DEMYSTIFYING SR&ED and Other Tax Tips for

Entrepreneurs

A MaRS Presentation

What we will cover today…

•  Income  Tax  Compliance  Considera2ons  –  Filing  requirements  and  compliance  informa2on  

–  Corporate  vs.  personal  

–  Planning  opportuni2es/considera2ons  

–  Exit  considera2ons  

•  Business  Incen2ves  –  What  You  Need  to  Know  

–  SR&ED  overview  

–  Digital  Media  

–  Other  Incen2ves  

–  Stacking  

•  How  Welch  Can  Help  

 

 

•  Corporate  Income  Tax  Returns  

–  Annual  income  tax  return  due  6  months  aOer  year  end  

–  Tax  owing  2  or  3  months  aOer  year  end  

–  Installments  may  be  required  

–  First  year  cannot  exceed  53  weeks  

–  Can  change  year  end  for  business  purposes  

•  Payroll  remiUances  –  due  15th  of  the  month  following  payroll  remiUance  

•  T4’s  due  February  28th  

•  HST/GST  –  due  3  months  aOer  year  end  for  annual  filers  

•  Personal  Income  Tax  Returns  –  due  April  30th  

Filing Requirements

Tax Rates, Credits & Calculations

Federal  Individual  Tax  Rates  and  Brackets  

2013   2012    

First  bracket  [15%]   $0  -­‐  $43,561   $0  -­‐  $42,707  

Second  bracket  [22%]   $43,562  -­‐  $87,123   $42,708  -­‐  $85,414  

Third  bracket  [26%]   $87,124  -­‐  $135,054   $85,415  -­‐  $132,406  

Fourth  bracket  [29%]   $135,055  -­‐  up   $132,407  -­‐  up  

Tax Rates, Credits & Calculations

Combined  Federal  and  Provincial  Top  Marginal  Tax  Rates  for  2013   Province

Salary and Interest

Capital Gains

Non-eligible Dividends

Eligible Dividends

Newfoundland 42.30% 21.15% 29.96% 22.47% Nova Scotia 50.00% 25.00% 36.21% 36.06% Prince Edward Island 47.37% 23.69% 38.56% 28.7% New Brunswick 45.07% 22.54% 33.05% 24.91% Quebec 49.97% 24.99% 38.54% 35.22% Ontario 46.41% 23.21% 32.57% 29.54% Ontario (1) 49.53% 24.76% 36.47% 33.85% Manitoba 46.4% 23.2% 39.15% 32.26% Saskatchewan 44.0% 22.0% 33.33% 24.81% Alberta 39.0% 19.5% 27.71% 19.29% British Columbia 43.7% 21.85% 33.71% 25.78% Yukon (2) 42.4% 21.2% 30.41% 15.93 to 19.29% Nunavut 40.5% 20.25% 28.96% 27.56% Northwest Territories 43.05% 21.53% 29.65% 22.81%

Tax Rates, Credits & Calculations

Combined  Federal  and  Provincial  Corporate  Tax  Rates  for  2013  Ac2ve  Income  

Manufacturing  Income  

Small  Business  <  $500,000  

Investment  Income  (8)  

Federal   15.00%   15.00%   11.00%   34.67%  Province  Newfoundland   29.00% 20.00% 15.00% 48.67% Nova  ScoSa  (1)     31.00% 31.00% 14.50%/27.00% 50.67% Prince  Edward  Island  (2)   31.00% 31.00% 14.64% 50.67% New  Brunswick  (3)     26.01% 26.01% 15.50% 45.67% Quebec     26.90% 26.90% 19.00% 46.57% Ontario(4)   26.50% 25.00% 15.50% 46.17% Manitoba  (5)   27.00% 27.00% 11.00%/23.00% 46.67% Saskatchewan   27.00% 25.00% 13.00% 46.67% Alberta   25.00% 25.00% 14.00% 44.67% BriSsh  Columbia  (6)   25.75% 25.75% 13.50% 45.42% Yukon  (7)   30.00% 17.50% 13.50%/15.00% 49.67% Nunavut   27.00% 27.00% 15.00% 46.67% Northwest  Territories   26.50% 26.50% 15.00% 46.17%

Tracking Your Financial Transactions

•  Types  of  expenses  and  revenue  –  G/L  set-­‐up  (accounts,  prior  year,  budget)  

–  Project/product  grouping  

–  Revenue  by  province/state/country  •  Frequency  of  recording  •  Financial  report  set-­‐up  •  Accrual  vs  cash  basis  accounSng  •  Competency  of  preparer  •  Maintain  receipts/supporSng  

documentaSon  in  structured  approach  •  Ensure  informaSon  is  relevant  and  Smely  

to  assist  with  business  monitoring  and  acSons  (must  have  a  basis  for  comparison)  

