Real-time high definition video feeds consume a very high volume of data (~10MB/s). Traditional and existing analysis/processing techniques are not able to keep up with this data rate, and still maintain 30 fps without extensive hardware upgrades (i.e. multiple networked computers). As existing video analysis techniques are very mature technology, it was uncertain if a brand new algorithm could be developed to deliver the desired processing power.

Our team has extensive experience in relation to image processing and video algorithm development. The team was led by an engineer with 25 years of experience. Despite our internal resources and consulting external resources, we were unable to resolve the above uncertainties.

Line 244 – What work did you perform in the tax year to overcome the scientific or technological uncertainties described in line 242?

To address the hardware bottlenecks, we first conducted a comprehensive study of existing computer vision techniques to determine how they compared against our requirements. We identified several open-source projects as well as two commercial software programs that were directly related to the material; however, the commercial software was proprietary and did not meet our speed requirements; as such it would be very difficult to modify the software, and infeasible to contract out the changes. Preliminary tests with the open-source software revealed acceptable performance levels for single object recognition, but they could not track multiple objects. All analysis/measurement functions were also absent. As such, we concluded we had to conduct all the work in-house with the open-source projects as a baseline.

Work proceeded on a parallelization scheme for the open-source project to allow images to be chunked into manageable pieces. Some documentation was available for this in the form of white papers, but they had not been designed for this kind of graphical project, so considerable experimental development had to be completed. Our initial builds of the device incorporated [Method A], but it did not scale well to higher resolution images due to [Problem A] and only resulted in a 10% improvement over serialized code. To address this, we attempted to re-work the mathematical models behind the processing code itself. We attempted 4 different approximation algorithms and permutations of the different algorithms [Examples of algorithms here], before finalizing on a final parallelization code which resulted in a 50% improvement over normal serial code on a traditional quad-core desktop workstation.

At the end of the reporting period, work was considered complete.

Line 246 – What scientific or technological advancements did you achieve or attempt to achieve as a result of the work described in line 244?

At the beginning of the reporting period, it was uncertain if a brand new algorithm could be developed to deliver the desired processing power (processing all incoming images (1280×720 minimum resolution) with a minimum frame rate of 30fps).

At the end of the reporting period, we created a new parallelization scheme that was specifically designed for graphical analysis. Elements incorporate both CPU and GPU power, and the process results in a 50% improvement over traditional serial methods (on a desktop machine). The new method achieves this by incorporating [Method C] using [Algorithm #5], which had never been combined in this fashion before.

This represents an advancement in the larger field of image processing and video algorithm development. Researchers interested in image processing and video algorithm development would benefit from reviewing our work.

Part 3 – Calculation of SR&ED Expenditures

To be eligible for the SR&ED Investment Tax Credits (ITCs), you must record all expenses related to your SR&ED investigations during the year in this section.

Section A – Select the method to calculate the SR&ED expenditures

Lines 160 and 162 – Proxy vs. Traditional

The Traditional and Proxy methods offer two methods of accounting for the standard overhead costs that are incurred when performing SR&ED. These include items such as utility costs, administrative support, office supplies, and other related expenses.

With the Traditional method, you must identify and enumerate every overhead cost you incur and then allocate a certain percentage of these costs relating to the SR&ED activities. For example, if a company spent a total of $100,000 on overhead for a given year, and the SR&ED development comprised about 50% of the company’s total time, it would be reasonable to claim $50,000 in overhead costs. The Traditional approach can be onerous, especially for small businesses who don’t have the time or record keeping capabilities to track all the necessary information.

Using the Proxy approach, an ‘allowance’ is given. This used to be equal to 65% of the total salary costs incurred by your employees doing the SR&ED work; however, this rate dropped to 55% in the 2014 federal budget and beyond, with all related expenses being pro-rated¹¹³ Either way, 55 to 65% is a rather generous allowance, and in many industries, it results in a higher overhead allowance compared to the Traditional method. Both methods are perfectly valid, however, and any company can choose which is the most advantageous for them.

For an in-depth analysis of the Proxy vs. Traditional methods, consult our post on “SR&ED Allowable vs. Qualified Expenditures: What are they?.”

Section B – Calculation of Allowable SR&ED Expenditures

How to complete this section is explained in detail in Step 5.1.

Section C – Calculation of Deductible SR&ED Expenditures

This section contains calculations that are only relevant to the company’s accounting situation. None of the numbers calculated here will affect the ITCs received. Companies can also deduct the relevant SR&ED activities as a normal business expense (in addition to receiving ITCs) and calculate the allowable deduction in this section. Most tax software programs will calculate Section C automatically with minimal input required by the user, except for Line 431, which you must always fill out manually.

