The Scientific Research and Experimental Development program (or SR&ED for short) has been around for decades and provides billions of dollars annually as an incentive for companies to perform qualifying research. Although, in general, the SR&ED program has not changed much for 2014, there are some subtleties in applying for the incentives that might affect you as a SR&ED tax credit claimant. These changes could potentially cause unnecessary risk to your claim, as well as introduce potential time delays in the CRA’s assessment of eligibility.
Before delving further into the most recent changes, it is important to review the major SR&ED program modifications that were first announced in 2012 but became effective in 2013 and 2014. The following adjustments were announced in the 2012 federal budget and followed closely on the heels of the Jenkins Report to the government on the state of innovation in Canada:
The credit rate for non-qualifying Canadian controlled private corporations (CCPCs) has been reduced to 15 per cent (from 20 per cent), effective January 1, 2014.
Capital costs and lease payments are no longer eligible for the SR&ED program effective January 1, 2014.
Contract payments after January 1, 2013 are only 80 per cent eligible for the SR&ED program so that credits are not allowed on the notional profit element included in a payment of this nature (note that some third-party payments were also caught by these rules).
The proxy rate for overhead has been reduced to 55 per cent in 2014 (from 60 per cent in 2013 and 65 per cent in 2012).
Project description changes for 2014
One of the more subtle changes for 2014 stems from a reordering of the project descriptions introduced with the new CRA prescribed T661 form, “SR&ED Expenditures Claim,” which must be used for claims filed after December 31, 2013. Previously, in completing the form to apply for the incentive, claimants had to state the advancements sought over the life of the project, uncertainties (or obstacles) preventing these advancements, and the work undertaken to resolve these uncertainties and achieve these advancements.
Under the new T661 form, however, claimants must first describe the uncertainties (or obstacles) faced, detail the technical work undertaken to resolve these issues and, only after these criteria have been described, note the advancements achieved in the year. It appears that some SR&ED claimants are not aware of this change, and are submitting descriptions of the advancements, uncertainties and work performed in the wrong place on the new form. Although recording this information incorrectly may not result in a denial of the claim (unless a claimant was filing at the 18-month deadline), it does introduce a risk of greater scrutiny and time delays.
A second concern with the new form arises with how claimants explain these required details on the form. Previously, claims have described advancements sought over the life of the project with the associated uncertainties and work performed. The approach on the new form, which removes the advancements section out of the uncertainties faced and work performed, is now more focused on the taxation year in question. This subtle change, if ignored, could mean you are not preparing the claims in the fashion that CRA expects and could cause delays. For the future, you may want to refresh your reports on a more regular basis and ensure the description and structure of the claim is appropriate to meet the CRA’s expectations, as required on the new form.