SRED Summary
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Transcript of SRED Summary
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Canada’s Federal Scientific Research and
Experimental Development Tax Incentive Program
(SR&ED)
Vania Karam, CPA, CRM, MA Econ, 2016
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Overview…
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Why? The SR&ED is a popular tax measure for SMEs
What? The SR&ED provides broad-based R&D support, with targeted support for SMEs
Who? Benefits available through the SR&ED vary by type and size of business
How? Simple examples to show how the federal SR&ED works
Eligibility? There are a number of different activities that qualify for the SR&ED
Issues? The significant burden with preparing claims is a longstanding concern for SMEs
Changes? Further to the Jenkins Panel recommendations, Budget 2012 made improvements to the SR&ED
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The SR&ED is a popular tax measure for SMEs…
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SR&ED is viewed as a cost-effective way to incentivize R&ED and promote ICT adoption. SR&ED produces an 11% return on investment to the Canadian fiscal system1. SMEs tend to invest proportionately more of their revenue in R&D than larger firms. ICT accounts for 35% of private-sector R&D in Canada and SR&ED is often used by ICT firms2.
A company does not necessarily have to be profitable to benefit from the SR&ED. There is a refundable component that provides ‘cash-in-hand’ to incentive R&D expenditures, a
key point for cash-strapped start-ups. For very small start-up technology companies that are not yet earning profits, the SR&ED can
cover almost half of their R&D budgets and improve their working capital position. Many smaller companies are bought and sold for the sole purpose of taking advantage of
accumulated SR&ED credits.
Provinces have similar tax incentives that complement the federal SR&ED (see Annex).
1 Source: M. Parsons and Phillips, “Tax Incentives for Scientific Research and Experimental Development,” Consultation Paper, Finance Canada, 2007.2 Source: Information Technology Association of Canada, “The Issue: The Importance of the SR&ED to ICT R&D”, 2012.
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The SR&ED provides broad-based R&D support, with targeted support for SMEs…
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The SR&ED is the largest federal program for supporting R&D in Canada, and provides over $3.1 billion in tax assistance to Canadian firms, including $1.37B in cash credits.
The rationale for the SR&ED is two-fold: In the absence of the SR&ED, firms would perform less R&D than is optimal; and R&D results in spillover effects that benefit other firms and sectors of the economy.
The SR&ED is particularly useful for SMEs and start-ups that conduct R&D to create new, improved, or technologically advanced products and processes.
SR&ED expenditures can be applied as a deduction against business income taxes payable, with any unused amounts carried forward indefinitely.
SMEs may also qualify for an investment tax credit (ITC) against taxes payable. Unused non-refundable ITCs can be carried back three years and forward 20 years.
For small firms, after reducing taxes to zero, any remaining ITC may be refunded in cash.
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Benefits available through the SR&ED vary by type and size of business…
Small and medium-sized Canadian-controlled private corporations (CCPCs) receive a fully refundable ITC at an enhanced rate of 35% on the first $3 million in qualified SR&ED expenditures, and a 40% refundable ITC on qualified expenditures in excess of $3 million.
If taxable income exceeds $500K, or taxable capital exceeds $10 million, access to the fully refundable ITC is restricted (For example, the $3 million expenditure limit is reduced by $10 for each dollar by which the prior year’s taxable income exceeds $500K).
Larger CCPCs with taxable income over $800K or taxable capital over $50 million cannot receive the refundable ITC.
For non-CCPCs, the general ITC rate is 15% in 2014 and subsequent taxation years, and they are generally eligible for a 40% refund.
Where a CCPC is part of a group of associated corporations, the annual expenditure limit for purposes of calculating the ITC must be shared amongst the group of corporations.
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Simple examples to show how the federal SR&ED works…
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A small CCPC has $4 million in SR&ED expenditures (where the CCPC is not part of an associated group of corporations).
The CCPC would receive a fully refundable ITC at an enhanced 35% rate on the first $3 million in qualified expenditures and a 40% refundable ITC at a 35% rate on the additional $1 million in expenditures.
Thus, the total ITC value is $1.19 million. 100% x $3 million x 35% = $1.05 million 40% x $1 million x 35% = $140K
Assuming the CCPC had no tax payable, the entire $1.19 million would be paid out as a refundable tax credit (credits are paid out 3-4 months after the tax filing date).
A medium-sized CCPC has $600K in taxable income and $10 million in qualified SR&ED expenditures.
The $3 million expenditure limit to access the fully refundable 35% ITC is reduced by 10 x $100K = $1 million.
