SR&ED Changes Proposed in the 2013 Budget – A Focus on Compliance
Unlike in the 2012 Budget, the Federal Government has not attempted to implement sweeping changes in the SR&ED program in the latest budget. The changes that have been proposed are relatively modest and are almost exclusively focused on improving compliance with the program’s objectives. The primary proposals are:
- $5 million over two years in additional funding to the CRA to develop educational materials and improve outreach to SR&ED claimants, particularly first-time claimants.
- $15 million over two years to the CRA to facilitate additional reviews of SR&ED claims where the risk of non-compliance or ineligibility is perceived to be high.
- Changes to SR&ED claim forms to require full and accurate disclosure of the participation of third-party tax preparers and their compensation arrangements.
- The introduction of $1000 per claim penalties for instances of incomplete or inaccurate disclosure of SR&ED preparation arrangements and fees. The disclosure requirements come into effect the on the later of January 1, 2014 or the day of Royal Assent to the legislation.
The changes proposed in the 2013 Budget are consistent with the Government’s broad objectives of increasing SR&ED compliance and reducing annual outlays. Taken in conjunction with the new administrative policies that may provide the CRA with an expanded eligibility assessment toolkit (see Observations on the CRA SR&ED Policy Review Project Documents), taxpayers should expect to see more frequent and more vigorous SR&ED audit activity.
In addition to increasing strictness, the SR&ED program will become significantly less generous over the next two years as the changes enacted through the 2012 Budget take effect. Estimates of the expected reduction in funding range from $500 million to $1.3 billion per year. For comparison, the SR&ED program provided approximately $3.6 billion in tax assistance in 2012.
Other Federal Innovation Funding Changes
In keeping with the recommendations of the 2011 Jenkins Report, the Government is redistributing some of the savings resulting from the changes to the SR&ED program into direct funding initiatives. The intent of these funds is to maximize the commercial relevance of all forms of government-funded research. Funding announced in the 2013 Budget includes:
- $37 million per year in additional funding to support Industry/Post-Secondary research partnerships through the existing granting councils (NSERC, CIHR, SSHRC)
- $121 million over two years to the National Research Council (NRC) to assist with re-focusing on growing innovative businesses.
- $20 million over three years to help small and medium sized businesses access R&D and business development services at universities, colleges and non-profits. This funding is to be administered by NRC-IRAP.
- $325 million over eight years to Sustainable Development Technology Canada (SDTC) to support new clean technology development.
Further information is available at: Budget 2012 – Comments on General Innovation Funding and Budget 2013 Chapters 3 and 4
New Venture Capital (VC) Funding and Status of Previous Initiatives
The 2013 Budget also announced the following new Federal funding for venture capital:
- $60 million in new funding over five years to high-potential incubator and accelerator organizations to expand their services
- $18 million in funding over two years to support youth entrepreneurship through the Canadian Youth Business Foundation
The above funding is in addition to the $500 million in venture capital financing that was pledged in the 2012 Budget. The 2013 Budget provided additional detail on the implementation of the 2012 venture capital funding:
- The $100 million to be disbursed through the Business Development Bank of Canada is to be awarded to business accelerator programs and through co-investments in companies graduating from such programs.
- The $400 million in general funding will be administered through the Venture Capital Action Plan announced in January 2013. Fund distribution will be: $250 million to establish two new private sector-led funds of funds, up to $100 million to recapitalize existing private sector-led funds of funds in partnership with interested provinces, and $50 million in direct investment into three to five existing Canadian venture capital funds.
Overall Impact Assessment on Canadian Innovation Funding
The changes enacted/proposed in the 2012/2013 budgets dramatically alter the landscape for Federal funding available for private sector technology development and commercialization. Innovative companies will no longer be entitled to the previous level of funding through the SR&ED program and will have to compete for resources administered through granting organizations. This change may be somewhat mitigated by improved opportunities to work with post-secondary and non-profit organizations that are being increasingly directed to turn their research efforts towards industry-relevant problems.
It is not clear from the available data that the savings from the SR&ED program changes will be fully reinvested in innovation-oriented direct granting and venture capital funding.
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.