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March 2012

TSGI Analysis of the Impact of the 2012 Budget on the SR&ED Program (posted March 30, 2012)

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General Assessment of the Effect of the Budget on the SR&ED Program
Broadly speaking, the budget proposes to redistribute Federal funding away from the SR&ED program and into direct granting programs and funding for venture capital efforts to improve commercialization. The net effect will be to reduce the total funds distributed through the SR&ED program by approximately 14%. The changes proposed are based, in part, on the recommendations of the Jenkins Report, “Innovation Canada: A Call to Action.

Although the financial benefits of the SR&ED program have been significantly reduced, there has been little progress to date in ameliorating the key problems of complexity and unpredictability.

It is likely that Alberta companies will experience the changes to the Federal SR&ED program least among their national peers. The reasons for this are two-fold. Firstly, Alberta only introduced its 10% SR&ED benefit (on the first $4 million in eligible expenditures) recently, in 2009, so businesses do not have long histories of enhanced SR&ED returns. Secondly, the Alberta Provincial Budget announced on February 9, 2012 proposes to undo the negative “double-grind” aspect of its current SR&ED legislation; this will somewhat offset the reduction in Federal benefits.

If you have questions about how the proposed 2012 Budget will affect your organization or how best to adapt to the changes, please contact TSGI at info@tsgi.ca or call 1-866-350-7498.

You are also invited to attend an educational panel discussion sponsored by TSGI-Chartered Accountants on the impact of the 2012 Budget. Details and registration can be found at The Leading Edge of SR&ED & Tech Funding.

A full version of the 2012 Budget is available at from Government of Canada records.

General SR&ED Investment Tax Credits (ITCs) Reduced Starting January 1, 2014

Currently, qualifying Canadian Controlled Private Corporations (CCPCs) receive an enhanced rate of 35% ITCs (refundable) on their first $3 million of qualified expenditures; expenditures above $3 million receive ITCs at a general rate of 20%. The budget proposes that the general rate for expenditures by CCPCs above $3 million be reduced from 20% to 15%.

Similarly, for non-CCPC organizations, the budget proposes to reduce the ITC rate from 20% to 15%.

The reduced ITC rates will affect taxation years ending after December 31, 2013 and will be applied on a prorated basis in cases where an organization’s year end is not December 31.

SR&ED Capital Expenditures No Longer Eligible Starting January 1, 2014
Presently, capital expenditures for SR&ED are fully deductable in the year incurred and are eligible for ITCs. The budget proposes to exclude capital expenditures as SR&ED deductions and from ITC eligibility. It is also proposed that lease costs for the right to use property that would otherwise be categorized as capital items also be excluded. Consequently, lease costs for equipment will no longer be eligible for ITCs.

This change will apply to capital property acquired after December 31, 2013 and to lease amounts paid or payable after this date.

SR&ED Contract Payments Benefits Reduced to 80% Starting January 1, 2013
Currently taxpayers that contract SR&ED work to arm’s length organizations are entitled to fully deduct these amounts and to receive ITCs on 100% of the payment.

Starting January 1, 2013, the budget proposes to allow only 80% of these amounts to be claimed for SR&ED purposes in order to ensure that the program is paying strictly for research and development (R&D) costs rather than contractor profits. To be consistent with the capital expenditure rules, SR&ED eligible contract payments will be required to be reduced by the amount of any capital expenditures incurred by the contract performer.

The net effect of these two changes is that the SR&ED eligible amount for contract payments will be computed by first deducting the capital expenditures incurred by the contractor performing the work and then multiplying the residual by 80%. Contract SR&ED performers will be required to specifically indentify their capital expenditures in order to allow payers to correctly calculate the SR&ED eligible portion of a contract.

Overhead Proxy Benefit Gradually Reduced to 55% by 2014
There are two methods by which overhead amounts can be claimed for SR&ED: the traditional method (i.e. item by item identification of directly related and incrementally incurred expenditures) and the proxy method (i.e. use of surrogate amount based on a multiple of labour expenditures). Currently, the proxy overhead multiplier is 65% of labour costs for employees directly engaged in SR&ED activities.

The budget proposes to reduce the proxy rate to 60% for the 2013 year and 55% for years thereafter. Organizations with non-calendar fiscal year ends will need to prorate the proxy amount claimed according to the number of days in their fiscal year that fall under the 2012, 2013 and 2014 periods.