Thus, the total ITC would be $1.82 million. 100% x $2 million x 35% = $700K 40% x $8 million x 35% = $1.12 million
If the CCPC had $1 million in tax payable: The ITC reduces tax payable to zero; and The remaining ITC is then paid out as a
refundable tax credit of $820K.
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There are a number of different activities that qualify for the SR&ED…
SR&ED eligibility is assessed according to three criteria: Scientific or technological advancement; Scientific or technological obstacle/uncertainty; and Scientific or technological content.
SR&ED activities must involve systematic investigation or search carried out in science and technology by means of experiment or analysis.
Activities that qualify: Experimental development; applied and basic research; engineering; design; mathematical analysis; computer programming; and testing.
Activities that do not qualify: Market research; routine testing and data collection; research in social sciences or humanities; commercial production; and style changes.
SR&ED allows for firms to claim previously allocated spending on R&D (versus a program like IRAP that is focussed more on the pre-activity R&D stage)
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While the SR&ED is an important incentive for Canadian corporations that carry out internal R&D activities, many SMEs have raised concerns over the administrative burden associated with filing claims.
Businesses must provide a record of the percentage of time their staff spent on eligible activities, explain the R&D that was conducted, how it advanced its understanding of the issue being addressed, and how the R&D helped it to overcome a technical obstacle.
Companies often use accounting firms to prepare SR&ED claims. They may also incur significant legal expenses to prove eligibility of expenditures.
CRA is taking steps to reduce the tax compliance burden associated with the SR&ED, including:
A pilot to assess the feasibility of a formal pre-approval process for SR&ED claims; and Online and in-person services to help claimants better understand the program’s eligibility
requirements.
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The significant burden with preparing claims is a longstanding concern for SMEs…
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Further to the Jenkins Panel recommendations, Budget 2012 made improvements to the SR&ED…
The “prescribed proxy amount” used to compute overhead expenditures was reduced from 65% to 55% of direct labour costs to limit instances where credits are granted for overhead costs that exceed the actual costs incurred.
The percentage of contract payments used for calculating SR&ED credits was reduced to 80% to remove the profit element from arm’s length contract payments.
Capital was removed from the expenditure base, while other elements (salary & wages, materials, overhead and contract payments, remain eligible). This change was met with mixed reviews:
Capital expenditures were one of the most complex components of the SR&ED and so their removal from the list of eligible expenditures simplified the claims process.
However, for firms that incur significant capital expenditures for R&D purposes, the loss of this element has diluted the value of the tax measure for those firms.
The general ITC rate was reduced from 20% to 15% to address the issue of growing pools of unused ITCs.
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ANNEX: Provincial R&D/SR&ED Tax Measures
R&D tax incentive Description Limits Availability Eligible Expenditures
Ontario R&D Tax Credit (ORDTC)
Non-refundable 4.5% credit for eligible expenditures
Can be carried back 3 yrs and forward 20 yrs to reduce ON corp. income tax payable (but not to a tax year that ends before Jan. 1, 2009)
Corps with a permanent establishment in Ontario after Dec. 31, 2008
Expenditures eligible for the federal SR&ED credits carried out in ON
Ontario Innovation Tax Credit (OITC)
Refundable 10% credit for qualified expenditures (any OITC in excess of tax otherwise payable will be refunded)
Annual expenditure limit of $3M of qualified expenditures phased out when a corp’s taxable paid-up capital for preceding tax yr exceeds $25M (eliminated at $50M in capital). Limit also phased out when taxable income for the preceding tax yr over $500K but not over $800K
Ontario Business Research Tax Institute Tax Credit
(OBRITC)
Refundable 20% credit for qualified expenditures (any OBRITC in excess of tax otherwise payable is refunded)
$20 million annual cap that must be allocated within an associated group of corps
Corps, incl. those that are members of partnerships (other than specified members) with a permanent establishment in Ontario
Qualified expenditures on SR&ED work performed in ON under contract with eligible research institutes
Quebec SR&ED tax measures
100% tax deduction for current and capital SR&ED expenditures
On Dec. 3, 2014, introduced new minimum thresholds starting at $50K per claim for SR&ED in QC. SR&ED spending below a specified threshold that starts at $50K are excluded for corps with assets of more than $50M
Corps with a permanent establishment in QC
Expenditures eligible for the federal SR&ED credits carried out in QC
Refundable 17.5% SR&ED credit Expenditures for wages paid in QC
Refundable 35% SR&ED credits
Expenses pursuant to: university, public research centre or research consortium contracts; pre-competitive research contracts; and dues and fees paid to an eligible research consortium
* Filing deadlines: AB–15 months after filing due date; Federal/BC/NS–18 months after corporate year-end; MA/YK/NL–12 months after filing due date** For all regions except Newfoundland & Labrador, eligible expenditures are reduced by government and non-government assistance, but not the related
provincial credit. The provincial credit will also reduce the federal pool of deductible SR&ED expenditures and qualified SR&ED expenditures. In most cases, any recapture will crease or increase provincial tax payable.
