2012 SR&ED Overview and Update Update - Deloitte_jh_Sept 13 2012_v2.pdf · 2012 SR&ED Overview and Update Natan Aronshtam, R&D Partner a nd Global Managing Director Albert de Luca,

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2012 SR&ED Overview and UpdateNatan Aronshtam, R&D Partner and Global Managing Director Albert de Luca, R&D Partner and Canadian Service Line LeaderJoanne Hausch, R&D Partner and Canadian Quality Leader

Deloitte & Touche LLP Global R&D and Government Incentives

Natan AronshtamNatan is the Managing Director, Global R&D and GovernmentIncentives at Deloitte. Natan regularly leads national andinternational engagements and serves many of the leadingcompanies in Canada and around the world, advisingcompanies on business and technology strategies, and go-to-market strategy.

Natan is a frequent speaker and has presented to manyinternal and external audiences both in Canada andworldwide. He is also frequently featured on TV and printmedia. Prior to joining Deloitte, Natan was a headquartersdirector of R&D at a multi-billion dollar technology company.In addition, Natan serves the boards of directors of severallarge non-profit organizations.

Natan graduated from the University of Waterloo with aBachelor of Mathematics in Computer Science with ElectricalEngineering Electives.

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Albert de LucaAlbert is the Canadian leader of the Global R&D andGovernment Incentives group at Deloitte.

Albert has more than 30 years of experience dealingwith IT companies and manufacturing entities whichperform R&D. He has advised companies on taxmatters relating to cost-sharing agreements,intellectual property transfer and R&D tax creditoptimization.

He was a member of the Quebec governmentinnovation committee of the MDEIE (Ministère duDéveloppement économique, de l’Innovation et del’Exportation) and a board member of the ADRIQ(Association de la recherche industrielle du Québec).

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Joanne HauschJoanne is a recognized leader in Canada’s SR&EDProgram with over 25 years’ experience in the field.

Joanne is the Quality and Risk Leader for Deloitte’sGlobal R&D and Government Incentives practice inCanada and a member of the National R&DManagement Committee. She has extensive R&Dexperience in many different business sectorsincluding information technology, mining and metalsprocessing, bio-sciences, pharmaceuticals, foodprocessing and forest products. She hasparticipated in the CRA-Industry Software JointCommittee, joint training and policy development.

Joanne is an author of many papers and courses forthe CCH, CTF, CICA, ICABC and CGA Associationsand a frequent speaker on the topic of innovation.She is also active in the community and has beenrecognized for her service to a number of non-profitorganizations.

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2012 SR&ED Overview and Update

• Today’s Webinar Topics• Canada’s Science and Technology Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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• Today’s Webinar Topics• Canada’s Innovation Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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Canada’s Innovation Strategy

• Canada’s Science and Technology Strategy guides development of policies and programs that support research and development– Government plays an important role in ensuring a

competitive marketplace and fostering a positive investment climate

– Global investors have many choices – Canada has many attractions including a strong economy, good standard of living, educated workforce, exceptional talent pool in certain sectors

– High dollar and high labour rates make Canada an expensive place to do business

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Canada’s Innovation Strategy

• Small innovation investment in Canada relative to other countries in the G8

• Non-Canadian ownership (and shrinking HO’s in Canada) = non-Canadian control of investment and R&D decisions

• Strong dollar and high wages resulting in lower investment incentive and cost competitiveness

• Access to financing (lower valuations on Canadian stock markets) and human resources (low university output and high tax rates in Canada) are more difficult in Canada

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Canadian Business Expenditure on R&D (BERD) is Low

Canada is lagging in BERD against other G7 nations

Sources: OECD Innovation Tod Report

BE

RD

as a % of G

DP

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Canadian Business Expenditure on R&D (BERD) is Low

Canada’s Innovation StrategyEconomic perspective

• Information‐based economy (free flow of information)

• Rapid global movement of investment (not tied geographically but based on opportunity, cost, politics)

• Massive capital investment by new economic forces in most populous countries (each year a single university in China graduates more engineers than in all of Canada)

• Canada scores low on the productivity scale

Impact on Canada

• Even resource based industries have mobility in their innovation investments

• Most MNCs have substantial investments in more than one geography (even Canadian controlled companies)

• Our competition is evolving quickly such that a whole generation could be lost in the shuffle unless we realize the importance of innovation

• Innovation is a major solution to enhanced productivity

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Canada’s Innovation Strategy• Concerns that Canada’s innovation program is losing

effectiveness:• As of 2008, OECD ranked Canada’s tax incentives ranked

9th for large companies – a significant slip• Since 2008, many foreign programs have been substantially

improved which widens the gap• Many global companies have said that they no longer

consider the Canadian tax incentives as a benefit in making their investment decisions due to unpredictability and lengthy audits

• Some significant R&D contributors are opting out of program due to cost of compliance and uncertainty

• Canada needs to improve its program to compete globally

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• Today’s Webinar Topics• Canada’s Science and Technology Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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Global Competition for R&D Investment

• Many countries offer tax incentives to encourage research and development attract new investments and increase domestic business growth.

