New prescribed form T661
R&D Tax Update, October 2008
A new form T661 is expected to be released in the fall by the Canada Revenue Agency (CRA). It is expected to apply to all fiscal years ending on or after January 1, 2009.
The new form T661 implementation follows the CRA’s SME-related consultations and strategies involving, amongst others, the simplification of SR&ED filing requirements for SMEs. The June 2008 Update on the SR&ED Small Business Action Plan is available on the CRA’s website and describes this strategy more fully.
However, contrary to initial indications, this new form T661 will be prescribed for all taxpayers, not only SMEs. It is therefore essential to understand the specific requirements to avoid being denied your SR&ED claim on the basis of having filed an incomplete claim.
As stated already, the declared objective is to simplify the filing requirements for all SR&ED claimants. This objective is expected to be achieved through the following:
- Access to E-filing for technical descriptions
- Limited number of words prescribed by form T661
- Changes to the format and wording of T661 simplifying the instructional content
Let’s look at each of these in more detail.
E-filing is simpler but all projects must be filed
Taxpayers who file their tax returns electronically currently need to file technical descriptions separately, which renders the filing process somewhat inefficient. New form T661 should eventually provide for electronic formatting of the required technical descriptions such that no separate manual submission is required.
This is clearly an advantage for those taxpayers which do file electronically. On the other hand, taxpayers will need to file form T661 for all projects as compared to the current requirement to only file the top 20 project descriptions. This will require some adjustment since companies may not capture technical and financial information in the required format.
Limited number of words
Whereas technical descriptions are now typically written in free form style, the new prescribed form will require that each section have a limited number of words. The prescribed form will not allow more than 350 words for each of the technological advancement and technological uncertainty sections, whereas the description of work section will be limited to 700 words. Furthermore, it appears that no distinction will be made for size of projects.
This is probably the area which will cause the greatest concern for claimants. While it was conventionally considered that a technical description should not exceed five pages, many claimants have experienced requests for more information or have been told that their technical description was not sufficiently explicit, especially in the case of very large projects. It will be interesting to see how reducing the number of words will impact clarity, particularly in cases of large, complex projects.
New format and instructions
Over the history of this program, the industry, the CRA and tax courts have developed an understanding of terms such as “advancement,” “uncertainty,” and “objective”. A number of new terms are being introduced which will require further clarification. For example, “obstacle” is used, most likely instead of “uncertainty.” The form will be accompanied by a new guide, which we hope will help in this process.
Furthermore, a checklist of prescribed information will be enclosed to ensure the company understands the CRA requirements such as for documentation. For example, it appears that the company will need to indicate whether a development plan existed in anticipation of the SR&ED project claimed.
Considering that this is a prescribed form, taxpayers will want to ensure their claim is complete to avoid being rejected. If this rejection occurs beyond the 18-month filing period, it could jeopardize the claim altogether.
What does all this mean for claimants?
Simplifying the filing requirements is undoubtedly desirable as expressed in the recent consultations. We will be interested to see how industry reacts when they realize that technical descriptions need to be filed for all projects and that it needs to be done in a reduced format. Getting the point across in succinct fashion is not always a simple thing to do. As much as this is intended to reduce and simplify the work, it may, at least in the near term, create concern and uncertainty. This is likely given that the new form T661 is prescribed and therefore creates compliance-related uncertainties: is the filing complete in all respects and how will it impact my claim if it isn’t? The CRA might have considered introducing the new form as a recommended (not prescribed) form to give claimants some time to transition into the required format. This would have alleviated the real or perceived risk of not being compliant.
Deloitte will be hosting a webcast on the new T661 form on November 18, 2008, at 11:00 am. Please register for the webcast here.
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