December 3, 2013
If your company does research and development (R&D) in Canada that’s eligible for tax credits under the federal government’s Scientific Research and Experimental Development (SR&ED) program, you may want to incur upcoming expenditures before the end of 2013 if possible because the general SR&ED tax credit rate will go down to 15% (from 20%) starting in 2014. Your company may also be affected by other SR&ED changes that take effect on January 1, 2014.
If your company is planning to acquire dedicated R&D equipment, you may want to explore the opportunities to make your purchase and ensure that the new equipment is available for use before the end of 2013, if possible, because these type of capital expenditures incurred after January 1, 2014 will not be eligible for SR&ED credits. All other expenditures such as salary and wages, materials, overhead expenses and contract payments remain eligible, subject to some changes noted below.
If your company is a small business that can claim the enhanced 35% SR&ED tax credit rate for eligible Canadian controlled private corporations, note that this tax credit rate will not change.
Background — SR&ED program changes
The changes to the SR&ED tax credit regime that come into effect starting January 1, 2014 or earlier were first proposed in the 2012 and 2013 federal budgets.
Tax credit rate and other changes
The 2012 federal budget announced the following changes:
- Reduction of general tax credit rate — The general SR&ED investment tax credit rate will be reduced to 15% (from 20%), effective January 1, 2014 (the enhanced 35% credit rate for eligible Canadian-controlled private corporations will not be affected).
- Capital expenditures — Capital expenditures will be removed from the base of eligible expenditures for expenditures incurred in 2014 and subsequent years. All other expenditures such as salary and wages, materials, overhead expenses and contract payments remain eligible.
- Proxy overhead calculation —The prescribed proxy amount will be reduced to 55% (from 60% in 2013 and 65% in 2012) of direct labour costs commencing January 1, 2014.
- Arm’s-length contract payments — Only 80% of the contract payments will be considered eligible expenditures for purposes of calculating the SR&ED tax credits, effective January 1, 2013.
Information on third party SR&ED claim preparers
- The 2013 federal budget introduced a measure requiring SR&ED tax credit claimants to provide additional information on third party preparers involved in the preparation of an SR&ED claim.
- A penalty of $1,000 may be imposed on each SR&ED program claim for which the information about the SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. The penalty applies for claims filed on or after January 1, 2014.
Use a new form in the new year to claim your SR&ED tax credits
To claim your SR&ED tax credits in 2014, your company will need to use a new version of Form T661, "Scientific Research and Experimental Development (SR&ED) Expenditures Claim".
This revised T661(13) form addresses the legislative changes proposed in the 2013 and 2012 federal budgets that will come into effect starting January 1, 2014. As well, changes to the form were made to ensure it is consistent with the CRA’s consolidated SR&ED policy documents released in December 2012, which became official policy as of July 2013.
The new T661(13) was released on October 31, 2013 and can be used as of that date, though the CRA will accept the existing version of the form (number T661(12)) until December 31, 2013. Starting January 1, 2014, the CRA will accept only the new version of the form (number T661(13)) for all tax years.
CRA working to clarify examples of SR&ED eligible activities
As part of continuing efforts to improve the administration of the SR&ED program, the CRA recently held a consultation on a new document featuring 10 example cases intended to help taxpayers understand concepts introduced in the Eligibility of Work for SR&ED Investment Tax Credits Policy. The CRA asked its key stakeholders, including associations and accounting firms such as KPMG, to provide their opinions on the information presented in the document.
KPMG’s submission on the CRA’s examples focuses on ensuring their clarity and usefulness for companies claiming SR&ED tax credits. The submission includes the CRA policy document.
These new examples are part of a CRA review of its SR&ED policy documents with the objective of consolidating, clarifying and updating these documents and related guidance. Many new draft policy documents were released for comment in December 2012 and became CRA policy in July 2013. KPMG’s submissions on these documents, including the CRA’s draft policies, are available at www.kpmg.ca.
CRA’s SR&ED assessment framework
Since the implementation of the new policy documents in July 2013, the CRA has been applying its policies in a manner that focuses on five questions established by case law to assess the eligibility of work for SR&ED tax credits. Companies that claim SR&ED tax credits should review their processes and related supporting documents to ensure they fit into the CRA framework.
The CRA’s five questions are not meant to replace the three SR&ED eligibility criteria, which require that the work involve:
- Scientific or technological advancement
- Scientific or technological uncertainty, and
- Scientific and technical content.
Instead, the five questions are meant to map out the five-part test established by the courts to determine whether the three eligibility criteria are met for a project to qualify for SR&ED tax credits. The table below shows how the five questions established through jurisprudence relate to the three-part eligibility criteria.
|Determining SR&ED Eligibility|
|Questions for assessing SR&ED eligibility
||Eligibility Criteria Related to Question|
|Was there a scientific or technological uncertainty — an uncertainty that could not be removed by standard practice?
||Scientific or technological uncertainty|
|Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
||Scientific and technical content|
|Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing and modifying the hypotheses?
||Scientific and technical content|
|Did the process result in a scientific or technological advancement?
||Scientific or technological advancement|
|Was a record of the hypotheses tested and the results kept as the work progressed?
||Scientific and technical content|
Recently, CRA presentations and correspondence seem to emphasize the fifth question, “Was a record of the hypotheses tested and the results kept as the work progressed?”
Specifically, the CRA is asking this question to ensure documentation is available to substantiate all components of eligibility, including the formulation of a hypothesis, a systematic investigation and the base level of technology.
KPMG recommends that SR&ED claimants review their policies and procedures for documenting their activities that may qualify for SR&ED tax credits because the CRA’s policy released in July 2013 emphasizes having the proper evidence and records to substantiate SR&ED activities.
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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. For details, contact your KPMG adviser.
Information is current to December 2, 2013. 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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