Sep 13, 2014
MaRS Centre June 14, 2012 John Sutherland
Scientific research and experimental development incentives
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Presenter contact info:
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John Sutherland BA, CGA Senior Manager – Tax Global R&D and Government Incentives Phone (416) 643-8048 Cell (905) 379-3261 [email protected]
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Agenda
• Overview of the Canadian SR&ED program • Budget updates – Federal and Ontario • CCPCs • Program Criteria • Ontario Technology credits • Stretching SR&ED dollars
4 Scientific research and experimental development incentives
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Canadian SR&ED Program
• Canadian Controlled Private Corporations (CCPC) Benefits: – SR&ED Deduction pool – ITCs
• 35% of eligible expenses – Refundable on the 1st 3m of SR&ED expenses – Taxable Income and Taxable capital thresholds to be maintained for
refund-ability – Provincial refund ability
• 20% of eligible expenses – 40% refund ability on SR&ED expenses in excess of $3m
– Taxable Income and Taxable capital thresholds to be maintained for refund-ability • Provincial Credits also available
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Benefit of the program
• Other benefits – Accelerated write-offs – Timing on utilization of expenditures – Unused credits carry forward
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Federal update
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Federal budget
• Non-CCPC – 15% non-refundable for taxation year ending after 2013 – Reduce proxy calculations to 60% for 2013 and 55% thereafter – Arm’s length subcontract expenses to be reduced to 80% after 2012 – No lease expenses after 2013 – No capital expenses made after 2013 – No shared use equipment after 2013
• CCPC – 35% rate remains unchanged though the base of qualifying
expenditures will be smaller – as per above – 15% for non-qualifying CCPC or for expenses in excess of $3m or
expenditure limit
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Federal budget – Impact
• Reduction in total benefit in Ontario will range from 6% to 40% – Depending on:
• CCPC small corporation status • Mix of employees versus contractors • Capital component of claims • Materials component of claims
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Federal budget – Other SR&ED and research Items
• Conduct a pilot project to determine the viability of a formal pre-approval process
• Enhance the existing online self-assessment eligibility tool • Make more frequent and effective use of “tax alerts” • Improve the Notice of Objection process to allow for a second review
of scientific eligibility determinations • Divert “savings” from reduced SR&ED ITC% to direct incentives
– Make the Canadian Innovation Commercialization Program permanent – Provide support in 2012-13 to the NRC to refocus on business-led, industry
relevant research – Double the IRAP Internship program – Launch the Western Innovation Program
• Similar to such programs in other provinces – Other plans not yet clarified
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Program criteria & qualifying expenditures
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Program criteria
Definition of SR&ED • Three types of eligible development:
1. Basic research 2. Applied research 3. Experimental development (90%+ of all claims)
− Work undertaken… for the purpose of creating new, or improving existing materials, devices, products or processes, including incremental improvements
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Program criteria (Cont’d)
Eligibility criteria • Three essential elements
1. Technological advancement 2. Technological uncertainties, and 3. Technical content
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Program criteria (Cont’d)
Technological advancement • Typically a new characteristic or capability • The knowledge gained • Transferability of this new knowledge
– Examples: – Integration of disparate technologies – Algorithms, methods or capabilities – e.g. special caching techniques to improve performance
– Tools (e.g. speed up development, load balancing) – Any technological improvements in proprietary systems – Faster, more data, smaller footprint, cheaper, etc
• Note that success is not a requirement, only an attempt
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Program criteria (Cont’d)
• “Technological uncertainty” may occur in either of two ways:
– Uncertain that goals can be achieved; technological obstacles exist that must be overcome through experimentation or analysis.
– Goals can be achieved; however, what path, route, approach, equipment configuration, etc., will work.
