Day 4 Afternoon - Goheen

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  • 1. Lead to Win Optimizing S R&ED Claims June 23, 2009 Kevin Goheen

2. SR&ED Program Overview

  • Canadas largest federally supported program for industrial R&D incentives
  • Program has existed since the 1980s
  • Over 19,000 claims made each year
  • >$4 billion in tax credits
  • Small and medium companies submit 75% of these claims, generally $20,000 to $2,000,000 in expenditures

Slide 3. SR&ED Program - Overview

  • Canadian Controlled Private Corporations (CCPCs) can earn refundable 35% investment tax credits (ITCs) on first $3M of expenditures
  • Public companies (non-CCPC) can earn 20% ITCs, applied against federal tax
  • 10% provincial tax credit for SR&ED performed in Ontario
  • 20% Ontario Business Research Institute Tax Credit
  • R&D costs CCPCs approx 30 cents/$ expenditure
  • Individuals can also claim SR&ED

Slide 4. What is R&D Practically ?

  • Indications that you MAY be doing R&D:
  • Technical attempts to make things faster, cheaper, better
  • Lower than average manufacturing yields
  • Prototype failures
  • Large warranty costs
  • Each case must be analyzed within the definition of eligible activity

Slide 5. SR&ED The Concept SlidePoint A base level Point B TechnologicalObjective Barriers,Constraints,Uncertainties,Challenges

  • Work elements
  • Systematic
  • Uncertainty
    • If?
    • How?
  • Better yield
  • Less polluting
  • More capacity
  • More users
  • Faster response
  • Lower energy use
  • etc

6. Software Engineering

  • Some examples of advancement are:
  • New architectures, algorithms or database techniques
  • Performance increases (response time, speed, user or database scalability, reliability)
  • Interfaces between two or more existing software packages
  • Development of new in-house development tools

Slide 7. Mechanical Engineering

  • Some examples of advancement are:
  • New packaging equipment and procedures
  • Non-routine substitute of materials in injection molding
  • Eliminating lead based solders in PCB manufacturing
  • New fuels in cement manufacturing
  • Emission reduction in cement manufacturing
  • New hockey tape production equipment
  • Development of new in-house CAD tools
  • Developing new machinery to enhance production

Slide 8. Other Sectors

  • Some examples of advancement are:
  • Development of new pharmaceuticals
  • New growing techniques for grape vines in cold climates
  • New endodontic treatments

Slide 9. Eligible Expenditures

  • Labour
  • Capital goods
  • Contractors
    • in many cases; be careful with wording
      • IP ownership
      • Location
      • Service vs. Product
      • Management of R&D project
  • Material
  • Overhead

Slide 10. Timing

  • SR&ED claims must be submitted within 18 months after the end of every fiscal period
  • December 31, 2009 is the deadline for submitting claims for fiscal periods that ended on June 30, 2008.
  • e.g.You can prepare two claims for your fiscal periods that ended on December 31, 2007 and 2008 at same time, and submit them both to CRA before June 30, 2009.
  • CRA has committed in writing to help fix administrative omissions and errors if received 90 days prior to 18 month deadline.
  • SR&ED cheques usually arrive ~3-4 months after CRA receives your SR&ED documentation.
  • However if you have already submitted your T2, it will need to be amended.This will delay your first SR&ED cheque, so it arrives in ~6-8 months.Subsequent SR&ED cheques will likely arrive in ~3-4 months.
  • The Ontario cheque (used to) tend(s) to arrive a few months later.
  • Many third parties will lend against filed SRED claims.
  • Note that there is no filing deadline for the Ontario Innovation Tax credit

Slide 11. Whats New?

  • New T661 form for YEs after Dec 31, 2008
  • Electronic filing
  • New terminology
  • Hard word limits on various sections of technical descriptions; no pictures or graphics allowed
  • All projects to be filed after 2010 (not just top 20)
  • Explicit requirement for contemporaneous documentation
  • HINT: Not enough space to describe projects, hence will be more audits. Write a long technical description, cut and paste into new form and keep the long form for the inevitable audit.

Slide 12. CRA Web Site Slide 13. What is Involved in Filing a Claim?

  • Scoping of projects
  • Preparation of technical reports for each project
  • Gathering and analysis of costs
  • Preparation of tax R&D forms and attachments
  • Submission of claim by 18 months following the year end

Slide 14. Technical Descriptions

  • Five components
  • A: Scientific or Technological Objectives
  • B: Technology or Knowledge Base Level
  • C: Scientific or Technological Advancement
  • D: Description of Work in this Taxation Year
  • E: Supporting Information.

Slide 15. A: Scientific and Technical Objectives

  • Preface this section with a brief description of the company and its commercial goals.
  • What did you intend to achieve?
    • Your work will qualify for SR&ED if you generate new knowledge to do new things and make technologies perform in unusual ways.You must intend to advance knowledge of your subject.
    • Use numerical goals where possible.
    • Emphasize the methods and practices that you wanted to develop.
  • For multi-year projects, include a technology roadmap which you probably have from a business plan.

Slide 16. B: Technology Knowledge Base

  • Describe what you knew internally about the project before beginning and what other companies have done
  • You are not expected to know trade secrets of others.
  • Area B is very important for software claims, where common knowledge evolves rapidly.Is often challenged at technical review.

Slide 17. C: Scientific and Technological Advancement

  • Describe what achievements you hope to gain:
    • It would be an achievement if
  • What was difficult?Stress uncertainty.Begin your paragraphs using these phrases:
    • We did not know how to
    • We were unsure whether we could
    • We could not understand why
    • Our problem was difficult to solve because

Slide 18. D: Description of Work in Taxation Year

  • For multi-year projects, described the status as of the first day of the FY
  • What did your employees and contractors do?
    • Describe the systematic way they investigated your technical challenges.
    • Describe approaches they contemplated, but abandoned.
    • What tests and analysis did they perform?
    • Described what lessons you finally learned.
    • Dont use certain phrases (trial and error, beta version, optimize)
  • Describe the status of the project on the last day of the FY and, for multi-year projects, your plans for the next FY.

Slide 19. E: Supporting Information

  • What documents exist?
    • high-level overview
    • functional specifications
    • Prototypes
    • source code
    • log books, bug reports
    • emails
    • minutes of meetings, etc
  • Just the titles. Do not submit copies of the documents to CRA.
  • List all the contractors and describe what they did very briefly.

Slide 20. New Documentation Requirements X X X X Others X Contracts X X Prototypes, scraps X X Photographs and videos X X Test protocols, data and results X X Progress Reports, Minutes X Trial Run Records X Source Code, System Architecture, etc.. X Lab Notebooks X X X Experiment Desig