SR&ED Tax Rules Changing

March 1, 2013 SRED

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It’s full speed ahead with changes to the SR&ED program in 2012

On Oct. 15, 2012, Finance Minister Jim Flaherty announced he would table a Notice of Means and Ways Motion in the House of Commons to put in place several tax changes announced in the federal budget. Several of the provisions will change the way in which SR&ED is performed.

“These changes will impact the types of expenditures that are deductible under section 37 of the Act and are
eligible for an investment tax credit under section 127, commonly known as SR&ED tax incentives,” read an explanatory notice issued in association with the motion.

“First, expenditures of a capital nature will no longer qualify for SR&ED tax incentives. Second, the rate at
which overhead SR&ED expenditures are accounted for under the so-called proxy method will be gradually
reduced from 65 percent to 55 percent. Third, third-party arm’s length payments for SR&ED expenditures will only be
80 percent eligible for ITCs. Fourth, the basic 20 percent ITC for SR&ED qualified expenditures will be reduced to 15 percent.”

Refocusing Government Support in 2012

While the October notice did not offer an explanation for the changes, reading the Budget 2012 documents reveals the government’s justification. The budget papers cited OECD figures showing that Canada is lagging other countries in research and development effectiveness, as well as the recent Jenkins report criticizing Canada’s “over-reliance” on tax credits.

With regard to SR&ED, the government pledged to improve it by “removing capital from the expenditure base, making it more cost-effective through design improvements and a measured rate reduction, and providing greater predictability through administrative improvements.”

Flaherty’s October motion also had provisions to change portions of international taxation, personal income tax and other facets of corporate taxation, such as phasing out the Corporate Mineral Exploration and Development Tax Credit.

The motion carried successfully on Oct. 17, 2012 in the majority Conservative house, paving the way for the government to introduce a bill at a later date. The next day, Flaherty introduced Bill C-45, a budget omnibus bill that contains the SR&ED provisions.

This article is based on the following Government of Canada notice: Minister Flaherty tables notice of ways and means motion to implement tax provisions in Economic Action Plan 2012 and other tax measures.