• Tax incentives are increasingly being used in the global war to attract R&D investment

• It is important to keep up-to-date on the changes

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• 11 of top 24 economies have substantially improved their programs during the economic downturn

• Increased credit or deduction percentages (Australia, China, Ireland, Italy, Japan, Russia, Singapore)

• New or enhanced carry-back and/or carry-forward provisions (France, Ireland, Japan)

• Patent box – deductions for gross patent income (Belgium)• Refundable credits – France, Ireland, Australia and England

(even for large companies)• Extension of credits to non-labour expenses

(Netherlands, adds to existing patent box regime)

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• Multi-nationals are looking for predictable incentives that will reduce their R&D costs and can be booked pre-tax

• Best regimes have refundable incentives which meet both criteria

• Next best regimes are non-refundable

• Least effective regimes are incrementally based

• Administration of the program must be consistent and predictable

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• Country-Specific Factors to Consider:• Basic definition of R&D • Rate• Ownership of IP• Location of R&D• Eligible Industries• Qualifying activities• Range of qualifying expenditures• Special incentives for start ups• Payer or performer• Are incentives taxable or tax-free• Carry-forward and carry-back opportunities• Political and economic situation

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Countries with R&D Incentives• Australia*

• Austria*

• Belgium*

• Brazil

• Canada*

• China

• Czech Republic

• France*

• Germany

• Hungary

• India

• Ireland*

• Israel

• Japan

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• Malaysia

• Mexico

• Netherlands

• Poland

• Portugal

• Russia

• Singapore*

• South Africa

• South Korea

• Spain

• Turkey

• United Kingdom*

• United States

*refundable

R&D Tax Credits

Canadian SR&ED Credit U.S. R&E Credit

Volume-Based or Incremental:

Volume-Based Incremental

Base Period/Amount Calculation:

No Yes

Refundability: Yes for CCPCs and some provincial incentives

Non-refundable but refundable for some state incentives

Location: R&D must be performed in Canada

R&D must be performed in the U.S.

Eligible Current Expenditures: •Wages

•100% of contract research

•Materials

•Overhead

•Wages

•65% of contract research expenditures

•Supplies

Capital Expenditures: Eligible for credit Not eligible for credit

Comparison of Canadian & U.S. R&D Incentives

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R&D Tax Credits (Cont’d)

Canadian SR&ED Credit U.S. R&E Credit

Unused Credits Credits can be carried back 3 years or forward 20 years

Credits must be carried back to the previous taxation year or forward to 20 years

Administration Need to identify all projects being claimed and file technical descriptions for top 20 projects with the return

Taxpayer files tax return and provides documentation upon request during audit

Local Incentives Available in many provinces

Available in many states

Internal-Use Software Standards

N/A Additional thresholds of innovation must be demonstrated to qualify

Comparison of Canadian & U.S. R&D Incentives

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Conclusion

• Countries have incorporated their social, economic needs in their innovation incentive programs

• Programs evolve to stimulate incentives for industries, attract global investments and stimulate employment

• Canada has one of the best R&D programs but improvements can be made.

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• Today’s Webinar Topics• Canada’s Science and Technology Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and the Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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Canadian SR&ED Program

• Government of Canada invests over $7 billion per year in R&D including direct grants and indirect tax credits – SR&ED

• Tax incentives among most generous in the world for R&D, particularly for small and medium sized businesses

• Tax credit rates:• 35% refundable for eligible CCPCs on

annual expenditure limit• 20% non-refundable available to non-

CCPCs, members of a partnership, trusts and individuals

• Reducing to 15% in 2013 23


• Canadian Controlled Private Corporations (CCPC)– 35% of eligible expenses

• Fully refundable for SR&ED expenses up to $3 million per year

• 40% refundable for SR&ED capital expenses within that limit

• Taxable Income and Taxable capital thresholds to be maintained for refundability

– 20% of eligible expenses• 40% refundable on SR&ED expenses in excess of $3

million per year– Taxable Income and Taxable capital thresholds to be

maintained for refundability– Can carry ITC back 3 years and forward 20 years– Accelerated capital write-off (until 2014)– Unlimited carry forward of expenditure pool

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Canada

• 18 month filing deadline• R&D must be related to the business• Activities must be carried on in Canada (except

for 10% of labor by Canadian employees)• No limit on annual expenditures claimed• Provincial credits in most jurisdictions

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• Other Benefits– Accelerated write-offs– Timing on utilization of expenditures

• Unused credits carry forward 20 years• Unused deductions carry forward indefinitely

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Qualifying Expenditures

1. Labor2. Material3. Overhead (2 methods of calculation)

– Proxy- 65% of labor (60% in 2013 and 55% after 2014)– Incremental and attributable overhead

4. Subcontract payments (80% after 2012)5. Certain capital expenditures (until 2013)6. Lease expenses ( until 2013)

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Program Criteria

Definition Of R&D

• Development:• Work undertaken…for the purpose of creating new, or

improving existing materials, devices, products or processes, including incremental improvements thereto

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Program Criteria

Eligibility Criteria

• Three Essential Elements– Technological uncertainties– Technological advancement– Technical content

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Program Criteria

Technological Uncertainties

• Uncertain that goals can be achieved; technological obstacles exist that must be overcome through experimentation or analysis.

