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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

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

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

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

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

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

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

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

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.

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

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

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

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

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!

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!

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

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

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

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…)

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

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 !

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

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Contact information:

Graham SmithTelephone 403-451-3376

Email graham.smith@tsgi.cawww.tsgi.ca