sr&ed: why it matters to your startup and how to best use the program 1 ©tsgi – all rights...
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SR&ED:WHY IT MATTERS TO YOUR STARTUP
AND HOW TO BEST USE THE PROGRAM
©TSGI – All Rights Reserved - November 2011
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SR&ED:Why it Matters to Your Startup
and How to Best Use the Program Prepared for Innovate Calgary
November 3, 2011
Graham SmithVice President – Business Development
TSGIThis summary is not sufficient for unassisted tax planning
©TSGI – All Rights Reserved - November 2011
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What Is The SR&ED Program?
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• Scientific Research & Experimental Development• A Federal tax program to encourage R&D in
Canada
• Most provinces have complementary programs
The largest industrial R&D incentive in Canada:
delivers >$4B/yr
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Why Does it Matter?
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• Primary benefit: Investment Tax Credits (ITC)– Either a cash refund or pre-paid tax
• Federal ITC is – 35% for CCPCs* (partly refundable)– 20% for all others entities (partly refundable)
• Provincial credit depends province* Qualfied Canadian Controlled Private Corporations
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Why Does It Matter? (cont’d)
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• AB Provincial Tax Credit is a nominal 10% – Refundable for corporations (capped $400k)– Partnerships are NOT eligible for AB ITCs
• The New Math: combined benefit in AB is:– CCPC: Up to 41.5%* cash back – Public Co’s: Up to 28%* partly refundable – Partnerships: 20% partly refundable
* Year 1 face rate; an AB grind effectively reduces this in subsequent years
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How Does SR&ED Work?
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• Program is a tax program, not a granting system: – You must execute your research and pay your
costs. – Then submit a claim as part of your taxes– Claims can be submitted up to 18 months after
your fiscal yearend (typically - no allowance for late filing!)
– Refunds usually issued 3-14 months after filing
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What Work Is Eligible?
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A) Basic ResearchB) Applied ResearchC) Experimental Development See section 248(1) of the Tax Act summarized as: – Purpose is to achieve Technological Advancement– For creating new, or improving existing, materials
devices, products, or processes – Incremental improvements specifically allowed
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What Are The Eligibility Criteria?
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Eligible projects must meet 3 technical criteria:• Technological Advancement– The technology being sought does not pre-exist within the
company or public domain• Technological Obstacle/Uncertainty– A qualified person could not predict if, or how, a project
could succeed on the basis of previous knowledge (i.e. existing proven methods)
• Systematic Approach– Qualified personnel working in a systematic manner with
documentation
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What Work Qualifies?
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Engineering Design Operations research Mathematical Analysis
Computer Programming Data Collection Testing Psychological research
Work undertaken by or on behalf of the taxpayer with respect to:
But does not include (per 248(1)e-k):• Market research• Quality control• Research in Social
sciences/humanities• Commercial production
• Style changes• Routine data collection• Prospecting/drilling for
minerals, petroleum or natural gas
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What If My Project Fails?
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Failure IS an option!• Failed projects can submit
successful claims!• The program supports the
attempt to advance technology.
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What Costs Can Be Claimed?
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Eligible projects can claim these cost categories:
• Labour• Materials• Leases (equipment)
• Contractors• Capital Items• Overhead
•Most work must be in Canada
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Is Our Industry Eligible?
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• The program can support projects in many fields of science and technology but excludes the social sciences (incl. bus. processes)
• We have seen successful claims in:- Manufacturing - Medical Tech.- Oil and Gas - Communications- Software/gaming - Agriculture- Clean Tech. - Consumer Products
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How to Get The Most Benefit
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• The SR&ED program is a generous and exceptionally effective incentive…
But you must know how to integrate it into your business
without interfering with your work
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How to Get The Most Benefit
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# 1 Make Sure You Apply If You Are Eligible!
– Many Alberta companies make the mistake of not filing - don’t let that be you!
– Make a realistic assessment of the eligibility of your technical work and the relevant costs
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How to Get The Most Benefit
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#1 Cont’d: Indicators of SR&ED Eligibility - You do not need a lab coat and goggles!
Does the company:• Employ B.Sc, M.Sc, P.Eng, or Ph.Ds?• Receive IRAP funding?• Publish or present technical findings?• Have patents?• Incur cost overruns or failures for technology reasons?
These are good indicators of SR&ED!
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How to Get The Most Benefit
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#2 Be Proactive!• Once you’ve decided you might have a SR&ED
claim set things up properly:– Choose the right business structure to execute– Keep appropriate technical and financial records– Make sure your paperwork is in order!
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How to Get The Most Benefit
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#3 Document, Document, Document (but not too much)
• SR&ED claims must be substantiated
• Documentation must be contemporaneously generated
• Achieve documentation target with the least possible effort
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How to Get The Most Benefit
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#4 Ensure it is Your SR&ED Claim
• Make sure it is clear who gets the SR&ED if contractors, 3rd parties, partners etc are involved
• CRA uses several tests to determine based on the laws
• It is not sufficient to simply write it in your contract
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How to Get The Most Benefit
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#5 Choose Employees vs Contractors (where appropriate)
• The program offers preferential treatment for employee wages for companies claiming overhead costs using the Proxy Method.
• You can get up to ~ 68% of a SR&ED employee’s wages
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How to Get The Most Benefit
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#6 Be Fiscally Prudent• Beware of over optimism in estimating your SR&ED
benefit: – Claims are often assessed at a lower value than what is
claimed– Many claims (or portions thereof) are non-refundable!
• Recall that you must submit your taxes in order to file a claim
• Approval time is usually reasonable, but can be lengthy (don’t get caught…)
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How to Get The Most Benefit
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#7 Get Help When You Need It!• Call for help if your spend exceeds ~$150K/yr – or would if you paid yourself/staff fair market value
• Or you have complex situations – i.e. agreements, partners, commercial production
etc• Call early: forensic tax accounting is no fun!• Call a SR&ED Pro – this is a specialty area
according to the ICAA
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What Should You Remember?
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If you are doing R&D in Canada you cannot afford to ignore this program
because…YOUR COMPETITORS ARE ALREADY
USING IT !
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What Is the Future of SR&ED?
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The future is unwritten….SRE&D will likely changeThe academics have weighed in:– The Jenkins Report (148 pages of light reading)– The Mowat Centre Report (another 22 pages)– Key recommendations include:• Simplification of the program (don’t hold your breath)• Redirection of SR&ED money to IRAP and others grants
The Federal Government hasn’t tipped their hand