SR&ED Tax Credit Program Overview

1. SR&ED Tax Credit Program Overview • In this presentation we will discuss. . . • A general overview of the program • How to identify potential SR&ED activities • Discuss types of activities that constitute SR&ED • Which expenditures are eligible • Tax treatment of SR&ED

2. SR&ED Scientific Research and Experimental Development “is the systematic investigation or search carried out in a field of science and technology by means of experiment or analysis” • $4 billion provided to over 22,000 companies across Canada • Added to the Income Tax Act in 1985

3. SR&ED The Purpose . . . • To encourage and assist Canadian companies to undertake efforts in Canada to develop new or technological advanced products or processes.

4. Sectors Involved • Manufacturing 29% • Information Technology 24% • Engineering 20% • Natural Sciences 9% • Electronics 9% • Agriculture & Food Sciences 9%

5. Questions to ask in identifying potential SR&ED activities? • Has your company developed a new product or process or changed an existing product or process (i.e. stronger, faster, lighter, more efficient, less expensive, more durable or flexible etc.)? • Has your company developed prototypes? • Did you have any failures or issues in your product or process development or improvement? • Has your development of your products or processes cost more than you expected? • Have you used existing technologies in new ways and in new combinations with each other?

6. Required Criteria 1. Scientific or Technological Advancement • Technologies utilized • Advancement (objective) must be identified from the start • Alternatives explored to get to the advancement • Achieving the advancement is not required • An attempt must be made to achieve the advancement

7. Required Criteria 2. Scientific or Technological Uncertainty • Must be an element of uncertainty • Technological uncertainty arises when the solution to the problem is not obvious to qualified people

8. Required Criteria 3. Scientific or Technological Content • The R&D effort must be conducted in a systematic manner • Documentation must support work undertaken

9. Activities specifically excluded • Market research • Sales promotion • Commercial production • Quality control or routine testing • Product style changes • Routine data collection • Human/social sciences

10. Eligible Expenditures • Labour Costs – salaries and wages • Materials – consumed in R&D • Contractors – consulting fees • Capital Expenditures – purchased or leased • ** Expenditures must be incurred and paid forby the corporation making the SR&ED claim.

11. Tax Treatment of SR&ED • Government assistance is an ITC (Investment Tax Credit) • The base rate of ITC is 20% of eligible expenditures • Canadian Controlled Private Corporations qualify for an enhanced rate of 35% depending on the taxable income level in the previous year. • Some Provinces provide an additional ITC amount • ITC is in the form of a cheque or a credit against taxes owing

12. Example Calculation of Benefit CCPC with acceptable taxable income Expenditures identified = $100,000 Provincial benefit @ 10% = $10,000 Amount available for federal benefit = $90,000 ($100K-$10K) Federal benefit @ 35% = $31,500 ($90K @ 35%) Total Benefit : $10,000 + $31,500 = $41,500

13. Tips for Successful SR&ED Claims • Identify eligible projects that meet the criteria • Properly account for SR&ED expenditures • Identify all SR&ED activities • Set up a method of tracking SR&ED expenditures separately • Filing deadline is 18 months after the company’s fiscal year end • Ideal to submit SR&ED with tax filing