This document summarizes information presented at a seminar on funding and protecting R&D opportunities for life sciences companies. It discusses the SR&ED tax credit program, including recent legislative changes, the new T661 claim form requirements, CRA eligibility policies and audit trends. It recommends that companies understand how the changes impact them, ensure strong documentation practices, consider using new CRA pre-approval processes, and complete tax credit claim forms accurately.

1. Funding and Protecting Your R&D
Opportunities for Life Sciences Companies
Montreal – October 7, 2014

2. Page 2
Agenda
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SR&ED program review
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SR&ED program legislative changes
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The New T661 Form
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Working with CRA’s eligibility policy
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Trends in CRA audits
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CRA’s new SR&ED services
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What should you do?

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SR&ED Program

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Per the Income Tax Act , SR&ED is
Systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:
(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,
and, in applying this definition in respect of a taxpayer, includes
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing and psychological research where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b) or (c) that is undertaken in Canada by or on behalf of the taxpayer,

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Per the Income Tax Act , SR&ED is NOT
but does not include work with respect to
(e) market research or sales promotion,
(f) quality control or routine testing of materials, devices, products or processes,
(g) research in the social sciences or the humanities,
(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
(j) style changes, or
(k) routine data collection
Presentation title

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SR&ED Program Legislative Changes

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SR&ED program legislative changes
2012 Budget measures
2013
2014
Reduction in general ITC rate - from 20% to 15%
(Note the ITC rate for CCPCs remains at 35%)
X
Exclusion of all capital expenditures
X
Reduction of prescribed proxy amount – 65% to 55%
X
(to 60%)
X
(to 55%)
Reduction in inclusion rate of arm’s length/payments for SR&ED – from 100% to 80%
X
X
2013 Budget measures
2013
2014
Additional disclosure of claim preparer information
X

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SR&ED Tax Credits – Recent Provincial Changes
Jurisdiction
Program
Rate
Base
Quebec
Tax credit for salaries and wages (refundable)
14% (for large businesses)
14% - 30% (for SMEs, as determined by an asset size test)
Salaries and payments to subcontractors
Quebec
Tax credit for university research or research carried out by a public research centre or a research consortium (refundable)
28%
Research contracts
Quebec
Tax credit for fees or dues paid to a research consortium (refundable)
28%
Fees or dues
Quebec
Tax credit for pre competitive research in private partnership (refundable)
28%
R&D expenditures

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The New T661 Form - 2013
Presentation title

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New T661 Form
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New form T661 and T4088 Guide released 31 October 2013
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Mandatory when filed after 31 December 2013, regardless of the taxation year
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Same form whether Basic Research, Applied Research and Experimental Development claims
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Line 242 - Claimants must describe technological uncertainties and why they are not resolved by known practices, techniques or methods
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Line 244 - Describes the work plan, and how new ideas use a systematic approach with analysis and experiments to close the gap
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Line 246 - Requires definition on how the project leads to advancements of science or technology as a result of the work.

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Project Descriptions
Box
What the Form Says
What the Guide Says
242
What scientific or technological uncertainties did you attempt to overcome – uncertainties that could not be removed using standard practice? (Maximum 350 words)
- Include project objective
-describe the scientific
knowledge/new or improved capability you were seeking.
- indicate the technology base that was available to you, at the project onset
-Describe the limitations of that technology base
-describe how existing technology would not resolve the problem
244
What work did you perform in the tax year to overcome the scientific or technological uncertainties described in Line 242?
(Summarize the systematic investigation or search) (Maximum 700 words)
-Describe the work done in chronological order.
-demonstrate the planned approach
–describe the experiments and/or analyses
-Indicate where contractors used
246
What scientific or technological advancements did you achieve as a result of the work described in Line 244? (Maximum 350 words)
-describe the new scientific knowledge you gained or the
technological advancements you achieved

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Part 9 – Claim Preparer Information
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Name of claim preparer
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Business number
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Billing arrangement
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Billing rate (percentage, hourly/daily rate or flat fee)
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Total fee paid, payable or expected to pay
“A $1000 penalty may be assessed if the information requested below about the claim preparer(s) and billing arrangement(s), is missing, incomplete, or inaccurate. Where a claim preparer has prepared or assisted in the preparation of this SR&ED form, the claimant and the claim preparer will be jointly and severally, or solidarily, liable for the penalty.”