•  Management  review/accountability  review  process  

Tracking Your Business

•  AccounSng  Soaware  –  Several  soaware  packages  available  

–  User  friendly  

–  Keeps  records  up-­‐to-­‐date  

–  Compiles  informaSon  into  reports  easily  

analyzed  

–  MulS-­‐currency,  mulS-­‐ledgers,  order  

entry,  A/R,  purchase  order,  A/P,  

inventory,  payroll,  project  cosSng,  Sme  

tracking,  data/user  limits  

Personal vs. Business

•  General  rule  is  expenses  are  deducSble  to  the  extent  they  were  incurred  to  generate  business  income  

•  Business  expenses  incurred  personally  should  be  charged  to  the  company  (e.g.  via  an  expense  report)  

•  Car  allowance  

Corporate Structure – Tax Considerations

Canadian  Controlled  Private  CorporaSon  (CCPC)  

 Company  prospecSve  •  Eligible  for  35%  refundable  tax  credit  on  1st  $3M  •  Eligible  for  10%  Ontario  refundable  tax  credit  on  

1st  $3M                      •  Lower  corporate  tax  on  taxable  income  up  to  

$500k    Founder/employee  prospecSve  •  Founder/employee  may  be  eligible  for  $800k  

capital  gains  exempSon  •  Stock  opSons  not  taxed  unSl  shares  sold  •  PotenSal  RRSP  eligibility      Note,  the  above  is  subject  to  restric2ons  and  rules  are  

subject  to  change.  Seek  professional  advice  before  proceeding.  

Non  CCPC      Company  prospecSve  •  15%  non-­‐refundable  federal  tax  credit  •  eligible  for  10%  Ontario  refundable  tax  

credit  on  1st  $3M  •  High  corporate  tax  rate  on  all  income  Founder/employee  prospecSve  •  No  $800k  capital  gains  exempSon  •  Stock  opSons  may  be  taxed  when  

exercised  

U.S. Tax Compliance

 

•  Compliance  at  federal  and  state  level  

•  Corporate  returns  due  15th  of  3rd  month  following  year  end  (extensions  can  be  filed)  

•  Separate  returns  for  each  state  •  Sales  and  use  tax  requirements  •  Branch  vs  corporate  tax  filing  •  Withholding  tax  •  Transfer  pricing  

International Tax Considerations

 

•  Establish  structures  to  facilitate  investment  from  foreign  based  investors  

•  Consider  corporate  tax  rates  outside  of  Canada  and  ensure  that  the  most  tax  efficient  structure  is  in  place  to  minimize  overall  tax  payable.  Ownership  of  intellectual  property  (IP)  is  central  to  creaSon  of  efficient  tax  structure.  Other  consideraSons  include:  

•  Rules  are  complex  and  vary  by  region  •  Expensive  to  set-­‐up  and  maintain  •  Need  to  consider  impact  on  future  acquisiSons  or  sale  of  company  •  Should  be  considered  before  any  substanSal  IP  value  is  created  to  minimize  

capital  gains  on  transfer  from  Canada.  •  Monitor  level  of  business  in  foreign  jurisdicSons  and  set  up  appropriate  

structures  to  avoid  unintended  tax  results  in  foreign  jurisdicSons  

Planning Opportunities/Considerations

 

•  Income  splijng  •  Dividends  •  Salary  •  Holdco  or  Trust  

•  Maximize  interest  deducSbility  –  use  cash  to  pay  down  non-­‐deducSble  loans  

•  Shareholder  remuneraSon  

Exit Planning

 

•  Due  diligence  consideraSons  •  Be  compliant  –  beware  of  tax  escrowed  

funds  •  Accessible  corporate  records  

•  Shareholder  tax  minimizaSon  •  Share  sale  –  capital  gains  exempSon  •  Asset  sale  –  dividend,  deferrals  •  Use  of  Holdco  and  Family  Trust  

Other Considerations

 

Employee  vs  Independent  Contractor  •  No  hard  and  fast  rules,    just  guidelines  •  Guidelines  include:  

•  Receive  no  employee  benefits;  •  You  provide  services  to  more  than  one  company;  •  You  use  your  own  equipment;  •  Work  at  home;  •  Work  on  your  own  with  no  supervision.  

•  Benefit  of  independent  contractor  includes  wider  scope  for  tax  deducSons,  however,  loose  rights  to  EI,  employer  health  and  other  benefits  

•  Onus  is  on  the  company  to  pay  previous  withholding  if  the  individual  is  assessed  as  an  employee  (employer  &  employee  porSon).  

•  Stock  opSons  received  by  independent  contractors  included  in  income  of  the  contractor  in  year  the  opSons  are  granted  

Advisor Perspective

 

•  Build  a  team  of  experienced  advisors  that  you  feel  comfortable  communicaSng  with  

•  Leverage  your  advisors  experiences  through  conSnuous  updates/communicaSon  

Improving Cash Flow via Government Incentives

Government Incentives Strategy

 

•  Consider  the  following  with  respect  to  government  incenSves:    

  Are  you  maximizing  government  assistance  via  tax  credits,  grants,  loans  and  rebates?  

  Are  you  reasonably  certain  that  you  will  receive  the  incenSve?  

  Do  you  know  the  Sming  of  the  assistance?  Is  it  predictable?  

