2012 Federal Budget Update

The new SR&ED tax credit environment

Impact to the Manufacturing Sector

IntroductionIntroductionAndrew Raphael, Partner

Director of Food & Ag Processing Division

Ryan P. Mackiewich, Taxation PartnerSR&ED Practice Leader

Andrew Pellizzari, ManagerSR&ED Technical Specialist

Today’s Discussion y1. Helping Manufacturers Meet a Complex

C titi L dCompetitive Landscape2. Opportunities for SR&ED activities3. Budget 2012

– Changes to SR&EDChanges to SR&ED – Additional Opportunities for Funding

4 Tax Planning4. Tax Planning5. Questions

Overview • Manufacturing Sector consists of about 80,000

establishments with annual revenue of aroundestablishments with annual revenue of around $500 billion.

• Sales have grown less than 1%from 2005 to 2008• Sales have grown less than 1%from 2005 to 2008 before declining sharply in 2009 due to global recession.

• Over 90% of manufacturers employ fewer than 100.employ fewer than 100.

Competitive Manufacturing LandscapeCompetitive Manufacturing Landscape• Across all Canadian manufacturers, operating profits

average about 6 to 8% of salesaverage about 6 to 8% of sales. • Manufacturing costs (average):

– materials and supplies ~ 85%pp– production wages ~ 10%– energy ~ 5%.

$• Manufacturers spend $15 billion annually on capital investments (machinery, equipment, and facility construction) )– Average manufacturing plant in Canada operates for only

nine years and over half of new plants shut down within six.

Trends• Appreciation Of Canadian

Dollar• Weak Productivity Growth

C d ’ d ti it thDollar • Competition From Imports

- Imports = $340 Billion

- Canada’s productivity growth lags most other industrialized countries’p $

- Growing faster than exports

• Demographics

- Output per employee in the manufacturing sector was 27 percent lower than that ofDemographics

- An aging population = shortage of skilled workers

27 percent lower than that of the USA in 2008

- Canada’s productivity gap = reduced manufacturing competitiveness.

SR&ED Considerations Efficient Production &

Distribution Regulations

– Innovate to respond to govt. l ti– Strong Loonie = time to

purchase & adapt

D i M With L

regulations: • Air emissions • wastewater discharge

Doing More With Less– Retail & distribution

consolidation impacts

• disposal of hazardous substances

• cleanup of contaminated sitesconsolidation impacts

– Being proactive ! Inventory Control &

Traceability

sites• health & safety matters

Packaging Traceability– RFID

– Product interaction with packaging.

– User friendly.

SR&ED Considerations Sustainable

E i t l Energy Savings

Environmental Practices

- Going Green good for the

– Conversion & adaption

Collaborative R&D With C t & S liGoing Green good for the

environment & good marketing

Customers & Suppliers– Inventory control practices,

production efficiencies, and Web-Based Interactive

ServicesSales inventory feedback

p ,sustainable practices

Get Export Ready- Sales, inventory, feedback,

price discovery– adapt for foreign needs

Federal Budget 2012Federal Budget 2012

• SR&ED = Scientific Research & ExperimentalSR&ED Scientific Research & Experimental Development Tax Credit Program

(th “G ld” t)• ITC = Investment Tax Credit (the “Gold” we want)

• CCPC = Canadian Controlled Private CorporationCCPC Canadian Controlled Private Corporation

• Proxy Amount = A notional gross up of labour costs t h dto cover overheads

Federal Budget 2012Federal Budget 2012Changes to SR&ED Programg g

(Effective January 1, 2013)

• Contractor costs for SR&ED reduced to 80% of the contract paymentsof the contract payments

• Proxy amount reduced from 65% to 60%

Federal Budget 2012Changes to SR&ED Program

(Effective January 1, 2014)

• SR&ED ITC reduced to 15% (from 20%)SR&ED ITC reduced to 15% (from 20%)– The enhanced ITC for CCPCs will remain at 35%

• Prescribed proxy amount reduced to 55%Prescribed proxy amount reduced to 55%(from 60%)

• Capital expenditures no longer eligible forCapital expenditures no longer eligible for SR&ED – Includes machinery and computer equipment

Federal Budget 2012Federal Budget 2012

ExampleExampleSpend $100,000 on eligible SR&ED

$50 000• $50,000 wages• $25,000 contractors

$• $25,000 materials

Canadian Controlled Private Corporations 10% ITCNewF d l T S iFederal Tax Savings:

Qualified SR&ED Expenditures 122,500 Provincial ITC 12,250 Federal ITC @ 35% 38 588Federal ITC @ 35% 38,588

Total SR&ED ITCs 50,838

PriorFederal Tax Savings:

Qualified R&D Expenditures 132,500 Provincial ITC 13,250 Federal ITC @ 35% 41,738

T t l SR&ED ITC 54 988Total SR&ED ITCs 54,988

Change in Total ITCs Earned (4,150)

Non-CCPCs 10% ITCNewFederal Tax Savings:

Qualified R&D Expenditures 122,500 Provincial ITC 12,250 Federal ITC @ 15% 16 538Federal ITC @ 15% 16,538