Line 429 – Provincial/Territorial Assistance

Most companies claiming SR&ED will need to enter the relevant amounts received from the Provincial ITCs received; however, this amount will ultimately be calculated later in the T661. So if you are manually filling this form out, leave this blank and fill in the amounts after completing Section D. The provincial assistance amounts on Line 429. DO NOT INCLUDE THE PROXY TOP-UP. As such, they will be different from the amounts recorded on line 513.

Line 431 – Other Government Assistance

All direct funding from government programs must be reported on this line. Standard items for SR&ED purposes include Industrial Research Assistance Program (IRAP) grants and other government (provincial or federal) funding related to employment. Only projects directly related to the SR&ED activities need to be reported here. If a $10,000 IRAP contract was received, and $7,000 went to an SR&ED employee and $3,000 was targeted towards an employee performing marketing of the product being developed, only $7,000 should be recorded on Line 431. Be aware that documentation will need to exist to justify this split.

Line 432 – Non-Government Assistance

Report assistance related to direct support from non-government sources (e.g., university grants) here. If the assistance was recorded correctly as income during the reporting period, it does not count as non-governmental assistance.

Line 435 – SR&ED ITCs Applied/Refunded in the Last Reporting Period

If an application for SR&ED was submitted last year, the total federal ITCs received by the company goes on line 435. You can find this figure on Schedule 31 from the previous reporting period.

Line 445 – Repayments of Government/Non-Government Assistance

If you accidentally over-reported the amount of government funding received in a previous reporting period (i.e., on Line 431)—perhaps due to an early contract cancellation—and you no longer receive the funding for those activities, record the difference on Line 445 to allow you to claim the cost reduction.

Line 450 – Prior Tax Year’s Pool Balance of Deductible Expenditures

Record the amount from Line 470 on the previous tax year’s T661 form. Note that this amount may be 0.

Lines 455 and 460 – Amount Available for Deduction

After adding and subtracting the amounts mentioned above, this figure represents the total sum of SR&ED expenses available for deduction for this reporting period. Companies are allowed to claim these costs as a normal business deduction or to keep these available for future years to reduce taxes owing. This decision is a purely financial one and has no impact on SR&ED eligibility or risk of review. This balance (the remainder on Line 470) can be carried forward indefinitely until it is needed.

Part 4 – Calculation of Qualified SR&ED Expenditures for Investment Tax Credit (ITC) Purposes

This section is one of the most important in the T661, as the final total at the end of this section forms the basis for calculating the refundable SR&ED tax credits for the fiscal period.

Line 500 – Payment of Prior Year’s Unpaid Amounts

Any salary amounts that were outstanding from a previous reporting period (e.g., Line 520 from the prior year) can be included here to increase the tax credits received.

Line 502 – Proxy Amount

An earlier discussion in this document used a worksheet to calculate the Proxy Amount (if this method was chosen earlier). Copy the calculated amount here if completing the form manually; however, most accounting software will calculate this for you.

Line 504 – Shared-Use Equipment Acquired Before 2014

Record any shared-use equipment (SUE) costs here.

Lines 508 and 510 – Transferred Expenditures

If an agreement is made with another company to transfer eligible SR&ED expenditures, include the agreed-upon amount on Line 508. Non-arm’s length agreements can complicate this process, but this is a relatively rare situation. See Form T1146¹¹⁴ for additional details.

Lines 513 and 514 – Provincial/ Territorial Assistance

Most companies will need to calculate the provincial/territorial ITCs received, then come back to include the amounts in this form. The provincial amounts are calculated first, based on the entire SR&ED expenditure pool (Line 570), and are usually a flat percentage. For example, in Ontario, you would calculate the Ontario Innovation Tax Credit (Schedule 566), which is equal to 10% of the total expenditures. Note that this includes the proxy top-up (if any) and will, therefore, differ from the amounts showing on Line 429.

Lines 515 and 516 – Other Government Assistance

Record all IRAP and similar assistance programs. This amount should be identical to Line 431.

Lines 517 and 518 – Non-Government Assistance

Record all non-governmental assistance. This amount should be identical to Line 432.

Line 528 – Non-Taxable Suppliers

If a portion of the SR&ED costs were paid to an agent who is not a taxable Canadian supplier, such as an overseas agent or a company who does not have offices in Canada, these costs are NOT eligible for ITCs. These costs will need to be recorded on Line 528.

