Claiming Scientific Research andExperimental DevelopmentGuide to Form T661

T4088(E) Rev. 01

Advisory ServicesThere are a number of advisory services provided toSR&ED claimants to enhance awareness of programrequirements and to help SR&ED claimants submitsuccessful claims. These services are described in the“General Information” section of this guide.

Project informationWe recommend that you submit a summary of each of yourprojects in four pages or less.

Application policiesThe following new application policies have been issued inyear 2000:

SR&ED 2000-01 – Cost of materials for SR&ED

SR&ED 2000-02 – Guidelines for resolving claimants’ SR&EDconcerns

SR&ED 2000-03 – Government Assistance – Treatment ofProvincial and Territorial R&D Assistance

SR&ED 2000-04 – Recapture of Investment Tax Credit

Other application policies will be developed in 2001 andwill be available on the SR&ED Web site as soon as they arefinalized. Also, a list of application policies issued inprevious years can be found on the Web site.

Internet site – www.ccra.gc.ca/sred/A number of papers have been developed to clarify SR&EDissues and are available on the Web site:

n SR&ED Project Definition – Principles

n Action Plan: Consultation to Implementation

n Software/Information Technology Sector Guidance

n Claim Review Process Letter

n Guide to Conducting a Scientific Research and ExperimentalDevelopment Review

Revision of Interpretation BulletinInterpretation Bulletin IT-151R5 – Scientific Research andExperimental Development Expenditures was released onOctober 17, 2000. The new version of the bulletin cancelsInterpretation Bulletin IT-151R3 dated June 24, 1988. Thecomments in this bulletin generally apply to expenditureson scientific research and experimental developmentincurred in taxation years ending after December 2, 1992.Interpretation Bulletin IT-151R4 will continue to apply,subject to certain transitional provisions, to thoseexpenditures incurred in taxation years ending before thattime and after December 15, 1987.

SR&ED coordinating officesA list of the SR&ED coordinating tax services offices andthe offices they serve is provided at the end of this guide.

February 28, 2000 budget proposal,Government assistance – Provincialsuper-deductions programProvincial SR&ED investment tax credits (ITCs) areconsidered to be government assistance for federal taxpurposes. These provincial and territorial ITCs reduce thefederal expenditure base on which federal ITCs aredetermined.

For taxation years commencing after February 2000, thebudget proposes to treat a specified percentage ofprovincial deductions for SR&ED in excess of the actualamount of the expenditure as government assistance. Thespecified percentage will be based on the provincial taxrates applicable to income earned in the province by acorporation for the year.

La version française de cette publication est intitulée Demande pour la recherche scientifique et le développement expérimental –Guide pour le formulaire T661.

What’s New

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Page Page

General Information.......................................................... 4

How to Complete Form T661 ........................................... 5Filing requirement .............................................................. 5How Form T661 is structured............................................ 6

Line-by-Line Explanations ............................................... 7Part 1 – General Information............................................ 7Part 2 – Scientific or Technological Project

Information ...................................................................... 9Step 1 – Project summary information ......................... 10Step 2 – Detailed project description ............................ 10

Part 3 – Summary of SR&ED Expenditures ..................... 11Step 1 – Allowable SR&ED expenditures for

SR&ED carried on in Canada ..................................... 11Step 2 – Pool of deductible SR&ED expenditures ....... 17Step 3 – Qualified SR&ED expenditures for ITC

purposes ........................................................................ 19Part 4 – Background Information ...................................... 27

Glossary................................................................................ 30

Tax services offices............................................................. 31

Blind or visually-impaired persons can get this publication inbraille and large print, and on audio cassette and computerdiskette. To order, please call 1-800-267-1267 weekdays between8:15 a.m. and 5:00 p.m. (Eastern Time).

In this guide, legislative references are to the Income Tax Act (the Act) and regulatory references are to the Income TaxRegulations (the Regulations).

Contents

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Legislative referencesIncome Tax ActSections 37, 127.1 and 248(1)

Subsections 96(2.4), 96(3), 127(5), 127(8), 127(9), 127(10.1),127(10.3), 127(10.4), 127(11.1) to (11.8), 127(13) to (35),and 194(2)

Paragraphs 12(1)(t), 12(1)(v), 12(1)(x), 20(1)(hh), 96(1)(e.1),and 96(1)(g)

See other references in the current version of InterpretationBulletin IT-151, Scientific Research and ExperimentalDevelopment Expenditures.

Income Tax RegulationsSections 2900, 2902, 2903 and 8201

Paragraph 1102(1)(d)

Internet accessYou can find SR&ED Program information, policies,publications, draft papers for comments, and other usefulinformation on our Web site at www.ccra.gc.ca/sred/.

Our publicationsThe following publications will help you determine yourSR&ED claim. We recommend that you review the currentversion of these publications.

T4052, An Introduction to the Scientific Research andExperimental Development Program – This brochure describesthe scope of the incentive program and explains how toreceive the program’s benefits.

Interpretation Bulletin IT-151, Scientific Research andExperimental Development Expenditures – This bulletindiscusses the provisions of the Act and the Regulationsdealing with SR&ED expenditures and ITC.

Information Circular 86-4, Scientific Research andExperimental Development – The information circular clarifieswhat constitutes SR&ED under subsection 248(1) of the Act.

Information Circular 97-1, Scientific Research andExperimental Development – Administrative Guidelines forSoftware Development – The information circular assistsclaimants and our staff in interpreting how the taxincentives apply to software development.

Provincial and territorial tax incentivesProvincial and territorial incentives may also be availablefor your SR&ED expenditures. Contact your provincial taxauthority to determine if such incentives exist. You willfind the telephone number of the provincial and territorialauthority in the government section of your and telephonebook.

Advisory servicesThere are a number of advisory services provided toSR&ED claimants to enhance awareness of programrequirements and to help SR&ED claimants submitsuccessful claims. These services include:

1. First time SR&ED claimant service – This serviceprovides information and assistance for companies newto the program. Prospective claimants may visitCCRA’s Web site at www.ccra.gc.ca/sred/ for access toSR&ED publications or request an information kit inwhich many of these publications are included. Onrequest, one of SR&ED’s representatives will call newclaimants to answer questions. If necessary, a SR&EDrepresentative can arrange a personal visit to explainthe program and documentation requirements in moredetail.

2. Public information seminars – New claimants areinvited to attend one of SR&ED Program’s regularpublic information seminars that are held at locationsthroughout Canada. Please contact your local taxservices office if you wish to attend a seminar. The firsttime claimant service and public information seminarsgreatly aid new or potential claimants to betterunderstand their entitlements under the SR&EDProgram.

3. Preclaim Project Review (PCPR) – PCPR serviceprovides a business with an up-front review and apreliminary opinion on the eligibility of projects forSR&ED investment tax credits, before the claim is filed.A key aspect of the service is direct communicationbetween a claimant’s personnel, who understand thetechnical issues of the project, and a SR&ED scienceadvisor. The service helps claimants understand theSR&ED Program, including substantiationrequirements, and it addresses concerns before a claimis made.

4. Account Executive service – This service providesclaimants with a designated contact person. A claimantcan call the account executive for help with variousSR&ED Program areas, including technical or financialissues, as well as access to other services such as PCPR.The account executive will ensure that the appropriateassistance is provided. Through ongoing contact, theaccount executive helps the claimant better understandthe program.

You are encouraged to use these services which areavailable through most CCRA tax services offices across thecountry.

Simplified claim Form T665A simplified claim Form T665 is available and is part of ourinitiatives to streamline paperwork, particularly for smallbusinesses. This measure is designed to reduce theadministrative burden for companies claiming investmenttax credits for SR&ED.

General Information

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You may use the simplified claim Form T665 if you are acorporation and you meet the following conditions:

n The total allowable expenditures for SR&ED carried on inCanada are $200,000 or less for the year;

n The corporation elects to use the proxy method for theyear; and

n There are no non-arm’s length SR&ED transactions.

There are also other conditions to be met. For more details,read the instructions attached to the simplified claimForm T665 available on the CCRA’s Web site or at your taxservices office.

Your opinion countsWe review this guide regularly. If you have comments orsuggestions that would help us improve the explanations inthis guide, we would like to hear from you.

Please send your comments to:

SR&ED DirectorateCanada Customs and Revenue Agency875 Heron RoadOttawa ON K1A 0L8

Filing requirementIf you have expenditures for SR&ED carried on in Canada,you must complete Form T661 and should send it withyour tax return, along with any related schedules andattachments. You have to file Form T661 whether or not,you claim an investment tax credit (ITC) in the current year.

NotesForm T661 applies only to SR&ED carried on in Canada.Expenditures for SR&ED conducted outside Canadashould not be claimed on Form T661. They should beclaimed with other business expenditures. If you wantmore information on how to treat these expenditures,read the current version of Interpretation Bulletin IT-151,Scientific Research and Experimental DevelopmentExpenditures, which is available on the CCRA’s Web site.

Generally, these out of country expenditures aredeductible under subsection 37(2) and are treated in thesame way as other business expenditures (i.e., youdeduct current expenditures in the year you incur them,and add capital expenditures to the appropriate capitalcost allowance class). Expenditures for SR&EDconducted outside Canada do not earn an ITC.

Technical personnel should complete Part 1 and Part 2 ofthe form, and the financial personnel should completePart 3. Part 4 may need information from both financial andtechnical personnel.

You have to file an original or revised Form T661 andSchedule T2SCH31 or Form T2038(IND.) for the year, nolater than the day that is 12 months after the filing-due date

of the return of income for the year. For a corporation, as ageneral rule, you have 18 months from the end of thetaxation year in which you incurred the expenditures toreport such expenditures. If you do not report anexpenditure by the reporting deadline on Form T661, youcannot deduct the expenditures for SR&ED purposes. Aswell, if you do not report your SR&ED expenditures withinthe same reporting deadline on Schedule T2SCH31 orForm T2038 (IND.), you will not be allowed to claim anyITC for the expenditures.

However, a corporation exempt from Part I tax underparagraph 149(1)(j) has to file Form T661 on or before thefiling-due date for the year. A corporation exempt from taxunder paragraph 149(1)(j) that does not file Form T661 ontime is subject to a penalty.

Under exceptional circumstances, if your claim is late-filed,you may apply to the Director of your tax services officeunder fairness provisions to have your claim accepted.

Information circulars 92-1, 92-2, and 92-3 containinformation and guidelines concerning the fairnessprovisions and examples of how they may be applied. Ingeneral, the comments in these circulars also apply to caseswhere the deadline prescribed in subsection 37(11) of theAct has not been met.

In general, this discretionary authority is exercised whenexceptional circumstances beyond the claimant’s controlhave prevented the claimant from meeting a legalrequirement or paying a required amount by the requireddeadline. The claimant must have shown reasonablediligence in his efforts to comply with the requirements ofthe Act.

General filing requirements for partnershipsIf the partnership’s members have to file Form T5013Summary, Partnership Information Return, the partnership’sT661 form and accompanying information should be filedwith the Partnership Information Return. A T5013 slip,Statement of Partnership Income, must be filed with eachpartner’s tax return. For more information, see the Guide forthe Partnership Information Return (T4068) which is availableon the CCRA’s Web site or at any tax services office.

When the partnership’s members do not have to file thePartnership Information Return, each partner has to fileForm T661 and financial statements for the partnershipwith his or her income tax return for the year. Each partneralso has to file an explanation of how the SR&ED allocationof income or loss was calculated for each partner for taxpurposes, and for the ITC.

The expenditures listed in Part 3 are the total SR&EDexpenditures at the partnership level, and not just aparticular partner’s prorata share of those expenditures.

Partnerships cannot carry forward an SR&ED expenditurepool balance to a later year. For more information onSR&ED expenditures and ITC of a partnership, read thecurrent version of Interpretation Bulletin IT-151, ScientificResearch and Experimental Development Expenditures.

How to Complete Form T661

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How to speed up the processing of yourclaimTo ensure we can process your current year claim asquickly as possible:

n use the latest version of Form T661 (see the CCRA’sWeb site);

n file a complete claim. Filing an incomplete claim, or usinga previous version of Form T661 to file a current yearclaim will delay the processing of your return;

n place the complete Form T661 on top of your corporatetax return for quick identification;

n keep all technical and financial information to supportyour claim;

n file the SR&ED claim at the tax centre (filing your claimat your local tax services offices may delay the processingof your claim);

n respond in a timely manner to our requests for moreinformation; and

n check off the appropriate box on the T2 return requestinga direct deposit of your refundable ITC.

Complete claimSubsections 37(1) and 127(9) (definition of “qualifiedexpenditure”) require that the claimant supply theprescribed information on the prescribed forms.

A complete claim is one that supplies the information askedfor on Form T661 and Schedule T2SCH31 orForm T2038(IND.) (used to claim ITC on qualified SR&EDexpenditures) on the version of the forms that apply to theyear of the claim. Form T2 is also required in order to havea complete claim.

You must complete all parts of Form T661, the schedules,and all parts of Schedule T2SCH31 or Form T2038(IND.),and you must sign where required. For Form T661, youmust indicate whether you use the proxy or traditionalmethod to determine the SR&ED expenditures and relatedITC. A checklist of most of the required key information isprovided on page 1 of Form T661.

Even if a claim is complete, it must meet the requirementsof the definition of “scientific research and experimentaldevelopment” contained in subsection 248(1) of the Act,and also meet the rules under sections 37 and 127 of theAct.

