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No Worries, Canada: SR&ED is here to stay

There was much sturm und drang in the Canadian technology community running up to this week’s federal budget. The Jenkins reports and hints from the government had many wondering if the SR&ED program, a major source of funding for tech companies would be cut.

But when the smoke cleared, any changes made were essentially fine tuning of the program. Not only is SR&ED here to stay, it is now being made simpler and more predictable. The overall program will be a bit smaller but more focused and easier to claim for technology companies.

I’m not sure if the tech community, which is notorious for its disdain for anything governmental, can claim a “victory” here, but it’s certainly good to see that it can rally around an issue when needs be. A much more proactive tech community may be in our future.

That said, let’s look at some of the budget’s effect on the SR&ED program:

General SR&ED Investment Tax Credit (ITC) rate

Most tech companies are Canadian-controlled private corporations (CCPCs ) and will be happy to know the 35% rate for qualifying CCPCs remains unchanged. The rate applies to the first $3 million in qualifying expenditures and is refundable.

SR&ED capital expenditures eliminated

This was always the dodgy end of SR&ED claims that flagged the most audits as some companies claimed all kinds of equipment as capital expenses. Eliminating capital expenditures will simplify claiming considerably. However, it will likely penalize the cleantech and other capital intensive tech sectors. It’s hoped the government will recognize this problem and mitigate it.

Overhead proxy rate reduced

There are two ways to claim SR&ED – item-by-item listing (traditional method) or the proxy method where companies claim as SR&ED overhead expenses, 65% of the total salary and wages of employees engaged in SR&ED.  The proxy rate is being cut to 60% for 2013 and 55% the next year. Most companies use the proxy method because it is easier, but may want to consider the traditional method given the reduction in proxy amount.

Companies may also want to consider putting some contractors on staff as the contractor rate of claim is being reduced from 100% to 80%. Making them employees will allow them to claim associated overhead expenses using the proxy method.

Contingency fee arrangements

The SR&ED program has been criticized for being overly complex, which forces many applicants to retain consultants on contingency fee to help them file claims. The budget proposed that the Government conduct a study of the situation and determine what action is required. Given the elimination of capital expenses in future years, this should make claims easier to file and potentially leave more money in the company’s hands. However, professional  tax and accounting advice will still be a good thing to have for any company filing SR&ED.

Enhancing predictability

One of the biggest complaints of the SR&ED program has been the somewhat subjective and seemingly arbitrary way in which CRA has been administering eligible expenditures. The budget ordered and funded the Canada Revenue Agency, which administer the SR&ED program, to take steps to make application results more predictable.

Other relevant budget aspects

The budget also touched other funding issues in the tech community. It is injecting $110 million a year into the Industrial Research Assistance Program (IRAP). It is also providing $500 million for venture capital in early stage companies in Canada — $100 million for Business Development Bank of Canada (BDC) and $400 million for venture capital companies.  This is in line with the Jenkins Report which recommended a balance of broad based incentive programs like SR&ED and more direct investment in the form of grants and contributions.

Summary

Despite the proposed trimming, the Canadian government is committed to early-stage technology companies and SR&ED is their primary vehicle to support growth in this sector. When combined with the various provincial R&D tax incentives, Canada continues to have a generous, broad based, incentive program to support R&D and technology growth in this country. The tech community now has to do our part to demonstrate why this government support will deliver a kick-ass return on investment for the taxpayers of Canada.

Techfest Montreal - May 4th
Techfest Montreal - May 4th