The Tax Court of Canada has strengthened the understanding that work done by a contractor that is not SR&ED but is necessary for the SR&ED to take place is a contractor expense for the purposes of ITC. And has broadened the meaning of contractor costs beyond current CRA interpretation.
In Feedlot Health Management Services Limited. v The Queen (2015 TCC 32) Justice Woods used the ruling in a previous case The Queen v Savage that work “in relation to”, “with reference to” or “in connection with” SR&ED work can qualify as contract work in respect of SR&ED so long as the work is work undertaken by or on behalf of the contracting company and has some relation to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research.
In the case of Feedlot Health Management the court ruled that Access Fees paid (fees paid to give Feedlot Health access to test cattle) bears sufficient relation to data collection and testing to qualify as such. In other words, the expenditure does not have to be for data collection but for expenditures that are related to data collection. In this case, once the company had access to the cattle they could collect data.
This is a major broadening of the current CRA interpretation of expenses which qualify as contractor costs. Currently only expenses which are specifically and very narrowly engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research are allowable SR&ED expenditures. Now the definition of what qualified under these terms has been much, much widened.
RSG Revenue Services Group has provision for a few companies to receive a loan against their SR&ED claim at the low rate of Prime + 5% (currently 8% APR). Traditional SR&ED loans are provided at 24-36% APR.
This is a pilot program.
50% of an expected ITC will be financed at Prime + 5%.
- The company has a high likelihood of being cash flow positive or has non-Canadian customers.
- The company has appointed a SR&ED claim manager internally
- The company agrees to follow the documentation requirements laid down by RSG
- The company’s SR&ED claim is prepared by RSG
- An ITC of at least $400,000 is expected.
- The company will open an account with RSG’s financing partner to facilitate the loan and receipt of the refund
Interested companies should contact Terra Mackie or David Kaplan at 604.800.4111 or by email.
NEW FUNDING OPPORTUNITY – FIRST ROUND DEADLINE DECEMBER 8TH 2013
The WESTERN INNOVATION (WINN) INITIATIVE is offering a zero-interest, security free loan of up to 50% of total eligible costs but no more than $3.5m for each project.
Applications must be made by December 8th 2013 and if accepted will be funding mid-2014
WINN was tabled in the 2013 Federal Budget but details have only now been published. $100m is available.
Companies can apply to fund the:
- Introduction of a new product, process or service to new or existing markets
- Improvement of products, processes or services
- Technology development/acceleration
- Product certifications, including Controlled Goods Registration
- Pilot projects (first user) and technology demonstration projects
- Validation of market potential and end-user acceptance
- Support for marketing, human resources development, productivity, and process or quality improvement directly related to the commercialization of new opportunities
Elements of a Strong Proposal will demonstrate:
- Qualified, experienced and complete management team
- Technology readiness and sufficient IP
- Strong market potential (e.g. strategic or supply chain partnerships in place, potential customers identified, etc.)
- Financial capacity to execute and ability to repay
- Measurable economic benefits to Canada
WHO IS ELIGIBLE
- For-profit businesses incorporated to conduct business in Canada
- Less than 500 full – time equivalent (FTE) employees
- Have been in operation for at least one year
- Have operating facilities located in Western Canada
- Have a viable plan to commercialize an innovative, technology-driven, new or improved product, service or process within three years of project commencement
- Have sufficient intellectual property rights to carry out the proposed project and to commercially exploit the results of the project
- Have provided a current business plan that details the investment opportunity and recent financial statements
- Have confirmed, at the time of application, funding from all other sources, including government and non-government (non-government funding must represent at least 50 percent of the proposed project costs)
- Quantifiable design, engineering and other professional services
- Costs of prototype development materials consumed
- Costs of transportation of prototype to location of demonstration site
- Costs of third party certification, testing, quality assurance, etc.
- Costs of specialized insurance while item is onsite for demonstration
- Related travel costs
- Material and supplies costs consumed in the product development and production stages
- Capital costs for machinery and equipment
- Labour costs
- Procurement of project- related innovation services (independent of the applicant), including, for example, patenting costs
The first call for proposals is currently underway and will close on Dec 8th 2013. To discuss how RSG can assist you with your application; please contact Terra Mackie at 778.288.2455 or at Terra.Mackie@RevenueServices.ca
Changes to SR&ED program coming your way in 2012 – with more audits
SR&ED (scientific research and experimental development) incentives are here to stay, but the program is quietly undergoing significant alteration. Short version: expect more scrutiny.
With the federal government projecting a $36-billion deficit, Canada Revenue Agency has narrowed the interpretation of what qualifies as SR&ED to reduce the value of projects and expenses qualifying for refunds or credits.