Classified projectsIf a federal agency has designated one of your projectdescriptions as “classified information” for nationalsecurity reasons, please follow these instructions:

n Prepare and keep on file a fully completed T661 form,including all project descriptions in Part 2, Step 2.

n Send a letter to the Research and Technology Section atthe following address:

SR&ED DirectorateCanada Customs and Revenue Agency875 Heron RoadOttawa ON K1A 0L8

n In the letter, explain that certain project descriptions areclassified information, and that they are available onrequest.

n With your income tax return, send a copy of theabove-mentioned letter and the completed Form T661,without the descriptions of the classified project(s).

How Form T661 is structuredWe have divided the form into four parts:

Part 1 – General InformationProvide the information required and sign the“Certification and Election” area on page 1 of the form.

Part 2 – Scientific or Technological ProjectInformationStep 1 – Project Summary InformationProvide information for each SR&ED project you claim inthe taxation year. You have to indicate the total currentexpenditures and the capital expenditures you claimed foreach project.

Step 2 – Detailed Project DescriptionProvide project descriptions for the expenditures youclaimed in Part 3. Remember to have the individualresponsible for technical work complete this part.

Part 3 – Summary of SR&ED ExpendituresProvide expenditure information on all claims for SR&EDcarried on in Canada. This part represents the total cost forall projects. Keep in mind that you also have to provideindividual project cost information in Part 2 of the form.

All claimants should keep records of costs and explanationsof cost allocations associated with individual projects.These records should be made available during the claimreview.

Step 1 – Allowable SR&ED expenditures for SR&EDcarried on in Canada – In this section, list the totalallowable SR&ED expenditures that you made inthe year, both current and capital, for SR&EDcarried on in Canada.

Step 2 – Pool of deductible SR&ED expenditures – In thissection, you will calculate the SR&ED expenditurepool deduction that is available in the year, startingwith the amount of allowable expenditures forSR&ED carried on in Canada determined online 400, the deduction claimed in the year, andany balance of the SR&ED expenditure pooldeduction you can deduct in future years.

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Step 3 – Qualified SR&ED expenditures for ITCpurposes – In this section, you will determine theSR&ED expenditures that qualify for a federal ITC.

Part 4 – Background InformationThis information on your business is needed to processyour SR&ED claim.

he following section explains the information you haveto provide on each line of Form T661. We recommend

that you read each explanation as you complete the form.

Part 1 – General InformationName, business address, Web site addressand postal codeEnter the registered business name, address, Web siteaddress (if available), and postal code. If you have to file aPartnership Information Return (Form T5013 Summary), enterthe name of the partnership.

Return for taxation yearWrite the dates of the beginning and the end of the taxationyear for which you are submitting the claim.

Business number, social insurance number,or partnership identification numberIn this area, enter the appropriate identification numberthat pertains to you.

Lines 100, 105, and 110Contact-personWrite the name, telephone number, and fax number of theperson best suited to provide information about the overallsubmission.

Lines 142, 145, and 150Answer questions on lines 142, 145, and 150 if you areentitled to a share of the SR&ED expenditures incurred by apartnership, and the partnership does not file a PartnershipInformation Return (Form T5013 Summary).

Lines 160 and 162Choice of methodYou can choose the traditional method and claim allSR&ED expenditures you incurred during the year, or youcan elect under clause 37(8)(a)(ii)(B) to use the proxymethod for the year. The proxy method provides analternative way to determine your SR&ED expendituresand investment tax credit (ITC) for overhead expenditures.

The proxy method involves calculating a substitute amountfor overhead expenditures using a formula, rather thanspecifically identifying and allocating these expenditures,as you would with the traditional method.

To determine your qualified SR&ED expenditures for ITCpurposes, calculate the amount representing the overheadexpenditures (the prescribed proxy amount (PPA)) as afixed percentage (65%) of the salaries or wages of theemployees directly engaged in SR&ED. Special rules applyto restrict the amount of salaries or wages of specifiedemployees you can include in the salary base. For moredetails, see the explanation for line 502. The PPA may beeligible for the 100% ITC refund.

You do not include the PPA in the SR&ED expenditurepool, and you do not deduct it when calculating income. Itrepresents the amount of overhead expenditures forSR&ED, and is used to determine your ITC for theseoverhead expenditures. The PPA is treated as a qualifiedexpenditure for ITC purposes. The actual overheadexpenses represented by the PPA are ordinary businessexpenses.

If you elect to use the proxy method, you will continue toclaim certain expenses separately. For example, you claimexpenditures for materials consumed for SR&EDseparately.

Lines 165 and 170Authorization and dateThe individual, an authorized signing officer of thecorporation, or an authorized partner will certify theinformation on Form T661, the related schedules, and theattachments. That person also has to indicate the choice ofmethod to calculate the SR&ED expenditures for the year.

Line-by-Line Explanations

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Treatment of expenses under the proxy and traditional methods

Expenditure Traditional method Proxy method

Direct SR&ED salaries or wages n eligible for ITCn deductible under 37(1)(a)

(see line 300)

n eligible for ITC and base for proxyamount (see line 502)

n deductible under 37(1)(a)(see line 300)

n Overhead expenditures directlyrelated and incremental to SR&ED

n eligible for ITC (see line 360) n not specifically identifiedn covered in prescribed proxy amount

(see examples below)—PPA is eligiblefor ITC.

n deductible as regular businessexpenses only—not deductibleunder 37(1)(a)

n Materials transformed in performingSR&ED

n deductible under 37(1)(a) (seeline 325)

n not deductible under 37(1)(a)

Other expenditures claimedseparately:

n materials consumed in performingSR&ED

n lease costs of SR&ED equipmentn expenditures for SR&ED directly

undertaken on your behalfn third-party payments

n eligible for ITCn deductible under 37(1)(a)

n eligible for ITCn deductible under 37(1)(a)

The proxy amount covers overhead expenditures such as:

n office suppliesn general purpose office equipmentn heat, water, electricity, and telephonesn support staff salaries or wagesn travel and trainingn property taxesn maintenance and upkeep of SR&ED premises, facilities or equipmentn any other eligible expenditures directly related to the prosecution of SR&ED that you would not have incurred if the

SR&ED had not occurred

You have to elect or choose a method for each taxation yearyou want to use it. You have to make your choice of amethod when you first file Form T661 for the year.Therefore, whether you elect to use the proxy method oryou choose the traditional method, your choice of a methodis irrevocable for the year.

If you are a member of a partnership that elects to use theproxy method to calculate the income from the partnership,the election is only valid if you made it on behalf of all themembers of the partnership and, as an authorized partner,you had the authority to act for the partnership.

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The following chart gives the advantages and disadvantages of each method.

Method Advantages Disadvantages

Proxy method You get ITC on the prescribedamount (PPA) which is 65% ofdirectly engaged SR&ED salariesand wages in the salary base.

It is easier to determine the PPAonce you establish the salary base.You will establish the PPA in mostcases.

No need to track SR&ED overheadexpenditures.

The PPA may be less than theactual overhead expensesincurred.

You have to calculate the salarybase on which a 65% rate willapply.

You may have to calculate anoverall cap on the PPA.

You cannot include in the SR&EDexpenditure pool the expenditureswhich the PPA represents.

No expenditures nor any ITC onmaterials transformed

Traditional method You calculate ITC on the actualoverhead expenditures youincurred.

The actual overhead expendituresmay be greater than the PPA.

There is no salary base to calculateand no PPA to determine.

There is no overall cap tocalculate.

Overhead expenditures areadded to the SR&ED expenditurepool.

You have to demonstrate that theoverhead expenditures areincremental to the SR&ED.

Using this method could be acomplex and uncertain exercise,especially when SR&ED and otherwork are carried out in the samefacility (e.g. shop-floor SR&ED).

You have to specifically identifyand allocate which overheadexpenditures are for SR&ED work.

You have to explain how youdetermined the amount and youhave to provide support for thedetermination.

Your allocation of overhead mustbe reasonable.

Part 2 – Scientific or TechnologicalProject InformationWhen we use the term project, we are referring to a SR&EDproject. A SR&ED project includes only the work that fallswithin the definition of SR&ED contained in the Act. Abasic principle of SR&ED is that the work is a systematicinvestigation or search that is carried out in a field ofscience or technology by means of experiment or analysis.Furthermore, for the purposes of experimentaldevelopment, the work must be undertaken to achieve atechnological advancement for the company.

The work claimed must be structured as a SR&ED project.The project description must contain the objective orobjectives in scientific or technological terms stating clearlythe advance or advances to be sought for the company. Itshould be clear that the work performed on the SR&EDproject was directed towards the attempt to achieve thatscientific or technological advancement for the company.

Paragraph 2.11 of Information Circular 86-4R3 discusseshow the CCRA applies the three criteria of projecteligibility in the claimant’s business environment.

SR&ED projects generally fall into two categories: distinctand well-defined projects with a clear beginning and endand a set of well-defined specific scientific and/ortechnological objectives and uncertainties; and larger,long-term multi-year projects. The latter contains aninterrelated work that may include routine development,routine engineering, routine programming, design, etc. Thisinterrelated work is characterised by being an integral partof the larger project and commensurate with its needs.These activities will not necessarily qualify as stand-aloneindependent SR&ED projects but could qualify as supportwork by virtue of their contribution to the overall project.

Generally, a program dedicated to advancing a particulartechnology by experimentation will inherently be SR&ED.A program’s technological objectives are broader and,conceptually, the advancement sought is described at ahigher level than that of a project. At this time, claimantsare required to contact the CCRA prior to filing their workat the program level. In these situations, the issue iswhether the allocation of the work attributed to theprogram reflects the contribution to its objectives. It isimportant that claimants establish the relationship andcontribution of the work claimed as SR&ED to theprogram’s technological objectives. In addition, claimants

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must be able to explain the process they use to differentiateSR&ED from non-eligible work. The CCRA will work withclaimants to establish how they are to proceed.

The discussion that follows assumes that the claimant isfiling on a project basis.

Step 1 – Project summary informationProvide the information requested in Step 1 and Step 2 onseparate sheets of paper, and submit them with theT661 form.

Line 680Provide the total number of projects being claimed in thisfiscal year.

Line 206 – Industrial Research Assistance Program(IRAP) – The National Research Council of Canada offerstechnical and financial assistance through its IRAP to smalland medium-sized Canadian companies (up to500 employees) that already have technological capabilitiesand wish to strengthen and enhance them. Indicate theamount of assistance, if any, received by the corporationfrom IRAP for the project(s) claimed in the year.

Table of projects claimedProject identification: code and name – Please list all theSR&ED projects claimed. The internal reference code is thecode used to track the project and its costs. If you do notuse a code to track the projects and costs, then give anequivalent identifier. The project name is the internal nameor title you have given the claimed project.

NoteIf you do not have an established system of projectcoding, please number them in sequence and use thesenumbers throughout your claim.

Start date – The date when you started work on the SR&EDproject.

Finish date – The date when the SR&ED project’s initialscientific or technological objectives were achieved. If theproject is not finished in this taxation year, give theexpected finish date.

Total labour expenditures – This may be an actual amountor a reasonable cost allocation and relates to the amountreported on line 300 to 310.

Other information such as the names of the qualifiedpersonnel and the amounts of material and capitalexpenditures must be maintained and provided uponrequest.

Step 2 – Detailed project descriptionThe specific project information essential to yoursubmission is made up of five questions. The answers tothese questions should provide the appropriate technicalinformation we need to do an initial review of the claim.We recommend that personnel who are familiar with thetechnical content of the work you are claiming prepare thispart of the submission. Your answers should concentrate onthe relevant technical facts, that illustrate the experimentalnature of the work. Most project information can beprovided in four pages or less.

Please note that you must provide the informationrequested in the five questions (A to E) for every projectlisted in Step 1 of Part 2 of the T661 form. If your companyis not claiming by program and conducted more than20 projects during the course of your fiscal year, providedescriptions for the 20 largest projects with yoursubmission. You are required to provide descriptions forany of the remaining projects when we review your claim.

To the extent possible, if you used the Preclaim ProjectReview (PCPR) service, utilise the information prepared forthat purpose in submitting this claim.

If you continue projects from a previous year, simplyupdate the previous year’s submission and especially forquestion D, describe what work performed is being claimedthis year.

HintWhen providing this technical information, you mustensure that the relevant SR&ED project informationfocuses on the science or technology necessary for theattempt to achieve a scientific or technologicaladvancement for your company. If your work wasexperimental development to create new, or improveexisting, materials, devices, products or processes,describe how the work contributes to a scientific ortechnological advancement for your company ratherthan simply describing the development of a newproduct or process. Explain how the new or improvedproduct or process represents a technologicaladvancement for the company.

Activities such as financing, marketing, customerdemonstration and consumer acceptance testing, qualitycontrol testing, patent search and registration, andpreparation of submission or documents for licensingagencies, certification agencies, or regulatory authorities arenot eligible.

A. Scientific or technological objectives – For eachproject, state the overall scientific or technologicalobjectives. The objectives must be scientific ortechnological, not financial or marketing goals. Thescientific or technological objectives put the workclaimed into the proper technical perspective of what itwill mean for your company. These objectives alsoprovide an indication of when the project is complete.The scientific or technological objectives you state mustbe specific and verifiable.

State the indicators or measures you will use todetermine if you meet the scientific or technologicalobjectives. If this project continues from a previous yearand has not changed in direction, simply restate thescientific or technological objectives. However, if youmade a change in direction, you must explain andclarify the new objectives.

B. Scientific or technological advancement – State thescientific or technological advancement you are seekingfor your company. Give the field of science ortechnology in which you expect to achieve the scientificor technological advancement. Indicate how this is anadvancement for your company.