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R&D tax incentive
Description Limits Availability Eligible Expenditures
Alberta SR&ED tax credit
Refundable 10% credit on up to $4M in eligible expenditures
--
Corps with a permanent establishment in Alberta, for SR&ED activities carried out in Alberta after Dec. 31, 2008
Expenditures eligible for the federal SR&ED credits carried out in AB. For years ending after Dec 31, 2012, eligible expenditure is amended to follow the federal reduction in the prescribed proxy amount
British Columbia
SR&ED tax credit
Refundable 10% credit for CCPCs up to the $3M expenditure limit
Otherwise, 10% non-refundable credit for qualified SR&ED expenditures
Can be carried back 3 yrs and carried forward 10 yrs to reduce BC tax payable
Corps with a permanent establishment in BC. Credit has been extended to allow corps that are members of partnerships to claim their proportionate share of the partnership’s SR&ED carried on in BC, for qualified expenditures after Feb 20, 2007
Rules parallel the federal SR&ED rules relating to the definition of SR&ED, qualifying expenditures, and the expenditure limit. SR&ED expenditures must be carried out in BC
Manitoba R&D tax credit
Non-refundable 20% credit on eligible expenditures incurred after Mar. 8, 2005, and 15% on eligible expenditures before Mar. 9, 2005
Refundable credit for eligible expenditures after 2009 for corps that work with eligible institutes in Manitoba
Non-refundable credits can be carried back 3 yrs and forward 10 yrs for yr ending after 2003 and carried back 3 yrs and forward 7 yrs for yr ending before 2004 and applied against MA tax payable
Manitoba’s 2010 budget extended refundability of the credit to in-house R&D expenditures (not undertaken by an institute in MB). Refundable portion is ¼ in 2011 and ½ in 2012.
Corps, incl. trust beneficiaries or that are members of a partnership with a permanent establishment in MB
Effective Jan 1, 2014, eligible expenditures amended to: follow the federal reduction in the prescribed proxy amount; not to follow the federal change to SR&ED provisions disallowing capital expenditures; and follow the federal reduction to 80% of the claimable portion of contract payments with exception of contract payments to eligible education institutions in MA
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ANNEX: Provincial R&D/SR&ED Tax Measures
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R&D tax incentive
Description Limits Availability Eligible Expenditures
Saskatchewan R&D tax credit
Non-refundable 15% credit for eligible expenditures before Mar. 19, 2009, and refundable 15% credit for eligible expenditures after Mar. 18, 2009
Effective for qualifying R&D expenditures incurred on or after Apr. 1, 2012, the refundable R&D credit for CCPCs is subject to a max. annual limit of $3M qualifying expenditures; qualifying expenditures in excess of this annual limit and qualifying expenditures by non-CCPCs will be eligible for a 15% non-refundable R&D tax credit
Non-refundable credits can be carried back 3 yrs and forward 10 yrs against SK tax payable
Corps, incl. trust beneficiaries or members of a partnership, with a permanent establishment in SK
Expenditures eligible for the federal SR&ED credit carried out in SK
Yukon R&D tax credit
--
Corps with a permanent establishment in YK at any time in the yr, individuals that are resident in the YK on last day of the yr, incl. trust beneficiaries and members of a partnership
Expenditures eligible for the federal SR&ED credit carried out in YK
Nova Scotia R&D tax credit
Fully refundable 15% credit on eligible expenditures
--
Corps, incl. those that are beneficiaries of a trust or that are members of a partnership, with a permanent establishment in NS
Expenditures eligible for the federal SR&ED credit carried out in NS
Newfoundland & Labrador
R&D tax credit
Fully refundable 15% credit on eligible expenditures
--
Taxpayers, incl. corps and individuals, beneficiaries of a trust, and members of a partnership, with a permanent establishment in NL
Expenditures eligible for the federal SR&ED credit carried out in NL
New Brunswick
R&D tax credit
Fully refundable 15% credit on eligible expenditures after Dec. 31, 2002, and 10% non-refundable credit on eligible expenditures before Jan. 1, 2003
Non-refundable credits can be carried back 3 yrs and forward 7 yrs
Corps, incl. trust beneficiaries or members of a partnership, with a permanent establishment in NB
Expenditures eligible for the federal SR&ED credit carried out in NB
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ANNEX: Provincial R&D/SR&ED Tax Measures