Budget 2012 – SR&ED Update

The Federal and Provincial 2012 budgets have been announced and the bottom-line impact on the Scientific Research & Experimental Development (SR&ED) tax credit program for TSI clients who are Canadian Owned Private Corporations (CCPCs) is minimal. There will be a greater impact to large, foreign and/or public corporations as of 2014. We have summarized the changes to SR&ED and other funding sources below. It is important, however, to understand that the Canada Revenue Agency (CRA) aims to continue to focus on compliance. Recently, there has been an increase in Requests for Information (RFIs) to support claims. TSI can work with you to ensure that the necessary processes are in place for the documentation of SR&ED claims.

SR&ED Highlights from 2012 Federal Budget – March 29, 2012

• Federal ITC rate for large, foreign and public companies: 15% as of Jan 1, 2014 (currently 20%)

• Federal ITC rate for small companies: 35% (no change)

• Capital: Eliminated as of Jan 1, 2014 (currently 40% refundable)

• Labour: 100% (no change)

• Proxy for Overhead: 55% as of Jan 1, 2014 (currently 65%)

• Contractors: 80% as of Jan 1, 2013 (currently 100%)

• Consumed Materials: 100% (no change)

General SR&ED Investment Tax Credit (ITC) rate reduced

• The budget proposes to reduce the 20% SR&ED investment tax credit rate to 15% from January 1, 2014 for large, foreign and public companies. The enhanced 35% credit for eligible Canadian controlled private corporations remains unchanged.

SR&ED capital expenditures eliminated

• The budget proposes to exclude capital expenditures from SR&ED deductions and investment tax credits for property from January 1, 2014.

Overhead proxy rate reduced

• The prescribed proxy amount for SR&ED purposes is proposed to be reduced from 65% to 60% starting 2013 and to 55% starting January 1, 2014.

SR&ED contract payments reduced

• The budget proposes to limit the qualifying expenditures to arm's length contractors for SR&ED purposes to 80% of the contract payment for expenditures as of January 1, 2013.

Overview of Changes to Government Directed Funding

• The budget's intention is to shift financial support from indirect programs – specifically, SR&ED – to more direct forms of support such as:

- an investment of $110 million per year in the Industrial Research Assistance Program (IRAP);

- an investment of $67 million in 2012-2013 in the National Research Council (NRC);

- an extension to the Hiring Credit for Small Business for one year with an investment of $205 million (this credit is valued at up to $1000);

- an additional $50 million over two years to the Youth Employment Strategy including support for the Summer Company program; and

- an investment of $14 million over two years to the Industrial Research and Development Internship program.

Please contact us if you have any questions about the 2012 budget or government funding programs ([email protected]).