Demystifying SRED and Other Tax Tips for Entrepreneurs - MaRS Best Practices
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Demystifying SRED and Other Tax Tips for Entrepreneurs - MaRS Best Practices



It’s tax time again, but MaRS Best Practices series has great news for startups and entrepreneurs! There is a wide range of business incentives available to offset various expenses incurred by ...

It’s tax time again, but MaRS Best Practices series has great news for startups and entrepreneurs! There is a wide range of business incentives available to offset various expenses incurred by entrepreneurial companies, from startups to established companies exporting products or services.

In this session, Welch’s Business Incentives leader, Terry Lavineway, will describe the process that entrepreneurs should employ when identifying and leveraging these incentives and an approach that can maximize access to this source of capital. He will provide detailed information on some of the more significant incentives available, including scientific research and experimental development (SRED) and digital media refundable credits.

Additionally, Bryan Haralovich, Welch’s Technology Service Sector leader, will provide an overview of the income tax compliance requirements imposed on entrepreneurs. This includes what must be filed, the timing of filings and the information required to complete the filings. He will address tax tips such as corporate structure, shareholder planning, international tax considerations and exit planning.



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Demystifying SRED and Other Tax Tips for Entrepreneurs - MaRS Best Practices Demystifying SRED and Other Tax Tips for Entrepreneurs - MaRS Best Practices Presentation Transcript

  • DEMYSTIFYING SR&ED and Other Tax Tips for Entrepreneurs A MaRS Presentation
  • What we will cover today… •  Income  Tax  Compliance  Considera2ons   –  Filing  requirements  and  compliance  informa2on   –  Corporate  vs.  personal   –  Planning  opportuni2es/considera2ons   –  Exit  considera2ons   •  Business  Incen2ves   –  What  You  Need  to  Know   –  SR&ED  overview   –  Digital  Media   –  Other  Incen2ves   –  Stacking   •  How  Welch  Can  Help  
  •   •  Corporate  Income  Tax  Returns   –  Annual  income  tax  return  due  6  months  aOer  year  end   –  Tax  owing  2  or  3  months  aOer  year  end   –  Installments  may  be  required   –  First  year  cannot  exceed  53  weeks   –  Can  change  year  end  for  business  purposes   •  Payroll  remiUances  –  due  15th  of  the  month  following  payroll  remiUance   •  T4’s  due  February  28th   •  HST/GST  –  due  3  months  aOer  year  end  for  annual  filers   •  Personal  Income  Tax  Returns  –  due  April  30th   Filing Requirements
  • Tax Rates, Credits & Calculations Federal  Individual  Tax  Rates  and  Brackets   2013   2012     First  bracket  [15%]   $0  -­‐  $43,561   $0  -­‐  $42,707   Second  bracket  [22%]   $43,562  -­‐  $87,123   $42,708  -­‐  $85,414   Third  bracket  [26%]   $87,124  -­‐  $135,054   $85,415  -­‐  $132,406   Fourth  bracket  [29%]   $135,055  -­‐  up   $132,407  -­‐  up  
