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Scientific Research and Experimental Development (“SR&ED”) High Level Overview

Scientific Research and Experimental Development (“SR&ED”) High Level Overview. Business Incentives – Lunch & Learn. SR&ED Background Financial Benefits SR&ED Scientific Criteria Qualifying Expenditures Examples of eligible projects. SR&ED Background.

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Scientific Research and Experimental Development (“SR&ED”) High Level Overview

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  1. Scientific Research and Experimental Development (“SR&ED”) High Level Overview

  2. Business Incentives – Lunch & Learn • SR&ED Background • Financial Benefits • SR&ED Scientific Criteria • Qualifying Expenditures • Examples of eligible projects

  3. SR&ED Background • Has existed in Canada its current form since early to mid-1990’s • Defined in the Canadian Income Tax Act section 248(1) • Means changes are onerous and generally infrequent • Also means that taxpayers are entitled to the tax credit • The premiere incentive in Canada • A fading reputation as being one of the most lucrative R&D incentives in the world • Pendulum swings • Incentive/entitlement vs. audit • Jenkins Report

  4. Financial Benefits to Canadian Companies • ITC rates – Current • Federal • 20% non-refundable for all Canadian companies • Additional 15% refundable on first $3M for CCPC • Ontario • 10% refundable on first $3M for all Canadian companies • Additional 4.5% non-refundable for all Canadian companies • ITC rates – Future • Federal rates will change starting January 1, 2014 • 15% non-refundable for all Canadian companies • Additional 20% refundable on first $3M for CCPC

  5. SR&ED Scientific Criteria • Three criteria defined in s.248(1) of the ITA • Scientific or Technological Advancement • You must be attempting to advance technology and/or scientific knowledge through experimentation or analysis • Your advancement must be (at least) incrementallybeyond the knowledge or technology available in the publicdomain • Scientific or Technological Uncertainty • In attempting your technological advancement, you must encounter one or more technological obstacles or problems for which the solution is not readily known by those operating in the industry. • Scientific or Technical Content • You must be following a methodical process with evidence of the work performed • Work must be performed by relevantly-qualified individuals

  6. Qualifying Expenditures – what can you claim? • Salaries and Wages • Materials • Contractors • reduced to 80% as of January 1, 2013 • Overhead • Traditional method • Proxy method • Currently 65% of eligible wages and salaries • Reduced to 60% on January 1, 2013 • Reduced to 55% on January 1, 2014 • Lease costs & capital expenditures • Both eliminated on January 1, 2014

  7. Submitting an SR&ED Claim • Identification of eligible activities in the business • Examination of the activities performed in Canada • Identification of what activities qualify for SR&ED • Segregate activities into SR&ED projects • There can be 1:1 correlation between SR&ED projects and business projects but not necessarily • Strategy: fewest number of SR&ED projects covering the maximum amount of eligible expenditures. • Prepare technical project descriptions • A technical description describing how the SR&ED project satisfies the 3 criteria • Identification and quantification of eligible costs • Identification, quantification and substantation/evidence • Prepare of the SR&ED claim form T-661 • Integrate with corporate tax return • Current year • Amended year (within 18 months of fiscal year end)

  8. Defending an SR&ED Claim • Every claim goes through a risk assessment process • Claims who are deemed higher risk are reviewed in more detail • Level of detail of the audit varies based on the risk assessment • High risk factors include: • First time claimants • Large claims • Claim history • Substantial increase in claim size year-over-year • Poorly documented technical descriptions • Consistently filing late • Nature and complexity of the claim

  9. Final Thoughts • Some foreign-owned, Canadian companies don’t realize the incentive is available and are missing out • Taxpayers experiences with the credit vary across the country; consistency of application and interpretation has been an issue. • Welch has sometimes been able to structure joint foreign-Canadian ownership to meet the CCPC requirements (and therefore enjoy the enhanced SR&ED tax credit rates) • Welch assists taxpayers through all the stages of SR&ED claim preparation and defence

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