SR&ED and the Plastics Sector Issues and Recommendations

Transcription

1 Scientific Research and Experimental Development SR&ED and the Plastics Sector Issues and Recommendations Western Plastics Association Member Meeting September 12, 2017 Wayne Pattern PEng, PMP Senior Manager, SR&ED Tax

2 KPMG nation wide in your neighborhood Both a national and local practice 100+ SR&ED professionals nationally Travelling from 12 hubs located across Canada 30+ tax professionals serving Western Canada directly 2

3 What is the SR&ED Program? Federal and Provincial tax incentives to encourage companies to increase scientific knowledge and make technological advances in Canada Annually: Approximately $3.6 billion in tax credits 19,000 claimants, 90% CCPC 42% of credits to CCPC, 58% to the other 10% Administered by the Canadian Revenue Agency Claimed through the tax return Can be amended up to 18 months after the fiscal year end 3

4 Why Claim SR&ED? Significant return on investment 64% 4

5 SR&ED Requirements for Eligibility Five Key Questions Asked by the CRA need to answer yes to all Was there a scientific or technological uncertainty? Was a hypothesis developed to reduce that uncertainty? Was the approach consistent with the scientific method, including testing the hypothesis by means of experimental analysis? Was the overall approach undertaken for the purpose of achieving a scientific or technological advancement? Was a record of the hypothesis tested and results kept as the work progressed? If yes to all questions, track development activities and costs 5

6 Two Ways to Claim SR&ED Proxy method Direct calculation, add 55% of salaries in lieu of overheads Advantage for high salary, low overhead projects Traditional method Claim overheads, utilities, operational costs, maintenance Requires high quality records Must be directly in support and incremental no allocation Higher risk of review 6

7 Qualifying Expenditures Related to SR&ED Eligible SR&ED expenditures are listed in subsection 37(1) of the ITA: Wages of employees directly engaged in SR&ED Cost of materials consumed or transformed in the prosecution of SR&ED Arm s length & non-arm s length contract payments Third party payments 7

8 SR&ED Eligible Activities Pure SR&ED: direct employees and contracts Experimentation and analysis Supporting activities: direct employees vs contract Engineering, design, operations research, mathematical analysis, computer programming, non-routine data collection, testing, supervised non-specialized employee activity, supervision SR&ED activities, technological feasibility studies, internal documentation 8

9 Time Claimed Internal Documentation Technological Feasibility Studies Technical Planning of SR&ED Projects Supervised Non- Specialized Employee Supervision of SR&ED Activities Testing Non-Routine Data Collection Computer Programming Mathematical Analysis Operations Research Design Engineering Analysis Experimentation Example of Proxy Method claim structure Eligible SR&ED Activities SR&ED Support Work Employee Salary Salary Claimed RnD Director $ 150, % 20% 25% 10% 75% $ 112, Engineering Director $ 150, % 20% 20% 60% $ 90, Engineer Mechanical $ 100, % 20% 20% 20% 20% 100% $ 100, Engineer Electrical $ 100, % 20% 20% 80% $ 80, Shop Foreman $ 100, % 25% $ 25, Shop 1 $ 75, % 20% 40% $ 30, Shop 2 $ 50, % 80% $ 40, Other Project Costs Total Salary Claimed $ 477, % Proxy in lieu of overhead $ 262, $ 50, Testing conducted by accredited laboratory (claim 80%) SR&ED Contracts $ 40, $ 75, Materials consumed to build prototypes (claim 100%) SR&ED Materials $ 75, Eligible SR&ED expenditures Provincial Income Tax Credit Federal Income Tax Credit Refundable Tax Credit ROI $ $ $ $ 855, , , , % 9

10 SR&ED Tax Benefits Expenditures earn Investment Tax Credits Federal rates constant, Provincial vary between 10% and 35% ITC may be refundable (generates a refund even if company not taxable) Some provincial ITC are fully refundable, regardless ITC can be carried back 3 years and forward 20 years 10

11 Offshore expenditures and SR&ED The SR&ED must be conducted by Canadian taxpayers, but Up to 10% of the total salary claim can be for employees working outside of Canada to support an SR&ED project Materials can be purchased out of country, so claim landed costs of materials required for SR&ED work done in Canada Look to Canadian providers if you require contract services for SR&ED, the benefits may any outweigh initial price difference (33%) 11

12 SR&ED does not include SR&ED does not include Market research Quality control, routine testing and data collection Research in the social sciences Commercial production or commercial use Style changes Patents and certification (occurs after RnD completed) Prospecting 12

13 High Rate vs Low Rate High rate refundable ITC Canadian Controlled Private Company 10% provincial (BC) + 35% federal of eligible expenditures Prior year taxable income scaled from $500,000 (35% refundable) to $800,000 (15% non-refundable) Low rate nonrefundable ITC Public companies 10% provincial (BC) + 15% federal 13

14 Recent changes to the SR&ED program CRA has removed $1.3B from the SR&ED program Reduction in the non-refundable tax credit rate from 20 % to 15% Capital expenditures removed from eligibility Proxy reduction from 65% to 55% Arm s length contract payments only 80% eligible Pre-approval and on-line assessment programs (no guarantees) Improved Notice of Objections process (has yet to be seen) New hires: FTCAS and reviews 14

15 Coping with change Claim Strategy File early: < 6 months = 120 days, > 6 months = 180 days File with corporate tax return, no need to amend Less time for CRA to review claim Documentation (project charters, objectives, issues, resources) KPMG can supply templates for time tracking and project scope 15

16 Alternative Government Funding Additional resources include Cuts to SR&ED have been moved into grant mechanisms Centres of Excellence for Commercialization and Research (CECR) Ministry of Small Business, Technology and Economic Development Natural Sciences and Engineering Research Council of Canada (NSERC) National Research Council IRAP Western Economic Diversification (WED) KPMG can help you connect with funding 16

17 SR&ED Company Type (1) Conducting SR&ED but don t know it At the leading edge of technology Constantly improving our practices Researching and developing new techniques and products Increasing efficiencies and passing these benefits to their customers Unaware they meet program criteria and missed opportunities KPMG can help companies recognize SR&ED 17

18 SR&ED Company Type (2) Understand SR&ED but are not filing Past claims were not successful Appears to be too much work, headache for busy staff Lack of available documentation, back up and evidence What s the return? KPMG can help organize planning, compile relevant documentation, establish time lines and other useful tools to develop a solid claim 18

19 SR&ED Company Type (3) Filing SR&ED but not realizing the full potential Do not understand eligible activities Weak documentation or write-ups Inefficiencies require up too much time for internal staff KPMG can help reduce inefficiencies in the process and expand the scope of the claim 19

20 SR&ED What to do? Time, cost, and the CRA Streamlines the process Minimize the requirements required to file a solid claim This is an opportunity to recover expenditures, but Need to understand the CRA and how to defend a claim KPMG provides success based contingency fees Contingent fees include claim defense 20

21 Best Strategy It s best to be involved early in the process Consider and coordinate SR&ED as part of entire tax plan Educate stakeholders on SRED opportunities Create project scope and maintain documentation The program is not going away; changes are ongoing SR&ED is essentially an additional source of income 21

22 Contact: Wayne Pattern KPMG LLP Source: Fredonia Group Inc The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 22