The Scientific Research and Experimental Development (SR&ED) tax incentive program provided $3.6 billion in tax assistance for research and development in 2011. In the past year, the SR&ED program was reviewed by an Expert Panel which presented a series of recommendations to the federal government.
As a response to the recommendations of the Expert Panel, the 2012 federal budget proposed 4 core refinements to the SR&ED program. Currently, eligible SR&ED expenditures include salary and wages, materials, overhead, contracts, and capital expenditures. The proposed changes are as follows:
1. Removal of capital from the expenditure base (for capital expenditures incurred in 2014)
2. Reduction of the proxy to calculate overhead costs from 65 percent to 55 percent (to be fully phased in as of January 1, 2014)
3. Reduction of contract payment eligibility to 80 percent of the payment (effective January 1, 2013)
4. Reduction in the general investment tax credit rate from 20 percent to 15 percent (effective Janary 1, 2014).
1. Removal of capital from expenditure base
The removal of capital from the expenditure base will have the largest impact on companies that incur significant costs on equipment and machinery purchased solely, or used partially, for the purpose of SR&ED.
2. Reduction of Proxy
The SR&ED program allows companies to claim supporting SR&ED overhead costs by one of 2 methods: (1) the direct approach, or (2) the indirect approach as a percentage of direct labour costs (i.e. proxy). At present, the proxy rate is 65 percent of labour costs. However, this rate will be reduced to 55 percent, and will be fully phased in as of January 1, 2014.
3. Reduction of contract payment eligibility
Effective January 1, 2013, no more than 80% of eligible sub-contract payments can be part of claimed SR&ED expenditures.
4. Reduction in general investment tax credit rate
The general rate investment tax credit applies primarily to larger corporations and foreign-owned entities. This rate has been reduced from 20 percent to 15 percent. Small and medium-sized CCPCs are not as affected, because they receive a separate enhanced rate of 35 percent on their first $3 million of eligible expenditures.
The SR&ED program will continue to be one of the most critical programs to support research and development in Canada. Introduced in the 1980s, SR&ED has evolved through various revisions and refinements. We are fairly certain that the program itself will continue to evolve, and as such, NorthBridge will work steadfast on behalf of our clients to ensure that they remain compliant with both present and future changes.