  • Tax Rates, Credits & Calculations Combined  Federal  and  Provincial  Top  Marginal  Tax  Rates  for  2013   Province Salary and Interest Capital Gains Non-eligible Dividends Eligible Dividends Newfoundland 42.30% 21.15% 29.96% 22.47% Nova Scotia 50.00% 25.00% 36.21% 36.06% Prince Edward Island 47.37% 23.69% 38.56% 28.7% New Brunswick 45.07% 22.54% 33.05% 24.91% Quebec 49.97% 24.99% 38.54% 35.22% Ontario 46.41% 23.21% 32.57% 29.54% Ontario (1) 49.53% 24.76% 36.47% 33.85% Manitoba 46.4% 23.2% 39.15% 32.26% Saskatchewan 44.0% 22.0% 33.33% 24.81% Alberta 39.0% 19.5% 27.71% 19.29% British Columbia 43.7% 21.85% 33.71% 25.78% Yukon (2) 42.4% 21.2% 30.41% 15.93 to 19.29% Nunavut 40.5% 20.25% 28.96% 27.56% Northwest Territories 43.05% 21.53% 29.65% 22.81%
  • Tax Rates, Credits & Calculations Combined  Federal  and  Provincial  Corporate  Tax  Rates  for  2013   Ac2ve   Income   Manufacturing   Income   Small  Business   <  $500,000   Investment   Income  (8)   Federal   15.00%   15.00%   11.00%   34.67%   Province   Newfoundland   29.00% 20.00% 15.00% 48.67% Nova  ScoSa  (1)     31.00% 31.00% 14.50%/27.00% 50.67% Prince  Edward  Island  (2)   31.00% 31.00% 14.64% 50.67% New  Brunswick  (3)     26.01% 26.01% 15.50% 45.67% Quebec     26.90% 26.90% 19.00% 46.57% Ontario(4)   26.50% 25.00% 15.50% 46.17% Manitoba  (5)   27.00% 27.00% 11.00%/23.00% 46.67% Saskatchewan   27.00% 25.00% 13.00% 46.67% Alberta   25.00% 25.00% 14.00% 44.67% BriSsh  Columbia  (6)   25.75% 25.75% 13.50% 45.42% Yukon  (7)   30.00% 17.50% 13.50%/15.00% 49.67% Nunavut   27.00% 27.00% 15.00% 46.67% Northwest  Territories   26.50% 26.50% 15.00% 46.17%
  • Tracking Your Financial Transactions •  Types  of  expenses  and  revenue   –  G/L  set-­‐up  (accounts,  prior  year,  budget)   –  Project/product  grouping   –  Revenue  by  province/state/country   •  Frequency  of  recording   •  Financial  report  set-­‐up   •  Accrual  vs  cash  basis  accounSng   •  Competency  of  preparer   •  Maintain  receipts/supporSng   documentaSon  in  structured  approach   •  Ensure  informaSon  is  relevant  and  Smely   to  assist  with  business  monitoring  and   acSons  (must  have  a  basis  for   comparison)   •  Management  review/accountability   review  process  
  • Tracking Your Business •  AccounSng  Soaware   –  Several  soaware  packages  available   –  User  friendly   –  Keeps  records  up-­‐to-­‐date   –  Compiles  informaSon  into  reports  easily   analyzed   –  MulS-­‐currency,  mulS-­‐ledgers,  order   entry,  A/R,  purchase  order,  A/P,   inventory,  payroll,  project  cosSng,  Sme   tracking,  data/user  limits  
  • Personal vs. Business •  General  rule  is  expenses   are  deducSble  to  the   extent  they  were   incurred  to  generate   business  income   •  Business  expenses   incurred  personally   should  be  charged  to  the   company  (e.g.  via  an   expense  report)   •  Car  allowance  
  • Corporate Structure – Tax Considerations Canadian  Controlled  Private  CorporaSon   (CCPC)     Company  prospecSve   •  Eligible  for  35%  refundable  tax  credit  on  1st  $3M   •  Eligible  for  10%  Ontario  refundable  tax  credit  on   1st  $3M                       •  Lower  corporate  tax  on  taxable  income  up  to   $500k     Founder/employee  prospecSve   •  Founder/employee  may  be  eligible  for  $800k   capital  gains  exempSon   •  Stock  opSons  not  taxed  unSl  shares  sold   •  PotenSal  RRSP  eligibility       Note,  the  above  is  subject  to  restric2ons  and  rules  are   subject  to  change.  Seek  professional  advice  before   proceeding.   Non  CCPC       Company  prospecSve   •  15%  non-­‐refundable  federal  tax  credit   •  eligible  for  10%  Ontario  refundable  tax   credit  on  1st  $3M   •  High  corporate  tax  rate  on  all  income   Founder/employee  prospecSve   •  No  $800k  capital  gains  exempSon   •  Stock  opSons  may  be  taxed  when   exercised  
