SR&ED contractors: The importance of Lines 267, 268, and 269.
When applying to the Canada Revenue Agency for Scientific Research & Experimental Development (SR&ED) investment tax credits, the information you provide in each section can ultimately decide its fate in the hands of a discerning CRA agent. Make sure you are on target for a successful application by considering the information provided below.
SR&ED Contractors: The Importance of Lines 267, 268, 269
Naming the contractors who performed your claimed SR&ED work on your T661 Scientific Research and Experimental Development (SR&ED) Investment Tax Credit application form can be tricky business. Failing to understand the CRA’s requirements of a contractor can result in a costly review. In this post, we discuss Lines 267, 268, and 269, so you can accurately depict the contractors in your claimed project.
What are you required to enter in Lines 267, 268 and 269?
For Line 267, the T661 form asks “Are you claiming expenditures for SR&ED performed by people other than your employees?” 1 If anyone who wasn’t an employee of your company executed a part or all of your claimed SR&ED work, you should check off “yes”. In Line 268 and Line 269, you enter the name of these individuals or these corporations and their BN if they are a corporation or their HST or GST if they are an individual.2
Who does the CRA consider to be a “SR&ED contractor”?
The SR&ED glossary claims a corporation or individual who performed “basic research, applied research or experimental development, or support work” on your behalf is part of a SR&ED contract.3 Let’s unpack some of those terms.
“Basic research” is work towards expanding the existing scientific knowledge base with no “specific practical application in view.” 4 “Applied research” also expands the existing knowledge base, but has a practical application.5 Experimental development has the objective or technological advancement to generate “new, or improving existing, materials, devices, products or processes”. 6
“Support work” is the “engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research” in the claimed project which is “commensurate with the needs, and directly in support” of the basic research, applied research or experimental development.7
Now, what if all of the above is performed on behalf of your company? This is “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.” 8
When your work to advance the scientific or technological knowledge base is done by a subcontractor but the advancement belongs to you, you answer yes in Line 267.
Usually, your contractor will be “arms’ length”. This means the contractor and your company are “not related to each other and no control exists between them”. 9
However, if your contractor doesn’t meet the CRA’s definition of “arms’ length”, they are (as you can probably guess) “non-arms’ length”. Employing a non-arms’ length subcontractor means there are “two related parties that deal with each other and one party exerts control over the other”.10 Navigating a non-arms’ length contractor in your SR&ED claim can create difficulties in demonstrating your project’s eligibility. It also triggers the requirement for multiple special documents. If you want to learn more about successfully including a non-arms’ length contractor in your SR&ED claim, you can find that information here.
What are the requirements of a SR&ED contractor?
For the CRA to consider your contractor a bonafide “SR&ED contractor”, the contractor must perform work that is “commensurate with the needs and directly in support of the basic research, applied research, or experimental development work performed by or on behalf of the payer”.11
Work that corresponds in the “amount, size, extent, or duration that is necessary to carry out” the SR&ED is “commensurate with the needs” of the research performed.12 This means there aren’t any inconsistencies between the details of the work performed by the subcontractor and the entirety of the SR&ED work.
Work that is directly in support of the research or development will be “carried out specifically to perform the related basic research, applied research or experimental development.” 13
Ensuring your contractor’s work is both commensurate with your claimed project’s needs and directly in support of the research and development that took place during your project is instrumental in demonstrating your eligibility.
Are there other requirements which accompany checking off “yes” in Line 267?
Yes, there are! If you answer yes to Line 267, you must provide a “description of the work performed on your behalf or a copy of the contract, including a statement of work” for each of the corporations or individuals you enter at Lines 267 and 268.14
Plus – if you’re not using tax software to fill out your T661, ensure you “attach a separate sheet” with the names of the involved contractors “if there are more than two parties listed on line 268.”15
Summary: SR&ED Contractors
Be diligent when filling out Lines 267 to 269. Name your contracts in Line 268 and give their BNs or HST/GST in Line 269. Be certain you know who is an arms’ length party and who is not. One tiny, unintentional mistake regarding the contractors involved in your SR&ED project can lead to a stinging review or possible denial.