day 4 afternoon - goheen
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Lead to Win
Lead to Win
Optimizing SR&ED ClaimsJune 23, 2009
Kevin Goheen
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Lead to WinSlide 2
SR&ED Program – Overview
• Canada’s largest federally supported program for industrial R&D incentives
• Program has existed since the 1980’s
• 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
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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
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Lead to WinSlide 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
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SR&ED – The Concept
Slide 5
Point A‘base level’
Point B‘Technological Objective’
Barriers, Constraints, Uncertainties, Challenges
Work elements•Systematic•Uncertainty
•If?•How?
• Better yield• Less polluting• More capacity• More users•Faster response•Lower energy use•etc…
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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
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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
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Other Sectors
Some examples of advancement are:
• Development of new pharmaceuticals
• New growing techniques for grape vines in cold climates
• New endodontic treatments
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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
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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
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What’s 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.
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CRA Web Site
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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
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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.
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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.
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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.
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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…”
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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.
– Don’t 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.
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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.
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New Documentation Requirements
Base Level Knowledge
Uncertainties Systematic Work Resources
Planning Docs X
Time Sheets X
Experiment Design X X X
Lab Notebooks X
Source Code, System Architecture, etc..
X
Trial Run Records X
Progress Reports, Minutes
X X
Test protocols, data and results
X X
Photographs and videos
X X
Prototypes, scraps X X
Contracts X
Others X X X X
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Preparing for your SR&ED Review
• Technical
– Prepare a slide deck from the T661
– Rehearse, rehearse, rehearse
– Let the reviewer present
– Don’t let the reviewer “wander around” your shop.
– Silence is your friend; shut up.
• Financial
– Can be extensive
– Examples
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Relationship with IRAP
• Advantages of having both– Usually SRED technical review goes better (or doesn’t happen)– Forces documentation– Cash flow improves 18 months– Financial risk drops– ITAs are usually on your side; CRA reviewers are not on your
side.• Disadvantages to having IRAP
– Reduces SR&ED claim, unless you get IRAP to pay for non-eligible activities
– e.g. R&D project with $50K salaries, $16.5 contractors, 65% overhead
• With $50K IRAP Small Project support, total cost to loss making CCPC is ($5060)
• Instead get IRAP to pay for marketing or IP; total cost to company will be ($27,060)
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Lead to Win
10-minute Exercise
• Work in LTW Groups
• Define technical objectives
• Define technical uncertainty
• Define work performed
• Identify costs
• Identify documentation
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