2012 Federal Budget Update  The new SR&ED tax credit        environment  Impact to the Manufacturing Sector
IntroductionAndrew Raphael, Partner   Director of Food & Ag Processing DivisionRyan P. Mackiewich, Taxation Partner   SR&E...
Today’s Discussion             y1. Helping Manufacturers Meet a Complex   Competitive L d   C      titi Landscape2. Opport...
Overview• Manufacturing Sector consists of about 80,000  establishments with annual revenue of around  $500 billion.• Sale...
Competitive Manufacturing Landscape• Across all Canadian manufacturers, operating profits  average about 6 to 8% of sales ...
Trends• Appreciation Of Canadian        • Weak Productivity Growth  Dollar                            -C                  ...
SR&ED Considerations Efficient Production &        Regulations  Distribution                   – Innovate to respond to ...
SR&ED Considerations Sustainable                    Energy Savings  Environmental  E i         t l               – Conve...
Federal Budget 2012• SR&ED = Scientific Research & Experimental  Development Tax Credit Program• ITC = Investment Tax Cred...
Federal Budget 2012       Changes to SR&ED Program           g               g            (Effective January 1, 2013)• Con...
Federal Budget 2012       Changes to SR&ED Program            (Effective January 1, 2014)• SR&ED ITC reduced to 15% (from ...
Federal Budget 2012ExampleSpend $100,000 on eligible SR&ED  • $50 000 wages    $50,000  • $25,000 contractors  • $    $25...
Canadian Controlled Private Corporations    10% ITCNewFederal Tax Savings:F d lT S i             Qualified SR&ED Expenditu...
Non-CCPCs                                 10% ITCNewFederal Tax Savings:             Qualified R&D Expenditures   122,500 ...
Federal Budget 2012• Th  These changes will result i $1 3 billi          h      ill     lt in $1.3 billion  in savings• Sa...
Federal Budget 2012                  gImprovements to SR&ED Administration• CRA to conduct a pilot project to determine th...
Federal Budget 2012   Improvements to SR&ED Administration• Providing additional training and establishing  coordinated te...
Federal Budget 2012    Additional changes in R&D support• Budget 2012 implements some of the  recommendations of “Jenkins ...
“Direct” Funding to Support Innovation Direct• $400 million to support creation of large-scale                            ...
“Direct” Funding to Support Innovation  Direct• Western Innovation Program                        g  – Announcement for fi...
“Direct” Funding to Support Innovation  Direct• Doubling support to the NRC-Industrial                          NRC Indust...
“Direct” Funding to Support Innovation  Direct• Supporting Private & Public Sector  Research Collaborations  – $ million o...
“Direct” Funding to Support Innovation  Direct• Business-Led Networks of Centres of  Excellence program  – Industry-led re...
“Direct” Funding to Support Innovation  Direct• Connecting innovative SMEs to federal  departments through procurement  – ...
“Direct” Funding to Support Innovation Direct– Emphasis on leveraging private & public R&D  efforts– Movement away from ma...
Federal Budget 2012What does this all mean for R&D ??? – Decrease to the value of SR&ED ITCs   ~ 7% for CCPCs   ~ 20% for ...
Federal Budget 2012               Tax Planning• Contractors vs. Employees  – Do the math – Employees much more valuable ! ...
Federal Budget 2012         Tax Planning                    g• Performance Bonuses  – Accrued by December 2013• Project Sp...
Building a Sound Growth              StrategyBenefits to your Business  – Minimizing your taxes  – Managing Risk         g...
ContactsAndrew J. Raphael1.877.688.84081 877 688 8408andrew.raphael@mnp.caRyan P. Mackiewich1.877.475.5678ryan.mackiewich@...
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2012 Federal Budget - Scientific Research & Experimental Development (SR&ED) Changes for Manufacturing

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Innovation has become critical in the manufacturing industry. Global competition, the need to do more with less, and labour issues mean that companies must develop new ideas and processes if they want to stay in the game. In Budget 2012 the Canadian government announced a number of changes to the way it fosters innovation that could help manufacturers deal with the challenges they face.

