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Performing R&D in your Business? SR&ED Changes Coming in 2014

The Canadian government offers one of the most lucrative research & development (R&D) tax incentives in the world. It is known as the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program has been an integral part of business growth across Canada because the program offers more than $3 billion dollars in tax credits to further R&D initiatives and to keep Canada competitive in the global marketplace.

The tax credits from SR&ED can help businesses gain a competitive edge by making it easier to hire workers, to expand into new markets or to purchase machinery. SR&ED has remained largely unchanged since its inception over 25 years ago. However, every now and then, changes have arisen, with the most recent being those outlined in the 2012 Federal budget. Here are some of the changes that are most relevant to businesses claiming SR&ED-related expenditures:

Contractor Payments Reduced

It is not uncommon for a company carrying out research and development activities to require the help of outside contractors. Currently, up to 100 percent of contractor expenses are eligible for SR&ED tax credits. However, beginning on January 1st, 2014, only 80 percent of outsourcing costs are eligible. The rationale behind the reduction is that arm’s length contractors include profit margins into their fees. Mark-up does not contribute to fostering research and development goals and as such, the amount that is claimable will be reduced to reflect this.

General Rate Reduction

At the moment, the enhanced rate, which predominantly applies to Canadian controlled private corporations (CCPCs), is 35 percent. There will be no change in the enhanced rate. However, non-CCPCs will have the general rate reduced from 20 percent to 15 percent. The change will be effective January 1st, 2014. If this date falls in the middle of a business’ taxation year, then the rate will be prorated. Furthermore, both of these rates will only apply to the first $3 million in qualifying expenditures.

Removal of Capital Expenditures

As of January 1st, 2014, capital expenditures will no longer be considered eligible SR&ED expenses. The cost of leasing equipment or property will also not be SR&ED eligible in 2014.

Overhead Proxy Rate Reduced

Overhead expenditures related to SR&ED can be claimed by either using the traditional method, which involves the identification of each overhead expenditure directly related to SR&ED activities on an item-by-item basis, or by using the elective proxy method. Through the proxy method, taxpayers in 2013 can claim 60 percent of the total salary and wages of employees directly engaged in SR&ED (65% in 2012). However, this number will be reduced to 55 percent starting in 2014.

Contingency Fees

After the government of Canada concluded its study into the effects of contingency fees for SR&ED, it was found that the effects of contingency fees do not reduce the benefits of the SR&ED program to claimants. That being the case, the government will still require claimants to specify whether or not they are paying a contingency fee as well as the amount that was paid out. A $1,000 penalty will be applied if the claimant does not provide the necessary information. This change will also take effect in January 2014.

With these changes coming at the beginning of next year, there is still time to fully take advantage of the SR&ED program in its current form. Despite the restrictions that these changes create for businesses, the SR&ED program still remains the best way of staying competitive and propelling R&D efforts forward.

About the Author: Andrei is a Client Manager at NorthBridge Consultants – a firm that excels in assisting businesses with acquiring government funding and SR&ED tax credits. To find out how the experts at NorthBridge Consultants can help you, call (855) SREDNOW (773-3669).

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 8 comments… add one }
  • Evan July 10, 2013, 12:03 pm

    We’ve used this program for at least 15 years now. Tax credits range from 100K to 500K a year, but our engineering budget is between 3-6million/year.

    The tax credit has helped in maintaining and growing our engineering/research capabilities here in Alberta. If not for the credit, I suspect our group would have moved to Houston where my company has a huge research center (cheaper).

    We just finished a large capital upgrade (500K), so it was timely considering they are getting rid of the capital claim.

  • FT FrugalTrader July 10, 2013, 8:17 pm

    Evan, what is your role within the Engineering Group?

  • LifeInsuranceCanada.com July 11, 2013, 10:24 am

    I know of another high tech company that takes full advantages of these tax credits. My understanding is that it’s a substantial driver for them in terms of keeping R&D up and running, perhaps even the primary driver. Seems a bit odd to me, but apparently this credit contributes very directly and substantially to high tech R&D in Canada. Without it, there’s probably be a lot of folks looking for work.

  • SREDucation July 11, 2013, 10:58 am

    The removal of capital expenditures from the program is especially worrisome; that’s going to have a major impact, especially on the manufacturing sector.

    At our blog SREDucation, we also did some coverage of these changes when the budget was released. Check it out if you’re interested.

    http://www.sreducation.ca/federal-budget-sred/

  • Evan July 11, 2013, 9:24 pm

    FT,

    I oversee our research and testing facility that supports our product lines. The product lines sell about 1bil/year worldwide. The test facility is the largest and best of its kind in the world. Edmonton is the logical place for it because our engineering staff and some manufacturing is here. The engineering staff grew in Edmonton partly because of the SR&ED tax credits that we’ve been eligible for over the past 15 years. Without them, our group wouldn’t have grown and would likely all be in Houston.

  • The Passive Income Earner July 13, 2013, 1:07 pm

    I have to do SRED every year and have been doing it for 12 years now but I get nowhere near the writing. We use a firm, PWC, to do everything but I remember when I was at a startup having to do the writing and all the justification.

    All the project leads at our company across the country are interviewed and PWC submits the reports. We get credit in the millions.

    For many startups in my field, the SRED credits provide them with a significant profit increase to make it viable in starting a business even though the project fees usually just match the cost.

    I was really not aware of how the numbers are calculated outside of the employee time we have allocated. It will be interesting to hear of the potential impact.

  • SST July 13, 2013, 1:25 pm

    re: “We use a firm, PWC, to do everything…”

    Would be informative to do an article on professional grant, credit et al writing companies/individuals, as well as the scope of available (gov’t) funds.

  • Evan July 15, 2013, 12:22 pm

    We use PWC as well. They take a percentage of the tax credit as payment from the company. I believe it’s 30%.
    They have mostly engineers who do the interviews and submission writing, but I don’t imagine it’s a great job as it seems to be a revolving door.

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