• Goals can be achieved; however, what path, route, approach, equipment configuration, etc., will work

• Need for experimentation and analysis

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Program Criteria

Technological Advancement

• Typically a new characteristic or capability

• The knowledge gained

• Transferability of this new knowledge

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Program Criteria

Technical Content

• It is the process used in finding the solution rather than the project itself that often provides strong evidence of its eligibility

• Documentation required to support process

• Evidence of systematic investigation (not trouble shooting)– Trials (lab/bench scale, pilot, line)– Prototypes

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SR&ED In A Nutshell

Point A‘base level’Point A‘base level’

Point B‘target level’

• Faster• Increased Yield• More Efficient• Better performance• New capability• New application• Knowledge• Better tools

Barriers, Constraints, Obstacles, Challenges

Adva

ncem

ent

Knowledge Base

Technical Objective

1. Idea Generation2. Idea Selection3. Prototype, Analysis, Testing, Simulation, Modeling, FEA, etc.4. Results / Conclusions

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SR&ED Program Review

• Innovation that leads to commercialization drives economic growth

• Government support for R&D will generate incremental benefits – spill over effect

• Global support for R&D is increasing

• The SRED program has been growing in recent years

• However Canada is lagging in Business Expenditures on R&D (BERD) against other G7 nations

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• Federal government has been reviewing the SRED program

• 2007 Joint Review – CRA and Department of Finance– Recommended improvement to the program– Led to investment in additional staff for CRA

• In 2010, the federal government appointed a new committee to review the program and present recommendations regarding legislation and administration of R&D spending in Canada, including SR&ED, direct grants and incentives, university research and procurement

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• Jenkins Committee presented their recommendations in late 2011:

1. Create the Industrial Research and Innovation Council with clear business innovation mandate

2. Simplify the SR&ED program 3. Increase government procurement 4. Refocus the National Research Council (NRC) 5. Establish new risk capital fund to support start-up and

later stage companies 6. Appoint a federal minister of innovation

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Budget 2012 ‐ Changes to SR&ED

• Finance responded with the largest change to the program in decades

• The changes are different than those recommended by Jenkins

• More changes will come

• The effect seems to be most significant to larger clients but all are impacted– Reduction of ITC rates, proxy percentages, elimination of

capital expenditures

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Budget 2012 ‐ Changes to SR&ED

Future areas of study:

• Conduct a pilot project to determine the viability of a formal pre-approval process

• Contingent fees – study currently underway (September 2012)

• Enhance the existing online self-assessment eligibility tool

• Make more frequent and effective use of “tax alerts”

• Improve the Notice of Objection process to allow for a second review of scientific eligibility determinations

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Budget 2012 – Other Changes

• Early stage access to capital– Increase private sector investment in early-stage risk

capital and support the creation of large-scale venture capital funds

– Confirm the commitment to increase Business Development Bank of Canada budget

• Government Procurement

• Make the Canadian Innovation Commercialization Program permanent

• Add a military procurement component

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Budget 2012 – Other Changes• Direct Grants

– Double support for companies through Industrial Research Assistance Program (IRAP) - IRAP increased by 110M annually

– Launch the Western Innovation Program (similar to such programs in other provinces)

• Refocus NRC– Provide support in 2012-13 to the NRC to refocus on

business-led, industry-relevant research – Double the IRAP Internship program – Make the Business-Led Networks of Centres of

Excellence program permanent – Support the continued enhancement of the forestry

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Draft Legislation – Changes to SR&ED

• Draft Legislation released August 14 2012• Reduce the SR&ED investment tax credit rate from 20% to

15% for taxation years ending after 2013. • No change to the enhanced 35% credit for eligible Canadian

controlled private corporations • Exclude capital expenditures from SR&ED deductions and

investment tax credits for property acquired after 2013 • Exclude lease payments incurred after 2013• Phase out shared-use equipment rules for capital expenditure

– credits available until 2017 for SUE that was acquired and available for use prior to December 31, 2013

– no credit for SUE expenditures incurred or available for use after 2013

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Draft Legislation – Changes to SR&ED

• Reduce the prescribed proxy amount from 65% to • 60% for 2013 and • 55% for years after 2013

• Limit qualifying expenditures to arm’s length contractors to 80% of the contract payment for expenditures incurred after December 31, 2012– Includes third party payments to approved associations, research

institutes, universities and non-profit research corporations

• Exclude from contract payments, any capital expenditures made after December 31, 2013 by an arms length contractor to fulfill the contract – Contractors must disclose the amount of any such capital expenditures

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Impact of Proposals

• Reduction in total benefits will range from 6% to 40% depending on factors including:

• CCPC small corporation status vs non CCPC

• Mix of employees versus contractors

• Capital component of claims

• Materials component of claims

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Impact of ProposalsExamples for Ontario

2014 Benefits compared to 2012% Reduction in

ITCSmall (qualifying) technology CCPC (ORDTC waived)• Equal mix of staff and contractors• No contractors

11% (cash)6% (cash)

Non-qualifying CCPC• Equal mix of staff and contractors 29%Midsize manufacturer• 500k employees, 200k contracts, 500k materials 19%Large manufacturer• 500k employees, 10m materials, 5m capital 41%Financial institution developing software• Contract to salary ratio of 3 to 1 32%

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Response to the 2012 Budget

• We continue to recommend full refundability of SR&ED tax credits to encourage foreign investment.

• We are disappointed that Canada has decided to go against the global trend of “more innovation support”

• The proposed changes have implications that are more complex than they initially appear.

• Most changes do not come into effect until 2014. However it is important that the government understands how these proposed changes may negatively affect decisions about whether to perform SR&ED in Canada.

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Response to the 2012 Budget

• Changes are significant– The average claim reduction for large business may be

more than 30%– All industries will be impacted– Some of the changes will have broader implications

than appear on the surface• In the global environment where 11 of the top 24 economies

enhanced their R&D incentives it’s clear these changes do not make Canada more attractive to foreign investment

• In 2009 Canada was ranked 9th in OECD in R&D incentives for large business.

• The changes will move Canada out of the top 10. What will the impact be on our performance?