Maximizing Access to Government

 

•  There  are  countless  government  incenSves  out  there  (federally,  provincially,  &  municipally)    

•  Companies  are  missing  out  on  opportuniSes  to  leverage  government  money  

•  Most  companies  don’t  have  the  Sme/resources  to  pursue  all  the  incenSve  opportuniSes  

 

Holistic Approach

 

•  Overview  of  the  business    Recent  past    Plans  for  the  future    

•  Overlay  landscape  of  incenSves    IdenSficaSon  of  where  government  

assistance  is  possible    Reduce  possibiliSes  where:  

•  Net  benefit  of  the  possible  assistance  <  (internal  +  external  costs  to  prepare/apply  and  report/defend)  

 •  Incorporate  necessary  documentaSon  &  

evidence  preparaSon  into  exisSng  business  processes  

 

Full Entitlement

 

  What  can  you  claim?    MisconcepSons  and  misinformaSon    

•  Can’t  claim  SR&ED  because  a  customer  paid  for  it  •  Can’t  claim  OIDMTC  because  we  contracted  out  most  of  the  soaware  

development  •  Claiming  costs  outside  eligible  jurisdicSons  

  Know  the  rules  for  each  respecSve  incenSve  –  or  ask  for  help  •  Tax  credits  –  legislaSon  defines  what  is  eligible  but  not  always  clear  •  DiscreSonary  incenSves  –  guidance  is  oaen  vague  and  at  Smes,  somewhat  

flexible    Stacking  

•  What  are  the  restricSons  amongst  the  incenSves  –  how  much  government  assistance  is  possible?  

•  E.g.  does  a  grant  impact  an  SR&ED  claim?  Does  a  loan?  Does  an  equity  investment?    

 

 

Certainty of the Outcome

 

•  Tax  credits:    When  are  you  confident  that  the  

outcome  of  the  claim  will  be  as  expected?  

•  Different  processes  for  different  tax  credits:  SR&ED  vs.  OIDMTC  

•  DiscreSonary  incenSves    Very  compeSSve  landscape  for  

discreSonary  incenSves:  free  or  very  cheap  money.  

  Need  to  examine  the  risk-­‐reward    Pre-­‐approval  required  

 

Timing Considerations

 

•  Tax  credits:    Is  the  credit  claimed  on  a  current  tax  return  or  an  amendment?    Are  there  other  tax  issues  in  existence  which  would  affect  the  Sming  &  resoluSon  of  

the  tax  credits?  •  Different  processes  for  different  tax  credits:  SR&ED  vs.  OIDMTC  

•  Discre2onary  incen2ves    How  far  in  advance  is  pre-­‐approval  required  prior  to  launching  the  project/iniSaSve?    How  long  aaer  the  expense  is  incurred  will  the  reimbursement  be  issued?  

 

SR&ED Recent Events

 

•  Legisla2ve  changes    Decreased  claim  amounts:  

  Overhead  calculaSon  65%-­‐>60%-­‐>55%  

  Subcontractors  100%-­‐>80%  

  Capital  no  longer  eligible  •  “Administra2ve”  changes  

  More  audits  and  (someSmes  onerous)  requests  for  addiSonal  informaSon  

  More  pressure  on  SR&ED-­‐specific  evidence  

 

OIDMTC Specifics

 

•  Cri2cal  fundamentals:    90%+  of  the  product  must  be  

developed  in  Ontario  by  a  single  corporaSon  

  Cannot  be  primarily  to  promote  your  company/products  or  another  company/product  

•  Winds  of  change    Recommended  to  Ministry  of  

Finance  to  relax  the  90%  rule    Rumours  that  access  to  the  credit  

might  be  restricted:  company  size,  industry  for  example  

Resources

 •  Websites:  www.fundica.com  www.concierge.portal.gc.ca  www.thefundingportal.com  

•  Welch  LLP    

Final Points

 

•  Significant  amounts  of  government  assistance  are  available    Provincially,  federally  &  

internaSonally  •  Know  the  rules  and/or  get  help  •  Look  for  the  best  net  results  •  PLAN  AHEAD    

How We Can Help

 

•  Regional firm with global resources to serve clients •  Business like in our approach •  12 offices & 260 staff •  Cost structure aligned with entrepreneurs and their businesses

•  Extensive experience providing assurance, tax, corporate finance and advisory services

•  Government Incentives – SRED, Digital Media, etc preparation/support •  Corporate Structure •  Accounting advice •  Personal tax planning •  Financial Statement Audits •  Business planning advice, valuations •  Cash flow management •  Operational improvements and efficiencies •  Access to contacts •  & much more

Q&A

 

Bryan Haralovich, CPA, CA, CPA (Illinois) Partner, Welch LLP bharalovich@welchllp.com www.welchllp.com Twitter:@CAHaralovich http://linkd.in/1ioTtbp

Terry Lavineway, B.Admin, B.Sc.CS Director, Business Incentives, Welch LLP tlavineway@welchllp.com www.welchllp.com Twitter:@terryl99 http://ca.linkedin.com/in/terrylavineway