Bdo Sr&Ed Presentation Silicon Halton March 23, 2010. Meetup 5.

The Tax Benefits of R&DSilicon Halton, Meetup 5March 23, 2010

Are you engaged in SR&ED, but not claiming the tax benefits you

are entitled to?

• In this presentation …– General program overview– How to identify potential SR&ED

activities – Discuss types of activities that

constitute SR&ED– Which expenditures are eligible– Tax treatment of SR&ED

SR&ED

Scientific Research and Experimental Development

“is the systematic investigation or search that is carried out in a field of science or technology

by means of experiment or analysis”

• In 2008, over $4 billion was provided to over 22,000 companies

• Represents 33% federal R&D spending

Industries

Manufacturing 29%

Information Technology 24%

Engineering 20%

Natural Sciences 9%

Electronics 9%

Agriculture & Food Sciences 9%

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100%

Questions to ask to identify potential SR&ED activities?

• Has your company developed a new or changed product or process that has characteristics substantially different from those currently available (i.e. stronger, faster, lighter, more efficient, less expensive, more durable or flexible, etc.)?

• Has your company developed any prototypes? If you were to develop subsequent models, would they have new and different characteristics.

• Did you have any failures in product or process development or improvement?

• Have any of your products or processes cost more to develop than you expected?

• Have you used or combined technologies in new ways?

What activities qualify as SR&ED?

• SR&ED does not have to be carried out in a lab– Basic or Applied Research

• SR&ED activities are often integrated with daily business activities– Experiment Development is “work

undertaken for the purposes of achieving technological advancement for the purposes of improving existing materials, devices, products or processes, including incremental improvements thereto”

• Activities carried out “directly in support” of qualified SR&ED activities can qualify

What activities qualify as SR&ED?

All 3 of the following criteria must be met,

Scientific or Technological:

1. Advancement

2. Uncertainty

3. Content

1. Scientific or Technological Advancement

– Technologies utilized in a project– By creating something or working

towards something that is truly new– Alternatives must be explored– Successful outcome is not required,

however an attempt must be made in order to achieve advancement

2. Scientific or Technological Uncertainty

– Must be an element of uncertainty– Technological uncertainty arises when

the solution to the problem is not obvious to people familiar with available knowledge and/or technologies for that industry

3. Scientific or Technological Content

– Research or development must be conducted in a systematic manner

– From hypothesis formulation, through testing by experimentation or analysis, to logical conclusions

– To reduce or eliminate the uncertainties

– Documentation must support work done

Certain activities are explicitly excluded from SR&ED, such as:

– market research– sales promotion– commercial production– quality control or routine testing– product style changes– routine data collection– human/social sciences research

Which expenditures are eligible?

• Labour Costs– Salaries and wages

• Materials– Consumed and/or Transformed

• Contractors– “Arm’s length” consulting or fees

• Capital Expenses– Purchased or leased

Tax Treatment of SR&ED

• An ITC (Investment Tax Credit) is the government provided assistance to companies that conduct SR&ED in Canada

• For most taxpayers, the Federal ITC rate is 20%• CCPCs may qualify for enhanced Federal ITCs at

35%, depending on taxable income level in previous year

• Ontario also provides an ITC of 10%, rules for qualification are similar to federal rules

• In most cases the ITC is applied to reduce taxes payable for the year, however for CCPCs qualifying for the 35% ITC rate, the ITC in excess of taxes payable may be refunded to the corporation.

Tips for Successful SR&ED Claims

• Properly account for SR&ED expenditures:– Identify all SR&ED activities– Set up accounting systems to capture

SR&ED expenditures separately– Ensure that the system identifies any

incremental “in support of” SR&ED activities

• Filing deadline is 18 months after the company’s fiscal year end

– Ideal to submit SR&ED with tax filing

Frank Fiasché, P.Eng.

Senior Manager, SR&ED

Advisory Services