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• Today’s Webinar Topics• Canada’s Science and Technology Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and the Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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R&D Tax Credits – Provincial Credits

• Newfoundland and Labrador 15% refundable credit• Nova Scotia 15% refundable credit• New Brunswick 15% refundable credit• Québec 17.5% to 37.5% refundable credit• Ontario 4.5% credit and 10% refundable credit• Manitoba 20% credit – partially refundable• Saskatchewan 15% credit (refundable for small CCPC)• Alberta 10% refundable credit (Max. $400K)• British Columbia 10% credit (refundable for small CCPC)• Yukon 15% refundable credits

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R&D Tax Credits on $1,950,000 Qualified Expenditures

Federal Québec Total Federal Ontario Total

Non‐CCPC 20% $ 353,250 $ 183,750* $ 537,000 $ 372,450 $ 87,750 $ 460,200

CCPC 35% $ 544,688 $ 393,750 $938,438 $ 586,609 $ 273,975 $ 860,584

* Assuming worldwide asset are more than $75M• Savings between 24% and 28% for a non-CCPC• Savings between 44% and 49% for a CCPC

R&D Tax Credits‐Before 2013

Example: $1,950,000 SR&ED expenditures (including $1,000,000 salaries, $850,000 capital expenditure and

$100,000 contract labour)

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Federal Québec Total Federal Ontario Total

Non‐CCPC 15% $ 134,438 $ 183,750* $ 318,188 $ 154,710 $ 48,600 $ 203,310

CCPC 35% $ 240,188 $ 393,750 $633,938 $ 324,891 $ 151,740 $ 476,631

* Assuming worldwide asset are more than $75M• Savings between 11% and 17% for non-CCPC• Savings between 25% and 33% for a CCPC

R&D Tax Credits‐After 2013

Example: $1,950,000 Qualified expenditures (including $1,000,000 salaries, $850,000 capital expenditure and

$100,000 contract labour)

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Federal Manitoba Total Federal BC Total

Non‐CCPC 20% $ 312,000 $ 390,000 $ 702,000 $ 351,000 $ 195,000 $ 546,000

CCPC 35% $ 546,000 $ 390,000 $ 936,000 $ 614,250 $ 195,000 $ 809,250

• Savings between 28% and 36% for a non-CCPC• Savings between 41.5% and 48% for a CCPC

R&D Tax Credits‐Before 2013

Example: $1,950,000 SR&ED expenditures(including $1,000,000 salaries, $850,000 capital expenditures and $100,000 contract labour)

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Federal Manitoba 20% Total Federal BC 10% Total

Non‐CCPC 15% $ 129,600 $216,000 $ 345,600 $ 145,800 $ 108,000 $ 253,800

CCPC 35% $ 302,400 $ 216,000 $ 518,400 $ 340,200 $ 108,000 $ 448,200

• Savings between 13% and 18% for a non-CCPC• Savings between 23% and 27% for a CCPC

R&D Tax Credits‐After 2013

Example: $1,950,000 SR&ED expenditures(including $1,000,000 salaries, $850,000 capital expenditures and $100,000 contract labour)

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Provincial Tax Credits ‐ Quebec

• 17.5% tax credit on eligible salaries and 50% of contract payments for SR&ED performed in Quebec

• Higher tax credit on the first $3M of eligible salaries for the year for corporations with: – Prior year assets less than $50M - ITC = 37.5% – Prior year assets between $50M and $75M - ITC decreases

pro-rata to 17.5%

• Associated corporations:– Worldwide assets– Sharing of the $3M limit and the $50M-$75M asset test

• Short Years: $3M on a pro rata basis

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Provincial Tax Credits ‐ OITC

– 10% Ontario Innovation Tax Credit for eligible expenditures incurred in Ontario

– Available for all corporations with operations in Ontario – Refundable– Qualified expenditures up to the expenditure limit

($3M)– Canadian taxable income of the group of companies– World wide taxable capital of the group of companies– Planning:

• No 18 months deadline• Contract payments from customers outside Ontario

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Provincial Tax Credits ‐ ORDTC

• 4.5% Ontario Research and Development Tax Credit -non-refundable

• considered to be assistance (AP 2005-02)– Reduce OITC– Reduce SR&ED pool ORDTC attracts federal and

Ontario tax• Unused ORDTC can be carried back 3 years (but not

to taxation year ending before 2009) and carried forward 20 years

• s.43 allows taxpayer to waive this non-refundable tax credit –presumably to increase federal ITC

• If waived, no immediate difference on cash flow in companies with losses

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Provincial Tax Credits ‐Manitoba

• 20% ITC – phase in of refundability starting in 2010– 2010 – Introduced refundable ITC for expenditures on

Contracts with prescribed entities.– 2011 – 25% of the credit refundable for in-house SR&ED

expenditures in addition to the fully refundable ITC on contracts with prescribed entities.

– 2012 – refundability for in-house SR&ED ITC’s increased to 50%.

• Available to all corporations with a PE in Manitoba in respect of SR&ED activities carried out in Manitoba

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Provincial Tax Credits ‐ BC

• 10% tax credit in respect of SR&ED activities carried out in British Columbia by a corporation with a permanent establishment in B.C.

• Available to corporate partners other than specified members– not available to individuals or trusts

• Refundable for CCPC’s on qualified expenditures up to the federal expenditure limit. Otherwise non-refundable.

• Apply non-refundable credits to B.C. taxes payable in the year. Carry-back unused credits to previous 3 years or carry-forward 10 years.

