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On August 14, 2012, the Department of Finance released draft proposals to reduce some of the benefits available under the SR&ED program however significant benefits still remain for small businesses. In particular, the 35% refundable credit has not been changed. What is SR&ED? The SR&ED program provides tax credits to businesses conducting research and development in Canada that will lead to new, improved or technologically advanced products or processes. The definition of SR&ED for tax purposes is the subject of much uncertainty and beyond the scope of this tax tip. In general, however, eligible SR&ED is a subset of what is commonly referred to as research and development. CCPC vs. Non-CCPC Canadian Controlled Private Corporation’s (CCPC's) generally receive a cash refund of 35% of the first $3,000,000 eligible SR&ED expenditures, annually. This benefit is ground down if the prior year's taxable income exceeds $500,000, or taxable capital exceeds $10 million. The draft proposals do not reduce this refundable credit. Non-CCPC’s receive a 20% investment tax credit (ITC) which can be applied to reduce current year taxes payable, carried back 3 years or carried forward 20 years. The Non-CCPC tax credit rate will be decreasing to 15% effective January 1, 2014. Proxy method instead of actual overhead The proxy method can be used to determine the amount of overhead costs that can be claimed for tax credit purposes. This amount is usually easier to determine (and audit) as it is calculated as 65% of direct R&D wages. The proxy factor will be reduced to 60% effective January 1, 2013 and to 55% effective January 1, 2014. The decreasing proxy factor may cause organizations to consider whether using the traditional method of accounting for overhead will now result in a greater claim. The traditional method requires detailed calculations to track overhead so consideration should be given to the time it will take to produce (and support on audit) the detailed overhead calculations required by the traditional method. Summary of changes
With the modifications to the SR&ED rules coming into force over the next two years, it is a good idea to review upcoming SR&ED expenditures and accelerate the spending, where practical, before certain rates are curtailed. This Tax Tip only mentions a few of the many SR&ED changes that have been proposed. Your TSG representative would be happy to discuss your SR&ED issues with you. TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes. |