Why the SR&ED Program is Complex
Attention: Policies May Have Been Updated
*** Some of the policies referenced were updated 2021-08-13. We are working to update this article and others. ***
Applying for SR&ED isn’t “just writing 1,400 words.” The T661 is simply the most visible part of the application to the taxpayer.
When most individuals approach SR&ED for the first time, they go straight to the T661 form.1 They are often lulled into a false sense of security–after all, it’s just answering three questions then adding in a bit of financial information, right?
Despite the T661 being the most visible part of the SR&ED application, it is proportionally a tiny fraction of the program. In fact, the 1400 words required in this form are supported by upwards of 1.4 million words of policies, supporting documents, and legal precedent. As such, it is best compared to an iceberg – the T661 floats above the water, looking small and manageable, while policy documents, history, legal precedent, and CRA culture loom invisibly beneath. Like an iceberg, the SR&ED program can conceal dire consequences to those who mistake the part above the surface for the whole.2 The SR&ED program as it is today represents the current iteration of a 30-year process of development and dialogue involving the CRA, the Treasury Board Secretariat, the Canadian Tax Court, scientific experts, and government funding researchers. For that reason alone, SR&ED is anything but the “simple 1400 word form” many mistake it to be.
A New Lens: What the T661 really is…
The form is relatively small: it is 9 pages long, with only 1,400 words available for a technical narrative. After a glance at the form, one might decide that the application process is trivial: Fill out the form, and receive tax credits. However, it’s not that simple.
The T661 is the main interface between a company and the CRA. The purpose is to assist the CRA in determining whether the claimant qualifies; specifically, whether they have met the definitions under the Income Tax Act. Ultimately, the T661 is a risk management tool used by the CRA. It was developed to quickly identify any misuse of the SR&ED program, intentional or otherwise. It would be a mistake to conflate it with the entire SR&ED program, it is the tip of the SR&ED iceberg.
The most discussed section of the form is lines 242, 244, and 246 – the “technical narrative” where the claimant must describe the work performed. This includes three questions:
242:What scientific or technological uncertainties did you attempt to overcome? (Maximum 350 words)
244:What work did you perform in the tax year to overcome the scientific or technological uncertainties described in line 242? (Summarize the systematic investigation or search) (Maximum 700 words)
246: What scientific or technological advancements did you achieve or attempt to achieve as a result of the work described in line 244? (Maximum 350 words)
The questions contain ambiguous terminology which can be misinterpreted by the taxpayer. While there are some explanations and additional insight into what needs to be provided in the T4088 – Guide to the T661,3 most individuals take these questions at face value. Worse, others describe their new product functionality – failing to realize the difference between an SR&ED project and a company project. If the CRA believes you have misunderstood the policies based on your technical narrative, you will be selected for review.
Note carefully the small word limits. For reference, 1,400 words is about 1/2 of the length of this article. If in this small space, you fail to demonstrate how the project meets each of the criteria for SR&ED, e.g. if you fail to properly define the project in relation to the company’s pre-existing knowledge base, you may be selected for review.
The financial portion of the T661 SR&ED form is no less particular. The CRA will review these costs against what has been described to determine whether or not they are reasonable.
There are a number of places in the financial portion of the application where an applicant can run afoul of the CRA. For example:
- Lines 517-518: The CRA carefully examines contract payments. Did you mention being paid for your work in the technical narrative, but not list the details on lines 517 and 518? The CRA must ensure that multiple companies do not receive SR&ED credits for the same work. When in doubt, they will send someone out to review your application.
- Line 820: There is a cap on the Prescribed Proxy Amount (PPA). Did you list a PPA that is larger than the company’s PPA cap? Take note, the T661 does not contain the formula for calculating this maximum. This must be done with the help of the T4088. When in doubt, they will send someone out to review your application.
- Lines 850-860: The CRA will take issue with applications in which specified employees (a SR&ED program-specific term referring to employees meeting certain shareholder criteria) are claimed at more than 75% in calculating the PPA. For example, if you claim a CEO with an arts degree at 100%, there will likely be issues. When in doubt, they will send someone out to review your application.