Total SR&ED ITCs 28,788

PriorFederal Tax Savings:

Qualified R&D Expenditures 132,500 Provincial ITC 13,250 Federal ITC @ 20% 23,850

Total SR&ED ITCs 37 100Total SR&ED ITCs 37,100

Change in Total ITCs Earned (8,313)g ( , )

Federal Budget 2012Federal Budget 2012

Th h ill lt i $1 3 billi• These changes will result in $1.3 billion in savings

• Savings used for funding various additional “direct” R&D initiatives

Federal Budget 2012gImprovements to SR&ED Administration• CRA to conduct a pilot project to determine the• CRA to conduct a pilot project to determine the

feasibility of a formal pre-approval process

• Enhance the existing online self-assessment eligibilityEnhance the existing online self assessment eligibility tool

• Work with industry representatives to address y pemerging issues

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

• Increase the number of technical reviewers

Federal Budget 2012Federal Budget 2012Improvements to SR&ED Administration

• Providing additional training and establishing coordinated technical support for the technical reviewers

D ti ti t i• Devoting more time to program services

• Enhancing the quality assurance methodology

• Reviewing dispute resolution procedures to ensure their effectiveness

Federal Budget 2012Federal Budget 2012Additional changes in R&D supportAdditional changes in R&D support

• Budget 2012 implements some of the recommendations of “Jenkins Report”

• Savings from SR&ED program will support more g p g pp“direct funding” of research to support innovation

• $1 1 billion “directed” over next 5 years• $1.1 billion directed over next 5 years

• $500 million for venture capital

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• $400 million to support creation of large-scale$400 million to support creation of large scale venture capital funds – promote private sector investments in early-stage riskpromote private sector investments in early stage risk

capital. – structure yet to be determined

• $100 million to the Business Development Bank of Canada to support venture capital activities– New or existing mandate? Details to be determined

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• Western Innovation Programg– Announcement for financial support of

innovative SMEs in Western Canada

– Like Programs offered in Quebec, Atlantic Canada and Southern Ontario

• Forestry Innovation and Market Development SupportDevelopment Support – $105 million over 2 years

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• Doubling support to the NRC-IndustrialDoubling support to the NRC Industrial Research Assistance Program (IRAP)

IRAP helps support R&D salaries and– IRAP helps support R&D salaries and contractor costs

– Additional $110 million per yearAdditional $110 million per year

• $205 million to extend the temporary hiring di f S ll B icredit for Small Business

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• Supporting Private & Public SectorSupporting Private & Public Sector Research Collaborations

$– $14 million over two years to double the Industrial Research and Development Internship programInternship program

– Labour cost sharing initiative with private t tsector partner

– Integrate researchers into the labour market

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• Business-Led Networks of Centres of Excellence program– Industry-led research consortia

• Forestry• Aerospace

Dr g disco er• Drug discovery• CleanTech

C t h i t ith i t• Cost sharing arrangement with private sector partner

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

• Connecting innovative SMEs to federalConnecting innovative SMEs to federal departments through procurement– Canadian Innovation Commercialization ProgramCanadian Innovation Commercialization Program

($95 million over three years)

• Refocusing the National Research CouncilRefocusing the National Research Council– $67 million in 2012–13 to support business-led,

industry-relevant researchy

“Direct” Funding to Support InnovationDirect Funding to Support Innovation

– Emphasis on leveraging private & public R&D efforts

– Movement away from market-based, industry-led R&D to more institutional-targeted R&D

– “Grant-style” funding programs could increase d i i i b d ‘ d ’administrative bureaucracy and ‘red tape’• Companies will need to apply for a program and

wait for approvalwait for approval• Process will involve an inherent lag period

Federal Budget 2012What does this all mean for R&D ???

– Decrease to the value of SR&ED ITCs ~ 7% for CCPCs~ 20% for non-CCPCs

– More “direct” R&D funding opportunities– More complex administrative landscape– Increased scrutiny by CRA– More ways to disagree with CRA– Tax Planning important !

Federal Budget 2012

Tax Planning

• Contractors vs. Employees– Do the math – Employees much more valuable !– $100,000 spent on Employees results in $ , p p y

$64,000 of ITCs vs. $33,000 of ITCs for the same amount spent on contractors

• Capital Spending– Have all purchases completed by end of 2013p p y

Federal Budget 2012Federal Budget 2012

Tax Planning

• Performance Bonuses

g

Performance Bonuses– Accrued by December 2013

• Project SpendingRates drop starting Jan 1/14– Rates drop starting Jan 1/14

– Factor in to ROI

Building a Sound Growth Strategy

Benefits to your BusinessBenefits to your Business– Minimizing your taxes– Managing Riskg g– Controlling Costs– Enhancing your Performance– Maximizing your Human

Resources– Regaining Financial Control– Regaining Financial Control– Financing Change

ContactsContactsAndrew J. Raphael1 877 688 84081.877.688.8408andrew.raphael@mnp.ca

Ryan P. Mackiewich1.877.475.5678ryan.mackiewich@mnp.ca

Andrew PellizzariAndrew Pellizzari1.877.251.2922andrew.pellizzari@mnp.ca