$6 Million in Funds Provided to Improve SR&ED Predictability
The budget does not directly resolve the recommendation of the Jenkins report to improve the predictability of the SR&ED program. Instead, $6 million will be provided to the CRA to implement improvements to the administration of the program. These will include:
a) enhancing the current online SR&ED self-assessment tool
b) studying the feasibility of a formal pre-approval process
c) increasing the use of “tax alerts”
d) working collaboratively with industry representatives to address issues
e) improvement of the Notice of Objection process to include a second review of scientific eligibility

Tax Strategies to Consider in Response to the Federal 2012 Budget
Businesses may wish to consider some of the following strategies to ameliorate the affects of the 2012 Federal Budget:

  • Consider moving substantial R&D spends forward into the 2012 and 2013 calendar years to take advantage of the more favorable tax treatment in these periods.
  • Re-examine the use of contractors vs employees in light of the increasingly favorable treatment of the latter
  • Structure business arrangements such that SR&ED is conducted by CCPCs as much as possible since the relative differential between qualified CCPCs and non-qualified entities will widen as a result of the Budget.

For further information on SR&ED strategies, please contact your TSGI service team.

Notes Regarding Interpreting the Significance of the 2012 Budget
The information provided here is based on the budget proposal as released on March 29, 2012 by the current Federal Government. Readers are advised to bear in mind the following cautionary points:
a) None of the changes proposed become effective until the budget is passed into law by parliament.
b) The budget may undergo significant revisions as part of the normal parliamentary process.
c) In some cases the effects of the budget will not be known precisely until the details of the method of implementation are announced by the government departments responsible.

 

Note: TSGI does not maintain this news article after its initial posting. Readers are further advised that the information presented here may not be sufficient for unassisted tax planning. Please contact a TSGI representative if you require clarification or other assistance regarding this topic.

TSGI, NRC-IRAP, and Venture Alberta to Present Assessment of the 2012 Budget at CCAT Leading Edge Series April 18, 2012. (posted March 22, 2012)

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The new Federal budget is expected to propose significant changes to the current system of innovation incentives in Canada. The current Government has indicated that it intends to act on at least some of the sweeping changes recommended by the expert panel chaired by Tom Jenkins and summarized in the report, “Innovation Canada: A Call to Action” (refer to rd-review.ca/eic/site/033.nsf/eng/home). These changes are expected to impact all organizations engaged in technology innovation and commercialization.

Graham Smith of TSGI-Chartered Accountants will provide an overview of the proposed budget as it relates to R&D funding, and Robert Faulder, Regional Director of the National Research Council – Industrial Research Assistance Program (NRC-IRAP), and Randy Thompson, CEO of Venture Alberta Angel Forum, will discuss the possible implications for start-ups and other innovation-focused organizations. The impact on all sources of innovation funding, including SR&ED, IRAP and angel/venture investment will be considered. The session will be highly interactive with questions and comments from the audience encouraged.
DETAILS:
Date: April 18, 2012
Time: 7:30 – 9:00 am
Location: Alberta Innovates Technology Futures (AITF) – 3608 – 33 St NW, Calgary, Alberta
Cost: $10 (includes Breakfast)
Registration: Online at: www.ccat.org or contact info@ccat.org
Host Organization: Calgary Council for Advanced Technology (CCAT)
PARTICIPANTS:
Graham Smith, Vice President, Business Development – TSGI-Chartered Accountants
Graham has more than seven years of experience in evaluating, preparing and defending SR&ED claims for businesses of all types and sizes in Western Canada. He has also co-taught the Institute of Chartered Accountants of Alberta (ICAA) course on SR&ED and has assisted his clients to access other forms of government and private innovation funding. Prior to joining TSGI, Graham spent more than 11 years as technical specialist, manager and part owner of a technology-focused SME. Graham holds a B.Sc. in Physics from the University of Calgary.

 

Robert Faulder, P.Eng., FEC, Regional Director – NRC-IRAP
Robert has been the Regional Director of NRC-IRAP responsible for Southern Alberta for seven years. Prior to that, he was an Industrial Technology Advisor for NRC-IRAP for 10 years. IRAP helps firms grow stronger, grow faster and bigger through innovation and technology. He has a B.Sc. in Mechanical Engineering from the University of Alberta.

R. (Randy) Stewart Thompson, CEO – Venture Alberta Angel Forum
Randy Thompson has been involved with tech start ups since 1990. He initially worked as a political assistant to Alberta’s Technology Minister, and became the founder of the first Internet Service Provider (ISP), sold in 1996, and built the first two angel groups in the Province of Alberta. With more than 50 members across Alberta, the Forum has funded 64 companies since 2005. As well as running Venture Alberta, Randy acts as the Entrepreneur in Residence for NAIT.

 

 

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Note: TSGI does not maintain this news article after its initial posting. Readers are further advised that the information presented here may not be sufficient for unassisted tax planning. Please contact a TSGI representative if you require clarification or other assistance regarding this topic.