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With experimental development, the scientific ortechnological advancement can be manifested in newproducts, new features of existing products, processes,improvements to processes or the knowledge acquiredin the attempt to achieve these. Even if you triedsomething unsuccessfully, this can be an advancementin the sense that you gained new knowledge useful forguiding future work. Note that novelty, innovation,uniqueness, feature enhancement, or increasedfunctionality in the product or process alone does notindicate technological advancement.

C. Scientific or technological uncertainty – Scientific ortechnological uncertainty is whether or not a givenresult or objective can be achieved, and/or how toachieve it, is not known or cannot be determined on thebasis of generally available scientific or technologicalknowledge or experience. See meaning of “commonlyavailable sources of knowledge or experience in theglossary (p. 28) of Information Circular IC 86-4R3”. Theuncertainty must be of a scientific or technologicalnature. Scientific or technological uncertainty ariseswhen knowledge generally available to your companydoes not provide you the necessary information on howto achieve the technological advancement. Generally,achieving scientific or technological advancementwould require removing the element of scientific ortechnological uncertainty through a process ofsystematic investigation.

In describing the scientific or technological uncertaintyit is not enough to state, “it is technologically uncertainhow to achieve the technological advancement.” Youhave to explain why there exists a scientific ortechnological uncertainty. Therefore, you must supportyour statement of scientific or technological uncertaintywith an analysis and discussion of the relevantunderlying technological issues and problems.

D. Description of work in this taxation year – Eligibility isgenerally determined at the project level. For multi-yearprojects, when the work extends beyond one taxationyear, eligibility of the project work ceases when thespecific scientific or technological objectives are met.Therefore, it is important that you describe what workwas actually carried out in this taxation year. In thisdescription the focus should be on the pursuit of thescientific or technological advancement. It must alsoinclude the results you obtained and the conclusionsyou made. If the project continued from the previousyear, state both the work and the progress madetowards the scientific or technological advancementstated in Part B above. Work in each year can qualify asSR&ED if it supports eligible work done in a previousyear.

E. Supporting information – To substantiate that yourwork was carried out as described in Step 2 of Part 2,you must have evidence of the work done to supportyour claim. List the information that you could use tosubstantiate the work described in Step 2. Technicalrecords that were created at the time the work wasperformed provide the most ready form ofdocumentation. Examples are planning documents,documents describing project objectives, descriptions ofthe problems to be solved, contract work statements,

notes of discussions dealing with unexpected obstaclesencountered, minutes of the meetings, records of trials,observations, project notebooks, lab notebooks, testrecords, and quantitative measurement data. Even thenew products, hardware, prototypes, pictures ofprototypes, or a combination of any of these, newgenetic material, business records, employee activityrecords, etc., can serve to substantiate the work.Usually, the information produced over the course ofdoing the SR&ED will be sufficient. It should not benecessary to specifically prepare additional documentsto substantiate the work claimed.

Part 3 – Summary of SR&EDExpendituresWe have divided Part 3 of this form into three steps. Youmust round all amounts you report in this part to thenearest dollar.

Step 1Allowable SR&ED expendituresfor SR&ED carried on in Canada (lines 300to 400)Usually, SR&ED current expenditures are those that do notresult in the acquisition of land, a leasehold interest in land,or property that would otherwise have been yourdepreciable property.

Current SR&ED expenditures involve three types ofexpenditures:

1. Cost for performing SR&ED: costs you incurred whenyou directly undertake the SR&ED (in-house SR&ED).These costs are basically wages, materials, andoverhead costs.

2. Cost for SR&ED on your behalf: costs associated withhaving SR&ED performed on your behalf (“contractpayments”).

3. Third-party payments: payments to certain thirdparties, such as approved associations or approvedinstitutions (“third-party payments”) to be used forSR&ED undertaken by these third parties. See line 370for more details.

Lines 300 to 315On lines 300 and 305, include in your pool of deductibleSR&ED expenditures the portion of salaries or wages andtaxable benefits you incurred for your employees who aredirectly engaged in SR&ED in Canada, which canreasonably be considered to relate to the time they spent inthe prosecution of SR&ED in Canada.

Determine the SR&ED portion of the employee’s salaryaccording to the time that person spends on SR&ED work.Employees directly engaged all or substantially all of theirtime (at least 90% of the time) in SR&ED will be consideredto spend all of their time in SR&ED.

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ExampleIf you incur $100,000 in wages for an employee who spent90% of his or her time directly engaged in SR&ED, then$100,000 is considered to be directly engaged wages for thatemployee.

We explain below the meaning of salary or wages anddirectly engaged in SR&ED.

Separate the amount of salaries or wages for employeeswho are specified employees (see glossary) and those whoare not.

For a specified employee, do not include bonuses orremuneration based on profits in your pool of SR&EDexpenditures.

For SR&ED purposes, the maximum amount of salaries andwages per specified employee is limited to five times theyear’s maximum pensionable earnings (YMPE) determinedfor purposes of the Canada Pension Plan. The YMPE are$38,300 for year 2001 and $37,600 for year 2000. Therefore,the maximum amount of salaries and wages per specifiedemployee that you can include on line 305 is $191,500 for ataxation year that ends in year 2001 and $188,000 for ataxation year that ends in year 2000. The maximum amountis prorated by the number of days in the taxation year inwhich the employee is a specified employee. If a specifiedemployee is also performing SR&ED for an associatedcorporation, the maximum amount must be allocatedbetween the associated corporations using Form T1174,Agreement Among Associated Corporations to Allocate Salariesor Wages of Specified Employees for Scientific Research andExperimental Development (SR&ED) Expenditures.

Unpaid salaries, wages, and other remunerationSubsection 78(4) generally applies to accrued salaries,wages, and other remuneration that you still have not paid180 days after the end of the year in which you incurred theexpense. It deems the expense not to have been incurred inthe year, but rather in the year the amount is paid.

Enter unpaid subsection 78(4) amounts on line 315 ofForm T661, even though the expense is not deductible forthe year. Make sure you do not include the amount enteredon line 315 to line 300 or 305. Later, in a following taxationyear, if you satisfy the reporting requirement, you candeduct such an expense on line 310 of Form T661 for thetaxation year in which you actually paid the expense.

Definition of “salary or wages”“Salary or wages” as defined in subsection 248(1) is incomefrom an office or employment as calculated in sections 5 to8 of the Act. Therefore, salary or wages of an employeeincludes such amounts as vacation pay, statutory holidaypay, sick leave pay, as well as a taxable benefit to theemployee under section 6. Since you have to incur theexpenditure to claim it as SR&ED, do not include benefitsfor which you have not incurred an expenditure such asbenefits under subsection 6(9) for interest-free loans.

Do not include as salary or wages an expenditure forrelated benefits. Related benefits include the employer’sshare of payments to the Canada Pension Plan (CPP) orQuebec Pension Plan (QPP), Employment Insurance (EI),

Worker’s Compensation Board (WCB) or the Commissionquébécoise de la santé et de la sécurité au travail (CSST), anapproved employee pension plan, and employee medical,dental, or optical insurance plans.

You may be able to deduct related benefits on line 360 ifyou use the traditional method.

Do not include as salary or wages an expenditure forextended vacation or extended sick leave of an employee.We consider extended leave to be leave in excess of theusual annual leave an employee earns.

Directly engaged in SR&EDWhether an employee is directly engaged in SR&ED is aquestion of fact based on the duties the employee performsand not on the employee’s job title.

We consider the time employees, including supervisors andmanagers, spend to carry out the following tasks as timeduring which the employee is directly engaged in SR&ED:

n preparing equipment and materials for experiments,tests, and analyses, but not for maintaining equipment;

n experimenting, testing, and analyzing;

n collecting data for experimentation and analysis; and

n directing the course of the ongoing SR&ED work beingclaimed in the year.

We consider time other employees spend to carry out thefollowing tasks, to the extent that the tasks are required aspart of an SR&ED project, to be time during which theemployee is directly engaged in SR&ED:

n recording measurements, making calculations, andpreparing charts and graphs;

n conducting statistical surveys and interviews;

n preparing computer programs; and

n working in the areas of engineering or design, operationsresearch, mathematical analysis, computer programming,data collection, testing or psychological research.

We do not consider employees providing a service toSR&ED staff, including clerks, secretaries, and receptionistsengaged in activities in such areas as accounting, payroll,finance, legal, purchasing, sales, human resources,shipping, inventory control, maintenance, and wordprocessing, to be directly engaged in SR&ED.

We consider the time supervisors or managers are directlyinvolved in the technical aspects of the ongoing SR&EDwork as time spent directly engaged in SR&ED.

We do not consider the time managers and supervisorsspend on the non-technological management aspect ofwork, such as long-term strategic planning, contractadministration, and other decision-making functions thatdo not directly influence the ongoing SR&ED work, to betime during which they are directly engaged in SR&ED.

Usually, we do not consider work performed beyond thefirst-line supervision level as directly engaged. If you claimtime for employees beyond the first-line supervision level,you will be asked to provide details of the duties theemployee performed in the time claimed as directly

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engaged in SR&ED, and to demonstrate how these dutiesare directly engaged as described above.

An employee performs a series of tasks in carrying out hisor her duties of employment. You should view these tasksin terms of how they correlate to the primary reason foremployment when you determine if the salary and wagesare directly engaged in SR&ED. We have designed the

following chart to help you determine how to handle thesalary and wages for various tasks and duties.

NoteThe eligibility of the salary and wages is subject tomeeting all the relevant conditions set out in sections 37and 248 of the Act and section 2900 of the Regulations,and may vary depending on the facts of each case.

DutyDirectly

engagedin SR&ED

Overheadand other

expenditures

Non-SR&ED

expenditures

Experimentation and analysis X

Technical-support work (under paragraph 248(1)(d) of the definition of SR&EDunder the Act)

X

Non-specialized employees:

n operating a machine for the purposes of an experiment that requires theuse of this machine;

n feeding raw materials into a machine;

provided that the non-specialized employee’s work is supervised by staff whohave scientific or technological qualifications.

X

Direct supervision of employees performing experimentation and analysis(directing the ongoing SR&ED work)

X

Technological planning for ongoing SR&ED projects you claimed in the yearsuch as:

n assignment of technological personneln job priorityn development of technological strategiesn quality of material used

X

Long-term planning for future SR&ED projects, e.g.:

n prototype vs. commercial scalen project selection

X

Human-resource activities such as technological staffing X

SR&ED contract administration (technical input only) X

Technological training for ongoing SR&ED projects you claimed in the year X

Administrative training X

Technological documentation for internal use X

Preparation of user manuals X

Clerical and other administrative support, such as personnel, accounting,maintenance, and purchasing, if such duties involve performingnon-technological functions that aid the ongoing SR&ED you claimed in theyear, and if the salaries and wages of these employees are:

n directly related and incremental to the prosecution of SR&EDn not incremental to the prosecution of SR&ED

XX

Other support, such as equipment maintenance or repairs, as long as suchduties involve performing non-technological functions that aid the ongoingSR&ED work you claimed in the year, and the salaries and wages are directlyrelated and incremental to the prosecution of SR&ED

X

Preparation of the T661 by employees for SR&ED projects carried out in thecurrent year

X

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Supporting documentsYou must be able to explain how you determined theamount you claimed and to provide supportingdocumentation (e.g., time sheets, T4 slips, job descriptions).For salary and wages, this involves identifying the time youallocated to SR&ED and the work the employee performedduring that time. Keep in mind that the amounts youallocate to SR&ED must be reasonable.

Line 320Enter the cost of materials consumed in the prosecutionof SR&ED. If you incur a liability for materials that you willuse later for SR&ED, we consider the cost of these materialsto be an SR&ED expenditure in that later year in which youwill consume the materials. Be sure all costs are the netlaid-down price after you deduct trade discounts and addacquisition costs (e.g., transportation costs). Refer toApplication Policy SR&ED 2000-01 – Cost of materials forSR&ED, issued March 1, 2000.

The phrase “materials consumed in the prosecution ofSR&ED” basically means that you destroyed the materialsor rendered them virtually valueless as a result of theSR&ED. For example, in the following situations, not allmaterials were consumed in the prosecution of SR&ED (seeline 325):

n developing assets to sell (custom products);

n developing assets to use in the commercial operations ofthe performer (commercial assets); and

n sale of experimental production.

Line 325 – Cost of materials transformed into anotherproductIf you use the traditional method, you can claim the costs ofmaterials transformed into another product, if theexpenditure is all or substantially all or directly attributableto the SR&ED. The costs of materials transformed into aproduct is considered directly attributable to theprosecution of SR&ED if the materials are transformed inthe prosecution of eligible SR&ED work. There will be anITC recapture as an addition to your tax payable underPart I when you sell the property or convert it tocommercial use after February 23, 1998.

Lines 340 and 345Enter expenditures you incurred for contractors orsubcontractors carrying on SR&ED on your behalf(i.e., other parties performing SR&ED services directly foryou). See the explanation for line 370 if you need detailsabout the difference between third-party payments forSR&ED and SR&ED undertaken on your behalf.

It is important that you separate the SR&ED contractexpenditures between arm’s length contractors andnon-arm’s length contractors. Expenditures you incur forSR&ED performed on your behalf by a person orpartnership (the performer) at a time when you and theperformer do not deal with each other at arm’s length arenot qualified expenditures for ITC purposes. In addition,the amount received or receivable by the performer will notbe considered to be a contract payment. For more details,see the explanations for lines 526 (expenditures fornon-arm’s length SR&ED contracts), 534 (contract

payments), and 508 and 510 (transfer of qualified SR&EDexpenditures between non-arm’s length parties).

SR&ED performed on behalf of a personThe key element for determining an amount as a contractpayment is whether the payer requested the contractor toperform SR&ED on behalf of the payer under the contractterms. You can only make this determination based on theterms of the contract read as a whole, and by reviewing allthe facts surrounding the particular situation.

