Why it is Important to File Your T661 Correctly
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. *** |
Avoid your claim being rejected by ensuring your T661 form is filed correctly.
When you fill out and file your T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim,1 it is vital that you fill out all of the information fully and completely. If not, your claim will be rejected, as a recent Tax Court of Canada case bears out.
Learn from Other’s Mistakes
In January 2017, the Tax Court ruled on Westsource Group Holdings Inc. v. The Queen.2 Westsource Group Holdings (the Appellant) is a privately held corporation based in Saskatchewan whose principal service is to provide management services to its subsidiary companies. In 2011, it filed a tax return that did not include any SR&ED activity. Two years later, the company filed an amendment to claim two projects as SR&ED for the 2011 tax year.
On the second project, the Appellant filled out the T661 form fully. However, on the first project, the company failed to provide all of the necessary information on Part 2 of the T661 form – specifically, lines 240, 242 and 244 were not filled out. The information that would go on those lines is as follows:
- Line 240 (which no longer exists on the T661 form) is where the Appellant would describe the technological advancements it was trying to achieve.
- Line 242 is where the Appellant would describe the technological obstacles or uncertainties it had to overcome to achieve the technological advancements.
- Line 244 is where the Appellant would describe the work performed (the systematic investigation) in the tax year to overcome the technological obstacles or uncertainties in line 242.
What is “Prescribed Information” on Form T661?
The CRA provided a tax credit to the second project but did not grant credit to the first project on the basis that it was incomplete. In its case, the Appellant felt that the questions in lines 240, 242 and 244 were “immaterial and were not made because the Minister never asked the Appellant to substantiate eligibility.” The issue was whether the information required in lines 240, 242 and 244 was “prescribed information.”
The judge found that the information was, indeed, “prescribed information,” noting that the instructions on Form T661 clearly state that the information given on the form is such. These instructions read, in part:
The information requested in this form and documents supporting your expenditures are prescribed information.
As even the CRA’s lawyer pointed out, the information required in lines 240, 242 and 244 “goes to the heart of whether the claim made is SR&ED.”
The Conclusion? File Carefully.
You need to fill out your T661 form as completely and fully as possible. Even if you think the information being asked of you may not be relevant, it is. All of the information on the form is prescribed, and the Income Tax Act notes the penalty for not filling out all information in subsection 37(12):
If a taxpayer has not filed a prescribed form in respect of an expenditure in accordance with subsection 37(11), for the purposes of this Act, the expenditure is deemed not to be an expenditure on or in respect of scientific research and experimental development.3
For clarity, here is subsection 37(11):
Filing requirement
(11) A prescribed form must be filed by a taxpayer with the Minister in respect of any expenditure, that would be incurred by the taxpayer in a taxation year that begins after 1995 if this Act were read without reference to subsection 78(4), that is claimed by the taxpayer for the year as a deduction under this section, on or before the day that is 12 months after the taxpayer’s filing-due date for the taxation year, containing
(a) prescribed information in respect of the expenditure; and
(b) claim preparer information, as defined in subsection 162(5.3).
Failure to file
(11.1) Subject to subsection (12), if the prescribed information in respect of an expenditure referred to in paragraph (11)(a) is not contained in the form referred to in subsection (11), no amount in respect of the expenditure may be deducted under subsection (1).4
Be careful when filling out your T661. If there is missing information, your claim will be rejected.