Alma Consulting Group

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1 Alma Consulting Group Action to take based on changes to the SR&ED tax credit program In response to the 2012 Federal Budget

2 Agenda Introduction SR&ED Program Overview Why is SR&ED so popular? Evolution of the SR&ED Program 2012 Federal Budget Changes to the SR&ED Program Action to take based on latest changes SR&ED - Strategic Claiming Conclusion 2

3 Alma Consulting Group 2011 Key Figures $340M Cdn: Revenue : multiplying factor of the savings achieved for our clients since years experience $340m Sales 98% of our clients renew their contracts 1,700 employees $325m Sales 10 locations: Belgium, Canada, Czech Republic, Germany, France, Hungary, Poland, Portugal, Spain, United Kingdom S147m Sales

Alma Consulting Group Canada Canadian Operations 50+ employees 40+ technology experts Six offices across Canada Over 400 active clients in Canada Among largest independent SR&ED consulting firms in

4 Alma Consulting Group Canada Canadian Operations 50+ employees 40+ technology experts Six offices across Canada Over 400 active clients in Canada Among largest independent SR&ED consulting firms in the country British Columbia 4180 Lougheed Hwy Suite 220 Burnaby, BC Ontario 3300 Highway 7 Suite 810 Vaughan, ON Quebec Montreal 4141 Sherbrooke St. West Suite 410 Montreal, QC Quebec Quebec City 5300 Boul. des Galeries, Suite 210 Quebec City, QC New Brunswick 500 St.George Street Moncton, NB Nova Scotia 1959 Upper Water St. Suite 1700 Purdy's Wharf Tower 1 Halifax, NS 4

5 2 SR&ED Program Overview 5

6 SR&ED Tax Credits Part of Income Tax Act Since 1985 Stimulate technological development in Canada Support the development of new and improvement of existing products and processes Project based program File claim with corporate tax returns Largest source of R&D funding in Canada: No limit or expiration date to program 24,000 companies claimed $3.6 billion awarded 75% are small business only 50% of eligible corporations are claiming 6

7 SR&ED Tax Credit All companies based in Canada that invest in R&D qualify, irrespective of their size, industry sector or technology area Qualified R&D Projects can be found in any of these 4 categories: New Product New Process Improving existing Products Improving an existing Process 7

8 SR&ED Eligibility Criteria Beyond existing / standard solutions Learning for next time Qualified personnel Systematic investigation Documentation Scientific Content Technological Advancement Three Criteria Technological Obstacles, Uncertainties Before success or failure Limitations and shortcomings of current state of technology R&D SR&ED *Within the business context of the company: Success or failure does not matter; Features and Benefits are not important. 8

9 3 Why is SR&ED Program so popular? 9

10 Importance of Innovation The funding of innovation is a hot topic Canada is the most generous country in the world for SR&ED Tax Credits Direct impact on Company IP, profitability, valuation, cash flow Major analysis point for companies of all size and industry whether claiming or not Determining factor in which countries companies conduct R&D Increased number of claimants with greater expectations 10

11 4 Evolution of the SR&ED Program 11

Evolution Rather Than Revolution Additional reviewers Consultations across country

compliance and administration More predictable qualifications Appointment of

Tom Jenkins Review federal programs that support (R&D) Provide recommendations on

12 Evolution Rather Than Revolution Additional reviewers Consultations across country T-661 e- filing Update and consolidate application policies Simpler compliance and administration More predictable qualifications Appointment of independent expert panel led by Mr. Tom Jenkins Review federal programs that support (R&D) Provide recommendations on how it can maximize benefit More cost effective: more direct spending More accountable Phased implementation and consultation

13 Federal Budget Changes to the SR&ED Program 13

14 The 2012 Federal Budget Changes to SR&ED Eligibility Criteria 3. Technological Advancement 1. Technological Uncertainty / Obstacle 2. Scientific Content No change Financials Lower tax credit for large co s Lower overhead proxy amount Lower eligibility rate for subcontractors Capital expenditures no longer eligible Administration Additional investment improve administration of the program Enhanced Notice of Objection process 14

15 The 2012 Federal Budget Changes to SR&ED Current Jan. 1 st, 2013 Jan. 1 st, 2014 Enhanced tax credit rate for small CCPC Taxable income < 800K & up to $3M of expenditure Basic Tax Credit rate for other entities Capital Expenditure Equipment purchased or leased for SR&ED Proxy rate for overhead Arm s length sub-contractor inclusion 35% 35% 35% 20% 20% 15% eligible eligible non eligible 65% 60% 55% 100% 80% 80% Phased in based on the FYE of the company. 15