Change began in June 2010 with a radically new CRA directive to deny SR&ED claims lacking “sufficient” supporting evidence, even if the projects clearly met the definition of SR&ED. Now more claims are being denied, and CRA has reduced it’s payout by about 30 percent. At the same time, CRA in British Columbia has increased it’s audit staff by 50 percent so as to scrutinize each claim more closely.
by David Kaplan on 3/29/12
Minister Flaherty’s Budget 2012 reduces SR&ED credit payouts to large businesses massively; and minimally reduces SR&ED credit payouts to small and medium sized business. What a surprise!
The Jenkins Report advised Minister Flaherty to reduce SR&ED payments to small companies. Mr. Flaherty began his by recounting the recommendations of the Jenkins report and his government’s intention to implement the recommendations. Then he gave a wacking to large companies, which the Jenkins report had recommended to leave alone. Read more »
Recommendations regarding the SR&ED program if adopted by the federal government would be slowly phased in. The most significant recommendations are to (i) restrict CCPC claims to the labour component of R&D, (ii) reduce the refundable portion of the claim over time and (iii) to allow the CRA to provide pre-claim approval – we like this one especially.
Restricting claims to the labour component alone means that salaries and wages, contractor labour costs and the proxy overhead would continue to be eligible expenses. Costs incurred for materials and equipment would no longer be eligible however the panel recommends that the percentage of labour credited be increased above the 35% rate currently, to offset this change. So really, most CCPCs may be unaffected by this change. Read more »
Barry McKenna has written two articles in the Globe and Mail on the SR&ED program, the most recent on March 11, 2011. We understand he’s a journalist, not an expert on SR&ED. That’s why we thought we’d provide some assistance to Barry for his next article.
A Flawed R&D Scheme?
R&D activity is a leading indicator of economic growth. As a result, most OECD countries encourage R&D through tax incentives. This fact contrasts with the statement in the article that “Unlike most other developed countries, Canada chooses to pump cash into business (sic) R&D indirectly, through tax breaks.”
In a paper on incentives for R&D in thirty six (36) developed nations, available on the Ministry of Finance web site, all 36 countries surveyed do in fact provide “tax assistance for investment in R&D through generous tax depreciation allowances and 12 countries provide ITCs.”
The Globe and Mail complains that “Money is often paid out to decidedly low-tech and routine manufacturing, such as baking gluten-free cake, making injection-moulded auto parts or growing potted roses.” This complaint stems from a misunderstanding of the way countries define R&D. Read more »
Companies considering claiming the BC Interactive Digital Media Tax Credit may want to note two items not mentioned on the official BC IDMTC website:
Companies should expect to wait 2 months for the IDMTC registration number to be provided, once a complete registration package has been submitted. Incomplete packages delay the registration period. The BC Ministry of Finance will likely make a site visit of registrants before the application is approved and the registration number is provided. We strongly suggest that corporations have this registration number before filing their claim. If the IDMTC claim is submitted without a registration number it will likely trigger a CRA review.
In any given tax year you must choose between BC SR&ED or BCIDMTC. However, you can register for the IDMTC, and then determine which has the better outcome. If you decide to go with BC SR&ED, you can de-register your IDMTC application, and file an SR&ED claim, but you will forfeit your application fee.
The registration process is undergoing review by the MoF. It appears that the process is becoming almost as onerous a the SR&ED claim process as the MoF decides what corporations are required to provide to demonstrate eligibility.
As Western Canada’s largest SR&ED firm, Revenue Services Group prepares IDMTC stand-alone applications or in conjunction with SR&ED claims.
BC’s interactive digital media tax credit is a 17.5% tax credit (on eligible payroll) for companies working on interactive digital media like video games. For more on the IDMTC please see “What is the IDMTC?”
The CRA has for some time communicated a mixed message to claimants and reviewers in terms of documentation or evidence required to substantiate a SR&ED claim.
On the one hand, the CRA has maintained that documentation or evidence is required to substantiate a claim. On the other hand they have written that “the lack of documentary information should not discourage you from making an SR&ED claim or be considered as an indication that SR&ED did not take place, particularly in the case of first-time claimants.” (T4088, Guide to Form 661, Appendix 2). Where there is no documentary information, other “supporting information” is needed to support the SR&ED work and the related expenditures. However, the CRA provides no guidance in terms of what non-documentary “supporting information” is.
As a result experienced CRA reviewers have tended to qualify a project on the basis of a range of evidence including oral interviews, facility tours, product demonstrations, company records not generated specifically for a SR&ED claim and where they exist, formal project documentation. Read more »
British Columbia’s new interactive digital media tax credit was introduced in the province’s March 2010 budget. The new refundable credit applies to interactive digital media products developed in British Columbia between September 1, 2010 until September 1, 2015.
The credit is a refundable credit equal to 17.5% of eligible salaries and wages incurred by qualifying corporations in the development of interactive digital media products, i.e., those designed for use by an individual to educate, inform or entertain, and capable of presenting information in at a minimum of two of the following formats: text, sound and images. Qualifying corporations are companies whose principal business is the development of interactive digital media products or the provision of eligible activites to such a business. Read more »
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ADDITIONAL NET INCOMEFunding & Tax Credits