A common stumbling point when completing the T661 SR&ED tax form is what method to choose for calculating overhead expenditures: traditional or proxy? This choice must be selected in Part 3 Section A of the T661 (lines 160 (proxy) or 162 (traditional)).
While a full discussion of the intricacies of both should be done with your accountant / tax specialist, it’s important to understand the high-level differences. For most early-stage companies, you’ll be filing under the proxy method because it’s easier and requires less documentation to back it up.
Let’s look at what each of these methods are, and when you should choose traditional or proxy.
What is the Proxy Method?
The proxy method simplifies the way to calculate overhead and other expenditures (known as the Prescribed Proxy Amount or PPA) by estimating these costs based on your eligible employee salaries. It’s calculated by taking 65% of the eligible portion of salaries of both regular and specified employees.
The proxy method is simple to use because you don’t have to track your SR&ED overhead during the tax year and simple to file because you don’t have to itemize all of your expenditures. Due to this simplicity and the generous calculation, it’s the most popular method used.
When Should You Choose Proxy Method?
- When your salaries/wages are high
- When you don’t have a lot of overhead expenditures
What is the Traditional Method?
By contrast, the traditional method requires that you identify each of your overhead expenditures to calculate the true amount (not an estimate). As well, you must track your overhead expenditures throughout your tax year. You will need to have detailed documentation and be able to prove that the expenditures you are claiming can be directly attributable to SR&ED work. This can get tricky and require some adjustments in your calculations. For example, if you are claiming only 50% of an employee’s salary for SR&ED, then you wouldn’t be able to claim the purchase of their computer at 100%.
When Should You Choose the Traditional Method?
- When your salaries/wages are low
- When your overhead expenditures are high
Even though the proxy method is the most popular method for filing SR&ED claims, it’s worth the time to evaluate which method is best suited for your situation in a particular tax year so that you can maximize your claim.