Meaning of “arm’s length”The current version of Interpretation Bulletin IT-419,Meaning of Arm’s Length, expresses in general terms thecriteria we consider when determining whether or notpersons deal with each other at arm’s length.

NoteWhen an expenditure relates to a contract for services tobe performed after the year-end, the amount for thoseservices does not qualify as an SR&ED expenditure untilthe year in which the services are actually performed.

Line 350 – Lease costs of equipment: allowable SR&EDexpendituresOn line 350, enter a lease expense that was all orsubstantially all (90%) attributable to the use of equipmentfor the prosecution of SR&ED in Canada. If you use theproxy method, do not include expenditures for generalpurpose office equipment or furniture (see glossary).

We consider a current expenditure for the lease ofequipment to be all or substantially all attributable to theuse of equipment for the prosecution of SR&ED if you usedit 90% or more for SR&ED. You must determine the SR&EDusage as a percentage of the total operating time. Generally,operating time means the time the equipment usually runsor functions.

Lease costs of building: not an allowable SR&EDexpenditureA building lease expense you incur does not qualifyfor SR&ED. A lease expense for a building is any outlay orexpense you made or incurred to use a building, or to havethe right to use a building.

OtherIn certain cases, a lease expense that was all or substantiallyall attributable to using premises or facilities other than abuilding may be allowable. For example, the lease expensefor a structure may be allowable.

Line 355On line 355, if you use the proxy method, enter 50% of thelease costs of equipment other than general purpose officeequipment or furniture, which is primarily used (morethan 50%, but less than 90%) for SR&ED.

You should determine the SR&ED usage as a percentage ofthe total operating time. Generally, operating time meansthe time the equipment usually runs or functions.

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Enter “0” on line 355 if you use the traditional method.Lease costs of equipment you use primarily for SR&EDmay be allowable under line 360 as overhead or otherexpenditures if you meet certain conditions.

Line 360On line 360, enter “0” if you use the proxy method. If youuse the traditional method, enter overhead and otherexpenditures you did not list on lines 300 to 355. Usually,“overhead and other expenditures” are expenditures thatare:

n directly attributable to the prosecution of SR&ED inCanada; or

n directly attributable to the provision of premises,facilities, or equipment for the prosecution of SR&ED inCanada.

Directly attributable to the prosecution of SR&ED inCanadaYou can claim the following types of expenditures:

1. Other salaries and wages of employees who directlyundertake, supervise, or support the prosecution ofSR&ED. You can only claim an expenditure on line 360if, for an employee, you meet all the followingconditions:

n you do not claim the SR&ED portion of the salaries orwages of the employee on line 300, 305, or 310 ofForm T661 as directly engaged salaries or wages;

n the employee directly undertakes, supervises, orsupports the prosecution of SR&ED (the employeerequires a strong technical background);

n the employee’s salary or wages can reasonably beconsidered to be for the prosecution of SR&ED.

Examples of tasks for which you can claim anexpenditure for salaries or wages on line 360:

n performance of non-technological managementactivities or decision-making functions that do notdirectly influence the course of the SR&ED but thatrelate to the SR&ED (e.g., long-term planning forfuture SR&ED projects or contract administration);

n preparation of a technical feasibility study relating toSR&ED projects carried out.

2. Other expenditures directly attributable to theprosecution of SR&ED in Canada. Include anexpenditure, or portion of the expenditure, that isdirectly related to the prosecution of SR&ED and thatwould not have been incurred if such prosecution hadnot occurred (incremental costs).

Other expenditures that may be directly attributable tothe prosecution of SR&ED include:

n lease costs of equipment used less than 90% of thetime for SR&ED;

n salaries or wages of clerical employees performingnon-technological functions that aid the ongoingSR&ED claimed in the year;

n related benefits, such as the employer’s share ofpayments to the Canada Pension Plan (CPP) orQuebec Pension Plan (QPP), Employment Insurance(EI), the Worker’s Compensation Board (WCB) or theCommission québécoise de la santé et de la sécuritéau travail (CSST), an approved employee pensionplan, and employee medical, dental, or opticalinsurance plans;

n travel and training; and

n other costs (e.g., utilities, long-distance telephonecharges, or supplies).

Incremental costs for the prosecution of SR&EDExpenditures directly related to the prosecution of SR&EDmust also be incremental to the SR&ED. For that purpose,we do not necessarily consider a percentage of anexpenditure to be incremental. You must be able todemonstrate that the expenditure would not have beenincurred if the prosecution of SR&ED had not occurred.Overhead costs for the prosecution of SR&ED have to bespecifically identified and allocated to SR&ED. The methodyou use to allocate overhead expenditures to SR&ED mustbe reasonable.

NoteCosts incurred in connection to work described inparagraph 248(1)(d) of the definition of scientificresearch and experimental development are notincremental but could qualify in themselves as SR&EDexpenditures.

ExampleCorporation A incurs travel costs of $40,000 in its 2000taxation year. SR&ED employees represent 25% of the totalpersonnel of the corporation. Corporation A cannot claim$10,000 as incremental SR&ED expenditures for theprosecution of SR&ED. It must demonstrate that theexpenditure is directly related to the prosecution of SR&EDand is incremental. For this purpose, Corporation A wouldneed to identify each trip, have evidence that each isattributable to SR&ED, and allocate the appropriate costs toSR&ED.

Directly attributable to the provision of premises,facilities, or equipment for the prosecution of SR&ED inCanada1. Costs directly attributable to the provision of premises,

facilities, or equipment for the prosecution of SR&ED inCanada, include the cost of the maintenance andupkeep of premises, facilities, or equipment providedfor SR&ED in Canada (e.g., the costs of cleaning,painting, and servicing equipment).

2. Other expenditures, or portions thereof, directly relatedto the provision of premises, facilities, or equipment forthe prosecution of SR&ED in Canada and that wouldnot have been incurred if these premises, facilities, orequipment had not existed (incremental). Include, forexample, taxes and insurance for a building that youown and that you use for the prosecution of SR&ED.

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Incremental costs for the provision of premises,facilities or equipmentThese other expenditures directly related to the provisionof premises, facilities, or equipment for the prosecution ofSR&ED in Canada must also be incremental to the SR&ED.For that purpose, we consider a reasonable percentage of anexpenditure to be incremental.

ExampleIf you own a building and use it for the prosecution ofSR&ED, we consider a reasonable portion of the municipaltaxes or the cost of insurance for the building to be directlyattributable to the provision of premises, facilities, orequipment for the prosecution of SR&ED.

The method you use to determine the portion that isdirectly related to the SR&ED has to be reasonable. You canbase it, for example, on the square meters of the buildingyou used for SR&ED over the total square meters of thebuilding. You can use other methods to determine theportion of an expenditure that is directly related to theprovision of premises, facilities, or equipment for theprosecution of SR&ED, as long as they are reasonable in thecircumstances. In all cases, whichever method you use, youhave to be able to provide support that it is reasonable.

On line 360, do not include capital cost allowance, generaladministrative expenses, or factory overhead expenses thatyou would have incurred if you had not conducted theSR&ED.

Supporting documentsYou have to identify each overhead expenditure specificallyand allocate a reasonable amount to SR&ED. At the time ofthe financial review, you may be asked to explain how youdetermined the amount, provide support for thisdetermination, and be able to demonstrate that theoverhead expenditures are incremental to the SR&ED.

Line 370On line 370, include third-party payments you made to thefollowing organizations if the payments are to be used forSR&ED carried on in Canada that is related to yourbusiness, and only if you are entitled to exploit the resultsof the SR&ED:

a) approved associations that undertake SR&ED;

b) an approved university, college, research institute, orother similar institution;

c) non-profit SR&ED corporations resident in Canada andexempt from tax under paragraph 149(1)(j) of the Act;

d) an approved organisation (granting councils) thatmakes payments to an association, institution, orcorporation described in a) to c) above;

e) corporations resident in Canada provided the SR&EDwas performed.

NoteTo determine whether the Minister of National Revenuehas approved an institution or association, you mustcontact the organization in question.

The amounts you report on line 370 are usually referred toas third-party payments for SR&ED. They do not includepayments for SR&ED undertaken on your behalf which youreport on lines 340 or 345. For example, third-partypayments for SR&ED could include payments to participatein arrangements such as industry-wide SR&ED undertakenby SR&ED associations, non-profit SR&ED corporations, oruniversities. In such cases, the payer does not control theactual work performed.

The following chart shows the usual differences betweenthe two concepts:

SR&ED contracts or Third-party payments

Characteristics SR&ED contractsThird-partypayments

Control ofSR&ED

payer performer

Rights exclusive non-exclusive(generallypublished)

Number offunders

usually limited toone payer

multiple funders

Type of SR&ED commerciallyfocused

often basic orappliedresearch

Tax treatment accrual cash basis

You cannot include all payments to organizations such asSR&ED associations and universities as expenditures online 370, since you could contract with such organizationsto perform SR&ED on your behalf. For example, if youneed a particular type of expertise, you can contract withthese organizations to perform specific tasks for you. In thiscase, the work is performed on your behalf, and you shouldreport the expenditures on line 340 or 345.

For a corporation, include on line 370 any payments youmade to a non-profit SR&ED corporation resident inCanada for basic or applied research carried on in Canada.For more details on such payments, see the current versionof Interpretation Bulletin IT-151, Scientific Research andExperimental Development Expenditures.

The amount of your payment eligible for SR&ED may bereduced if the recipient uses the funds to acquire abuilding, a leasehold interest in a building, or to pay rentfor a building.

See instructions for Schedule A below.

Line 390Capital expenditures for SR&ED carried on in CanadaOn line 390, include in the pool of deductible SR&EDexpenditures under paragraph 37(1)(b) any capitalexpenditures for SR&ED carried on in Canada and relatedto a business of yours. Capital expenditures on SR&ED areonly those expenditures that result in the acquisition ofdepreciable property other than buildings and leaseholdinterest in buildings. Generally, only capital expendituresfor new equipment are allowable. You cannot includenon-depreciable assets in the pool. A list of capital itemsacquired in the year should be available for review.

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ExampleA claimant acquires land, building, and equipment to beused all or substantially all for the prosecution of SR&ED.The expenditure pool will only be affected by theequipment expenditure, as land is a non-depreciable asset,and buildings are generally excluded (see below).

The only difference in determining capital expendituresunder the traditional method and the proxy method is thatyou cannot include general purpose office equipment orfurniture if you use the proxy method.

An SR&ED capital expenditure is an expenditure you madeto acquire property that would otherwise be depreciableproperty if, when you acquired it, you intended either to:

n use the property during all or substantially all (90% ormore) of its operating time in its expected useful life forthe prosecution of SR&ED in Canada; or

n consume all or substantially all of the value of theproperty in the prosecution of SR&ED in Canada.

You determine a property’s eligibility when you make theexpenditure. However, when determining eligibility, welook beyond the use of the property in the year you makethe expenditure, to the intended use over the life of theasset.

We cannot consider you as having made a capitalexpenditure until the property you acquired as a result ofthe expenditure becomes available for your use.

NoteIf you are allowed an SR&ED deduction for thedepreciable property, you cannot also claim capital costallowance on the same property.

When you sell the SR&ED property, the tax treatment ofthe proceeds may vary. What you do depends on whetheror not you have previously claimed a deduction for theproperty. For more details, see the explanation for line 440.

ITC recaptureThere will be an addition to your tax payable under Part Iwhen you sell an ASA equipment or convert it tocommercial use after February 23, 1998. For more details,see Application Policy SR&ED 2000-04 – Recapture ofInvestment Tax Credit, issued December 7, 2000.

Buildings and landExpenditures you incurred to acquire buildings andleasehold interests in buildings (other than prescribedspecial-purpose buildings) do not qualify as SR&EDexpenditures. In addition, expenditures to acquire land andleasehold interests in land are also excluded.

Prescribed special-purpose buildings are defined insection 2903 of the Regulations. They are buildings theDepartment of Finance Canada approves on abuilding-by-building basis.

Line 400Allowable SR&ED expenditures are the total current andcapital expenditures you made in the year. On line 400,enter the total of the amounts on lines 380 and 390.

Step 2Pool of deductible SR&ED expenditures(lines 430 to 470)In this section, starting with the amount of allowableexpenditures for SR&ED carried on in Canada determinedon line 400, you will calculate the SR&ED expenditure pooldeduction that is available in the year, the deductionclaimed in the year, and any balance of the SR&EDexpenditure pool deduction you can deduct in future years.

Line 430Assistance refers to both government and non-governmentassistance for SR&ED. Government assistance includesforgivable loans, grants, subsidies, deductions from tax,investment allowances, or any other form of assistance,excluding the federal ITC. It also includes assistance forSR&ED from a provincial government, a municipality, or apublic authority. This includes provincial SR&ED taxcredits when they apply. Non-government assistanceincludes inducements and assistance you obtained fromother persons that you do not include in your taxableincome because of some other provision (e.g., the generalprovisions of section 9).

Certain provinces have introduced “super-deductions”which allow corporations to deduct over 100% of SR&EDexpenditure costs for provincial tax purposes. Even thoughthese deductions provide for a similar level of provincialassistance, as compared to provincial ITCs, they were notconsidered to be government assistance and did not reducethe expenditures for federal ITC purposes.

