October 25, 2012
If your company claims tax credits for Scientific Research and Experimental Development (SR&ED), you may be affected by changes to this program coming as soon as January 1, 2013. The government has just tabled a bill (Bill C 45) to enact the 2012 federal budget including these changes, which is expected to become law before the end of 2012.
Companies doing R&D may want to consider accelerating certain expenses so they’re incurred before 2014, where possible, to help these companies get the most out of the current SR&ED tax credit program before the changes take effect.
Companies doing R&D may also be affected by a CRA initiative to clarify its administrative policies on the SR&ED program. Further, the government has recently completed consultations to better understand why many companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims. It’s unclear whether any changes may be announced in this area.
Changing SR&ED tax credit rules
The federal government announced in its 2012 budget that it would redirect funding from the Scientific Research and Experimental Development (SR&ED) tax incentive program into direct granting programs to fund industrial research and development. As such, the government will:
- Reduce the general SR&ED investment tax credit rate to 15% (from 20%), effective January 1, 2014.
- Remove capital expenditures incurred in 2014 and subsequent years from the base of SR&ED eligible expenditures. All other expenditures such as salary and wages, materials, overhead expenses and contract payments will remain eligible.
- Reduce the prescribed proxy amount for the overhead calculation to 60% of direct labour costs in 2013 and 55% of direct labour costs in 2014. The prescribed proxy amount is presently 65% of direct labour costs.
- Allow only 80% of arm’s-length contract payments to be used for calculating SR&ED tax credits, effective January 1, 2013.
Planning for SR&ED changes
Companies claiming SR&ED tax credits may want to incur upcoming expenditures in 2013 rather than 2014 to claim the higher tax credit rate, where possible.
Companies considering the acquisition of dedicated R&D equipment may want to make these investments in 2013 rather than 2014 so they can be eligible for SR&ED tax credits and deductions.
The government also plans to spend $6 million over the next two years to improve the administration of the SR&ED program. These measures will include having the CRA conduct a pilot project to determine the feasibility of a formal pre-approval process, enhancing the existing online self-assessment eligibility tool, working with industry representatives to address emerging issues and improving the Notice of Objection process to allow for a second review of scientific eligibility determination.
Clarifying the CRA’s administrative policies
The measures announced in the 2012 federal budget to improve the administration of the SR&ED program are intended to complement the SR&ED policy review project the CRA currently has underway. This project aims to consolidate, clarify and update the administrative policies in about 70 CRA guidance documents pertaining to the SR&ED tax incentive program. We expect to see revised versions of these policy documents soon, possibly before the end of 2012.
The CRA’s project is not intended to alter the principles in the current policy documents but only to make wording changes for clarity and consistency of existing administrative policies as well as to present the information in a user-friendly way on CRA’s SR&ED website.
As part of the project, the CRA consulted key stakeholders including associations and accounting firms such as KPMG to gather their opinions on the information presented in more than 20 policy documents.
KPMG’s submissions on these policy documents focus on ensuring their clarity and usefulness for companies claiming SR&ED tax credits. KPMG’s submissions, including the CRA policy documents they pertain to, are available at www.kpmg.ca.
Consulting on contingent fees for SR&ED services
The 2012 federal budget also announced that the government would conduct a study, including consultation with taxpayers, to better understand why many companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims.
KPMG recently delivered a submission to the Department of Finance in response to Finance’s request for formal comments on concerns it raised in a consultation documents dated August 2, 2012.
KPMG’s 12-page submission states that contingency fee arrangements for SR&ED services are market-driven and benefit Canadian businesses performing R&D because they allow these businesses access to the knowledge and experience of SR&ED consultants who can help them prepare their SR&ED claims at little risk to these businesses and at a price that the market has determined is reasonable.
Further, given that the process of obtaining a refund can take as long as two to three years from the initial preparation of a claim, a contingency fee arrangement provides an invaluable source of financing that enables a company to deploy cash flow (that would otherwise be used to pay professional fees) into its operations.
Without contingent fee choices, KPMG’s view is that many small and medium-sized enterprises may not be able to afford the upfront costs of preparing SR&ED claims, especially if there is uncertainty about when they might receive an SR&ED refund from the CRA.
The submission further notes that KPMG does not believe these taxpayer compliance costs are high — the healthy competition in the market for these priority consulting services ensures that businesses can negotiate reasonable fees. In any case, companies that use SR&ED service providers are usually offered a variety of alternative fee arrangements including hourly, fixed fee, contingency-based and a blend of hourly and contingency-based, with the choice being at the company’s discretion.
The submission concludes that KPMG sees no reason for the government to interfere with the existing free market, which allows the market to determine the price for SR&ED consultants’ services and the types of fee arrangements available for businesses to choose from.
KPMG’s submission is available at www.kpmg.ca.
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We can help
Your KPMG adviser can help you assess the effect of any changes the government introduces to the SR&ED program and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of any forthcoming proposals as they make their way into law and help you bring any concerns you may have to the government’s attention.
Information is current to October 24, 2012. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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