• Need for experimentation and analysis • SR&ED Project STARTS when uncertainty is identified • SR&ED Project ENDS when uncertainty is resolved
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Program criteria (Cont’d)
Scientific or technological content • Qualified people involved
– Employee records can support qualifications – Professional, academic, technical training and work experience are all
relevant credentials
• Systematic investigation – Departure from application of proven approaches – Experimentation and analysis – Testing and evaluation – Conclusions reached
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SR&ED activities include
• Technical feasibility studies • Review of competing technology • Design • Prototype build and evaluation • Programming • Component, system and integration testing • Technical documentation • Support activities undertaken directly to help
resolve the uncertainties that make the project R&D
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SR&ED activities exclude
• Market research • Routine testing • Routine data collection • Social sciences or humanities • Commercial production • Style changes
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Other criteria
• Development must be in a field of science or technology • Work must be performed physically in Canada • Work must be performed by Canadian taxable entities
• Claimant and claimed subcontractors
• Claim must be submitted within 18 months of fiscal year end • Expenditures must be paid within 6 months of fiscal end • Work contracted by another Canadian entity may be subject to
reduction of eligible expenses by the amount paid • And many other less common rules which we will deal with on a case-
by-case basis – e.g. Salaries of “specified employees”
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SR&ED in a nutshell
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Point A ‘base level’
Point B ‘target level’
• Faster • Increased yield • More efficient • Better performance • New capability • New application • Knowledge • Better tools
Barriers, Constraints, Obstacles, Challenges
Adv
ance
men
t
Knowledge base
Technical objective
1. Idea generation 2. Idea selection 3. Prototype, analysis, testing, simulation, modeling, FEA, etc. 4. Results/conclusions
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SR&ED industry examples
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Industry Example of SR&ED Software/ IT Improvements to customized software
Manufacturing Process improvements to reduce production time
and cost Consumer Goods Production formulations with restricted ingredients to
achieve sought specifications Pharmaceutical/Biotechnology Improving processes to reduce material waste
Chemicals Developing custom equipment to improve process
performance
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SR&ED – What can you claim?
1. Salaries and wages 2. Materials consumed and transformed 3. Contract SR&ED payments (80% after 2012) 4. Lease expenses (until 2013) 5. Third party-payments for other people performing SR&ED that taxpayer
can exploit 6. Overhead (2 methods of calculation) 7. Certain capital expenditures (until 2013)
• Less SR&ED contract payments received • Less Government Assistance (grants, credits)
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Overhead
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Traditional or proxy method of calculation
Each year taxpayer can choose between: • Traditional Method
– Calculation of actual overhead directly attributable to SR&ED, or
• Proxy Method – Notional calculation of overhead based on 65% * of directly engaged
labour
* (60% for 2013 and 55% thereafter)
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Salary and wages
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Salary and wages
• Employees Directly engaged (proxy)
• Employees Directly attributable (traditional) Ø Incremental and related to SR&ED
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Materials
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Materials consumed vs. transformed
Consumed • Implies materials are absorbed, used
up or broken into small pieces • Destroyed or rendered virtually
useless as a result of SR&ED
Transformed • Materials are incorporated into
product that has some value to the taxpayer or to another party
• Subject to ITC recapture when a disposition occurs
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SR&ED Contract payments (80% after 2012)
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127(9) – Definition of contract payment
“Contract payment” means • An amount paid or payable to a contractor taxpayer for SR&ED
performed
• on the claimant’s behalf
• on an arm’s length basis
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Leases (until 2013)
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Leases (until 2013)
• All or substantially all (ASA) – 90% used for SR&ED
• Claim actual cost
• Primarily – Used 50% to 90% for SR&ED
• Claim 50% of cost
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Third party payments
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Third party payments
• Payments to any one of the following entities which carry on SR&ED activities in Canada:
– An approved association that undertakes SR&ED
– An approved university, college, research institute or other similar institution
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Capital expenditures (Until 2013)
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Eligible capital expenditures
• “All or substantially all” (ASA) • Intent test
• “Shared use equipment” (SUE) • Use test
Ø Must be new for ITC purposes Ø Excludes buildings and leasehold interest in buildings Ø Must be available for use
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ITC Recapture
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What does it apply to and when?