  • U.S. Tax Compliance   •  Compliance  at  federal  and  state   level   •  Corporate  returns  due  15th  of  3rd   month  following  year  end   (extensions  can  be  filed)   •  Separate  returns  for  each  state   •  Sales  and  use  tax  requirements   •  Branch  vs  corporate  tax  filing   •  Withholding  tax   •  Transfer  pricing  
  • International Tax Considerations   •  Establish  structures  to  facilitate  investment  from  foreign  based   investors   •  Consider  corporate  tax  rates  outside  of  Canada  and  ensure  that  the   most  tax  efficient  structure  is  in  place  to  minimize  overall  tax   payable.  Ownership  of  intellectual  property  (IP)  is  central  to   creaSon  of  efficient  tax  structure.  Other  consideraSons  include:   •  Rules  are  complex  and  vary  by  region   •  Expensive  to  set-­‐up  and  maintain   •  Need  to  consider  impact  on  future  acquisiSons  or  sale  of  company   •  Should  be  considered  before  any  substanSal  IP  value  is  created  to  minimize   capital  gains  on  transfer  from  Canada.   •  Monitor  level  of  business  in  foreign  jurisdicSons  and  set  up  appropriate   structures  to  avoid  unintended  tax  results  in  foreign  jurisdicSons  
  • Planning Opportunities/Considerations   •  Income  splijng   •  Dividends   •  Salary   •  Holdco  or  Trust   •  Maximize  interest   deducSbility  –  use  cash  to   pay  down  non-­‐deducSble   loans   •  Shareholder  remuneraSon  
  • Exit Planning   •  Due  diligence  consideraSons   •  Be  compliant  –  beware  of  tax  escrowed   funds   •  Accessible  corporate  records   •  Shareholder  tax  minimizaSon   •  Share  sale  –  capital  gains  exempSon   •  Asset  sale  –  dividend,  deferrals   •  Use  of  Holdco  and  Family  Trust  
  • Other Considerations   Employee  vs  Independent  Contractor   •  No  hard  and  fast  rules,    just  guidelines   •  Guidelines  include:   •  Receive  no  employee  benefits;   •  You  provide  services  to  more  than  one  company;   •  You  use  your  own  equipment;   •  Work  at  home;   •  Work  on  your  own  with  no  supervision.   •  Benefit  of  independent  contractor  includes  wider  scope  for  tax   deducSons,  however,  loose  rights  to  EI,  employer  health  and  other   benefits   •  Onus  is  on  the  company  to  pay  previous  withholding  if  the  individual   is  assessed  as  an  employee  (employer  &  employee  porSon).   •  Stock  opSons  received  by  independent  contractors  included  in   income  of  the  contractor  in  year  the  opSons  are  granted  
  • Advisor Perspective   •  Build  a  team  of  experienced   advisors  that  you  feel   comfortable  communicaSng   with   •  Leverage  your  advisors   experiences  through  conSnuous   updates/communicaSon  
  • Improving Cash Flow via Government Incentives
  • Government Incentives Strategy   •  Consider  the  following  with   respect  to  government   incenSves:       Are  you  maximizing  government   assistance  via  tax  credits,  grants,   loans  and  rebates?     Are  you  reasonably  certain  that   you  will  receive  the  incenSve?     Do  you  know  the  Sming  of  the   assistance?  Is  it  predictable?  
