Updated to Reflect New Policies (2022)
*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. ***
Re-evaluate how you collate your SR&ED information by using a 5 step guide to write your technical narrative.
One of the main questions we’re asked is how to complete the T661 Technical Narrative. Over the years, we’ve found that it doesn’t always make sense to follow the standard technical narrative format as structured by the CRA in the T661. We find it is easier to write out the ideas in a linked fashion, then insert them back into the document in the correct section.
Much like structuring a novel, there are many methods to writing your technical narrative, such as the Snowflake Model (designed by a software architect) used to help organize the information prior to drafting a final version. While this post references CRA SR&ED forms (including the T4088 1 and the CRA’s Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives document 2) we deliberately do not follow the T661 3 format.
How Do I Write My Technical Narrative? 5 Steps Tool
We’ve created a 5 steps solution to writing your SR&ED technical narrative on your T661 4 form.
1. Your reasons for undertaking this R&D venture: Specify the Technological Objectives
Indicate the overall objective of the project. This can also be completed using the project title. Be sure to reference the technological objective. A good comparison of a company’s internal name for a project vs. an SR&ED project name can be found here. 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?
Describe the scientific or technological uncertainty you encountered that led you to do the SR&ED. 5
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.
Note: We often use groups of three when describing the objectives. Often one technological objective will be more critical; however, there will be supporting requirements. If you need more, be sure to include them.
2. Specify Limitations in Technology and/or Knowledge Base – the Uncertainties
The current Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives state:
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.6
What is a “scientific or technological uncertainty”? The CRA defines scientific or technological uncertainty in their glossary as:
Scientific or 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 scientific or technological knowledge.7
Thus, we must also define what our knowledge base is in regards to the science or technology. 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;
- 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 businesses.8
What prevented you from easily meeting your objectives? This can include software architecture limitations, hardware limitations, a lack of documentation from the original developers (including a lack of access to non-proprietary documentation), no research papers in this area, etc.
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.
Note: This is the most difficult section in SR&ED and where most claims fail! You must show that you had established a technological baseline and that standard practice would not be sufficient in overcoming these obstacles.
3. Specify the Work Performed
The T4088 suggests the following:
Describe the work done in chronological order. In doing so, clearly demonstrate the systematic nature of the investigation or search. This includes describing;
- the hypotheses designed to reduce or eliminate the uncertainties;
- experiments and/or analysis conducted to test the hypotheses;
- the results obtained; and,
- the conclusions.9
In order to determine if SR&ED work was performed, the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives state:
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 progresses.10
Outline the work which was performed to overcome technological obstacles. Include descriptions of what did/did not work and show how they link to the objectives and obstacles. As well, clearly demonstrate the systematic nature of your approach and quantify the results wherever possible.
4. Specify the Technological Advancements
Describe the new scientific knowledge you gained or the technological advancements you achieved, or attempt to achieve, as a result of the SR&ED work you performed.11
To supplement the T4088, the Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives define scientific or technological advancements as:
[…] the generation or discovery of knowledge that advances the understanding of science or technology.12
From your base level, what advances to the technology occurred during the reporting period? Compare them to the technology 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?
Explain the following:
(a) Why the new capability represents a scientific or technological advancement in terms of the underlying science or technology,
(b) What knowledge you gained as a result of the work you did, regardless of success or failure
Specifically, describe “the information or the knowledge generated that advanced your understanding of scientific relations or technology.” 13
5. Keep Supporting Documentation
While supporting documentation is not discussed within the technical narrative, it is essential that you are able to provide evidence to substantiate every aspect of the SR&ED work written within your technical narrative in the case of a review.
It is important to maintain supporting evidence (for example, information, records, documentation) to substantiate that the scientific research and experimental development (SR&ED) work was performed and allowable expenditures have been incurred. The business environment in which SR&ED is carried out will influence the nature and sources of evidence that are available to support the SR&ED claim. If your SR&ED claim is selected for review, you will be asked during the review to support your claim by providing supporting documentation that were generated as the SR&ED was being carried out. Work for which you have no relevant supporting evidence will likely be disallowed.14
The forms of documentation produced will depend on the type of business environment that the SR&ED occurred within, however, the CRA prefers the use of contemporaneous documentation:
Most often, supporting evidence is in the form of contemporaneous documents (for example, documents generated as the SR&ED was being carried out). In fact, contemporaneous documentation that is dated, signed, and specific to the work performed are the best supporting evidence that you can provide. If you choose to substantiate the work performed using other evidence, you must ensure that the evidence clearly addresses the questions in Part 2 of Form T661.15
Maintaining appropriate supporting evidence will facilitate the review of your claim and help substantiate the claim. The supporting evidence you have should be able to explain and/or demonstrate:
- who did the work claimed and how much time employees spent on SR&ED work;
- how the work claimed was related to the scientific or technological advancement sought;
- how materials were used, the quantities consumed or transformed in SR&ED work, and how materials and products were ultimately disposed of;
- in the case of contracts and/or agreements relating to claimed work, what services or products were provided, who performed the work, where the work took place, as well as who acquired rights to any intellectual property resulting from that work; and
- how the project costs that are attributable to SR&ED work are segregated from those that are for non-SR&ED work, when the SR&ED is carried out in a commercial environment.16
Maintaining appropriate supporting evidence is especially important in work environments where both SR&ED and commercial work are taking place to demonstrate that the work performed and expenditures incurred were SR&ED eligible. Indicate what evidence you have to support your claim in lines 270 to 282 of the T661.
Combining the Information
Once all of these have been completed using quantifiable metrics it is time to insert them into the correct order under the correct lines in the T661 form:
- Line 242 – Insert answers from questions 1-2. Wordcount requirements: 350 words / 50 lines.
- Line 244 – Insert answer from question 3. Wordcount requirements: 700 words / 100 lines.
- Line 246 – Insert answer from question 4. Wordcount requirements: 350 words / 50 lines.
For all other sections of the T661, including the title and qualification, please read through our other articles.
One Size Does Not Fit All
While the above 5-steps tool is one approach you can take to complete your T661 technical narrative, the most important thing is to do whatever works for you. If there is another way of collecting information that makes more sense for your SR&ED project, then use it!
Translating your information into the T661 form should always come last, however, ensure you fully understand the forms before you begin. Remember there are strict word limits so ensure you give yourself enough time before the deadline to complete the form in its entirety.