• Recapture rules apply 57

Provincial Tax Credits ‐ Alberta

• 10% refundable tax credit up to $400,000 per year• In respect of SR&ED expenditures in Alberta after

December 31, 2008 – Note that federal credits reduce the eligible expenditures in

Alberta

• Corporation must have a PE in Alberta and carry on R&D in Alberta

• Not available to partnerships, individuals or trusts• Must file before the 18 month deadline• Recapture rules apply

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Provincial Tax Credits ‐ Saskatchewan

• Prior to March 19, 2009–15% non-refundable tax credit• Between March 19, 2009 and April 1, 2012–15% refundable credit – no cap• After March 31, 2012• Refundable for CCPC’s on qualified expenditures up

to the federal expenditure limit, otherwise non-refundable.

• Available to corporations with a PE in Saskatchewan in respect of SR&ED activities carried out in Saskatchewan

• Recapture rules do not apply

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Provincial Tax Credits ‐ Atlantic

• 15% refundable credit in Newfoundland and Labrador, Nova Scotia and New Brunswick

• Available to corporations with a PE in the Province for SR&ED carried out in the Province

• Also available to individuals (only in Newfoundland), trust and partnerships

• Must file within 18 months• Recapture rules apply in Nova Scotia and New

Brunswick• Note - no credit in Prince Edward Island

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Provincial Tax Credits ‐ Yukon

• 15% refundable credit in Yukon Territory• Available to corporations with a PE in the Yukon for

SR&ED carried out in the Yukon• Also available to individuals, trust and partnerships• Must file within 18 months• No recapture• Note – no SRED programs in NWT or Nunavut

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Provincial Tax Credits – Research centres

Québec – University Research Tax Credit • 28% of payments to prescribed entities

– Universities, research centres etc… – Advanced ruling must be obtained from the Québec tax

authorities• Also available for foreign-controlled corporations

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Provincial Tax Credits – Research Centers

• Ontario Business Research Investment Tax Credit –refundable at 20% of SR&ED payments made to an Ontario Eligible Institute.

• For SR&ED expenditures through a PE in Ontario• Business should be entitled to exploit the results of the

SR&ED • An eligible research institute includes most universities

and colleges in Ontario, hospital research institutes and certain non-profit research organizations

• OBRITC is in addition to OITC credit

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Provincial Tax Credits – Research Centers

• 20% credit for SR&ED payments to Yukon College.• Available to corporation and individuals resident in

the Yukon.

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Provincial Tax Credits – Pre‐Competitive

Québec - Precompetitive Research Tax Credit• Enhanced tax credit rate – 35%• Also available to foreign controlled corporations• Must have a Permanent Establishment in Québec• Qualified expenditures include:

– Salaries– 80% of contracts costs (arm’s length)– Materials– Overhead (up to 65% of salaries)– Equipment rental and Capital expenditures

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Provincial Tax Credits – Pre‐Competitive

Québec - Precompetitive Research Tax Credit• Joint venture agreement between private parties at arm’s

length– Common scientific or technological interest in a research

project• May aim for different utilization of the technology

developed – Risks, responsibility and IP sharing – reduces cost to

develop the technology– Advanced ruling required from the Québec tax

authorities for each project

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Provincial Tax Credits – Personal Taxes

Québec Tax Holiday for Foreign Researchers • 5 years personal tax holiday (under certain conditions) for

certain foreign individuals (researchers, experts …) moving and living in Québec

• Deduction in the calculation of the taxable income • 100% of the salary or income for year 1 and year 2• 75% for year 3• 50% for year 4 • 25% for year 5

– Equivalent to 70% over 5 years– Only applicable to the Québec provincial tax

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Provincial Tax Credits – Personal Taxes

• BC Tax holiday for International Business Specialists registered under the International Business Activity program.

• IB specialist can get a refund of personal taxes paid on a % of income earned from a registered IBA corporation

• Deduction in the calculation of the taxable income • 100% of the salary or income for year 1 and year 2• 75% for year 3• 50% for year 4 • 25% for year 5

– Equivalent to 70% over 5 years

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Provincial Tax Credits – Multimedia

Ontario Interactive Digital Media Tax Credit (OIDMTC)• 40% refundable tax credit based on eligible Ontario labour

expenditures and eligible marketing and distribution expenses

• There is no limit on the amount of eligible Ontario labour expenditure.

• Eligible marketing and distribution expenses are capped at $100,000 per eligible product.

• Eligible labour expenditures are 100% of salaries and wages for employees and 100% of contract payments to arm’s-length persons

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OIDMTC - Eligible product• Developed by a qualifying corporation for sale or license

without prior arrangement

• Cannot be used primarily to promote or sell qualifying corporation’s product or service

• Cannot be used primarily for interpersonal communication

• All or substantially all of the product was developed in Ontario by the qualifying corporation

OIDMTC - Specified product• Developed under fee-for-service arrangement for an arm’s

length purchaser, same rules as above

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Ontario Computer Animation and Special Effects Tax Credit

• 20% refundable tax credit

• Ontario labour expenditures for development of computer digital animation and digital visual effects for use in television or film

• A certificate of eligibility must be obtained from the Ontario Media Development Corporation and filed with the CT23 return

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• Québec Multimedia Titles Tax Credit

• Specialized Corporations– Québec offers a refundable tax credit of 26.25% to 37.5%

for corporations whose activities are primarily related to the production of eligible multimedia titles for itself or others

– The corporation must hold a certificate of eligibility from Investissement Québec

– Revenue test is 75% after March 20, 2012 • (90% for certificates filed prior to March 21, 2012)

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• Québec Multimedia Titles Tax Credit

• Other Corporations– Québec offers a refundable tax credit of 26.25% to 37.5%

for corporations that do not qualify as specialized corporations

– A qualified corporation can claim the credit for specialized corporations if they are performing contract work for a company that cannot qualify

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• Québec Multimedia Titles Tax Credit– Eligible multimedia titles– All multimedia titles produced for commercial use. The

titles must be produced on electronic support, be controlled by software that allows interactivity, and include an appreciable quantity of three of the following four types of data: text, sound, fixed images and animated images

– Titles that encourage violence, sexism or discrimination are not eligible titles

– March 20, 2012 budget introduced a broader definition of eligible work – includes quantitative data analysis

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Manitoba Interactive Digital Media Tax Credit • 40% refundable tax credit for developing interactive media

projects such as e-learning, video games, or interactive websites.