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2012 Federal Budget - Scientific Research & Experimental Development (SR&ED) Changes for Manufacturing

  1. 1. 2012 Federal Budget Update The new SR&ED tax credit environment Impact to the Manufacturing Sector
  2. 2. IntroductionAndrew Raphael, Partner Director of Food & Ag Processing DivisionRyan P. Mackiewich, Taxation Partner SR&ED Practice LeaderAndrew Pellizzari, Manager SR&ED Technical Specialist
  3. 3. Today’s Discussion y1. Helping Manufacturers Meet a Complex Competitive L d C titi Landscape2. Opportunities for SR&ED activities3. Budget 2012 – Changes to SR&ED – Additional Opportunities for Funding4.4 Tax Planning5. Questions
  4. 4. Overview• Manufacturing Sector consists of about 80,000 establishments with annual revenue of around $500 billion.• Sales have grown less than 1%from 2005 to 2008 before declining sharply in 2009 due to global recession.• Over 90% of manufacturers employ fewer than 100.
  5. 5. Competitive Manufacturing Landscape• Across all Canadian manufacturers, operating profits average about 6 to 8% of sales sales.• Manufacturing costs (average): – materials and supplies ~ 85% pp – production wages ~ 10% – energy ~ 5%.• Manufacturers spend $ billion annually on capital $15 investments (machinery, equipment, and facility construction) ) – Average manufacturing plant in Canada operates for only nine years and over half of new plants shut down within six.
  6. 6. Trends• Appreciation Of Canadian • Weak Productivity Growth Dollar -C Canada’s productivity growth d ’ d ti it th• Competition From Imports lags most other - Imports = $ p $340 Billion industrialized countries’ - Growing faster than exports - Output per employee in the manufacturing sector was• Demographics 27 percent lower than that of - An aging population = the USA in 2008 shortage of skilled workers - Canada’s productivity gap = reduced manufacturing competitiveness.
  7. 7. SR&ED Considerations Efficient Production &  Regulations Distribution – Innovate to respond to govt. – Strong Loonie = time to regulations: l ti purchase & adapt • Air emissions • wastewater dischargeD i M Doing More With L Less • disposal of hazardous substances – Retail & distribution • cleanup of contaminated consolidation impacts sites – Being proactive ! • health & safety matters Inventory Control &  Packaging Traceability – Product interaction with – RFID packaging. – User friendly.
  8. 8. SR&ED Considerations Sustainable  Energy Savings Environmental E i t l – Conversion & adaption Practices  Collaborative R&D With- Going Green good for the Customers & S C t Suppliers li environment & good marketing – Inventory control practices, p production efficiencies, and , Web-Based Interactive sustainable practices Services  Get Export Ready- Sales inventory feedback Sales, inventory, feedback, – adapt for foreign needs price discovery
  9. 9. Federal Budget 2012• SR&ED = Scientific Research & Experimental Development Tax Credit Program• ITC = Investment Tax Credit (th “G ld” we want) (the “Gold” t)• CCPC = Canadian Controlled Private Corporation• Proxy Amount = A notional gross up of labour costs to t cover overheads h d
  10. 10. Federal Budget 2012 Changes to SR&ED Program g g (Effective January 1, 2013)• Contractor costs for SR&ED reduced to 80% of the contract payments• Proxy amount reduced from 65% to 60%
  11. 11. Federal Budget 2012 Changes to SR&ED Program (Effective January 1, 2014)• SR&ED ITC reduced to 15% (from 20%) – The enhanced ITC for CCPCs will remain at 35%• Prescribed proxy amount reduced to 55% (from 60%)• Capital expenditures no longer eligible for SR&ED – Includes machinery and computer equipment
  12. 12. Federal Budget 2012ExampleSpend $100,000 on eligible SR&ED • $50 000 wages $50,000 • $25,000 contractors • $ $25,000 materials
  13. 13. Canadian Controlled Private Corporations 10% ITCNewFederal Tax Savings:F d lT S i Qualified SR&ED Expenditures 122,500 Provincial ITC 12,250 Federal ITC @ 35% 38,588 38 588Total SR&ED ITCs 50,838PriorFederal Tax Savings: Qualified R&D Expenditures 132,500 Provincial ITC 13,250 Federal ITC @ 35% 41,738TotalT t l SR&ED ITC ITCs 54,988 54 988Change in Total ITCs Earned (4,150)
  14. 14. Non-CCPCs 10% ITCNewFederal Tax Savings: Qualified R&D Expenditures 122,500 Provincial ITC 12,250 Federal ITC @ 15% 16,538 16 538Total SR&ED ITCs 28,788PriorFederal Tax Savings: Qualified R&D Expenditures 132,500 Provincial ITC 13,250 Federal ITC @ 20% 23,850Total SR&ED ITCs 37,100 37 100Change in Total ITCs Earned g ( , (8,313) )
  15. 15. Federal Budget 2012• Th These changes will result i $1 3 billi h ill lt in $1.3 billion in savings• Savings used for funding various additional “direct” R&D initiatives