The qualifications of the personnel listed on the T661 can influence the success or failure of an SR&ED application – so be sure to think carefully about the qualified personnel you list on lines 260/261.
In summary, the CRA carefully scrutinizes this form to ensure your application aligns with Canada’s Income Tax Act legislation and the CRA’s policies.
What Lies Below the SR&ED Iceberg: Policies, Administrative Procedures, and Jurisprudence
SR&ED Program policies
The collected CRA policies are comprised of 20 documents (that we have summarized here). These are supplemented by policy applications, which clarify the CRA’s position in the case of changes–the policies themselves are continually in flux, as Federal Budgets, CRA resources, and legal precedent change. They were completely overhauled as recently as 2012 and under any new governments, they may change further.
The CRA’s collected SR&ED policies are more than 150,000 words long; at the average adult reading speed of 236 words per minute 4, it would take at least 10 hours to read the collected documents once. Note that the time it takes for a once-over is not the time needed to learn the nuances of the policy and to be able to apply the policies to your company’s work. In addition, the SR&ED glossary – containing terms that may be confusing, contentious, or require extra definition – contains more than 100 entries.5 By word count, the T661 is about 3% of the size of the CRA’s collected SR&ED policies (150,000 words).
SR&ED Program Review Procedures & Guidelines
In addition to the SR&ED policies, the CRA has released four documents under the category of Procedures and Guidelines:6
- Guidelines for Resolving Claimants’ SR&ED Concerns
- Financial Claim Review Manual – Review Procedures for Financial Reviewers (public severed version)
- Claim Review Manual for Research and Technology Advisors
- The SR&ED Technical Review: A Guide for Claimants
The existence of these documents is an acknowledgment that the SR&ED application process cannot be contained within policy documents – that there is also a need for guidelines for how applications take place in real life.
The document Guidelines for Resolving Claimant’s Concerns is of particular note: The process for resolving disputed SR&ED claims involves several stages, sometimes resulting in a Tax Court case years after the filing in question. In summary, they are essential reading for SR&ED claimants as they contain more information than the policies regarding how the SR&ED program operates in practice.
In perspective: There are an estimated 120,000 words in the SR&ED Program Review Procedures and Guidelines. It would take the average adult more than 8 hours to review all the documents once. For those keeping track, the T661 is about 1.6% the size of the total of the SR&ED Program Review Procedures and collected CRA policies.
Legal Issues & Jurisprudence
Beneath the forms, processes, and policies is another level of information: legal precedent.
The courts’ function is often to interpret the program in light of differing views. If there is a term or section of a policy document that is difficult to interpret, it is quite likely that debates about it have surfaced in tax court. Jurisprudence has been so important in informing the policies of the CRA that each official policy includes further citations of legal cases in which have informed it. For instance, the CRA’s Overhead and Other Expenditures Policy cites eight court cases.
Our legal rulings database is a collection of previous tax court rulings regarding issues pertaining to SR&ED. Having substantial knowledge about the program is an excellent way to avoid being caught by surprise.
A random sampling of six cases from our legal rulings database provided an average word count of 5,900 words per case. Multiplied by the number of cases in that same database (195), we are left with more than 1,000,000 words of legal proceedings relating to SR&ED – each of which has varying degrees of influence on how policies should be interpreted. This is an enormous amount of text, and reading it all is not imperative for a good understanding of the SR&ED program in the same extent as reading the policies and claim review guidelines. However, for illustration purposes, were one to decide to read all of the legal precedents, it would take more than 70 hours of uninterrupted reading.
Word count is admittedly a rough proxy for a quantity of information, but this is more an illustration than a precise measurement. There is an enormous amount of information about SR&ED, and familiarity with legal precedent is extremely useful for any SR&ED applicant.
In perspective: There are an estimated 1,000,000 words of legal proceedings relating to SR&ED. It would take the average adult 70 hours to read these documents once. The T661 is 0.3% the size of the cumulative total of CRA Policy, CRA Review Procedures and Guidelines, and legal proceedings.
Permeating Everything: History and Culture
It would be impossible to develop and implement a program as large and complex as SR&ED without generating compelling history. Being aware of the history of the policy and administrative aspects of the SR&ED program means being aware of trends at the CRA, as well as how interpretations of the program have changed over time. A strong knowledge of program history gives an opportunity for educated predictions about how policies are likely to be interpreted in the future.
