The document discusses various tax credits available in Canada for scientific research and experimental development (SR&ED) as well as other digital media credits. It provides an overview of eligible SR&ED expenses under federal and provincial programs, how to qualify for the credits, examples of credit calculations, and tips for maximizing benefits. Other credits covered include multimedia, design, and interactive digital media tax credits available in Quebec and Ontario that require certificates of eligibility.

1. Tax Credits
Scientific Research &
Experimental Development
February, 2014

2. Today’s Agenda
47
• Who is Richter
• Scientific Research & Experimental Development (SR&ED) Tax Credits
• Eligible SR&ED Expenses
• How to Qualify
• Example SR&ED Credit Calculation
• Recent Changes to the SR&ED Program
• Optimizing your Eligible Costs
• Tax Planning to Maximize the Benefits of SR&ED
• Other Credits
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3. Who is Richter?
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•
Strategic accounting, financial advisory, and business consulting firm
specializing in privately held, entrepreneurial companies
•
60+ partners, with offices in Toronto and Montreal
•
A wide range of services including, but not limited to:
– Audit
– Tax
– Business Valuations, M&A, Litigation Support
– Wealth Management
– Insolvency
– Restructuring
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4. What’s in it for You?
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Why should you care about SR&ED?
• Increase your business’ working capital and cash flow
– Get cash early on, instead of later
• Many eligible companies are either not claiming SR&ED or are severely
underestimating their claims
• Your competition is claiming these credits
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5. What is SR&ED?
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Scientific Research & Experimental Development Tax Credits
• “Canada’s tax incentives for industrial research are among the most
generous in the world.” (Canadian Council of Chief Executives)
• “In the global, knowledge-based economy, firms that invest significantly in
R&D are more likely to thrive…by offering their customers new or
significantly improved products and services.” (Innovation Canada)
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6. What is SR&ED?
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• The Government reimburses companies that invest in innovation that
results in new or improved products or processes
• Approximately $5 Billion to be allocated by the Federal/Provincial
governments
• Claimed by over 24,000 companies in Canada
– 75% of claimants are SME’s – all growth is related to this sector
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7. Eligible SR&ED Expenses
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Federal
•
•
•
•
Salaries
Sub-contractors
Material
Overhead
•
•
•
Salaries
Sub-contractors (50% in QC)
Overhead salaries
Provincial
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8. Types of SR&ED Credits
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How the SR&ED program works:
 Companies are reimbursed:
– 15% or 35% Federally
– 17.5% or 37.5% Provincially
…with:
Non-Refundable Tax Credits
or…
Refundable Tax Credits = Cash
Did you know that a $100,000 SR&ED claim could translate into
a reimbursement of up to $70,000 in cash?
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9. How Do You Qualify?
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Tell-tale signs of a potential claim:
• You have created or modified a process or product
• You developed some form of custom equipment or machinery
• You are in a start-up or growth phase
• You are planning to change an existing process or develop a new product in the near future
• You tried to create a new product/process/technology but failed in the attempt
– i.e. something blew up
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10. How Do You Qualify?
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Three Basic Criteria:
1.
Uncertainty/Obstacle
–
–
2.
Technological obstacles to overcome a scientific risk
Must be unknown whether the project will succeed
Scientific Content
–
–
3.
Evidence of qualified personnel must exist
Systematic approach
Advancement (Scientific or Technological)
–
An attempt to generate new knowledge
–
Failure is acceptable
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11. How Do You Qualify?
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The 5 Questions:
1.
Was there a scientific or a technological uncertainty—an uncertainty that could not be removed
by standard practice?
2.
Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that
uncertainty?
3.
Was the adopted procedure consistent with the total discipline of the scientific method, including
formulating, testing, and modifying the hypotheses?
4.
Did the process result in a scientific or a technological advancement?
5.
Was a record of the hypotheses tested and the results kept as the work progressed?
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12. Common Myths Debunked…
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Many companies are doing it…but why aren’t they claiming it?
