by David Kaplan on 3/29/12
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 by recounting the recommendations of the Jenkins report and his government’s intention to implement the recommendations. Then he gave a wacking 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 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 effect 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 labor 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 labor 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 labor 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:
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 ITC 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.
Please contact David Kaplan, President of Revenue Services Group for clarification or discussion.