Canada’s Changes to the Scientific Research and Experimental Development Program

March 6, 2013 Published by
Post Categories: Financial Performance • Tax Accounting

Canada’s 2012 federal budget contained a number of changes to the Scientific Research and Experimental Development program (SR&ED). The majority of changes resulting from these measures are cuts in expenditure eligibility for all companies claiming SR&ED. Additional expenditure cuts apply to public and foreign- owned corporations.

What is the Impact Budget 2012 Changes to SR&ED:

 

Effective January 1, 2013 (regardless of year end)

  • Investment Tax Credit (ITC) claim for contract payments is restricted to 80% of the cost to payer.
  • Proxy method formula reduced to 60% from 65%.

Effective for year ends after December 31, 2013.

  • For non-Canadian Controlled Private Corporations (CCPCs), ITC rate reduced to 15% from 20%.
  • For CCPCs”rate reduction applies to expenditures in excess of $3 million (limit is lower if taxable income greater than $500,000 or taxable capital is greater than $10 million).
  • The enhanced rate of 35% that applies to the expenses claimed up to the expenditure limit remains unchanged.

Effective January 1, 2014(regardless of year end)

  • Proxy method formula reduced to 55% from 60%.
  • Capital expenditures no longer part of SR&ED program.
  • Lease payments for capital equipment no longer part of SR&ED program.
  • Sub-contractor invoices must break out any capital component of charges.

Provincial Benefits

  • Quebec boosted wage credit for bio-pharma sector
  • Ontario introduced ORDTC (~ 2 years ago) and boosted multi-media tax credit.

Key policy documents:

1. T4088, Guide to T661.

2. Eligibility of work for SR&ED investment tax credit policy (replaces Information Circular 86-4R3).

  • New policy omits doctrine of “slight advancement” and reinforces “advancement in knowledge”.
  • New eligibility model hasd 5 criteria vs. 3 in the old policy:
    • Scientific or technological advancement.
    • Technologic uncertainty identified prior to start of project.
    • Formation of Hypothesis.
    • Scientific Method – including formulation, testing and revising hypothesis.
    • Record keeping of hypothesis tested and results as the work progresses.

3. Interpretation Bulletin 151-R5, SR&ED expenditures.

Selected Planning Strategies:

  • Accrue outgoing contract payments before end of 2012 (might be too late)
  • Convert R&D contractors to employees
  • Require contractors to break out capital component of their fees
  • Consider using traditional instead of proxy overhead
  • Convert to CCPC and safeguard the CCPC status
  • Safeguard expenditure limits
  • Assess capital equipment needs and purchase equipment by December 31, 2013 (note “available for use” rules in subsections 37(1.2), 248(19), 13(26)-13(31) of the Income Tax Act.
  • Buy-out capital equipment leases extending beyond 2013 (acquired equipment is “new” not “used”)