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SR&ED: What you need to know about the changing landscape - MaRS Best Practices
 

SR&ED: What you need to know about the changing landscape - MaRS Best Practices

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The Scientific Research and Experimental Development (SR&ED) tax incentive program provides support in the form of tax credits to groups or individuals conducting scientific research or experimental ...

The Scientific Research and Experimental Development (SR&ED) tax incentive program provides support in the form of tax credits to groups or individuals conducting scientific research or experimental development in Canada.

Some significant changes are on the way as a result of the last federal budget. See how these new rules could affect you!

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    SR&ED: What you need to know about the changing landscape - MaRS Best Practices SR&ED: What you need to know about the changing landscape - MaRS Best Practices Presentation Transcript

    • Scientific research and experimental development incentivesMaRS CentreJune 14, 2012John Sutherland
    • Presenter contact info: John Sutherland BA, CGA Senior Manager – Tax Global R&D and Government Incentives Phone (416) 643-8048 Cell (905) 379-3261 josutherland@deloitte.ca3 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Agenda•  Overview of the Canadian SR&ED program•  Budget updates – Federal and Ontario•  CCPCs•  Program Criteria•  Ontario Technology credits•  Stretching SR&ED dollars4 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 available5 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Benefit of the program•  Other benefits –  Accelerated write-offs –  Timing on utilization of expenditures –  Unused credits carry forward6 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Federal update7 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 limit8 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 claims9 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 clarified10 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Program criteria &qualifying expenditures11 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Program criteriaDefinition 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 improvements12 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Program criteria (Cont’d)Eligibility criteria•  Three essential elements 1.  Technological advancement 2.  Technological uncertainties, and 3.  Technical content13 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 attempt14 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 resolved15 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 reached16 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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&D17 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • SR&ED activities exclude•  Market research•  Routine testing•  Routine data collection•  Social sciences or humanities•  Commercial production•  Style changes18 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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”19 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • SR&ED in a nutshell 1.  Idea generation 2.  Idea selection 3.  Prototype, analysis, testing, simulation, modeling, FEA, etc. 4.  Results/conclusions Technical objective Point B •  Faster ‘target level’ •  Increased yield •  More efficient •  Better performance •  New capability Advancement •  New application •  Knowledge •  Better tools Knowledge base Point A Barriers, ‘base level’ Constraints, Obstacles, Challenges20 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • SR&ED industry examples 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 performance21 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • SR&ED – What can you claim?1.  Salaries and wages2.  Materials consumed and transformed3.  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 exploit6.  Overhead (2 methods of calculation)7.  Certain capital expenditures (until 2013)•  Less SR&ED contract payments received•  Less Government Assistance (grants, credits)22 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Overhead23 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Traditional or proxy method of calculationEach 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)24 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Salary and wages25 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Salary and wages•  Employees Directly engaged (proxy)•  Employees Directly attributable (traditional) Ø Incremental and related to SR&ED26 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Materials27 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Materials consumed vs. transformed Consumed Transformed •  Implies materials are absorbed, used •  Materials are incorporated into up or broken into small pieces product that has some value to the •  Destroyed or rendered virtually taxpayer or to another party useless as a result of SR&ED •  Subject to ITC recapture when a disposition occurs28 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • SR&ED Contract payments(80% after 2012)29 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 basis30 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Leases (until 2013)31 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 cost32 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Third party payments33 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 institution34 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Capital expenditures(Until 2013)35 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 use36 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • ITC Recapture37 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 recaptured38 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Ontario technologytax credits oftenoverlooked39 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 credit40 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 Ontario41 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 losses42 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 Eligibility43 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 product44 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 arms length purchaser –  Not required to develop all, or substantially all, of products included45 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 return46 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • 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 credit47 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Stretching your SR&ED dollarsAgreements 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&ED48 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Stretching your SR&ED dollars (Cont’d)Tracking SR&ED on a contemporaneous basis•  Meets CRAs requirements•  Capture additional activitiesPurchase of Capital Assets for SR&ED purposes•  Purchase requisition should state intent•  Ensuring available for use by the year end49 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Who is Deloitte?•  Largest service provider in this field in Canada•  Integrated team of engineers, scientists, accountants and tax specialists Practice overview Canada GTASR&ED Partners 8 3SR&ED Associate Partners 11 5SR&ED Senior Managers 58 9Other Professional Staff 75 31Total number of SR&ED practitioners 152 48Professional/Graduate Engineers 71 22CA’s, CGA’s and CMA’s 81 26•  Adaptable work models –  “A la carte” to full outsourcing capability –  We provide support from opportunity qualification, through all CRA technical and financial approvals50 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.
    • Questions?51 Scientific research and experimental development incentives © Deloitte & Touche LLP and affiliated entities.