SR&ED Legislative Changes – Budget 2012
Reference Article (>5 Years Old)Please note that the information herein may be outdated, links could be inactive, and policies discussed may have evolved. For the most current data, consult our latest publications. If you would like us to refresh this article as it is of interest to you, please contact us. |
One of the great confusions regarding SR&ED is how it can be changed. In order to change the program, the legislation needs to be modified. In the 2012 Federal Budget, announced today, the following proposed changes have been put forward in Appendix 4 (starting on page 457):
You can read an explanation, in layman’s terms, of all of these changes in our post here.
Scientific Research and Experimental Development Program
(20) That,
(a) for taxation years that end after 2013, the reference to “20%” in paragraph (a.1) of the definition “investment tax credit” in
subsection 127(9) of the Act be replaced with “15%”, except that for taxation years that include January 1, 2014, it shall be read as a reference
to the percentage that is the total of
(i) 20% multiplied by the proportion that the number of days that are in the taxation year and before 2014 is of the number of days in the
taxation year, and
(ii) 15% multiplied by the proportion that the number of days that are in the taxation year and after 2013 is of the number of days in the
taxation year;
(b) for taxation years that end after 2013, the reference to “15%” in subsection 127(10.1) of the Act be replaced with “20%”, except that for taxation years that include January 1, 2014, it shall be read as a reference to the percentage that is the total of
(i) 15% multiplied by the proportion that the number of days that are in the taxation year and before 2014 is of the number of days in the
taxation year, and
(ii) 20% multiplied by the proportion that the number of days that are in the taxation year and after 2013 is of the number of days in the
taxation year;
(c) for expenditures incurred after 2012, subparagraph (a)(ii) of the definition “qualified expenditure” in subsection 127(9) of the Act be
amended to include only 80% of an expenditure that
(i) would otherwise be included under that subparagraph,
(ii) is for scientific research and experimental development performed for or on behalf of the taxpayer by another person or partnership
with whom the taxpayer deals at arm’s length, and
(iii) has been reduced to exclude any amount of a capital nature incurred by the other person or partnership in the performance of
the scientific research and experimental development;
(d) the percentage at which the prescribed proxy amount, for a taxation year, referred to in paragraph (b) of the definition “qualified
expenditure” in subsection 127(9) of the Act is calculated be, for taxation years that end after 2012, the percentage that is the total of
(i) 65% multiplied by the proportion that the number of days that are in the taxation year and before 2013 is of the number of days in the
taxation year,
(ii) 60% multiplied by the proportion that the number of days that are in the taxation year and in 2013 is of the number of days in the
taxation year, and
(iii) 55% multiplied by the proportion that the number of days that are in the taxation year and after 2013 is of the number of days in the
taxation year;
and
(e) for expenditures made by a taxpayer after 2013,
(i) section 37 of the Act be amended to exclude an expenditure in respect of the use or the right to use property that would, if it were
acquired by the taxpayer, be capital property of the taxpayer,
(ii) paragraph 37(1)(b) of the Act be repealed,
(iii) subparagraphs (a)(i) and (iii) of the definition “qualified expenditure” in subsection 127(9) of the Act be repealed, and
(iv) section 127 of the Act be amended to exclude from the SR&ED qualified expenditure pool an expenditure in respect of the use or the
right to use property that would, if it were acquired by the taxpayer, be capital property of the taxpayer.
(21) That such other amendments to the Act be made as are necessary to give effect to the proposals relating to scientific research and experimental development described in the budget documents tabled by the Minister of Finance in the House of Commons on Budget Day.
These changes will have a significant impact on many businesses. What are your thoughts? Will they help or hinder innovation?
The Federal Budget introduced today contains a number of the recommendations in the Jenkins Report. The main changes are shown below.
The good news is that the program has fundamentally remained the same, although it is somewhat less generous. It still remains a strong incentive for companies to take risks in advancing the boundaries of technical knowledge in their field of endeavour.
The only significant disappointment is the reduction in the amount of an arm’s length contract that can be included in eligible expenditures.
The Government has also indicated that it will add technical advisors and take steps to improve training so that claimants can expect consistent treatment, no matter who is their Technical Reviewer.
Item: Capital Expenditures
Change: Removed from expenditure base in 2014
Comment: We have been counseling our clients against claiming Capital unless it was a major expenditure. It results in no effective long term cash effect.
Item: Labour, Material Contracts Overheads As Eligible Expenditures
Change: No change
Comment: Jenkins recommendation re: “labour-only” basis not accepted.
Item: Arms Length Contracts
Change: Reduced to 80% of expenditure effective January 1, 2013
Comment: This will remove the so-called “profit element” from eligible expenditures. If you use contract employees, it makes the use of employees paid through the payroll much more attractive.
Item: Prescribed Proxy Amount (65% of labour)
Change: Reduces in steps to 55%; new rate effective January 1, 2013.
Comment: This actually makes sense and we have often wondered why it was set at 65% in the first place. At 55% it is still a very good incentive as it assumes that the overhead ratio is now 55%. Most companies could not survive with a 55% overhead rate.
Item: General SR&ED Credit Rate
Change: Reduced from 20% to 15% effective January 1, 2014.
Comment: Similar to reduction in corporate tax rate. No a change in the rate for CCPC’s (35%) on expenditures less than $3 million.
Item: Use of Notice of Objection
Change: Extends the use of the NOO process to include a second review of scientific eligibility determination.
Comment:. This is an excellent change. Presently one needs to go to Tax Court to get a “second look” at the scientific eligibility of a claim.
Item: Contingency Fees
Change: The Government will conduct a study over the next year to determine why claimants prefer to hire consultants on a contingency fee basis.
Comment: We suspect that many clients will prefer to stay with contingency fees, especially those who have little confidence in CRA’s fairness. None of our clients choose contingency fees, even though we offer the option of doing so.
I agree that SRED will remain a strong incentive to ” take risks in advancing the boundaries of technical knowledge in their field of endeavour”. However, I would hope that the awareness of the SRED program is investigated. In particulair, is the SRED incentive factorred into the decision criteria for taking the risk or not? I suspect that we would all be better off by improvig our understanding of what differentiates those that find SRED affects the tipping point of the decision versus those that don’t. I suspect the biggest overall gain is being overlooked – potetial benefit of increased promotio of general SRED awareness to increase the number of first time claimants. Has there even been a compariso of the benefits of promoting the home renovation tax credit versus the amount spent for our SRED tax credits?
Thanks for the comment Mark! You raise some excellent points. The problem with comparing the Home Renovation Tax Credit (HRTC) to SR&ED is that it is an individual tax credit. We’re comparing apples to oranges. However, we’ve definitely seen a discrepancy in the amount of money spent promoting the HRTC versus the amount spent on SR&ED. I am currently unaware of a study that compares the two incentives, though it sounds like an excellent read!