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Working with CRA’s Eligibility Policy
Presentation title

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Eligibility Policy
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Increased emphasis on how the work was planned
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Problems during development or remedied with proven method are suspect
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Show how modifications for site conditions or specific variable exceed prior norms
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The “systematic process” recounts a plan for the research was prepared
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Show work to exclude any prior conventional solution as “due diligence”,
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Show origin of the idea “hypothesis“ to be studied, and
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Recount post-experiment analysis needed to decide next steps.
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“Standard practice” is excluded from eligible SR&ED

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The 5 Questions
New Policy Questions
Three Criteria
Was there a scientific or technological uncertainty-an uncertainty that could not be removed by standard practice?
Scientific or Technological Uncertainty
Did the effort involve formulating
Hypotheses specifically aimed at reducing or eliminating that uncertainty?
Scientific and Technical Content
Was the adopted procedure consistent with the total discipline of the scientific method including formulating, testing and modifying the hypotheses?
Scientific and Technical Content
Did the process result in a scientific or technological advancement?
Scientific or Technological Advancement
Was a record of the hypotheses tested and results kept as the work progressed?
Scientific and Technical Content

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EY’s Conclusion – Opportunity
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Are you ready?
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If your overall approach address work following the standards defined in T4088(1) and the CRA Technical Claim Review Manual, then NO WORRIES !
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CRA doesn’t want to throw out all claims
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CRA will question costs and projects that aren’t compliant upon review. All reviews are to address issues noted
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The Five Questions are not “optional” for the CRA technical auditor.
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You must be prepared – do not underestimate the time required to pull the required information together!

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Trends in CRA audits

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Trends in CRA audits
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Audit changes speed up the process with intent of maintaining fairness
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A more thorough basis documenting why CRA allowed or disallowed claims
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Extensive re-training of CRA staff and new tools and procedures, and

Internal pre-audit stages have been altered for screening

Creation of initial standardized RFI “Request for Information”

Extended use of “Joint Review” by technical and financial reviewers

Additional standardized forms of RFI and confirmation letters to specifically identify what is needed
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Deficiencies noted in fully audited projects generally to lead to costs disallowed in other projects
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The claimant must show evidence why conditions noted do not apply in other cases

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Trends in CRA audits
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CRA request for information or for a visit to audit you is significant event.
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“Staged review process” can cascade from a simple “proof of data” sampling, to an initial site visit, to a full analysis of all work for all projects
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Your risk mitigation starts with a claim that complies with the CRA policies
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CRA “digs deeper” and widens scope when additional risk is evident

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CRA’s New SR&ED services and Appeals process

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First Time Claimant Advisory Service (FTCAS)
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Claimants who have not filed in the last 3 years
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If screening shows high risk – undergo normal audit
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If screening shows low risk – CRA will initiate the FTCAS
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When FCTAS initiated:

CRA sends claimant letter indicating claim will be accepted as filed on the condition that CRA meets with claimant (i.e., visit not optional)

Projects and costs are discussed at the meeting

CRA gives feedback on claim including issues and areas for improvement for next year’s claim

CRA will give courtesy phone call in advance of filing of subsequent claim

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Formal Pre-Approval Process (FPAP)
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Mandated by Finance Canada
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Designed to give claimants certainty before filing
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Company enters into agreement with CRA
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CRA visits each quarter to review work, costs and documentation
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CRA to advise client on claim prior to filing
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Pilot underway
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According to CRA, survey results from participants is mostly positive

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Self Assessment and Learning Tool (SALT)
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Online tool designed to:
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Assist claimants in understanding eligibility
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Identifying eligible work
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2 step process
1. Provides guidance in answering the five eligibility questions
2. Assists in determining the extent of your claim by helping identify eligible costs

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Appeals process
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Compared to other tax disputes, the former NOO process for SR&ED claims was widely seen as inadequate
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Following 2012 Budget, new SR&ED NOO process changes details released in December 2012 including:

Additional Appeals staff with science and engineering expertise

Greater focus on addressing SR&ED eligibility issues

Reviews expanded to provide for contact between CRA’s SR&ED advisors and taxpayers (although these remain desk reviews, not second on-site reviews)

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What should you do?

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What should you do?
1.
Understand the impact of the 2012 Federal and 2014 Quebec Provincial Budgets on your business
2.
Understand the five questions CRA is now using to assess eligibility
3.
Review and improve documentation processes where needed
4.
Consider using the new SR&ED processes
5.
Ensure new T661 form is complete and accurate including Part 9

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Questions?

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Thank you
Soraya Khouadri
Manager
+1 514 879 2783
Soraya.Khouadri@ca.ey.com
Pamela Shaver-Walker Senior Manager +1 514 874 4313 Pamela.Shaver-Walker@ca.ey.com