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Federal Budget 2012 and SR&ED Highlights(March 29, 2012)
VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 03/29/12 -- David Kaplan, President of SREDable.com and Founder of Revenue Services Group comments on Canada's Budget announced today and the Scientific Research and Experimental Development (SR&ED) changes.
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 Budget speech by recounting the recommendations of the Jenkins report and his government's intention to implement these recommendations. Then he gave a whacking to large companies, which the Jenkins report had recommended to leave alone.
SR&ED Highlights 2012
1. Most of the changes to the program will begin in two years time on January 1, 2014. This leaves companies almost two years to plan.
2. SR&ED tax credits on capital expenditure eliminated completely. This seems the most extreme measure in the budget but really does not affect most businesses that greatly. For Capital to qualify for SR&ED it needs to be used at least 50% of the time on R&D. Few companies outside pharma have dedicated R&D facilities. Some engineering firms may need to tax plan but in general the change is intended to remove the complex rules related to shared-use equipment and later claw backs on capital converted to commercial use or sold. In our view this is a simplifying move not a major incentive reduction for qualifying companies.
3. Large company SR&ED ITC on labour reduced by 21% and SR&ED ITC on contractors reduced by 33% (in BC and AB). This is the most extreme measure in the budget. Large, Foreign and Public Companies will see a 20 to 33 percent reduction in their ITC!
4. Small company SR&ED ITC on labour reduced by only 6% and SR&ED ITC on contractors reduced by 20% (in BC and AB). This is bad news for large companies, a relief for smaller companies. Small company claims are overwhelmingly labour based. The changes will reduce these claims by only 6% whereas larger companies see 20% lobbed off their claims.
In our view Flaherty made this change because a small number of large companies received 50% of the $3.6b in credits awarded in 2011. By reducing the value of credits paid to large companies the government reduces their overall SR&ED payout substantially.
For the record the new eligible percentages are:
Labour: 100% Contractors: 80% as of Jan 1, 2013 Proxy for Overhead: 55% as of Jan 1, 2014 Consumed Materials: 100% Federal ITC rate for small companies: 35% Federal ITC rate for large companies: 15% from Jan 1, 2014
5. The CRA will pilot a pre-approval process in which companies can have their claims approved in advance. We applaud this move and hope it succeeds.
6. Contingent Fees may be under review. The government is considering reviewing the practice by tax preparers of charging contingent fees.
Since its inception, the SR&ED incentive program has undergone almost yearly changes during the budget speech. This year's changes reduce the level of tax credit available to companies, mostly to large and foreign owned companies that qualify for tax credits only. Companies that qualify for a refund on R&D expenses will be minimally affected.
About David Kaplan
Prior to founding SREDable.com and Revenue Services Group, David Kaplan was a senior M&A executive with Ernst and Young and founded Barzelan an innovative, benchmark steel wire producer. He has an MBA and an MIA from Columbia University.
SREDable is a web-based software application designed to improve the preparation of scientific research and experimental development (SR&ED) claims for Canadian organizations. SREDable's online wizard ensures that SR&ED claims meet the Canadian Revenue Agency (CRA) requirements for SR&ED tax credits and cash refunds. View overview video. View sales presentation. Subscribe to SRED TIME.
About Revenue Services Group
Revenue Services Group (RSG) is Western Canada's largest professional advisory specializing in R&D tax credits (SR&ED) and zero-interest loans. Its mission is to deliver products that significantly improve company profits. Revenue Services Group advises most mid-tier accounting firms on SR&ED and is a member of the Canadian Tax Foundation.
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