For taxation years commencing after February 2000, thebudget proposes to treat a specified percentage ofprovincial deductions for SR&ED in excess of the actualamount of the expenditure as government assistance. Thespecified percentage is based on the provincial tax ratesapplicable to income earned in the province by acorporation for the year and is:

n the maximum provincial tax rate applicable to activebusiness income, where the corporation’s federal ITCexpenditure limit (relevant for the purposes of theenhanced ITC rate of 35%) for the year is nil;

n the provincial tax rate applicable to small businessincome, in any other case;

The amount calculated will be added to the corporation’sPart I tax payable in the year. For more details, refer toApplication Policy SR& ED 2000-03 – Government Assistance– Treatment of Provincial and Territorial R&D Assistance,issued October 31, 2000).

Assistance amounts will reduce the pool of deductibleSR&ED expenditures if, at the filing-due date of your taxreturn for the taxation year, you have received, are entitledto receive, or can reasonably expect to receive the amounts.

If you are using the proxy method, do not deduct theassistance for expenditures that the prescribed proxyamount replaces.

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Line 435An ITC for SR&ED expenditures that you claimed in theyear (including ITC refunds, an ITC you carried back toprevious years, an ITC on the prescribed proxy amount, anITC on qualified SR&ED expenditures transferred to youfrom a non-arm’s length performer underparagraph 127(13)(e), but not an ITC on shared-usedequipment) does not reduce your pool of deductibleSR&ED expenditures for the current year. Rather, it will bededucted from the pool of deductible SR&ED expendituresin the next year.

To the extent that an ITC deducted or refunded mayreasonably be considered to relate to a property acquired ina preceding year as shared-use equipment, it will reducethe capital cost of the property acquired.

For partnerships, you have to reduce the balance in the poolof deductible SR&ED expenditures by the amount of ITC inthe same year the partnership makes the related SR&EDexpenditures.

Line 440If you sold an SR&ED asset (capital equipment youpurchased for SR&ED) during the year, and the line 450amount includes unclaimed expenditures for the asset,include on line 440 the sale proceeds or the amount ofunclaimed expenditures for the asset, whichever amount isless.

If the sale proceeds are more than the unclaimed balance ofSR&ED expenditure for the asset, include the difference inyour income up to the amount of recapture of capital costallowance (CCA). If the sale proceeds are more than theoriginal cost of the asset, the difference is either a capitalgain or income, depending on the facts of each case.

ExampleFacts (1) Unclaimed SR&ED expenditures

balance carried forward from theprevious year (line 450) ......................... $ 500

(2) Asset you sold during the year:Original cost............................................ $1,000Proceeds of disposition ......................... $ 100Unclaimed expenditures for the assetthat are included in the line 450amount..................................................... $ 50

Solution (1) Determine the line 440 amount,whichever amount is less: theproceeds of disposition ......................... $ 100

orthe amount of unclaimedexpenditures for the asset ..................... $ 50The line 440 amount............................... $ 50

(2) Determine the recaptured CCA,whichever amount is less: cost ............. $1,000

orproceeds of disposition ......................... $ 100

$ 100Minus the reduction to the line 440amount..................................................... $ 50Recapture of CCA (include thisamount in your income for the year)... $ 50

NoteIn certain cases, other deductions may be required to bemade to the SR&ED expenditure pool (e.g., expendituresa corporation renounced for the purposes of Part VIIItax, and amounts deducted under section 61.3).

Line 445If an amount of assistance has reduced your balance in thepool of deductible SR&ED expenditures (see line 430), addany repayments of that assistance to the pool on line 445. Inaddition, if an amount of assistance receivable has reducedyour expenditure pool balance and you did not receive itand it ceased to be an amount you can reasonably expect toreceive, the amount is considered to be a repayment ofassistance that you can add to the pool on line 445.

Line 450Enter the unclaimed balance in the pool of deductibleSR&ED expenditures you are carrying forward from theprevious year. For a partnership, enter “0” on line 450.

Line 452For information on amalgamation and winding-up and theimpact on the pool of deductible SR&ED expenditures readInterpretation Bulletin IT-151, Scientific Research andExperimental Development Expenditures.

Line 453 – Recapture of ITCAny ITC recaptured under new subsections 127(27), (29),(30) or (34) for the previous taxation year, will increase theamount of the taxpayer’s subsection 37(1) SR&ED pool forthe current year.

Generally, the circumstances which will cause the reductionin a taxpayer’s SR&ED ITCs are disposition or conversionto commercial use of a property (after February 23, 1998),where the cost of that property was previously claimed asan SR&ED cost for SR&ED ITC purposes. Refer toApplication Policy SR&ED 2000-04 for more information onITC recapture.

Line 454If the amount on line 454 is positive, enter that amount online 455. If the amount on line 454 is negative, enter “0” onlines 455, 460, and 470, and include the line 454 amount inyour income for the year.

Line 460Enter the deduction you claim in the year from the pool ofdeductible SR&ED expenditures. You can deduct all or aportion of your expenditures for SR&ED carried on inCanada in the year you make the expenditures, or you canaccumulate them and carry them forward to deduct infuture years. The deduction is optional, and can be anyamount up to the current year’s line 455 amount, subject tothe following restrictions:

n If the claimant is a corporation and an acquisition ofcontrol has previously occurred, the total amount online 455 may not be available for deduction in the year orin a later year. You have to use special rules to determinethe amount you can deduct. Usually, these rules operatelike the non-capital loss restrictions in subsection 111(5)for an acquisition of control. For more details, see the

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current version of Interpretation Bulletin IT-151, ScientificResearch and Experimental Development Expenditures.

n A partnership cannot carry forward SR&ED expendituresto a subsequent year.

Line 470This amount is your unclaimed balance in the pool ofdeductible SR&ED expenditures at the end of the year and,subject to the restrictions noted at line 460, you can deductit in future years. For a partnership, enter “0” on line 470.

Step 3Qualified SR&ED expenditures for ITCpurposes (lines 500 to 570)In this section, you will determine the SR&ED expendituresthat qualify for a federal ITC. Not all expendituresfor SR&ED carried on in Canada will earn an ITC. UseStep 3 to determine the base of SR&ED expenditures thatearn an ITC.

You should break down your expenditures between currentand capital expenditures. This will help you calculate yourrefundable ITC.

Line 500On line 500, enter unpaid amounts from previous years youpaid in the year and that are deemed to be an expenditureyou incurred in the year under subsection 127(26).

Under subsection 127(26), SR&ED current expenditures thatyou do not pay within 180 days of the end of the taxationyear in which you incurred them are deemed not to havebeen incurred in that year for ITC purposes but only at thetime you paid them. This applies to all unpaid amounts forSR&ED current expenditures except unpaid salaries, wages,or other remuneration under subsection 78(4). Seeexplanation for line 310.

On line 520, deduct unpaid amounts deemed not to be anexpenditure incurred in the year under subsection 127(26).

NoteEven if your unpaid subsection 127(26) amounts do notqualify for ITC until the time you paid them, they arestill allowable SR&ED expenditures deductible in theyear you otherwise incurred the expenditures. Makesure to include your unpaid subsection 127(26) amountsin your allowable SR&ED expenditures within theperiod allowed to file Form T661. Otherwise, they willnot be qualified expenditures in the year you pay them.

ExampleIn its 2000 taxation year ending on December 31, 2000,Corporation A incurs SR&ED expenditures of $100,000 forconsulting fees payable to Corporation B. Corporation Astill has not paid the expenditure 180 days after the end ofthe 2000 taxation year. The expenditure is only paid inNovember 2001.

n Corporation A must identify the expenditure in theSR&ED expenditure pool on Form T661 within thereporting deadline. It is an allowable SR&EDexpenditure deductible in 2000.

n Corporation A has to deduct the unpaid amount online 520 of Form T661 for the 2000 taxation year. For ITCpurposes, the expenditure is deemed not to have beenincurred in 2000.

n When Corporation A pays the expenditure in the 2001taxation year, enter the amount that is paid on line 500 ofForm T661 for that year.

Line 502 – Prescribed proxy amountEnter “0” on line 502 if you use the traditional method.

The prescribed proxy amount (PPA) for a taxation year is65% of the salary base. In certain situations, an overall capon the prescribed proxy amount may limit the amount youwould otherwise determine.

Use Table 1 below to help you calculate the PPA inaccordance with the Act.

Salary base – The salary base for the proxy method iscomprised of salaries and wages of employees who aredirectly engaged in SR&ED in Canada. The directlyengaged salaries and wages are those you entered online 300 of Form T661 for non-specified employees, andline 305 for specified employees. However, special rulesapply to restrict the amount of salaries or wages ofspecified employees that you can include in the salary base.

The salary base does not include taxable benefits undersections 6 and 7of the Act, bonuses, remuneration based onprofits, or an amount deemed incurred in the year undersubsection 78(4).

The following chart illustrates the differences between thesalaries or wages expenditure you include in the SR&EDexpenditure pool, and the salary base you use to calculatethe PPA:

Salaries or wagesexpenditure Salary base

Directly engaged salaries orwages other than taxablebenefits under sections 6and 7, bonuses,remuneration based onprofits, an amount deemedincurred undersubsection 78(4)

– for non-specifiedemployee

– for specified employee

Taxable benefits (section 6)incurred

Remuneration based onprofits, bonuses

Amount deemed incurredin the year undersubsection 78(4)

Related benefits(employer’s contributions tocertain plans)

yes (included online 300)

yes (on line 305)amount isrestricted *

yes (lines 300and 305)

yes fornon-specifiedemployees(line 300)

yes (line 310)

no (seeexplanations forlines 300 to 315)

yes

yes, amountis restricted**

no

no

no

no

* 5 x YMPE** 2.5 x YMPE

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Section A of Table 1Enter the amount from line 300 to line 1 of Table 1. Thisamount is the total wages or salaries of personnel directlyengaged in SR&ED, for employees other than specifiedemployees.

On line 2, enter the bonuses, remuneration based on profits,and taxable benefits under sections 6 and 7 of the Act thatyou included on line 300.

On line 3, enter the amount of wages or salaries of specifiedemployees directly engaged in SR&ED that qualify to beincluded in the salary base.

The amount of salaries or wages for a specified employeethat you can include in the salary base for the proxyamount is subject to certain restrictions outlined insubsection 2900(9) of the Regulations. Use columns 1 to 6 inSection C of Table 1 on page 20 to help you calculate thisamount.

Table 1

Prescribed proxy amount

Table 1 will help you to calculate the prescribed proxy amount to enter on line 502 of Form T661.You can only claim a prescribed proxy amount if you elected in Part I of Form T661 to use the proxy method for the year.The prescribed proxy amount is 65% of the salaries or wages (the salary base) of employees directly engaged in SR&ED in Canada.Special rules apply for specified employees. Calculate your salary base in Section A, the prescribed proxy amount in Section B, and thesalaries or wages of specified employees eligible to include in the salary base in Section C.

Section A – Salary base

Salaries of employees directly engaged in the SR&ED, other than specified employees (from line 300) 1) +________

Less: Remuneration based on profits, bonuses, and taxable benefits under sections 6 and 7, includedon the above line 2) –________

Plus: Salaries and wages of specified employees directly engaged in SR&ED, (total column 6 amountsin Section C below) 3) +________

Salary base 4) =________

Section B – Prescribed Proxy Amount

Calculate 65% of the amount on line 4 and report this amount on line 502 of Form T661 5) ________

In certain situations, an overall cap on the prescribed proxy amount may limit the amount otherwise determined.

Section C – Salaries or wages of specified employees

Special rules apply to restrict the amount of salaries of specified employees that you can include in the salary base. Use the chartbelow to calculate this amount.

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6

Name ofspecifiedemployee

Total salaries orwages for the year)

(SR&ED andnon-SR&ED)*

% of time in SR&EDin Canada

(Maximum 75%)

Amount incolumn 2

multiplied by % incolumn 3

2.5 × A × B÷ 365

Amount incolumn 4 or 5,

whichever amountis less

Enter total column 6 amounts on line 3 in Section A

*Do not include taxable benefits under sections 6 and 7, bonuses, remuneration based on profits, or an amount deemed incurred inthe year under subsection 78(4).

Section C of Table 1In column 1, write the name of each specified employee.

In column 2, enter the total amount you incurred in the yearfor salaries or wages of the specified employee. Thisamount is 100% of the expenditure for salaries or wages ofthe employee, not only the SR&ED portion. Do not includetaxable benefits under sections 6 and 7, bonuses,remuneration based on profits, or an amount deemedincurred in the year under subsection 78(4).

In column 3, enter the percentage of time the employee isdirectly engaged in SR&ED in Canada, up to a maximumof 75%.

In column 4, enter the results of the amount in column 2multiplied by the percentage in column 3.

In column 5, enter the maximum amount allowed for theyear. To determine the maximum amount allowed for theyear, use the formula 2.5 ê A ê B ¸ 365. In this formula,A is the year’s maximum pensionable earnings (section 18 of

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the Canada Pension Plan) for the calendar year in which yourtaxation year ends. The maximum pensionable earnings are$38,300 for year 2001 and $37,600 for year 2000. B is thenumber of days in the taxation year that you employ theindividual.

If the specified employee is also employed by a corporationwith which you are associated, the maximum amount

allowed cannot be more than 2.5 ê A, minus the amount theassociated corporation has included in its salary base for itstaxation year ending in the same calendar year.

In column 6, enter the salary allocated to SR&ED for eachspecified employee and carry the total on line 3 in section A.The salary allocated to SR&ED is the amount in column 4,or the amount in column 5, whichever amount is less.

Illustration of rules for specified employees

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6

Name ofspecifiedemployee

Total salaries or wages for the year (SR&ED andnon-SR&ED). Do not include taxable benefitsunder sections 6 and 7, bonuses, remunerationbased on profits, or an amount deemedincurred in the year under subsection 78(4).