• based on eligible Manitoba labour for prototyping and product development

• Maximum credit is $500,000 per project• Credit extended to December 31, 2013

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B.C. Interactive Digital Media Tax Credit (BCIDMTC)• 17.5% refundable tax credit based on qualifying B.C.

labour expenditures for projects commencing after August 2010

• Incentive for video games development - not covered by film tax credits

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Other Tax IncentivesQuébec E-Business Tax Credit

1 The refundable tax credit equal to 30% of the eligible salaries (capped at $66,667) paid by an eligible corporation as of March 14, 2008 until December 31, 2015.

2 The credit is limited to $20,000 per eligible employee, which means that the maximum eligible salary is $66,667 per eligible employee.

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To be eligible, a corporation must carry on a business of which at least 75% of its activities are considered eligible activities

It is possible, for a corporation that doesn’t meet the 75% of its activities criterion, to spin off its eligible activities in a new corporate entity in order to get the benefits of the tax credit for the development of e-business if:

- More than 75% of its services are carried out for arm’s length corporations or,

- Its services are used « exclusively » outside of Québec.

Although a corporation may carry on several businesses, the 75% criterion will be applied to the whole corporation and not only to one of the businesses of the corporation.

Other Tax Incentives Québec E-Business Tax Credit – Details Regarding the Tax Credit

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IT consulting services relating to technology, systems development, e-business processes and solutions (for instance, strategic planning, reconfiguration of business processes and technology architecture design).

Development, integration, maintenance and evolution of information systems (for instance, distribution packages, software and computer programs) and technology infrastructure (for instance, technology architecture upgrading and integration of hardware and software components).

Design and development of e-commerce solutions (for instance, portals, search engines and transactional web sites).

Development of security and identification services (for instance, electronic imaging, artificial intelligence and interface) relating to e-commerce activities (for instance, security over Internet networks)

Other Tax Incentives Québec E-Business Tax Credit – Eligible Activities

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Operation of an e-business solution (for instance, processing of electronic transactions over a transactional web site, and management and operation of information systems, applications and infrastructures arising from e-commerce activities)

Operation of a customer contact centre (for instance, a customer relations management department arising from e-commerce activities).

Other Tax IncentivesQuébec E-Business Tax Credit – Excluded Activities

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Other Tax IncentivesQuébec Biotechnology Development Centres

• Eligible business• Québec offers a refundable tax credit for corporations carrying on

business in the field of biotechnologies, in one of the four BDCs located in the province (Laval, Lévis, Saint-Hyacinthe or Sherbrooke)

• The corporation must hold a certificate of eligibility from Investissement Québec

• The tax credit is available for three types of expenditures:• salaries (capped at $37,500) paid to eligible employees (i.e. full-time

employees spending 90% of their time executing biotech activities in a BDC)

• eligible property acquired during first 3 years of the corporation’s eligibility. The property must be used for eligible operations conducted by eligible employees.

• special facilities leased during the first 5 years and for which the lessee has obtained an eligibility certificate from Investissement Québec.

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Other Tax IncentivesQuébec Biotechnology Development Centres

Component of the incentive Incentive Duration

Wage paid to an eligible employee

• 30% of eligible wage(maximum $11,250 per employee)

• Up to 10 years (not beyond December 31, 2013)

Eligible asset • 30% of cost of acquisition or rental charges

• 3 years (acquisition) • 5 years (rental)

Special facilities • 30% of eligible rental charges • 5 years

Foreign specialist • Tax Holiday on employment income – 100% for the first two years– 75% for the third year– 50% for the fourth year – 25% for the fifth year

• 5 consecutive calendar years

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Other Tax IncentivesOntario Tax Credits

• Ontario Computer Animation and Special Effects (OCASE) Tax Credit– 20% refundable tax credit based upon eligible Ontario labor

expenditures incurred by a qualifying corporation with respect to eligible computer animation and special effects activities.

• Ontario Production Services Tax Credit (OPTSC)– 25% refundable tax credit based upon eligible Ontario labor

and other production expenditures incurred by a qualifying corporation with respect to an eligible film or television production

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Other Tax IncentivesManitoba Tax Credits

• Manitoba Film and Video Production Tax Credit- 65% film tax credit based on eligible labour costsOr- 30% tax credit based on production costs incurred for

labour, goods and services provided in Manitoba that are directly attributable to production of an eligible film

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Other Tax IncentivesBritish Columbia Tax Credits

• Basic Production Services Tax Credit– 33% of accredited qualified B.C. labor expenditures

• Regional Production Services Tax Credit– 6% of accredited qualified B.C. labor expenditures– Prorated by the number of days of principal photography done

in B.C. outside of the designated Vancouver area, over total number of days in which principal photography is done in B.C.

• Distant Location Production Services Tax Credit– 6% of accredited qualified B.C. labor expenditures– Prorated by the number of days of principal photography done

in a distant location in B.C., over total number of days in which principal photography is done in B.C.

