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Day 4 Afternoon - Goheen

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  • 1. Lead to Win Optimizing S R&ED Claims June 23, 2009 Kevin Goheen
  • 2. SR&ED Program – Overview
    • Canada’s largest federally supported program for industrial R&D incentives
    • Program has existed since the 1980’s
    • Over 19,000 claims made each year
    • >$4 billion in tax credits
    • Small and medium companies submit 75% of these claims, generally $20,000 to $2,000,000 in expenditures
    Slide
  • 3. SR&ED Program - Overview
    • Canadian Controlled Private Corporations (CCPCs) can earn refundable 35% investment tax credits (ITCs) on first $3M of expenditures
    • Public companies (non-CCPC) can earn 20% ITCs, applied against federal tax
    • 10% provincial tax credit for SR&ED performed in Ontario
    • 20% Ontario Business Research Institute Tax Credit
    • R&D costs CCPCs approx 30 cents/$ expenditure
    • Individuals can also claim SR&ED
    Slide
  • 4. What is R&D Practically ?
    • Indications that you MAY be doing R&D:
    • Technical attempts to make things faster, cheaper, better
    • Lower than average manufacturing yields
    • Prototype failures
    • Large warranty costs
    • Each case must be analyzed within the definition of eligible activity
    Slide
  • 5. SR&ED – The Concept Slide Point A ‘ base level’ Point B ‘ Technological Objective’ Barriers, Constraints, Uncertainties, Challenges
    • Work elements
    • Systematic
    • Uncertainty
      • If?
      • How?
    • Better yield
    • Less polluting
    • More capacity
    • More users
    • Faster response
    • Lower energy use
    • etc…
  • 6. Software Engineering
    • Some examples of advancement are:
    • New architectures, algorithms or database techniques
    • Performance increases (response time, speed, user or database scalability, reliability)
    • Interfaces between two or more existing software packages
    • Development of new in-house development tools
    Slide
  • 7. Mechanical Engineering
    • Some examples of advancement are:
    • New packaging equipment and procedures
    • Non-routine substitute of materials in injection molding
    • Eliminating lead based solders in PCB manufacturing
    • New fuels in cement manufacturing
    • Emission reduction in cement manufacturing
    • New hockey tape production equipment
    • Development of new in-house CAD tools
    • Developing new machinery to enhance production
    Slide
  • 8. Other Sectors
    • Some examples of advancement are:
    • Development of new pharmaceuticals
    • New growing techniques for grape vines in cold climates
    • New endodontic treatments
    Slide
  • 9. Eligible Expenditures
    • Labour
    • Capital goods
    • Contractors
      • in many cases; be careful with wording
        • IP ownership
        • Location
        • Service vs. Product
        • Management of R&D project
    • Material
    • Overhead
    Slide
  • 10. Timing
    • SR&ED claims must be submitted within 18 months after the end of every fiscal period
    • December 31, 2009 is the deadline for submitting claims for fiscal periods that ended on June 30, 2008.
    • e.g. You can prepare two claims for your fiscal periods that ended on December 31, 2007 and 2008 at same time, and submit them both to CRA before June 30, 2009.
    • CRA has committed in writing to help fix administrative omissions and errors if received 90 days prior to 18 month deadline.
    • SR&ED cheques usually arrive ~3-4 months after CRA receives your SR&ED documentation.
    • However if you have already submitted your T2, it will need to be amended. This will delay your first SR&ED cheque, so it arrives in ~6-8 months. Subsequent SR&ED cheques will likely arrive in ~3-4 months.
    • The Ontario cheque (used to) tend(s) to arrive a few months later.
    • Many third parties will lend against filed SRED claims.
    • Note that there is no filing deadline for the Ontario Innovation Tax credit
    Slide
  • 11. What’s New?
    • New T661 form for YEs after Dec 31, 2008
    • Electronic filing
    • New terminology
    • Hard word limits on various sections of technical descriptions; no pictures or graphics allowed
    • All projects to be filed after 2010 (not just top 20)
    • Explicit requirement for contemporaneous documentation
    • HINT: Not enough space to describe projects, hence will be more audits. Write a long technical description, cut and paste into new form and keep the long form for the inevitable audit.