% of time spentin SR&ED inCanada(maximum 75%)

Amount incolumn 2multiplied by% in column 3

2.5 ê A ê B/ 365

A= $38,300

B= no. days

Amount incolumn 4 or 5,whicheveramount is less

Employee 1 $ 50,000 50% $25,000 $95,750** $25,000

Employee 2 $ 50,000 75% * $37,500 $95,750 $37,500

Employee 3 $100,000 60% $60,000 $95,750 $60,000

Employee 4 $100,000 75% * $75,000 $95,750 $75,000

Employee 5 $150,000 70% $105,000 $95,750 $95,750

Carry the total amount of column 6 to line 3 of Section A in Table 1 $293,250

* Although 80% of actual time was directly engaged in SR&ED in Canada, enter only 75% in column 3 (maximum % allowed).

** This is the maximum allowed for the 2001 year (as determined by the formula 2.5 ê $38,300 (in 2001) ê 365/365, if you employed theemployee for the whole year).

On line 5 of Table 1, enter 65% of line 4 and report thisamount to line 502 of Form T661.

In certain situations, an overall cap on the prescribed proxyamount may limit the amount otherwise determined.

Overall cap on prescribed proxy amount – For mostclaimants, the prescribed proxy amount is 65% of the totalof the eligible portion of salaries of employees directlyengaged in SR&ED in Canada. However, in certainsituations, an overall cap on the prescribed proxy amountmay limit the proxy amount you have otherwisedetermined. Usually, the overall cap will not restrict theprescribed proxy amount if you have deducted more than$65 of non-SR&ED expenses (other than rent for a building,capital cost allowance, interest and financing costs,allowance for doubtful accounts, and all other amountsdeductible under section 20) for each $100 of eligible salaryyou included in the salary base.

Use the Table 2 to help you calculate this amount.

Table 2

Enter the total amounts you deductedwhen calculating your net income for taxpurposes from your business for the year(include the cost of goods sold in the totalamounts you deduct) .............................................. 6)

Enter the deductions you claimedin the year under sections 20 (e.g., capitalcost allowance, interest, bad debts), 24(if you cease to carry on a business), 26(for a bank), 30 (improving land for farming),32 (if your business is that of an insuranceagent or broker), 37 (for SR&ED expenditures),66 to 66.8 (e.g., exploration and developmentexpenditures), and 104 (for a trust)........................ 7)

Enter the amount of expendituresyou incurred for the use of, or the right touse, a building (other than a prescribedspecial-purpose building)........................................ 8)

Enter the amount from line 6,minus the amounts on line 7 and line 8 ................ 9)

The prescribed proxy amount to enter on line 502 iseither 65% of the amount on line 4 in section A of Table 1,or the amount on line 9 of Table 2, whichever amount isless.

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Line 504 – Shared-use equipment (SUE)Equipment used primarily (more than 50% of its operatingtime) for the prosecution of SR&ED in Canada qualifies fora partial ITC. One half of the expenditures on equipmentused primarily for SR&ED is eligible for an ITC at the ratethat would have applied if the expenditure had been all orsubstantially all attributable to SR&ED.

This shared-use treatment could apply to equipment usedfor dual purposes in the same year, or equipment whoseuse changes over time, e.g., a company that performsSR&ED in a shop-floor setting where it uses equipment forboth SR&ED and production activities.

You earn the partial credit over time—you earn one half ofthe partial credit at the end of the first taxation year afterthe first 12-month period of your acquiring the equipment,and the other half of the credit at the end of the firsttaxation year after the first 24-month period of youracquiring the equipment. For that purpose, the equipmentis deemed not to have been acquired until it has becomeavailable for use.

The test of whether the equipment qualifies for the partialcredit begins when you acquire the equipment and it isavailable for use and ends at the end of the tax year inwhich the relevant test period ends. The test is based onhow you use the equipment during the entire period up tothe end of that taxation year. You should be prepared toprovide documentation to substantiate the percentage oftime you use the equipment for SR&ED.

The shared-use rules are for ITC purposes only. Theequipment does not form part of the SR&ED pool, but isdepreciated under the regular capital cost allowance ratesand rules.

On line 504, enter the expenditures on first term SUE plusthe expenditures on second term SUE.

First term shared-use equipment

To qualify, the equipment must be:

n depreciable property;

n equipment that does not qualify as capital expenditurewhich you entered on line 390 of Form T661 (capitalexpenditure all or substantially all attributable toSR&ED);

n an asset that is not a prescribed depreciable property(PDP) per subsection 2900(11) of the Regulations (PDPincludes a building, a leasehold interest in a building andequipment used in the assembly, construction orcommissioning of a commercial facility, plant, or line);

n equipment other than general purpose office equipmentor furniture (see glossary);

n new (i.e., it must not have been used or acquired for useor lease, for any other purposes before you acquired it);

n equipment that is used primarily (more than 50% of itsoperating time) for SR&ED in Canada during the period starting with the time the property was acquired andavailable for use, and ending at the end of the firsttaxation year ending at least 12 months after that time.

Generally, operating time means the time the equipmentusually runs or functions. Whether you use the equipmentfor SR&ED during its operating time is a question of factthat can only be determined on a case-by-case basis.However, we usually consider time you spend to set upequipment for SR&ED work, and time you spend to switchthe equipment back to another use to be operating time inwhich you used the equipment for the prosecution ofSR&ED, as long as it is reasonable in the circumstances.

You can claim as expenditure, 1/4 of the capital cost of theequipment after certain adjustments; you may need tomake adjustments to the capital cost if you purchased theequipment from a non-arm’s length supplier (seeexplanations for lines 522 and 524). However the capitalcost of the equipment is not reduced by the amount of therelated assistance or contract payments; rather, suchassistance and contract payments reduce the qualifiedexpenditures on lines 534 and 536 of Form T661.

Second term shared-use equipment – Second termshared-use equipment is a property that was first termshared-used equipment that you used primarily (morethan 50% of its operating time) for SR&ED in Canada,during the period starting with the time you acquired theproperty and it was available for use, and ending at the endof the first taxation year that ends at least 24 months afterthat time.

ExampleOn November 30, 1997, Company A purchased a newmilling machine for $100,000, to be used in SR&ED and inmanufacturing and processing (M&P) over its expecteduseful life. The capital expenditure does not pass the all orsubstantially all test. The company has a June 30 year-end.The machine ran 8 hours a day, 5 days a week. Theoperating time of the machine for SR&ED and M&P is asfollows:

Time periodTotal

machinehours

SR&ED M&P

December 1, 1997, toJune 30,1998

1,200 1,000 200

July 1, 1998, toNovember 30, 1998

800 600 200

December 1, 1998, toJune 30, 1999(end of first period)

1,200 800 400

July 1, 1999, toNovember 30, 1999

800 200 600

December 1, 1999, toJune 30, 2000(end of secondperiod)

1,200 400 800

Total 5,200 3,000 2,200

For the taxation year ending June 30, 1998:

You should capitalize the asset’s cost in the regular capitalcost allowance (CCA) class.

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For the taxation year ending June 30, 1999:

The machine was used primarily in SR&ED (2,400/3,200 or75%) for the period from the time the machine is availablefor use (Dec. 1, 1997) to the end of the first taxation yearending at least 12 months after that time (June 30, 1999).Therefore, it is first term SUE, and you can include 25% of100,000 ($25,000) as a qualified expenditure.

For the taxation year ending June 30, 2000:

The machine was used primarily in SR&ED (3,000/5,200 or58%) for the period from the time the machine is availablefor use (Dec. 1, 1997) to the end of the first taxation yearending at least 24 months after that time (June 30, 2000).Therefore, it is second term SUE, and you can include 25%of $100,000 ($25,000) as a qualified expenditure.

NotesTo qualify for SUE, the property must not have beenused or acquired for use or lease, for any other purposesbefore it was acquired by the claimant.

Any ITC you earned and claimed for SUE reduces theCCA class in the year after the claim.

The following chart compares equipment all orsubstantially all (ASA) for SR&ED (line 390 of Form T661)and shared-use equipment (SUE).

ASA equipmentused for SR&ED Shared-use equipment

n relates to equipmentintended to be usedin SR&ED throughoutits useful life;

n included insubsection 37(1)expenditure pooland earns ITC;

n ITC is earned whenyou make thecapital expenditure;

n you earn ITC on fullcost;

n includes generalpurpose officeequipment orfurniture under thetraditional methodonly;

n eligibility is based onintent.

n relates to equipmentyou use for SR&EDand some otherpurpose;

n only earns ITC –capital cost isincluded in CCAschedule in usualmanner;

n you earn the partialITC over time;

n you earn ITC onone-half of the cost;

n excludes generalpurpose officeequipment orfurniture under boththe traditional andproxy methods;

n eligibility is based onactual use.

Lines 508 and 510Transfer of expenditures between claimants not dealingat arm’s length for SR&ED contracts – If you (the payer)contract the performer for SR&ED which the performer willperform on your behalf and the SR&ED is performed whenthe two parties are not dealing at arm’s length, yourexpenditures for the contract are not qualified expendituresfor ITC purposes. In addition, the amount received orreceivable by the performer is not considered to be acontract payment. However, the performer can transfer

qualified expenditures to you up to a maximum of thecontract amount.

Subsection 127(13) provides for the transfer of qualifiedexpenditures between non-arm’s length claimants. Apartnership cannot be a party to such a transfer, since it isnot considered to be a person for the purpose of thisparagraph.

To effect such a transfer, the two parties (the payer and theperformer) must file a joint agreement on Form T1146,Agreement to Transfer Qualified Expenditures Incurred inRespect of Scientific Research and Experimental Development(SR&ED) Contracts.

The amount that the performer can transfer for a taxationyear of the performer is the least of the following threeamounts:

n the amount specified by the parties in their agreement;

n the performer’s SR&ED qualified expenditure pool at theend of the year before reducing the transfer of qualifiedexpenditures to the payer; and

n the total of all amounts that would be contract paymentsif the two parties were dealing at arm’s length (notionalcontract payments) that are:

– for performing SR&ED for or on behalf of the payer;

– paid by the payer to the performer on or before the daythat is 180 days after the end of the particular year; and

– for a qualified expenditure the performer incurred inthe particular year (not considering subsections 78(4)and 127 (26)) for that portion of the SR&ED that wasperformed when the performer did not deal at arm’slength with the payer, and is paid by the performer onor before the day that is 180 days after the end of theparticular year, or for an amount transferred to theperformer in respect of the SR&ED.

The least of the three amounts is transferred out of theperformer’s SR&ED qualified expenditure pool for the year(enter amounts you transferred on lines 544 and 546) andinto the payer’s SR&ED qualified expenditure pool for itsfirst taxation year ending at the same time, or after, the endof the performer’s year in which the transfer is made (enteramounts transferred to you on lines 508 and 510).

ExampleCorporation C performs SR&ED for a related corporation,Corporation D, according to a contract for services. BothCorporations have the same December 31 taxationyear-end. The contract price is $1,000, which Corporation Dpaid fully in 1999.

Corporation C performed 80% of the SR&ED in 1999 andincurred $784 of qualified expenditures in 1999. However,Corporation C only paid $392 of the qualified expendituresby the 180th day after December 31, 1999. Corporation Cpaid the remaining $392 in 2000. Corporation C completedthe SR&ED in 2000 and incurred an additional $196 ofqualified expenditures in that year. Corporation C paid thatamount at the end of that year. Corporation C also incurredand paid qualified expenditures of $100 in 1999 and $100 in2000 for other SR&ED projects.

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Corporation C and Corporation D want to file anagreement to transfer qualified expenditures fromCorporation C to Corporation D for 1999 and 2000. Theyhave to use Form T1146, Agreement to Transfer QualifiedExpenditures Incurred in Respect of Scientific Research andExperimental Development (SR&ED) Contracts.

Calculation 1999 2000

Line 100 of Form T1146

Corporation C’s SR&ED qualifiedexpenditure pool at the end of theyear, before reducing for the transfer ofqualified expenditures to Corporation D($392 + $100 in 1999, $588 + $100 in 1999) $492 $688

Line 102 of Form T1146 $400 $200Calculation of line 102 amount1999: $392 ÷ $784 ê $800* = $4002000: $196 ÷ $196 ê $200* = $200

*Notional contract payment for1999: $800 ($1,000 less $200 under

paragraph 18(9)(a)—that is20% of $1,000)

2000: $200 (The paragraph 18(9) amountof $200 in 1999, is deemed incurredin 2000.)

Line 104 of Form T1146Maximum amount that can betransferred: the amount on line 100or 102, whichever amount is less $400 $200

Corporation C can transfer toCorporation D an amount up to theamount on line 104.

Line 520See the explanation for line 500.

Lines 522 and 524Special rules apply to how you determine the expendituresfor purchases of goods and services from non-arm’s lengthparties.

Basically, if an SR&ED performer purchases goods orservices for SR&ED from a person with whom theperformer does not deal at arm’s length, the amounteligible for investment tax credit to the performer is limitedto the cost to the non-arm’s length person of providing thegoods or services.

Under subsection 127(11.6), the amount of an expenditureyou incur for the service or property and the capital cost ofthe property is deemed to be:

1. in the case of a service rendered to you, the lesser of theexpenditure you actually incurred and the adjustedservice cost; and

2. in the case of a property sold to you, the lesser of thecapital cost to you otherwise determined and theadjusted selling cost to the supplier of the property.

The definitions of adjusted service cost and adjustedselling cost are found in subsection 127(11.7).

Subsection 127(11.8) provides additional rules relating tonon-arm’s length purchases of goods and services. One ofthese rules is that any cost to a supplier cannot include anyamount that would not be a qualified expenditure if theultimate purchaser or user of the goods or services directlyincurred the amount. Under another rule, the leasing of aproperty is deemed to be the rendering of a service.