• “Just part of my business”
• Secrets will be revealed
• Lab coats/PhD required
• Automatic, full-blown audit by CRA
• Failure = no claim
• SR&ED claim is an onerous process
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13. The ABC Case Study
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• Eligible for SR&ED because…
• Expenditures
– Wages
– Material
– Subcontractors
– Overhead – 55% proxy
Total SR&ED Claim:
$166,000
Total Cash Refund:
$87,174
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14. Example SR&ED Credit Calculation
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Expenses
Federal Rate
of 35%
Provincial Rate
of 37.5%
Salaries
Sub-Contractors
Material
Proxy (55%)
$100,000
$10,000
$1,000
$55,000
$100,000
$5,000
-
Total Expenses
$166,000
$105,000
Less Provincial Tax Credit
Eligible Expense for Tax Credit
SR&ED Credit
Total Tax Credit
(39,375)
$126,625
$105,000
$44,319
$39,375
$87,194
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15. When to File a SR&ED Claim
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• Up to 6 months / 18 months after Fiscal Year End
– No claims may be submitted or adjusted thereafter
– Claims filed within 6-month Corporate Tax Return deadline get processed faster
•
120 days
– Claims filed within 18-month amended Tax Return deadline get processed
slower
•
240 days
– Can amend an already-filed Tax Return
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16. Recent Budget Changes to the SR&ED program
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• Capital equipment excluded after 2013
• Overhead proxy percentage reduced
– To 60% in 2013 (down from 65%)
– To 55% in 2014
• Starting in 2013, only 80% of subcontracted expenses can be claimed
(down from 100%)
• The general 20% rate (for large and/or foreign corporations) has been
reduced to 15% in 2014
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17. Tax Planning to Maximize the Benefit
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• Better to have T4 employee costs vs. subcontracted costs
• Maximizing shareholder remuneration to enhance claims
– Pay yourself
• Must consider tax implications of SR&ED claim in one year on the
following year’s income
• Some projects may have components that qualify for multiple tax credits
• “…carried out in Canada…”
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18. Keys to Remember
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• Documentation
• Contemporaneous
• Meeting Notes
• Challenges / Failures
• Timesheets or equivalent
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19. Other Tax Credits
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E-Commerce (CDAE)
•
Multimedia
•
Design Tax
•
Ontario Interactive Digital Media Tax Credit (OIDMTC)
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20. Other Tax Credits: E-Commerce
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For the development of electronic commerce
– Must obtain a certificate of eligibility from Investissement Québec (IQ)
•
30% of eligible salary (maximum salary of $66,666) - Tax credit is refundable
•
Revenue test where 75% must be from E-commerce activities (based on NAICS activity codes)
•
Must have at least 6 full time employees
•
Must apply for certificate (attestation) eligibility with IQ within 15 months of fiscal year end
•
Must apply for tax credits with Revenue Quebec within 18 months of fiscal year-end
•
Example Codes/Activities:
– 334110: Computer and Peripheral Equipment Manufacturing;
– 511210: Software Publishers;
– 51821: Data Processing, Hosting and Related Services;
– 541510: Computer Systems Design and Related Services.
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21. Other Tax Credits: Multimedia
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For the development of Multimedia Titles
– Must obtain a certificate of eligibility from Investissement Québec (IQ)
•
26.25%, 30%, or 37.5% of eligible expenditures - Tax credit is refundable
•
To be eligible, a multimedia title must satisfy the following conditions:
– it is produced by the corporation;
– it includes an appreciable quantity of three of the following four types of data in
digital form: text, sound, fixed images and animated images.
– it is produced on electronic media and controlled by software that allows for
interactivity.
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22. Other Tax Credits: Design Tax Credits
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•
Must obtain a certificate of eligibility from Ministère des Finances et de l'Économie
(MFE)
– Fashion Design
– Industrial Design
•
Max 30.0% Tax Credit
•
Max Admissible Salaries (ex: $60,000 for a Designer)
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23. Other Tax Credits: OIDMTC
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•
OIDMTC is a refundable tax credit claimed by qualifying corporations for their work
on interactive digital media products
– 40% of labour expenses plus marketing and distribution expenses
– Or 35% of labour expenses of a specified product
• The product must be “interactive digital media”
• Primary purpose is to educate, inform or entertain the user
• Achieves the primary purpose using 2 of:
– Text
– Images
– Sound
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24. Summary
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•
SR&ED tax credits exist
•
Document your work and testing
•
No expenses, no credits
•
Additional Credits can be claimed
•
Federal and provincial credits are available
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25. For More Information
Mitchell Weiss, Eng. – R&D Manager
mweiss@richter.ca
514.934.3503
Earl Forman – Partner
eforman@richter.ca
514.934.3558
Richter LLP
1981 McGill College
Montreal, QC H3Z 0G6
www.richter.ca