  • Maximizing Access to Government   •  There  are  countless   government  incenSves  out   there  (federally,  provincially,  &   municipally)     •  Companies  are  missing  out  on   opportuniSes  to  leverage   government  money   •  Most  companies  don’t  have   the  Sme/resources  to  pursue   all  the  incenSve  opportuniSes    
  • Holistic Approach   •  Overview  of  the  business     Recent  past     Plans  for  the  future     •  Overlay  landscape  of  incenSves     IdenSficaSon  of  where  government   assistance  is  possible     Reduce  possibiliSes  where:   •  Net  benefit  of  the  possible  assistance  <   (internal  +  external  costs  to  prepare/ apply  and  report/defend)     •  Incorporate  necessary  documentaSon  &   evidence  preparaSon  into  exisSng   business  processes    
  • Full Entitlement     What  can  you  claim?     MisconcepSons  and  misinformaSon     •  Can’t  claim  SR&ED  because  a  customer  paid  for  it   •  Can’t  claim  OIDMTC  because  we  contracted  out  most  of  the  soaware   development   •  Claiming  costs  outside  eligible  jurisdicSons     Know  the  rules  for  each  respecSve  incenSve  –  or  ask  for  help   •  Tax  credits  –  legislaSon  defines  what  is  eligible  but  not  always  clear   •  DiscreSonary  incenSves  –  guidance  is  oaen  vague  and  at  Smes,  somewhat   flexible     Stacking   •  What  are  the  restricSons  amongst  the  incenSves  –  how  much  government   assistance  is  possible?   •  E.g.  does  a  grant  impact  an  SR&ED  claim?  Does  a  loan?  Does  an  equity   investment?      
  • Certainty of the Outcome   •  Tax  credits:     When  are  you  confident  that  the   outcome  of  the  claim  will  be  as   expected?   •  Different  processes  for  different   tax  credits:  SR&ED  vs.  OIDMTC   •  DiscreSonary  incenSves     Very  compeSSve  landscape  for   discreSonary  incenSves:  free  or  very   cheap  money.     Need  to  examine  the  risk-­‐reward     Pre-­‐approval  required    
  • Timing Considerations   •  Tax  credits:     Is  the  credit  claimed  on  a  current  tax  return  or  an  amendment?     Are  there  other  tax  issues  in  existence  which  would  affect  the  Sming  &  resoluSon  of   the  tax  credits?   •  Different  processes  for  different  tax  credits:  SR&ED  vs.  OIDMTC   •  Discre2onary  incen2ves     How  far  in  advance  is  pre-­‐approval  required  prior  to  launching  the  project/iniSaSve?     How  long  aaer  the  expense  is  incurred  will  the  reimbursement  be  issued?    
  • SR&ED Recent Events   •  Legisla2ve  changes     Decreased  claim  amounts:     Overhead  calculaSon  65%-­‐ >60%-­‐>55%     Subcontractors  100%-­‐ >80%     Capital  no  longer  eligible   •  “Administra2ve”  changes     More  audits  and  (someSmes   onerous)  requests  for   addiSonal  informaSon     More  pressure  on  SR&ED-­‐ specific  evidence    
  • OIDMTC Specifics   •  Cri2cal  fundamentals:     90%+  of  the  product  must  be   developed  in  Ontario  by  a  single   corporaSon     Cannot  be  primarily  to  promote   your  company/products  or  another   company/product   •  Winds  of  change     Recommended  to  Ministry  of   Finance  to  relax  the  90%  rule     Rumours  that  access  to  the  credit   might  be  restricted:  company  size,   industry  for  example  
  • Resources  •  Websites:   •  Welch  LLP    
  • Final Points   •  Significant  amounts  of  government   assistance  are  available     Provincially,  federally  &   internaSonally   •  Know  the  rules  and/or  get  help   •  Look  for  the  best  net  results   •  PLAN  AHEAD    
  • How We Can Help   •  Regional firm with global resources to serve clients •  Business like in our approach •  12 offices & 260 staff •  Cost structure aligned with entrepreneurs and their businesses •  Extensive experience providing assurance, tax, corporate finance and advisory services •  Government Incentives – SRED, Digital Media, etc preparation/support •  Corporate Structure •  Accounting advice •  Personal tax planning •  Financial Statement Audits •  Business planning advice, valuations •  Cash flow management •  Operational improvements and efficiencies •  Access to contacts •  & much more
  • Q&A   Bryan Haralovich, CPA, CA, CPA (Illinois) Partner, Welch LLP Twitter:@CAHaralovich Terry Lavineway, B.Admin, B.Sc.CS Director, Business Incentives, Welch LLP Twitter:@terryl99