Download pdf - SR&ED: What you need to know about the changing landscape - MaRS Best Practices

MaRS Centre June 14, 2012 John Sutherland

Scientific research and experimental development incentives

© Deloitte & Touche LLP and affiliated entities.

Presenter contact info:

Scientific research and experimental development incentives 3

John Sutherland BA, CGA Senior Manager – Tax Global R&D and Government Incentives Phone (416) 643-8048 Cell (905) 379-3261 [email protected]


Agenda

•  Overview of the Canadian SR&ED program •  Budget updates – Federal and Ontario •  CCPCs •  Program Criteria •  Ontario Technology credits •  Stretching SR&ED dollars

4 Scientific research and experimental development incentives


Canadian SR&ED Program

•  Canadian Controlled Private Corporations (CCPC) Benefits: –  SR&ED Deduction pool –  ITCs

•  35% of eligible expenses –  Refundable on the 1st 3m of SR&ED expenses –  Taxable Income and Taxable capital thresholds to be maintained for

refund-ability –  Provincial refund ability

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

–  Taxable Income and Taxable capital thresholds to be maintained for refund-ability •  Provincial Credits also available



Benefit of the program

•  Other benefits –  Accelerated write-offs –  Timing on utilization of expenditures – Unused credits carry forward



Federal update



Federal budget

•  Non-CCPC –  15% non-refundable for taxation year ending after 2013 – Reduce proxy calculations to 60% for 2013 and 55% thereafter –  Arm’s length subcontract expenses to be reduced to 80% after 2012 – No lease expenses after 2013 – No capital expenses made after 2013 – No shared use equipment after 2013

•  CCPC –  35% rate remains unchanged though the base of qualifying

expenditures will be smaller – as per above –  15% for non-qualifying CCPC or for expenses in excess of $3m or

expenditure limit



Federal budget – Impact

•  Reduction in total benefit in Ontario will range from 6% to 40% – Depending on:

•  CCPC small corporation status •  Mix of employees versus contractors •  Capital component of claims •  Materials component of claims



Federal budget – Other SR&ED and research Items

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

•  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 •  Divert “savings” from reduced SR&ED ITC% to direct incentives

–  Make the Canadian Innovation Commercialization Program permanent –  Provide support in 2012-13 to the NRC to refocus on business-led, industry

relevant research –  Double the IRAP Internship program –  Launch the Western Innovation Program

•  Similar to such programs in other provinces –  Other plans not yet clarified



Program criteria & qualifying expenditures



Program criteria

Definition of SR&ED •  Three types of eligible development:

1.  Basic research 2.  Applied research 3.  Experimental development (90%+ of all claims)

−  Work undertaken… for the purpose of creating new, or improving existing materials, devices, products or processes, including incremental improvements



Program criteria (Cont’d)

Eligibility criteria •  Three essential elements

1.  Technological advancement 2.  Technological uncertainties, and 3.  Technical content




Technological advancement •  Typically a new characteristic or capability •  The knowledge gained •  Transferability of this new knowledge

–  Examples: –  Integration of disparate technologies –  Algorithms, methods or capabilities –  e.g. special caching techniques to improve performance

–  Tools (e.g. speed up development, load balancing) –  Any technological improvements in proprietary systems –  Faster, more data, smaller footprint, cheaper, etc

•  Note that success is not a requirement, only an attempt




•  “Technological uncertainty” may occur in either of two ways:

–  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 •  SR&ED Project STARTS when uncertainty is identified •  SR&ED Project ENDS when uncertainty is resolved




Scientific or technological content •  Qualified people involved

–  Employee records can support qualifications –  Professional, academic, technical training and work experience are all

relevant credentials

•  Systematic investigation – Departure from application of proven approaches –  Experimentation and analysis –  Testing and evaluation – Conclusions reached



SR&ED activities include

•  Technical feasibility studies •  Review of competing technology •  Design •  Prototype build and evaluation •  Programming •  Component, system and integration testing •  Technical documentation •  Support activities undertaken directly to help

resolve the uncertainties that make the project R&D



SR&ED activities exclude

•  Market research •  Routine testing •  Routine data collection •  Social sciences or humanities •  Commercial production •  Style changes



Other criteria

•  Development must be in a field of science or technology •  Work must be performed physically in Canada •  Work must be performed by Canadian taxable entities

•  Claimant and claimed subcontractors

•  Claim must be submitted within 18 months of fiscal year end •  Expenditures must be paid within 6 months of fiscal end •  Work contracted by another Canadian entity may be subject to

reduction of eligible expenses by the amount paid •  And many other less common rules which we will deal with on a case-

by-case basis –  e.g. Salaries of “specified employees”



SR&ED in a nutshell


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

Adv

ance

men

t

Knowledge base

Technical objective

1.  Idea generation 2.  Idea selection 3.  Prototype, analysis, testing, simulation, modeling, FEA, etc. 4.  Results/conclusions


SR&ED industry examples


Industry Example of SR&ED Software/ IT Improvements to customized software

Manufacturing Process improvements to reduce production time

and cost Consumer Goods Production formulations with restricted ingredients to

achieve sought specifications Pharmaceutical/Biotechnology Improving processes to reduce material waste

Chemicals Developing custom equipment to improve process

performance


SR&ED – What can you claim?