    Slide
  • 12. CRA Web Site Slide
  • 13. What is Involved in Filing a Claim?
    • Scoping of projects
    • Preparation of technical reports for each project
    • Gathering and analysis of costs
    • Preparation of tax R&D forms and attachments
    • Submission of claim by 18 months following the year end
    Slide
  • 14. Technical Descriptions
    • Five components
    • A: Scientific or Technological Objectives
    • B: Technology or Knowledge Base Level
    • C: Scientific or Technological Advancement
    • D: Description of Work in this Taxation Year
    • E: Supporting Information.
    Slide
  • 15. A: Scientific and Technical Objectives
    • Preface this section with a brief description of the company and its commercial goals.
    • What did you intend to achieve?
      • Your work will qualify for SR&ED if you generate new knowledge to do new things and make technologies perform in unusual ways. You must intend to advance knowledge of your subject.
      • Use numerical goals where possible.
      • Emphasize the “methods and practices” that you wanted to develop.
    • For multi-year projects, include a technology roadmap which you probably have from a business plan.
    Slide
  • 16. B: Technology Knowledge Base
    • Describe what you knew internally about the project before beginning and what other companies have done
    • You are not expected to know “trade secrets” of others.
    • Area B is very important for software claims, where common knowledge evolves rapidly. Is often challenged at technical review.
    Slide
  • 17. C: Scientific and Technological Advancement
    • Describe what achievements you hope to gain:
      • “ It would be an achievement if…”
    • What was difficult? Stress uncertainty. Begin your paragraphs using these phrases:
      • “ We did not know how to…”
      • “ We were unsure whether we could…”
      • “ We could not understand why…”
      • “ Our problem was difficult to solve because…”
    Slide
  • 18. D: Description of Work in Taxation Year
    • For multi-year projects, described the status as of the first day of the FY
    • What did your employees and contractors do?
      • Describe the systematic way they investigated your technical challenges.
      • Describe approaches they contemplated, but abandoned.
      • What tests and analysis did they perform?
      • Described what lessons you finally learned.
      • Don’t use certain phrases (“trial and error”, “beta version”, “optimize”)
    • Describe the status of the project on the last day of the FY and, for multi-year projects, your plans for the next FY.
    Slide
  • 19. E: Supporting Information
    • What documents exist?
      • high-level overview
      • functional specifications
      • Prototypes
      • source code
      • log books, bug reports
      • emails
      • minutes of meetings, etc…
    • Just the titles. Do not submit copies of the documents to CRA.
    • List all the contractors and describe what they did very briefly.
    Slide
  • 20. New Documentation Requirements X X X X Others X Contracts X X Prototypes, scraps X X Photographs and videos X X Test protocols, data and results X X Progress Reports, Minutes X Trial Run Records X Source Code, System Architecture, etc.. X Lab Notebooks X X X Experiment Design X Time Sheets X Planning Docs Resources Systematic Work Uncertainties Base Level Knowledge
  • 21. Preparing for your SR&ED Review
    • Technical
      • Prepare a slide deck from the T661
      • Rehearse, rehearse, rehearse
      • Let the reviewer present
      • Don’t let the reviewer “wander around” your shop.
      • Silence is your friend; shut up.
    • Financial
      • Can be extensive
      • Examples
    Slide
  • 22. Relationship with IRAP
    • Advantages of having both
      • Usually SRED technical review goes better (or doesn’t happen)
      • Forces documentation
      • Cash flow improves 18 months
      • Financial risk drops
      • ITAs are usually on your side; CRA reviewers are not on your side.
    • Disadvantages to having IRAP
      • Reduces SR&ED claim, unless you get IRAP to pay for non-eligible activities
      • e.g. R&D project with $50K salaries, $16.5 contractors, 65% overhead
        • With $50K IRAP Small Project support, total cost to loss making CCPC is ($5060)
        • Instead get IRAP to pay for marketing or IP; total cost to company will be ($27,060)
    Slide
  • 23. 10-minute Exercise
    • Work in LTW Groups
    • Define technical objectives
    • Define technical uncertainty
    • Define work performed
    • Identify costs
    • Identify documentation
    Slide
  • 24. Thank you! Slide Kevin Goheen, PhD, P.Eng. 613.726.1010 X.227 [email_address]