Line 529 – Adjustment for Contract Payments

Due to the budget changes, only 80% of the contract payments made after December 31, 2012, are eligible for SR&ED. Formerly, 100% of the contract could be claimed. Applicants must prorate time spent on the contract after this date accordingly.

Lines 530 and 532 – Other Non-Compliant Expenditures

Other expenditures explicitly listed as ineligible for SR&ED must be removed from the ITC calculation here. These include interest and other financing costs, legal/accounting fees, membership fees, any costs relating to used equipment, as well as any activities that were not subject to normal income tax rules. Charitable work is one example.

Lines 538 and 546 – Non-Arm’s Length Arrangements

Any goods purchased from non-arm’s length suppliers or related contracts must be removed from the ITC calculation here.

Line 570 – Total Qualified SR&ED Expenditures

This total amount is the basis for calculating what the Federal ITC will be. Transfer this amount to Schedule 31.

Part 5 – Calculation of Prescribed Proxy Amount (PPA)

This section is mostly self-explanatory, with two important things to note:

Section A – Salary Base

First of all, the salary base—which is used to calculate the PPA—needs to exclude all bonuses, taxable benefits, and performance incentives for both specified AND non-specified employees.

Section B – Prescribed Proxy Amount (PPA)

The second is that, for calculating the PPA (this restriction does not exist when calculating the total salary expenses on Line 300), specified employees are capped at 75% SR&ED time. The CRA assumes that a specified employee will be spending at least part of his/her time working on business development and company-specific activities independent from SR&ED. Each Specified Employee can claim a maximum of 2.5 times the YMPE in the PPA. For example, for fiscal year 2012, this would have been 2.5 X $50,100 = $125,250.

The percentages for the PPA have changed due to the 2012 Canadian budget. Effective January 1, 2014, the PPA has been adjusted from 65% to 55%. All costs are prorated for companies who have fiscal years bridging these dates.

Part 6 – Project Costs

If claiming multiple projects (i.e., multiple Part 2 T661 forms), you must provide the high-level breakdown of costs for each project. Ensure that the totals match the total claimed amounts on the relevant lines in Section C.

Part 7 – Additional Information

The information in this section is largely for demographic information at the CRA, but you must maintain self-consistency. The questions deal with the internal organization of the company (e.g., where did the funding for the SR&ED come from). Answer as completely as possible.

Lines 632 and 638 – SR&ED Personnel

When listing the SR&ED personnel involved in the project, ensure that their occupations are accurately described. The CRA considers it a red flag if most of the personnel involved in the project are managers/administrators as opposed to engineers or technicians. The CRA may have more questions about a submission that involves one engineer and six managers as opposed to an application with four technicians, two engineers, and one or two managers.

Part 8 – Application Checklist

This is a brief checklist to ensure you’ve completed every aspect of your application. Check off each box once each task has been completed.

Part 9 – Application Preparer Information

This is a relatively new part of the T661, having first appeared in the form two versions ago. Should you have engaged an outside party to assist in the preparation of your submission, this section asks for full disclosure of that relationship.

Be sure to work together with your application preparer to ensure this is filled out properly. Should any information be falsified or omitted, you will be subject to a $1,000 fine.

Part 10 – Certification

Sign and date this section to certify that the information provided in the T661 is “true, correct, and complete.”

Step 7: Prepare Any Additional Tax Credit Forms

The table below has a list of various federal and provincial/territorial tax forms:

Most tax software packages will automatically populate the other tax credit related forms as you fill out the T661. These include the Schedule 31¹¹⁵ form and related provincial form(s).

See our page Corporate Tax Preparation Software for Filing SR&ED Claims for a list of tax software packages that include the SR&ED forms. Remember you must ensure your chosen software is compatible with your province’s tax forms.

Note. It’s important to have your accountant review this section to ensure that you are not making any errors, as it relates to other parts of your taxes.

Step 8: Submit the Completed Application and Wait for Response

Once you have collected and completed all the required documents and reviewed the financial and technical SR&ED application checklists provided by the CRA, you are ready to submit your application to the CRA.

Your SR&ED forms must be filed with your taxes. Contact your accountant and ask them to include your application with your T2s (if they have not yet been submitted) or amend your T2s.

If you are submitting the package near the 18-month deadline, ensure that the application is date stamped to avoid an early rejection.

The CRA is mandated to respond to all amended tax forms within 120 days for refundable applications and 365 days for non-refundable applications. This timeline is also modified if the application is submitted as an amendment to the original tax submission, or if it is submitted with the original taxes. The required response time is doubled in the event of an amendment. The CRA is usually quite good at responding within this timeline; if you haven’t heard anything from the government in two months, give your local SR&ED centre a call.