• The “property” subject to the recapture rules include: • Materials, all or substantially all equipment (“ASA”),shared use
equipment (“SUE”) • When sold or converted to commercial use, the itc’s related to these
items may be recaptured
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Ontario technology tax credits often overlooked
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Ontario tax credits
• Ontario innovation tax credit • Ontario research and development tax credit • Ontario interactive digital media tax credit • Ontario computer animation tax credit • Ontario business research institute tax credit
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OITC
• 10% Ontario Innovation Tax Credit (OITC) for eligible expenditures incurred in Ontario
• Available for all corporations with operations in Ontario • Refundable • Qualified expenditures up to the expenditure limit ( $3M)
– Canadian taxable income of the group of companies – World wide taxable capital of the group of companies – Planning:
• No 18 months deadline • Contract payments from customers outside Ontario
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ORDTC
• Replaces pre – harmonization Ontario deduction for federal ITC • Catch: considered to be assistance Reduce ITC
– Reduce SR&ED pool à ORDTC attracts federal and Ontario tax • Unused ORDTC can be carried back 3 years (but not to taxation year
ending before 2009) and carried forward 20 years • Taxpayer can waive this non-refundable tax credit –presumably to
increase federal ITC • If waived, no immediate difference on cash flow compared to O161 in
companies with losses
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Ontario Interactive Digital Media Tax Credit (OIDMTC)
• Refundable tax credit of 40% since March 27, 2009 for non-specified products – 35% for “specified products” (fee-for-service)
• Eligibility based on product, which must be complete • Educate, inform or entertain • Interactive (What info and how info is displayed) • Multimedia (2 of text, images and/or sound) • Available to non-exempt corporations only • For work done in Ontario • Must obtain a Certificate of Eligibility
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OIDMTC: Funding for eligible product
• Eligible expenditures – Salaries and wages – Contractors (only 50% of cost eligible before March 27, 2009) – Marketing and distribution costs (capped at $100k per product)
• Benefits – 40% regardless of size (after March 26, 2009) – non specified product – 35% specified product
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OIDMTC – Digital media game corporations
• 35% tax credit rate for qualifying digital game corporations • Incur a minimum $1 million of eligible Ontario labour costs over a 3 year period for
fee-for-service work done in Ontario that is directly related to the development of a digital game
• Not required to be at arm’s length with the purchaser corporation • Not required to develop all, or substantially all, of the eligible product
• 35% tax credit rate to specialized digital game corporations – 80% of Ontario payroll or 90% of annual revenues attributable to interactive digital
media game development • Minimum of $1 million of Ontario labour expenditures in the taxation year directly
attributable to the development of eligible digital games – Entitled to file an annual OIDMTC application – Not required to contract with an arm's length purchaser – Not required to develop all, or substantially all, of products included
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Computer animation and special effects tax credit
• 20% refundable tax credit • Ontario labour expenditures for development of computer digital
animation and digital visual effects for use in television or film • A certificate of eligibility must be obtained from the Ontario Media
Development Corporation and filed with tax return
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Ontario Business – Research Institute Tax Credit (“OBRITC”)
• 20% refundable tax credit • For SR&ED expenditures through a PE in Ontario • SR&ED payments made to an Ontario Eligible Institute • Business should be entitled to exploit the results of the SR&ED • An eligible research institute includes most universities and colleges in
Ontario, hospital research institutes and certain non-profit research organizations
• OBRITC is in addition to OITC credit
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Stretching your SR&ED dollars
Agreements with suppliers/customers • Proactively reviewing agreements to ensure SR&ED tax credits are
maximized • Invoices should have proper segregation of materials and services
to avoid/minimize recapture • Clear terms regarding performance and ownership of SR&ED
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Stretching your SR&ED dollars (Cont’d)
Tracking SR&ED on a contemporaneous basis • Meets CRAs requirements • Capture additional activities
Purchase of Capital Assets for SR&ED purposes • Purchase requisition should state intent • Ensuring available for use by the year end
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Who is Deloitte?
• Largest service provider in this field in Canada • Integrated team of engineers, scientists, accountants and tax specialists
• Adaptable work models – “A la carte” to full outsourcing capability – We provide support from opportunity qualification, through all CRA
technical and financial approvals
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Practice overview Canada GTA
SR&ED Partners 8 3 SR&ED Associate Partners 11 5 SR&ED Senior Managers 58 9 Other Professional Staff 75 31 Total number of SR&ED practitioners 152 48 Professional/Graduate Engineers 71 22 CA’s, CGA’s and CMA’s 81 26
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Questions?
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