16 2012 Federal Budget Impact in Quebec 16

17 Quebec Cumulative Tax Credits Taxable Income $800K Labour 63% Mat. / Cap. 20% Sub-C 35% Labour 82.1% Mat. / Cap. 35% Sub-C 47.2% Labour 47% Mat. / Cap. 20% Sub-C 27% Labour 69.1% Mat. / Cap. 35% Sub-C 40.7% $75M Worldwide Assets Note: Preceeding FY / Federal: Taxable Capital < $50M 17

18 Impact on SME PME Combined Can/Qc R&D Tax Credit Rate Current Jan. 1st, 2013 Jan. 1st, vs. current Labour 82.1% 80.4% 78.6% - 3.5% Material. 35.0% 35.0% 35.0% - Sub-C 47.2% 40.2% 40.2% - 7% Capital 35% 35% 0% - 35% Prior year: Taxable income < $800 K and Taxable capital is between $10 M and 75M Qc taxable assets less than $50M 18

19 Impact on Large Companies Large Companies Combined Can/Qc R&D Tax Credit Rate Current Jan. 1st, 2013 Jan. 1st, vs. current Labour 63% 62.0% 55.1% - 7.9% Material. 20% 20% 15% - 5% Sub-C 35% 31.0% 27.9% - 7.1% Capital 20% 20% 0% - 20% Canadian Public or Private with taxable Income > $800K but assets <$50M 19

1st, 2014 2014 vs. current Labour 47.0% 46.0% 38.1% - 8.9% Material. 20.0% 20.0% 15.

20 Impact on Foreign and Very Large Companies Foreign and v. Large Companies Combined Can/Qc R&D Tax Credit Rate Current Jan. 1st, 2013 Jan. 1st, vs. current Labour 47.0% 46.0% 38.1% - 8.9% Material. 20.0% 20.0% 15.0% - 5% Sub-C 27.0% 23.0% 19.4% - 7.6% Capital 20.0% 20.0% 0.0% - 20% Foreign OR Canadian Public/Private with assets more than 75M 20

Impact On a Typical SR&ED Project Impact on a typical $100,000 project Labour Material Sub-C Capital Total $57,500 $12,500 $24,000 $6,000 $100,000 Current $66,423

21 Impact On a Typical SR&ED Project Impact on a typical $100,000 project Labour Material Sub-C Capital Total $57,500 $12,500 $24,000 $6,000 $100,000 Current $66, $63, % 2014 $60, % Current $50, $48, % 2014 $42, % Current $38, $36, % 2014 $29, % SME Large Co v. large Co 21

22 Federal budget impact Quebec Remains the most generous province for SR&ED 80.0% Current vs Rate of Return for a $100K project - SME 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% ON ON (2014) QC QC (2014) BC BC (2014) 22

23 The 2012 Federal Budget is SR&ED still worth it? Despite the cuts over the next 5 years in SR&ED ($1.33B) the SR&ED program still remains a generous incentive program in Canada: The direct funding committed represents only 7% of the annual budget for SR&ED Still provides broad incentives to ALL companies irrespective of their size, industry sector, or technology area. In 2011, the program provided more than $3.6B in tax assistance to 24,000 companies 23

24 The 2012 Federal Budget Changes to SR&ED Simplified and more focused approach: Additional $6M will be invested over the next 2 years to improve administration of the program: pre-claim approval, self assessment The government will work with industry to address emerging issues and enhance Notice of Objection process to allow for second review of scientific eligibility 24

25 What has not changed SR Scientific Research Clearly defined in program and tax act & ED Experimental Development Subject to interpretation Proper isolation of project is key to defining the SR&ED project and the technological advancement sought R&D SR&ED 25

26 Other changes... More Direct funding... $1.1B over the next 5 years, in the form of grants, mostly for IRAP ($110 M/yr). Remainder will be distributed. $400M to increase private sector investment in early stage risk capital. $100M provided to Business Development Bank of Canada to support venture capital activities Other programs (Canadian Innovation Commercialization Program is permanent, Digital Technology Adoption Pilot Program is in place until 2014, etc.) More changes will come... 26

27 6 Action to take based on the changes 27

28 Action to take based on the latest changes Strategic Approach to SR&ED Proactive Financial Planning Add subcontractors to payroll before 2013 Purchase your capital prior to 2013 Track real Overhead (traditional method vs. 55% of direct labour) Lobby with MPPs and government More important than ever to be STRATEGIC with SR&ED CLAIMS!! 28

