tax credits for technology-related business

Government incentive tax programs

GETTING THE GOVERNMENT TO PAY FOR THE DEVELOPMENT OF YOUR

PROJECTS

www.sredunlimited.com

BEFORE or AFTER

PROJECT COMPLETIONIRAP

SR&ED

PROVINCIAL DIGITAL MEDIA PROGRAMS

IRAP

• Strict conditions apply

• Competitive basis (annual cap)

• Audit

• Mandatory reporting

PROVINCIAL PROGRAMS -

• QC: 10% of qualified labour (max 5% of production costs) + 20% of qualified labour for claims related to QC Production Tax Credit

• ON: 20% of qualified labour (no max)

ANIMATION

PROVINCIAL PROGRAMS -

• QC: Production of multimedia titles tax credit; 30% of eligible labour + 7.5% if in French

• ON: Digital media tax credit;30% of eligible labour

DIGITAL MEDIA

FEDERAL+ PROVINCIAL:

• QC: 89% and more of eligible labour

• ON: 68% of eligible labour

SR&ED

SR&ED Program Eligibility Technical Criteria

What is Experimental Development?

• It has Technological Content • It seeks Technological Advancement• It attempts to resolve Technological

Uncertainty• It involves systematic analysis, tests or

experimentsSuccess or failure of experimental development is

not a factor.

FEDERAL + PROVINCIAL:SR&ED

Salary % R&D

Fed Prov Direct cost(*)

Over-head

Total w/OH

Prov Fed Total % of qualified payroll

ON 200,000 50% 35% 10% 100,000 65% 165,000 16,500 51,975 68,475 68%

QC 200,000 50% 35% 37.5% 100,00050%

(**) 150,000 56,250 32,813 89,063 89%

(*) For simplicity’s sake, there are no contractor fees in this example

(**) 50% is taken just as an example; Quebec allows overhead up to 100% of qualified payroll and 50% of the contractor fees

FEDERAL + PROVINCIAL:SR&ED

• After fiscal year end (you have 18 months)

• Submit your taxes

• T661 form

Scientific Research & Experimental Development (SR&ED)

• NOT on competitive basis

• Flexible definition of what is innovative

• Tax refund, not tax credit

SR&ED Tax Incentive Program

• Employee wages and owner's labour (68%-89% of qualified payroll)

• Sub-contracts (lower rate)

Dividends, bonuses and remuneration based on profit are not claimable. Contract fees paid to owners are not claimable.

ELIGIBLE EXPENSES

SR&ED Tax Incentive Program - Statistics

• $4 billion a year to about 18,000 claimants

• 70% of claimants are small to mid-size businesses

Claim Refund Size – Example 2

• A company spent 100K on salaries and 60K on consulting fees

• 75 percent of the labour and consulting fee were attributed as R&D

• ON: Claim size 100,000 x 0.75 x 0.685(*) + 60,000 x 0.75 x 0.415(*)

Claimable refund: 70,050

(*) These multipliers are for Ontario; Quebec’s will be higher (see the table on slide 8)

Work that qualifies for SR&ED tax credits

• Research to advance scientific knowledge without a specific practical application in view.

• Experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones.

Who qualifies for the SR&ED refund

• Canadian-controlled companies, privately owned, incorporated

• Other types of companies (lower rate)

• Payroll (T4) • Producing a product or service (Software,

Electronics, Manufacturing, Chemical, Environmental Protection, Printing/Image Processing, Biotechnology, Food industry)

• Experimental Development

SR&ED Program Eligibility Technical Criteria

• What qualifies as a "technological advancement"? • Something that creates new knowledge that advances

our understanding of some aspect of science or technology

• Definitions are vague

SR&ED Program – Projects Eligibility

• Technological Advancement• Technological Uncertainty• Technological Content (software was

developed systematically and the uncertainties are systematically resolved)

A systematic investigation or search by experiment or analysis must be demonstrated.

SR&ED Program – Projects Eligibility

• Technical challenge that competent professionals could not have overcome by applying generally available knowledge

• New knowledge must be gained during the work on the project

Examples of eligible software development activities

• Developing and utilizing mathematical algorithms (scheduling, optimization, forecasting, image processing etc.)

• Improving performance• Non-standard problems• Resolving problems imposed by restrictions/bugs of

the tools used for development.

Software Projects – Eligible Activities

• Analysis; design; experimental development• Research into and Review of existing, emerging,

and competing technologies• Internal technical documentation (but not User

Manuals).• First-line management of employees and

contractors• Testing in which software is verified against

technological advancement goals

Software Projects –Ineligible Activities

• Marketing research; Sales

• Maintenance and Customer Support

• Routine development

• Testing that deals primarily with user acceptance, suitability and marketability

SRED claim supporting materials

• Evidence of systematic approach • To justify SRED expenses - especially labour

expenditures

CRA Policies regarding labour tracking:• Cooperative with first time claimants, allow estimates• Require proper tracking later

MYTHS about SR&ED

• Only “rocket science” projects are eligible

• It is very difficult to make a claim

• The project must be successful

• You will be audited by CRA

Planning for a SR&ED claim

• Evaluate project to determine eligibility• Develop a project plan and keep it updated• Keep all prototypes, plans, drawings, notes• Register issues that cause problems or difficulties in your

development• Expenses tracking: Time sheets

Planning for a SRED claim: proper structure of company

financials

• Payroll (salary paid through T4) to “specified employees” – owners.

Contract fees paid to owners are not claimable.

• Payroll instead of bonuses and dividends.

CRA reviews

• 100% claims go through screening• Technical review. Reviewers can reduce

the size of the claim.• Financial review. No crossover with CRA

audit division.

Without proper tracking (by hours) – client estimate against CRA estimate; often results in a settlement.

No clawback if subsequent year claim deemed not eligible

SRED program and saleability of the custom software

• If a company outsources SR&ED development to a contractor, some of its own expenses are also claimable (feasibility study, analysis, requirements, testing, etcetera).

• If you are a subcontractor: propose a custom application (or customization of existing application), which will be paid for by government through the SR&ED claim - a great selling feature.

SRED Unlimited

• SRED Unlimited specializes in SR&ED claims and digital media program claims

• SRED Unlimited employs highly qualified technical consultants

www.sredunlimited.com

We help you with• Pre-screening and projects identification; identification of

a project’s potential• Recommendations on project structuring to better meet

the criteria of SR&ED program• Preparing a detailed technical report• Preparing all tax schedules and accounting reports

detailing the costs associated with the project• Dealing with SR&ED financial and technical reviewers. • Assistance in negotiations on your behalf

www.sredunlimited.com

SRED Unlimited

• We charge a contingency based fee

• We pay you a referral fee

www.sredunlimited.com

SR&ED Tax Credit

• Digital media programs• SR&ED Tax Incentive Program • Planning ahead for SR&ED claim• How you could benefit from the

SR&ED program:Submitting the claim for your own

companyReferral fees