tax credits for technology-related business
DESCRIPTION
This is the presentation on government funding for technology-related business I gave at MIGS, game developers summit in Montreal, in November 2009.TRANSCRIPT
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