1. Salaries and wages 2. Materials consumed and transformed 3. Contract SR&ED payments (80% after 2012) 4. Lease expenses (until 2013) 5. Third party-payments for other people performing SR&ED that taxpayer

can exploit 6. Overhead (2 methods of calculation) 7. Certain capital expenditures (until 2013)

•  Less SR&ED contract payments received •  Less Government Assistance (grants, credits)



Overhead



Traditional or proxy method of calculation

Each year taxpayer can choose between: •  Traditional Method

– Calculation of actual overhead directly attributable to SR&ED, or

•  Proxy Method – Notional calculation of overhead based on 65% * of directly engaged

labour

* (60% for 2013 and 55% thereafter)



Salary and wages



Salary and wages

•  Employees Directly engaged (proxy)

•  Employees Directly attributable (traditional) Ø Incremental and related to SR&ED



Materials



Materials consumed vs. transformed

Consumed •  Implies materials are absorbed, used

up or broken into small pieces •  Destroyed or rendered virtually

useless as a result of SR&ED

Transformed •  Materials are incorporated into

product that has some value to the taxpayer or to another party

•  Subject to ITC recapture when a disposition occurs



SR&ED Contract payments (80% after 2012)



127(9) – Definition of contract payment

“Contract payment” means •  An amount paid or payable to a contractor taxpayer for SR&ED

performed

•  on the claimant’s behalf

•  on an arm’s length basis



Leases (until 2013)



Leases (until 2013)

•  All or substantially all (ASA) –  90% used for SR&ED

•  Claim actual cost

•  Primarily – Used 50% to 90% for SR&ED

•  Claim 50% of cost



Third party payments



Third party payments

•  Payments to any one of the following entities which carry on SR&ED activities in Canada:

–  An approved association that undertakes SR&ED

–  An approved university, college, research institute or other similar institution



Capital expenditures (Until 2013)



Eligible capital expenditures

•  “All or substantially all” (ASA) •  Intent test

•  “Shared use equipment” (SUE) •  Use test

Ø Must be new for ITC purposes Ø Excludes buildings and leasehold interest in buildings Ø Must be available for use



ITC Recapture



What does it apply to and when?

•  The “property” subject to the recapture rules include: •  Materials, all or substantially all equipment (“ASA”),shared use

equipment (“SUE”) •  When sold or converted to commercial use, the itc’s related to these

items may be recaptured



Ontario technology tax credits often overlooked



Ontario tax credits

•  Ontario innovation tax credit •  Ontario research and development tax credit •  Ontario interactive digital media tax credit •  Ontario computer animation tax credit •  Ontario business research institute tax credit



OITC

•  10% Ontario Innovation Tax Credit (OITC) 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



ORDTC

•  Replaces pre – harmonization Ontario deduction for federal ITC •  Catch: considered to be assistance Reduce ITC

– Reduce SR&ED pool à 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 •  Taxpayer can waive this non-refundable tax credit –presumably to

increase federal ITC •  If waived, no immediate difference on cash flow compared to O161 in

companies with losses



Ontario Interactive Digital Media Tax Credit (OIDMTC)

•  Refundable tax credit of 40% since March 27, 2009 for non-specified products –  35% for “specified products” (fee-for-service)

•  Eligibility based on product, which must be complete •  Educate, inform or entertain •  Interactive (What info and how info is displayed) •  Multimedia (2 of text, images and/or sound) •  Available to non-exempt corporations only •  For work done in Ontario •  Must obtain a Certificate of Eligibility



OIDMTC: Funding for eligible product

•  Eligible expenditures –  Salaries and wages – Contractors (only 50% of cost eligible before March 27, 2009) – Marketing and distribution costs (capped at $100k per product)

•  Benefits –  40% regardless of size (after March 26, 2009) – non specified product –  35% specified product



OIDMTC – Digital media game corporations

•  35% tax credit rate for qualifying digital game corporations •  Incur a minimum $1 million of eligible Ontario labour costs over a 3 year period for

fee-for-service work done in Ontario that is directly related to the development of a digital game

•  Not required to be at arm’s length with the purchaser corporation •  Not required to develop all, or substantially all, of the eligible product

•  35% tax credit rate to specialized digital game corporations –  80% of Ontario payroll or 90% of annual revenues attributable to interactive digital

media game development •  Minimum of $1 million of Ontario labour expenditures in the taxation year directly

attributable to the development of eligible digital games –  Entitled to file an annual OIDMTC application –  Not required to contract with an arm's length purchaser –  Not required to develop all, or substantially all, of products included



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 tax return



Ontario Business – Research Institute Tax Credit (“OBRITC”)

•  20% refundable tax credit •  For SR&ED expenditures through a PE in Ontario •  SR&ED payments made to an Ontario Eligible Institute •  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



Stretching your SR&ED dollars

Agreements with suppliers/customers •  Proactively reviewing agreements to ensure SR&ED tax credits are

maximized •  Invoices should have proper segregation of materials and services

to avoid/minimize recapture •  Clear terms regarding performance and ownership of SR&ED



Stretching your SR&ED dollars (Cont’d)

Tracking SR&ED on a contemporaneous basis •  Meets CRAs requirements •  Capture additional activities

Purchase of Capital Assets for SR&ED purposes •  Purchase requisition should state intent •  Ensuring available for use by the year end



Who is Deloitte?

•  Largest service provider in this field in Canada •  Integrated team of engineers, scientists, accountants and tax specialists

•  Adaptable work models –  “A la carte” to full outsourcing capability –  We provide support from opportunity qualification, through all CRA

technical and financial approvals


Practice overview Canada GTA

SR&ED Partners 8 3 SR&ED Associate Partners 11 5 SR&ED Senior Managers 58 9 Other Professional Staff 75 31 Total number of SR&ED practitioners 152 48 Professional/Graduate Engineers 71 22 CA’s, CGA’s and CMA’s 81 26


Questions?