In our Research and Analysis section, we have carefully documented some aspects of the history of the program, including mentions of SR&ED In the Federal Budget, Canada Revenue Agency Reports to the Treasury Board, Parliamentary Reports about SR&ED, and other Government Reports. We have also analyzed trends in the administration of the SR&ED program, collecting data from the CRA’s annual reports to Parliament to examine the effect that recent changes in administration and reviewing procedures have had on refund amounts.
In addition to policies, procedures, and legal precedent, there is the undeniable fact that the CRA is an institution, replete with corporate culture. SR&ED offices exist across Canada, each with their own management teams with particular espoused values, which trickles down to each Research Technology Advisor (RTA) who is obligated to interpret the SR&ED guidelines. The decentralization, while necessary due to the geographic enormity of the country, can result in disparities regarding the assessments of SR&ED applications.
This is not intended as an indictment of the CRA: in recent years, they have responded to applicant concerns with steps to improve consistency, including increased employee training and the introduction of new programs. But the existence of these programs confirms the argument: the CRA is a human institution, with the foibles that that involves. As a result, there are certain tendencies of interpretation that exist within the CRA, which can be described as “CRA culture.” An awareness of these attitudes–both at the organizational and individual level–can only be derived from experience, and through a thorough understanding of the history of the organization.
How Can Taxpayers Create An Unsinkable SR&ED Project?
The key is to establish a system of risk management by mapping the “whole iceberg”–by being aware of history, legal precedent, procedures, and policy–an applicant can analyze what issues may come into play with regards to their SR&ED application and ensure they are prepared.
Ensure that your team (and external consultant, if applicable) recognize that the T661 is only a small part of the whole SR&ED iceberg. Build your own SR&ED iceberg–keep detailed technical documentation that supports your statements and demonstrates you understand the depth of the program.
It takes knowledge and experience to be able to evaluate exactly what constitutes quality documentation and to put record-keeping protocols in place that document SR&ED work in an effective way; however, in the event of a review, having this documentation prepared will make the difference between an accepted claim and a rejection, possibly followed by a prolonged appeal process.
“Unsinkable” may be impossible, but with a little foresight, it is possible to reduce your risk or review, reduction, or rejection from the CRA.
Why does any of this matter?
This article was not written to make the SR&ED program seem dangerous and complex, but to showcase that many individuals fail to look beyond the T661, the tip of the SR&ED iceberg, and how this is can be a fatal mistake to your organization.
The CRA refunds more than 3 billion dollars a year through the SR&ED program, which is uniquely large among national research tax credits; SR&ED accounts for more than triple the funding per capita compared to its American equivalent. It should not come as a surprise that participation in such a large and potentially advantageous program would require diligence and awareness. In order to effectively present your work to the CRA, you must be informed. The first step: to realize just how much of the program exists outside the T661–with the SR&ED program, taxpayers must look beneath the surface (of the iceberg).
Have SR&ED experiences of your own to share? T661 stories you’d like to share?
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- Government of Canada. (November 10, 2015.) T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim. (Accessed: August 29, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t661.html. ↩
- The average iceberg is 12% above the waterline[2. United States Coast Guard. (2015, November 17). How much of an Iceberg is Below the Water Line? Retrieved November 1st, 2016, from http://www.navcen.uscg.gov/?pageName=iipHowMuchOfAnIcebergIsBelowTheWater. ↩
- Government of Canada. (November 10, 2015.) T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim- Guide to Form T661. (Accessed: August 29, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html. ↩
- Journal of Investigative Opthalmology and Visual Science. (August 2012). Standardized Assessment of Reading Performance: The New International Reading Speed Texts IReST. Retrieved November 1st, 2016, from http://iovs.arvojournals.org/article.aspx?articleid=2357834. ↩
- Government of Canada. (July 15, 2015.) SR&ED Glossary. (Accessed: August 29, 2017.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/glossary.html. ↩
- Government of Canada. (August 13, 2021.) Learn about policies and procedures. (Accessed: April 5, 2023.) Retrieved from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/policies-procedures-guidelines.html. ↩