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 firstname.lastname@example.org 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.