• Digital Animation or Visual Effects (DAVE) Production Services Tax Credit

– 17.5% of accredited qualified B.C. labor expenditures directly attributable to prescribed DAVE activities

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Other Tax Incentives Green Incentives

To encourage and support investment in environmental and sustainable technologies, and to promote innovation in Canada, governments at all levels (federal, provincial and municipal) have introduced various public funding programs. These green incentives include:

• Direct funding through grants or contributions.• Indirect funding through Tax credits (e.g., Scientific

Research and Experimental Development); and• Interest-free loans.

These programs are available to US companies and can helpreduce the costs, and improve the return on investment for projects undertaken in Canada.

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Each program has specific goals and eligibility criteria, but all typically require the project to address one or more of the following environmental areas:

– Air pollutant emissions reductions (e.g., greenhouse gases);

– Energy efficiency; – Renewable energy production and use: biomass,

biofuels, wind, solar, etc.;– Water consumption or pollution reduction; and– Soil contamination remediation.


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What is typically not funded

Continuing operations

Companies undertaking a restructuring as a result of bankruptcy or insolvency

Projects that have no benefit beyond the organization

Projects without financial/technical/managerial resources necessary to make the project a success

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Clean Energy Fund

Focus

• Supporting clean energy technologies including large‐scale Carbon capture and storage projects and smaller scale demonstrations of the development of renewable and clean energy;

• To meet the Government of Canada’s target GHG levels by 2020 and help meet the goal of 90% non‐emitting energy sources by 2020.

Applicant Eligibility

• Project value in excess of $100 million; and• Integrated CCS projects at/near full commercial scale.

Funding • $850 million over 5 years• 19 projects selected to date.

89Federal & Provincial Grants & Incentives

Clean Energy Fund – Research & Development

Focus

• Supporting research and development of the next generation of clean technologies;

• Meet the Government of Canada’s commitment to reduce GHG levels by 20% by 2020; and

• Help Canada meet its goal of 90% non‐emitting energy sources by 2020.


• Working collaboratively with research institutions and local utilities to develop renewable and clean energy; or

• Collaborative research to address the environmental challenges facing oil sands, hydrogen and fuel cells; or

• Developing technologies to lower CO2 capture costs and increase knowledge on CO2 storage.

Funding • $150 million over 5 years


Focus• To expand the production and use of cleaner renewable biofuels such as ethanol and biodiesel


• Open to existing or new producers;• The company must have full ownership of the equipment or structure necessary for the production of renewable alternatives to gasoline or diesel in Canada

• Must carry on the entire end‐to‐end production process solely in Canada

Funding

• $1.5 billion over 9 years• Non‐repayable operating incentive of $.10 to $.26 per litre based on volume produced and sold

• Recipients may be funded for up to 7 years• Program runs to March 31, 2017• No further applications are being accepted

EcoENERGY for Biofuels Programs

Next round: Government funding


Focus

• To support the construction or expansion of transportation biofuel production facilities

• To help achieve the government’s goal of 5% renewable content in gasoline and 2% renewable content in diesel fuel and heating oil


• Open to agricultural producers using agricultural feedstock to produce biofuel

• Must invest at least 5% of the total eligible project costs

Funding• $200 million billion over 4 years• Repayable contributions of up to $25 million per project• Deadline for construction or expansion of facilities extended to September 30, 2012

EcoAgriculture Biofuels Capital Initiative

Next round: Government funding


Alberta – Carbon Capture and Storage

Focus

• Alberta Government commitment to advancing Carbon Capture and Storage technologies;


• Working collaboratively with research institutions and local utilities to develop renewable and clean energy; or

• Collaborative research to address the environmental challenges facing oil sands, hydrogen and fuel cells; or

• Developing technologies to lower CO2 capture costs and increase knowledge on CO2 storage.

Funding

• $2 billion commitment;• Up to 75% of total incremental cost to capture, transport and store CO2

• Funds paid during design/construction (40%), commercial operations (20%) and over 10 years of operations (40%)


Sustainable Development Technology CanadaSD Technology Fund

Focus• Projects must focus on the development and demonstration of new technologies

that address environmental sustainability; and• Supports late-stage development and pre-commercial demonstration of clean

technology solutions.


• Canadian incorporated entity;• Project must be in demonstration phase;• Must be working collaboratively with one or more industry/academic partners; and• Incremental intellectual property must be generated for the benefit of Canada.

Funding• Grant up to 33% of eligible costs; and• $590 million has been allocated for funding projects that address clean water and

soil technologies, climate change and air quality• Latest call for proposal closes October 24, 2012

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Sustainable Development Technology CanadaNext Generation Biofuels Fund

Focus• Helping Canada meet upcoming renewable fuel standards;• De-risking next generation biofuel technology; and• Help bridge the capital expenditure requirements for biofuel companies.


• Canadian incorporated entity;• Next generation bio-fuel (i.e. not corn-based);• First of kind facilities;• Commercial scale demonstration facilities; and• Incremental intellectual property must be generated for the benefit of Canada.

Funding• $500 million fund• Repayable contributions up to 40% of eligible costs;• Repayment terms based upon free cash flow over a 10-year time frame; and• Fund accepts applications year-round.

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Automotive Innovation Fund (AIF)

Focus• Automotive manufacturers (drive train);• Clean technology including fuel efficiency & GHG reduction; • Support Canada’s Science and Technology agenda; and• Leverage new investments in Canada.


• Project value minimum of $300 million over 5 years;• Create/retain Canadian jobs; and• Creation of Canadian IP.