On lines 522 and 524, enter the difference between theamount you included in your pool of deductible SR&EDexpenditure for the purchases of goods and services fromnon-arm’s length suppliers and the amount of the deemedamount of the expenditure under subsection 127(11.6).

If the property is shared-use equipment, the amount of theexpenditure for SUE you enter on line 504 is based on theadjusted selling cost of the property.

The current version of Interpretation Bulletin IT-419,Meaning of Arm’s Length, expresses in general terms, criteriawhich we will consider in determining whether or notpersons deal with each other at arm’s length.

Line 526Expenditures for SR&ED performed on behalf of a payer bya person or a partnership (the performer) at a time whenthe payer and the performer do not deal with each other atarm’s length are not qualified expenditures for ITCpurposes. On line 526, deduct the amount you entered online 345 for non-arm’s length SR&ED contracts.

NoteExpenditures you incurred for non-arm’s length SR&EDcontracts are not considered to be either qualifiedexpenditures or a contract payment to the performer forITC purposes. However, the payer and the non-arm’slength performer can file a joint agreement so that all ora part of the performer’s qualified SR&ED expendituresfor SR&ED, up to a maximum of the contract amount, betransferred to the payer for ITC purposes. For moredetails, see explanations for lines 508 and 510, andlines 534 and 536.

ExampleA Canadian corporation, Parentco, contracts with itswholly-owned Canadian subsidiary, Subco, for Subco toperform SR&ED on behalf of Parentco. An amount of$100,000 is payable by Parentco under the contract. ThisSR&ED is subcontracted out by Subco to an arm’s lengthparty, Performco, for $95,000. Performco Subco completesthe work in 1998 and all contract amounts are paid in full in1998.

Since the work is performed at a time when Subco is notdealing at arm’s length with Parentco, Parentco’s $100,000expenditure is not a qualified expenditure. Under thedefinition of contract payment, the $100,000 would not be acontract payment paid or payable to Subco. As a result,Subco would have a qualified expenditure of $95,000 whichit can transfer back to Parentco by filing a joint agreement.Performco, however, has to reduce the qualifiedexpenditures it incurred for the SR&ED by the $95,000contract payment from Subco.

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Line 528You cannot claim ITC on any allowable SR&ED currentexpenditure (lines 300 to 370) that is paid or payable to orfor the benefit of a person or partnership that is not ataxable supplier in respect of the expense. Taxable supplierin respect of an amount usually means a resident ofCanada, a Canadian partnership, or a person or partnershipthat pays or receives the amount in the course of carryingon a business through a permanent establishment inCanada.

This rule does not apply to an expenditure on SR&ED thatyou directly undertake. It usually applies in situationswhere a payer contracts out its SR&ED to an arm’s lengthperformer. If the SR&ED contract expenditure is paid orpayable to or for the benefit of a non-taxable supplier, it isnot a qualified expenditure for ITC purposes.

ExampleCompany A, a Canadian corporation, contracts out itsSR&ED to Company B, another Canadian corporation, witha contract amount of $100,000. Company A and Company Bdeal with each other at arm’s length throughout the periodin which the SR&ED is performed. However, Company Bdoes not actually perform the SR&ED. Instead it contractsout the SR&ED to a foreign company, Forco, for a contractprice of $95,000. Forco, in turn contracts it to a thirdCanadian company, Company C, with a contract amount of$90,000.

Because $95,000 of the $100,000 paid or payable byCompany A to Company B was, in turn, paid or payable toForco, who is not a taxable supplier in respect of theamount, $95,000 of the $100,000 is considered to be paid orpayable to, or for the benefit of a corporation that is not ataxable supplier in respect of the amount. Enter $95,000 online 528 of Form T661. Company A may still be able toclaim $5,000 of qualified expenditures, since the SR&ED isperformed in Canada.

Company B, on the other hand, would not have anyqualified expenditures for two reasons. First, the $95,000paid or payable to Forco is also considered to be paid orpayable to, or for the benefit of a corporation that is not ataxable supplier in respect of the $95,000. Second, there is acontract payment of $100,000 paid or payable toCompany B.

Lines 530 and 532Enter the total prescribed expenditures that Section 2902 ofthe Regulations does not allow for ITC purposes. The mostcommon prescribed expenditures are:

n interest and other financing costs;

n a legal or accounting fee; and

n expenditure for the acquisition of used equipment.

Read the current version of Interpretation Bulletin IT-151,Scientific Research and Experimental Development Expenditures,for more details.

Lines 534 and 536Assistance will only reduce the SR&ED expenditures towhich they can reasonably be considered to relate. Weillustrate this with the following example.

ExampleProject 1 Project 2 Project 3

Allowable SR&EDexpenditures

$125 $250 $125

minus:

Contract payments ($ 50) 0 ($100)

Government assistance ($100) 0 ($ 50)

Non-governmentassistance 0 ($ 50) 0*

Qualified expenditures 0* $200 0*

* The excess funding received for Projects 1 and 3($25 each) does not reduce the Project 2 expenditures thatare eligible for an ITC.

The amount of qualified expenditures is reduced by anygovernment assistance, non-government assistance andcontract payment that the claimant or a person orpartnership not dealing at arm’s length with the claimanthas received, is entitled to receive, or can reasonably expectto receive.

For a brief overview of what constitutes government andnon-government assistance, see the explanation forline 430. However, for ITC purposes, assistance forexpenditures that the prescribed proxy amount replaces isalso included on lines 534 and 536.

Usually, an amount a claimant received or that is receivableis considered to be a contract payment if:

n the amount is received or receivable by the claimant froma taxable supplier;

n the amount is for SR&ED;

n the SR&ED is performed for, or on behalf of, a person orpartnership entitled to deduct the amount because ofsubparagraph 37(1)(a)(i) or (i.1); and

n the claimant and that person or partnership are dealingat arm’s length when the SR&ED is performed.

NoteWhen an amount received is not for SR&ED done onbehalf of the payer, it will not reduce the qualifiedexpenditures of the performer.

For more details on contract payments, see the currentversion of Interpretation Bulletin IT-151, Scientific Researchand Experimental Development Expenditures.

Non-arm’s length SR&ED contractFor a non-arm’s length SR&ED contract, the payer does nothave any qualified expenditure in respect of the contractamount for SR&ED. At the same time, the contract amountis not a contract payment to the payee.

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Rules for reducing qualified expendituresSubsection 127(18) reduces qualified expenditures of aclaimant (including a partnership) by any governmentassistance, non-government assistance, or contractpayments (assistance) received or receivable directly byyou. It applies when you have received, are entitled toreceive, or can reasonably expect to receive assistance forSR&ED on or before the filing-due date for a taxation year.

The assistance that can reasonably be considered to be inrespect of the SR&ED, minus all amounts applied forpreceding taxation years to reduce your qualifiedexpenditures or the qualified expenditures of some otherclaimant that does not deal at arm’s length with you (seebelow), is used to reduce the qualified expenditures youotherwise incurred in the year that can reasonably beconsidered to be in respect of the SR&ED.

Example 1Company A receives $30,000 of assistance for SR&ED in its1999 taxation year. It incurs $50,000 of qualifiedexpenditures before any reduction under subsection 127(18)for the 1999 taxation year.

Subsection 127(18) requires that Company A’s qualifiedexpenditures be reduced to $20,000. As a result,Company A can only claim an ITC based on the $20,000amount.

Example 2Company A incurs a $20,000 expenditure on shared-useequipment (SUE). For the purpose of this example, this isthe only SR&ED expenditure the company incurred.Company A receives $6,000 of assistance for SR&ED toacquire the SUE. The qualified expenditure otherwisedetermined before the reduction for the assistance receivedis $5,000 in 1998 (the first-term SUE, 1/4 of $20,000) and$5,000 in 1999 (the second term SUE).

Subsection 127(18) requires that the portion of theassistance that is for the SR&ED ($6,000 in this case) reducequalified expenditures incurred in the year for the SR&ED.In 1998, the assistance of $6,000 will fully offset thequalified expenditures of $5,000 for first-term SUE. SinceCompany A did not incur other qualified SR&EDexpenditures in that year, it has to apply the remaining$1,000 to reduce the qualified expenditures for second-termSUE to $4,000 in 1999.

In certain cases, assistance received or receivable by anon-arm’s length party may also reduce your qualifiedexpenditures under subsection 127(19). This subsectionapplies when the assistance, minus all amounts applied fora preceding year in reduction of your, and the non-arm’slength party’s qualified expenditure relating to theassistance, is greater than the total qualified expendituresincurred in the year by the recipient and the non-arm’slength parties in respect of the SR&ED. In such cases, yourqualified expenditures with respect to the SR&ED will beeliminated.

Example 3Company D receives a contract payment of $120,000 forSR&ED from an arm’s length party in its 1999 taxation year.Company D contracts out part of this SR&ED to itssubsidiary, Company E, which has the same December 31taxation year-end.

Company E completes its portion of the SR&ED in its 1999taxation year and incurs $48,000 of qualified expendituresrelating to the SR&ED before any reduction because ofassistance. Company D incurs qualified expenditures of$20,000 for the SR&ED in its 1999 taxation year, and $40,000for the SR&ED in its 2000 taxation year before anyassistance reduction. All of the SR&ED is completed by theend of year 2000.

Under subsection 127(18), Company D’s qualifiedexpenditures it otherwise incurred in its 1999 taxation year,$20,000, are reduced to nil. Under subsection 127(19),Company E’s $48,000 of qualified expenditures it otherwiseincurred in 1999 are also reduced to nil because of thecontract payment received by Company D.

In 2000, subsection 127(18) requires that the differencebetween $120,000 and $68,000 (the sum of $20,000 and$48,000 that was applied to reduce the qualifiedexpenditures of Company D and Company E for their 1999taxation years) be applied to reduce to nil the qualifiedexpenditures of Company D it otherwise incurred in 2000for the SR&ED.

Since Company D incurs only $40,000 more qualifiedexpenditures in 2000 before completing the SR&ED, itwould have no qualified expenditures for the SR&ED in2000. The unapplied amount of the contract payment,$12,000 ($120,000 – $68,000 – $40,000) would not affect theamount of qualified expenditures of Company D orCompany E incurred for other SR&ED.

When each member of a non-arm’s length group performsthe SR&ED when the member is not dealing at arm’s lengthwith the recipient of the assistance and section 127(19) doesnot apply to the assistance in respect of a particular year,the unapplied amount of the assistance, if any, will reducethe qualified expenditures incurred by each non-arm’slength person for the SR&ED. However, to avoid themultiple qualified expenditures reduction, the recipient canmake an allocation of the remaining assistance undersubsection 127(20).

Lines 538 and 540Agreement to allocate assistance undersubsection 127(20)Subsection 127(20) provides a way to allocate assistance forSR&ED that was unapplied to the recipient’s qualifiedexpenditures among the members of a non-arm’s lengthgroup in situations where:

n each member of the group performs the SR&ED whenthe member is not dealing at arm’s length with therecipient of the assistance; and

n subsection 127(19) does not apply to the assistance for thetaxation year in which the allocation can be made(i.e., the amount of the government assistance, net of the

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amount applied against qualified expenditures inprevious years, is less than the total qualifiedexpenditures incurred in the year by the recipient and bythe non-arm’s length persons in respect of the SR&ED).

ExampleCompany A, Company B, and Company C are relatedcorporations which have the same December 31 taxationyear-end. Company A contracts out its SR&ED toCompany B and Company C. Company B and Company Cwill each perform half of the SR&ED for $50,000.

In June 1999, Company A receives government assistance of$40,000 for the SR&ED. Company B and Company C eachincur $15,000 of qualified expenditures for the SR&ED in1999 and $33,000 in 2000. They pay for all their qualifiedexpenditures by the end of each year to which theexpenditures relate.

In 1999, subsection 127(19) would apply to the governmentassistance in respect of Company A’s 1999 taxation year. Asa result, Company B and Company C’s qualifiedexpenditures, $15,000 each, they otherwise incurred in 1999is reduced to nil. Since there remains $10,000 of governmentassistance that has not been applied to reduce qualifiedexpenditures for the SR&ED, that amount would reducequalified expenditures that Company B and Company Cincurred for the SR&ED in 2000.

In 2000, subsection 127(19) would not apply in respect ofCompany’s A 2000 taxation year, since the amount ofgovernment assistance, $40,000, is less than the sum of: thetotal amounts previously applied under subsection 127(19),$30,000; and the total qualified expenditures, $66,000, thatCompany B and Company C otherwise incurred in theirtaxation years that end in Company A’s 2000 taxation year.

Under such a scenario, the companies should allocate theremaining assistance among themselves. Subsection 127(20)permits the three companies to allocate the remaining$10,000 of assistance to reduce the qualified expenditures orCompany B, Company C, or both, which they incurred in2000. If they don’t allocate the remaining $10,000 ofassistance, under subsection 127(20), subsection 127(21) willoperate to reduce both B and C’s qualified expenditures.

Company A and Company B can file an agreement with theCCRA specifying that the $10,000 remaining assistanceshould be applied to reduce Company B’s $33,000 ofqualified expenditures to $23,000. Consequently, theamount of qualified expenditures that Company C incurredin 2000 would still be $33,000.

To make the allocation, use Form T1145, Agreement toAllocate Assistance for Scientific Research and ExperimentalDevelopment (SR&ED) Between Persons Not Dealing at Arm’sLength.

Lines 544 and 546See the explanations for lines 508 and 510.

