The t661 and the t2sch31 forms are the heart of a SRED submission. Here are some tips for filling out these forms strategically so that you maximize your chances of having your claim be accepted as filed.
I don’t recommend that anyone self-file their SRED. SRED is more complicated than regular T2 filing. You use an accountant to ensure your T2 is filed correctly, don’t you? Why would you not take the same approach with your SR&ED claim? We have a thriving audit defense practice at G6 Consulting. See here for detail: https://www.g6consulting.ca/audit-defence/ This practice is mostly comprised of companies who ignore my advice and self-file their SRED claims. Or almost as bad, these people use one of the big 4 accountants to file their SRED.
Here are a few basics about filing these forms properly. Then we will look at each form separately in more detail later. Fill out the forms completely with no skipped fields. Ensure there are no spelling mistakes on the forms. Ideally you want to submit the t661 and the t2sch31 as part of your regular T2 submission. File your T2+ SRED electronically within your FYE 6 month on-time filing window. The government is evaluating your claim for work which was carried out systematically. Spelling mistakes, blank fields, incorrect information that can be cross-referenced by the CRA, filing tight to the claim deadline; none of these practices convey a systematic approach. I see these rookie mistakes all the time on self-filed SRED claims. Don’t give the government an easy reason to flag your claim.
Let’s look at the forms in more detail and I’ll point out some do’s and don’ts.
The t661 is a two-part form. The t661 itself aggregates all the projects for a company’s fiscal year. The t661 part 2 is a project specific form. You fill out as many part 2 forms as you have projects to claim for the year. The aggregate of the t661 part 2’s is rolled up and reported on the main t661 form.
Download the CRA’s Guide to Form T661 here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088.html There is lots of invaluable information in this guide to help you fill out the 661 correctly.
Line 160 Proxy. You should take advantage of the proxy method when filling out your SRED claim. Proxy is an automatic calculation that gives you an automatic 55% uplift on the salary expenses you claim to account for overhead expenses incurred in carrying out your SRED. The proxy method streamlines your application and reduces audit risk too.
Lines 300 to 340. These are the main expenditure lines for SRED consisting of salary, material and subcontract expense. Make sure you put exact figures down for materials and subcontracts. Putting rounded figures down on these fields look like estimates have been used rather than exact figures calculated. That increases audit risk. If your material and subcontract amounts are low relative to your salary expenditures, consider zeroing out these fields.
Line 431. Other Government Assistance. If you received CEWS in the fiscal year, you must deduct the portion here that overlaps with your SRED expenditures. G6 can help ensure that you put the lowest legal figure here with our CEWS-SRED software. Repeat the figure on line 515. Deduct the amount from line 705 on the schedule 1.
The t661 part 2 is the most important part of the SRED claim. The purpose of lines 242, 244 and 246 is to distinguish your work from routine engineering. Emphasize all prototyping, testing, technological failures, re-dos, blind alleys and learning. The government is not interested in your widget or its commercial prospects, they are interested in the technology that enabled the widget. The three sections should be tightly linked. Only talk about work in line 244 that directly bear against lines 242 and 246. Excellent projects can usually be well described in few words relative to the section maximum word counts allowed.
The t2sch31 form uses information from the t661 form to calculate your federal ITC tax credits. Here’s a g6 online calculator that automates this calculation for you., plus it accounts for your provincial tax credits too: https://www.g6consulting.ca/sred-calculator/
ITC credits differ for small business corporations, called CCPCs, who receive 35% credits, versus large/public/foreign-owned companies who receive 15% ITCs. There are a couple more factors to determine whether a CCPC is a qualifying corporation which will receive 35% credits. These factors seldom apply, but too much deployed capital can disqualify a company from receiving 35% credits. Additionally, 35% credits are only available on the first $3M of SRED expenditures. Above that amount, the credit rate drops to 15%.
G6 Consulting Inc has over 12 years of experience specializing in the SR&ED program. SR&ED experts such as G6 often work on a contingency basis, with payment only based on a percentage of SRED credits once received. You can contact G6 for a free consultation here. https://www.g6consulting.ca/contact/