Funding• $250 million over 5 years; • Grant upwards of 30% of eligible project costs;• Detailed technical, market and financial proposal; and• Rigorous external due diligence process.

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Strategic Aerospace Defense Initiative(SADI)

Focus

• To encourage strategic research and development;• Promote innovation and excellence in new products and services; • Enhance the competitiveness of Canadian A&D companies; and• Foster collaboration between research institutes, universities, colleges and the

private sector.


• Small, medium and large Canadian companies engaged in aerospace and defense activities;

• Companies engaged in strategic research and development (R&D) activities;• Incorporated under Canadian law;• Working with research and academic institutions; and• Creation of Canadian skilled labour and intellectual property.

Funding• Contributions up to 30% of eligible expenses;• Repayable contribution; and• Royalty-based repayments on gross business revenue.

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Federal Tax Incentives

Accelerated CCA – Clean Energy

Generation

• Advantageous capital cost allowance rates available for certain types of assets used for renewable energy.

• Class 43.2 (50% declining balance basis) for specified clean energy equipment acquired before 2020 and meeting higher efficiency standards.

• Class 43.1 (30% declining balance basis) for specific clean energy equipment meeting lower efficiency standards.

Accelerated CCA – Clean Energy

Generation

Eligible equipment includes facilities, equipment and components related to• generation of electricity using solar, geothermal, wind, wave and tidal power• production of fuels from waste, biogas and biomass and• Carbon capture and storage

Accelerated CCA - Carbon Capture

and Storage

• Proposed consultations re acceleration of CCA for assets used in carbon capture and storage.

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Federal Tax Incentives

Youth Employment

Strategy

• NRC IRAP YES program: Provides funding up to $30,000 to help innovative companies hire talent (college/university degree required); and

• YES Career Focus Program: funding to help employers hire post-secondary employees for career related work.

Apprenticeships

• Registered apprentices in designated Red Seal Trades• Apprenticeship Incentive Grant - $1,000 per year; max $2,000• Apprenticeship Completion Grant - $2,000 on completion of training to become

certified journeymen• Similar programs in most provinces

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Other Tax IncentivesInternational Business Activity (IBA) – British Columbia

Focus

• Refund of B.C. corporate income tax paid on income from assigning or licensing a qualified patent or selling goods and services in connection with a qualified patent owned by a corporation, to a non-resident person.

• Eligible patents include those related to power generation through the use of wind, solar or tidal power, as well as those related to waste water treatment and fuel cell technology.


• Companies must be incorporated in Canada with a permanent establishment in BC and carry on international business activities as part of an active business.

Funding • 75% of BC corporate income taxes paid on income from the international financial business that relates to qualifying activities. Maximum $ 8 million.

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Venture Capital ProgramsBritish Columbia

Focus

1. Eligible Business Corporations (EBC): 30% tax credit for corporations investing in an EBC

2. Venture Capital Corporations (VCC): 30% tax credit for corporations investing in a VCC that invests in an eligible small business (ESB) or an EBC.


1. Shares must be held at least five years. A small business that is registered as an EBC must have 100 employees or less, pay 75% of its wages to BC residents, have equity capital of at least $25,000 and be substantially engaged in a prescribed activity (e.g. alternative energy development and environmental technology). Maximum direct investment of $5 million.

2. Shares of the VCC must be held at least five years. ESB must have 100 employees or less at time of initial investment, pay 75% of its wages to BC residents and be substantially engaged in a prescribed activity (e.g. alternative energy development and environmental technology). Maximum direct investment in the ESB is $10 million from VCCs in any two-year period.

Credit1. Maximum tax credit is $1.5 million (30% of $5 million) per EBC. Unused tax

credits can be carried forward four years. 2. No maximum. Unused tax credits can be carried forward four years.

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Venture Capital ProgramsManitoba

Focus • Eligible Business Corporations (EBC): 30% tax credit for individuals or corporations investing in an EBC


• New Investors• company must have 50 or fewer employees, less than $15M in revenue, and at least 25% of employees in Manitoba

Credit • Maximum tax credit is $135k per investor, spread out over 3 years ($45k/yr).

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• Today’s Webinar Topics• Canada’s Innovation Strategy• Global Competition for R&D Investment• Canada’s SR&ED Program and Federal Budget 2012• Other Grants and Incentives• Changes and Predictions

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Changes and Predictions

• August 14, 2012 Draft legislation will be passed into law with minor modifications

• Venture capital funds will then expand with new funding• No immediate impact from increased funding of direct grants

and incentives as the government evaluates where the funds will be channelled

• The SR&ED program will continue to be the most important funding available for companies in Canada, particularly small businesses

• SR&ED claims that are not supported by documentation will be denied

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Changes & Predictions

• Large Canadian companies will carefully evaluate the impact of the 2012 budget which reduced benefits and compare the after tax cost of performing research in Canada with other lower cost jurisdictions

• Outside Canada, countries will continue to compete for research investment

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Questions?

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This webinar is brought to you by CCH Canadian and in partnership with Deloitte & Touche LLP

For more information please contact customer service at 1-800-268-4522.

Visit www.cch.ca/ExpertEdge for a full list of our webinars.

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Natan Aronshtam, [email protected], 416.643.8701 Albert de Luca, [email protected], 514.393.5322Joanne Hausch, [email protected], 604.640.3306

Documents

2012 SR&ED Overview and Update Update - Deloitte_jh_Sept 13 2012_v2.pdf · 2012 SR&ED Overview and Update Natan Aronshtam, R&D Partner a nd Global Managing Director Albert de Luca,