  16. 16. Federal Budget 2012 gImprovements to SR&ED Administration• CRA to conduct a pilot project to determine the feasibility of a formal pre-approval process• Enhance the existing online self-assessment eligibility self assessment tool• Work with industry representatives to address y p emerging issues• Improve the Notice of Objection process to allow for a second review of scientific eligibility determination.• Increase the number of technical reviewers
  17. 17. Federal Budget 2012 Improvements to SR&ED Administration• Providing additional training and establishing coordinated technical support for the technical reviewers• D Devoting more ti ti time t program services to i• Enhancing the quality assurance methodology• Reviewing dispute resolution procedures to ensure their effectiveness
  18. 18. Federal Budget 2012 Additional changes in R&D support• Budget 2012 implements some of the recommendations of “Jenkins Report”• Savings from SR&ED p g g program will support more pp “direct funding” of research to support innovation• $1 1 billion “directed” over next 5 years $1.1 directed• $500 million for venture capital
  19. 19. “Direct” Funding to Support Innovation Direct• $400 million to support creation of large-scale large scale venture capital funds – promote private sector investments in early-stage risk early stage capital. – structure yet to be determined• $100 million to the Business Development Bank of Canada to support venture capital activities – New or existing mandate? Details to be determined
  20. 20. “Direct” Funding to Support Innovation Direct• Western Innovation Program g – Announcement for financial support of innovative SMEs in Western Canada – Like Programs offered in Quebec, Atlantic Canada and Southern Ontario• Forestry Innovation and Market Development Support – $105 million over 2 years
  21. 21. “Direct” Funding to Support Innovation Direct• Doubling support to the NRC-Industrial NRC Industrial Research Assistance Program (IRAP) – IRAP helps support R&D salaries and contractor costs – Additional $110 million per year• $205 million to extend the temporary hiring credit f S ll B i di for Small Business
  22. 22. “Direct” Funding to Support Innovation Direct• Supporting Private & Public Sector Research Collaborations – $ million over two years to double the $14 Industrial Research and Development Internship program – Labour cost sharing initiative with private sector partner t t – Integrate researchers into the labour market
  23. 23. “Direct” Funding to Support Innovation Direct• Business-Led Networks of Centres of Excellence program – Industry-led research consortia • Forestry • Aerospace • Drug discovery Dr g disco er • CleanTech• C t sharing arrangement with private Cost h i t ith i t sector partner
  24. 24. “Direct” Funding to Support Innovation Direct• Connecting innovative SMEs to federal departments through procurement – Canadian Innovation Commercialization Program ($95 million over three years)• Refocusing the National Research Council – $67 million in 2012–13 to support business-led, industry-relevant research y
  25. 25. “Direct” Funding to Support Innovation Direct– Emphasis on leveraging private & public R&D efforts– Movement away from market-based, industry- led R&D to more institutional-targeted R&D– “Grant-style” funding programs could increase administrative b d i i i bureaucracy and ‘ d tape’ d ‘red ’ • Companies will need to apply for a program and wait for approval • Process will involve an inherent lag period
  26. 26. Federal Budget 2012What does this all mean for R&D ??? – Decrease to the value of SR&ED ITCs ~ 7% for CCPCs ~ 20% for non-CCPCs – More “direct” R&D funding opportunities – More complex administrative landscape – Increased scrutiny by CRA – More ways to disagree with CRA – Tax Planning important !
  27. 27. Federal Budget 2012 Tax Planning• Contractors vs. Employees – Do the math – Employees much more valuable ! – $100,000 spent on Employees results in $ , p p y $64,000 of ITCs vs. $33,000 of ITCs for the same amount spent on contractors• Capital Spending – Have all purchases completed by end of 2013 p p y
  28. 28. Federal Budget 2012 Tax Planning g• Performance Bonuses – Accrued by December 2013• Project Spending – Rates drop starting Jan 1/14 – Factor in to ROI
  29. 29. Building a Sound Growth StrategyBenefits to your Business – Minimizing your taxes – Managing Risk g g – Controlling Costs – Enhancing your Performance – Maximizing your Human Resources – Regaining Financial Control – Financing Change
  30. 30. ContactsAndrew J. Raphael1.877.688.84081 877 688 8408andrew.raphael@mnp.caRyan P. Mackiewich1.877.475.5678ryan.mackiewich@mnp.caAndrew Pellizzari1.877.251.2922andrew.pellizzari@mnp.ca

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