Lines 548 and 550On lines 548 and 550, enter any qualified expendituresincurred in the course of earning income that will not besubject to Part I tax. Subsection 127(9), which defines the

term investment tax credit, ensures that an investment taxcredit will be generated only when the income from thebusiness to which a particular expenditure relates is subjectto Part I tax.

Enter also expenditures renounced for the purposes ofPart VIII tax. For more details, read the current version ofInterpretation Bulletin IT-151, Scientific Research andExperimental Development Expenditures.

Line 555SR&ED qualified expenditure poolYou use the amount in this pool at the end of a taxationyear to calculate the ITC for that year.

In general, the amount in the SR&ED qualified expenditurepool at the end of a taxation year is equal to the qualifiedexpenditures you incur in the year, plus any amounttransferred to you under paragraph 127(13)(e), (amounts onlines 508 and 510), and minus any amount you transferredto another person under paragraph 127(13)(d) (amounts onlines 544 and 546).

Line 560Repayments made in the yearAmounts that can reasonably be considered as repaymentsof government assistance, non-government assistance, orcontract payments that previously reduced SR&EDexpenditures eligible for an ITC are also eligible for an ITC.

On line 560, enter any repayments that you made duringthe year of assistance and contract payments for qualifiedSR&ED expenditures, including expenditures theprescribed proxy amount replaced. Also, add on this lineamounts that are considered to be assistance you repaid inthe year. These include the amount of assistance thatreduced the amount of a qualified expenditure, that wasnot received, and ceased to be an amount that you canreasonably expect to receive.

Also include on line 560 the repayments of assistance forfirst and second term shared-use equipment.

Line 570This is the total of the SR&ED qualified expenditure pooland the repayments of assistance and contract payments.Add the amounts of lines 555 and 560, and enter the total ofline 570. To claim an ITC on this amount, use ScheduleT2SCH31 – Investment Tax Credit – Corporations, or formT2038(IND.) for individuals, as applicable.

Part 4 – Background InformationWe ask for background information in this part ofForm T661. This information on your business is needed toprocess your SR&ED claim.

A. Sources of funds for SR&ED (lines 600to 618)Estimate the percentage distribution of the sources of fundsfor SR&ED performed within your organization. Use thetotal SR&ED expenditures you entered on line 605 (makesure that the total of lines 600 to 618 equals 100%). Give thepercentage distribution of the following sources of fundsfor your SR&ED efforts.

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Line 600Internal sources include funds that originate from internalcompany funding, loans, and income tax refunds usedfor SR&ED you performed in this fiscal period.

Lines 602 and 604Enter funding from parent companies, subsidiaries, andaffiliated companies. Identify both Canadian and foreignfunding.

Expenditures for SR&ED performed by you (line 605)Line 605 is the total allowable expenditures for SR&EDperformed within the company.

Line 606Enter federal grants for SR&ED, and the SR&ED portion ofany other federal grants. Exclude funds or tax creditsfrom SR&ED tax incentives.

Line 608Enter federal contracts for SR&ED, and the SR&ED portionof any other federal contracts.

Line 610Include provincial funding for SR&ED, as well as SR&EDcontracts and the SR&ED portion of any other provincialgrants or contracts. Exclude funds or tax creditsfrom SR&ED tax incentives.

Lines 612 and 614Exclude funds from companies reported on lines 602and 604. Identify both Canadian and foreign funding.

Lines 616 and 618Include funds from universities, other levels ofgovernment, private non-profit organizations, individuals,and foreign governments. Identify both Canadian andforeign funding.

B. Business personnel (lines 630 to 638)Line 630Enter the average annual number of employees on yourorganization’s payroll.

Lines 632 to 640Include the number of people who work solely on SR&EDprojects, plus a full-time equivalent (FTE) for people whowork only part-time on SR&ED. To arrive at the totalpersonnel effort devoted to SR&ED, estimate the FTE of thepeople working only part-time on SR&ED.

ExampleIf, out of five scientists engaged in SR&ED, one workssolely on SR&ED projects and the remaining four devoteonly one-quarter of their working time to SR&ED, then:FTE = 1 + ¼ + ¼ + ¼ + ¼ = 2 scientists.

C. Nature of SR&ED work (lines 650 to 664)Lines 650 to 664In this section, estimate the approximate distribution ofyour SR&ED, using the total SR&ED expenditures youentered on line 605 (make sure that the total of lines 650to 664 equals 100%).

Lines 658 and 664Technical services are new or existing services that eithersupport or complement the production or use of thetechnology.

D. Specialized Field of Research(lines 670 to 674)Line 670Indicate the percentage of the amount on line 605 attributedto software development. Software development is definedas work relating to programming the encoded instructionsexecuted by electronic devices including computers forperforming operations and functions. See InformationCircular 97-1, Scientific Research and ExperimentalDevelopment – Administrative Guidelines for SoftwareDevelopment, on the identification of SR&ED in softwaredevelopment.

Line 672Indicate the percentage of the amount on line 605 attributedto biotechnology. Biotechnology is defined as work usingbiological agents. “Biotechnology’s multidisciplinary natureencompasses a range of techniques dealing withrecombinant DNA (Deoxyribonucleic Acid), cell fusion,plant and animal cell cloning, monoclonal antibodies, tissueculture, and bioprocess engineering. What distinguishes thenew biotechnology from the one used to make bread, beeror cheese is the enormous expansion of our power tomanipulate biological agents through the transfer,modification, and control of genetic material.” (ScienceCouncil of Canada, Enabling Technologies)

Line 674Indicate the percentage of the amount on line 605 attributedto environmental protection. Environmental protection isdefined as the field of work devoted to the reduction orelimination of pollutants and wastes (including prevention,treatment, and reuse of pollutants and wastes). SR&EDmade in order to improve employee health and workplacesafety are excluded.

Schedule A – Third-Party paymentsOn Schedule A, please provide the required information foreach entity to which you made payments for SR&EDcarried on in Canada, and that you reported on line 370(third-party payments).

A third-party payment includes:

n A payment to certain approved entities to be used forSR&ED carried on in Canada that is related to a businessof the payer but only if the payer has preferential rightsto use the results of the SR&ED in its business.

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n A payment to a corporation resident in Canada to beused for SR&ED carried on in Canada that is related to abusiness of the payer but only if the payer haspreferential rights to exploit the results of that SR&ED inits business.

n A payment by a corporation to a non-profit SR&EDcorporation resident in Canada that is for basic orapplied research carried on in Canada. InterpretationBulletin IT-151 describes the circumstances under whichyou can deduct the payment.

You do not need to submit project descriptions withForm T661 for expenditures you report on line 370.However, you must be able to substantiate that thepayment is to be used for SR&ED in Canada, that theSR&ED is related to the business that you carried on, andthat you are entitled to exploit the results of that SR&ED.Such substantiation would usually be contained in theterms of the agreement between you and the third-partyentity. You do not have to submit the agreement now, butyou must supply it when we ask for it.

If the prepaid expense rule in subsection 18(9) applies to athird-party payment, the payer can deduct the paymentunder subsection 37(1) only after the SR&ED is performed.

Schedule B – Expenditures for SR&EDcontractsComplete Schedule B when you claim expenditures inrespect of SR&ED contracts on lines 340 and 345 ofForm T661.

You have to provide the required information for eachcontractor when the contract expenditures in the year forthat contractor are more than $30,000. If you need morespace, use additional sheets.

We need a separate list of arm’s length and non-arm’slength contractors’ names and business number or GSTregistration number, along with the total dollar amount ofthe contract(s), the contract expenditures incurred in theyear, and the project code for the expenditures claimed inthe year. We explain in Part 2 the meaning of project code.If you used the contractor in more than one project, identifythe main project with which the expenditures areassociated.

If there is more than one SR&ED contract with the samecontractor, give the total of all contracts with the contractor.

An amount paid or payable to an arm’s length contractorfor SR&ED carried out on your behalf is a contract paymentif you are a taxable supplier in respect of the amount andare entitled to a deduction under subparagraph 37(1)(a)(i)or (i.1). A contract payment reduces the SR&EDexpenditures of the contractor for ITC purposes. The onusis on the claimant to determine whether the contractorperformed SR&ED on his behalf.

List the arm’s length and non-arm’s length contractors’names and business number or GST registration number,along with the total dollar amount of the contract(s), thecontract expenditures incurred in the year, and the projectcode for the expenditures claimed in the year. We explainin Part 2 the meaning of project code. If you used thecontractor in more than one project, identify the mainproject with which the expenditures are associated.

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Directly engaged in SR&ED – See the explanations forlines 300 to 315 in the guide for the meaning of directlyengaged in SR&ED.

General purpose office equipment or furniture – Generalpurpose office equipment or furniture (GPOEF) includes allfurniture, such as desks, chairs, lamps, filing cabinets andbookshelves. It also includes photocopiers, fax machines,telephones, pagers, typewriters, word processors, teletypesand calculators. Computers, including hardware, software,and ancillary equipment, are not considered to be GPOEF.

Pool of deductible SR&ED expenditures – You can poolexpenditures of a current and capital nature on SR&ED youcarried on in Canada and deduct them when you calculatethe income from a business you carried on in the year youmade the expenditure or in any later year. For more details,see the current version of Interpretation Bulletin IT-151,Scientific Research and Experimental Development Expenditures.

Prescribed proxy amount (PPA) – If you elect underclause 37(8)(a)(ii)(B), you can calculate a prescribed proxyamount (PPA) under subsection 2900(4) of the Regulations.Your PPA is a notional amount. You do not include thisamount in the pool of SR&ED expenditures and you do notdeduct it when calculating your income. It represents theamount of overhead expenditures related to SR&ED and isused to determine the claimant’s investment tax credits forthese overhead expenditures. The PPA is treated as aqualified expenditure for ITC purposes. The actualoverhead expenses the PPA represents are ordinarybusiness expenses. Although you do not include the PPA inthe pool of SR&ED expenditures, any investment tax credityou claimed in a previous year that can reasonably beconsidered to be for a PPA of a previous year will reducethe pool of SR&ED expenditures. For most claimants, thePPA for a taxation year is 65% of the salary base.

Salary base – The salary base is the portion of salaries andwages of employees who are directly engaged in SR&EDcarried on in Canada that can reasonably be considered torelate to such work having regard to the time spent on theSR&ED. However, the amount of an employee’s salariesand wages that you can use to determine the salary basecannot include an amount described in sections 6 or 7 of theAct, an amount deemed incurred under subsection 78(4),remuneration based on profits, or bonuses. In addition, theamount of salaries and wages that you can take intoaccount may be further restricted for a specified employee.

Scientific research and experimental development(SR&ED) – See the current version of Information Circular86-4, Scientific Research and Experimental Development, fortechnical guidelines clarifying what constitutes SR&EDaccording to subsection 248(1) of the Income Tax Act.

Shared-use-equipment (SUE) – Equipment you usedprimarily (more than 50%) for the prosecution of SR&EDcan earn investment tax credits on a portion of the cost. Formore details, see the explanations for line 504 in the guide.

Specified employee – A specified employee is definedunder subsection 248(1) of the Act and, in a particular year,includes an employee who does not deal at arm’s lengthwith the employer or who owns directly or indirectly, atany time during the year, 10% or more of the issued sharesof any class of the capital stock of the employer or of anycorporation related to the employer (for this purpose,shares owned by a person with whom the employee doesnot deal at arm’s length are included).

Glossary

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The CCRA delivers the SR&ED Program through 10 coordinating Tax services offices.

Tax services office For offices in:

Calgary 220-4th Avenue South EastCalgary AB T2G 0L1Telephone: (403) 691-6452Fax: (403) 691-6625

Calgary, Edmonton, Northwest Territories,Regina, Saskatoon, Winnipeg

Halifax 1313 Barrington StreetHalifax NS B3J 2T5Telephone: (902) 426-7875Fax: (902) 426-4727

Bathurst, Charlottetown, Halifax, Moncton,Saint John, Newfoundland and Labrador, Sydney

Hamilton 150 Main Street WestHamilton ON L8N 3E1Telephone: (905) 572-2650Fax: (905) 570-8247

Hamilton, Kitchener/Waterloo, London,St. Catharines, Windsor

Laval 3131 St. Martin Blvd. WestLaval QC H7T 2A7Telephone: (450) 973-5728Fax: (450) 973-5665

Laval, Rouyn-Noranda

Montréal 305 Blvd. René Lévesque WestMontréal QC H2Z 1A6Telephone: (514) 496-2242Fax: (514) 496-6607

Montréal, Montérégie/Rive-Sud,

Ottawa 333 Laurier Avenue WestOttawa ON K1A 0L9Telephone: (613) 598-2180Fax: (613) 952-1856

Belleville, Kingston, Nunavut, Ottawa,Peterborough, Sudbury, Thunder Bay, Outaouais

Québec 165 de la Pointe-aux-Lièvres Sud StreetQuébec QC G1K 7L3Telephone: (418) 649-4993,

Ext. 3055Fax: (418) 648-5663

Chicoutimi, Québec, Rimouski, Sherbrooke,Trois-Rivières

Toronto Centre 1 Front Street WestToronto ON M5J 2X6Telephone: (416) 973-0450Fax: (416) 952-8334

Toronto Centre, Toronto East, Toronto North

Toronto West 5800 Hurontario Street , 3rd floorP.O. Box 6000Mississauga ON L5A 4E9Telephone: (905) 566-6352Fax: (905) 566-6754

Toronto West

Vancouver 1166 West Pender StreetVancouver BC V6E 3H8Telephone: (604) 666-8589Fax: (604) 666-0222

Burnaby, Northern B.C. and Yukon,Southern Interior, Vancouver, Vancouver Island

Tax services offices