29 7 SR&ED Strategic Claiming 29

30 STRATEGIC CLAIMING case studies Examples on specific projects Strategic use of programs, expenditures classification, differences between Federal and Provincial tax credits... Project Optimization 1 Retention and recovery IRAP vs. IRAP & SR&ED 2 Acrylic bathtubs with ornamental groove Qc Design Tax Credit & SR&ED 3 Insulation panels for city buses Federal vs. Provincial 4 Isopropyl free hand gel Lab vs. Production scale 5 Recycling line plastic waste Innovation on the Prod. Line 6 New sidewalks casing Documentation vs. Audit 30

31 IRAP vs. IRAP + SR&ED Geomembrane manufacturer Project with McGill for biogas retention and recovery $12,000 IRAP funding Discussions with McGill New anchor system IRAP only IRAP $12,000 IRAP + SR&ED SR&ED $11,271 TOTAL $12,000 $23,271 $30/h $3,600 Design: $30/h (CEO + 2 eng.) Tests & Mods: $20/h (5 tech.) $18,800 Lowers SR&ED eligible expenses 31

32 SR&ED vs. Qc Design Tax Credit Acrylic Bathtubs with avec ornamental groove challenging thermoforming Industrial designer with high salary ($100,000) with 40% implication in SR&ED eligible activities Initial claim: Design 100% claimed under Quebec Design Tax Credit QDTC QDTC $18,000 $10,800 SR&ED (35%/37.5%) $11,480 $32,840 TOTAL $18,000 $29,480 SR&ED + QDTC $43,640 32

33 Federal vs. Provincial Insulating panels cutting, sealing and wrapping project Development of a new equipment to cut and seal wrap triangle foam panels Crucial context: Lengthy set up time and numerous business trips Initial claim: same amounts both on federal and provincial sides Fed = Qc Qc direct & support expenditures Direct Labour costs $10,000 $10,000 Welder, Electrician services for set-up $17,000 Buyers, Salesmen $10,000 SR&DE (20%/37.5%) $6,300 $11,850 33

34 Lab scale vs. Production Isopropyl free hand gel Cleaning product company new softer lab stage but turn-out very viscous and hard to manufacture Manufacturing plant and Lab are on different sites: Lab is not aware of Production issues Initial claim: Lab work Lab Labo + Preproduction Lab:32 batches $20,000 $20,000 Preproduction: 5 reactors jammed+ new internally developed $10000 (Labour) $5000 (scrapped gel) SR&ED (35%/37.5%) $16,425 $26,388 34

35 Production Line Innovation Plastic bag company lots of wasted trims On the line experimentation with trim recylcing No specific test phases Experimentation on the line over sevreal months All production is sold (Low / High Grade) Eligible activities 6 test phases of 3 weeks Expenditures Operator time wasted during test phases (1h per shift for 4 operators+ supervisor) Supervision time & tests analysis (3h/day) for Engineer & Dir. Operations $/h $/h Excess waste incremental to tests $7500 RS&DE (35%/37.5%) $18,147 35

36 Documentation vs. Audit New sidewalks casing technology. Tests over several sites, over several years Initial audit presentation : Site by Site presentation and objectives Documentation: Site daily reports+ pictures Initial CRA assessment: Simple routine troubleshooting $0 New perspective: Global project with a unique objective Connexion between each job and the project objective # jobs with tests vs. # total number of sites 100% Accepted 36

37 STRATEGIC CLAIMING case studies Impact of a STRATEGIC approach to SR&ED claims Project Before After 1 Retention and recovery $12,000 $23,271 2 Acrylic bathtubs with ornamental groove $18,000 $43,640 3 Insulation panels for city buses $6,300 $11,850 4 Isopropyl free hand gel $16,425 $26,388 5 Recycling line plastic waste $0 $18,147 6 New sidewalks casing $0 $83,722 Total $52,725 $207,018 37

38 8 Conclusion 38

39 Alma Consulting Group A Strategic Approach to SR&ED Total Accountability, Sensible Risk Management and Service Excellence. These values set Alma Consulting Group Canada apart from the competition. The depth and experience of our team allows us to take an investigative approach to ensure that the fullest extent of your entitlement to innovation and technology tax credits is realized, while minimizing the efforts required by your company. This is the fundamental idea behind our five service standards. Account Management Audit Technical Communication with Government Financial 39

40 Five Service Standards see enclosed copy Total accountability, sensible risk management and service excellence this is the fundamental idea behind our five service standards: ACCOUNT MANAGEMENT Senior advisors on tax credit legislation Develop a documentation system suitable to both company & government Train company staff beyond just the program; establish R&D protocol Disseminate tax credit information throughout the company s management team Develop forward looking claim strategy to maximize benefits Advise senior management on the continuous progress of the company s claims status TECHNICAL Identify eligible projects in all areas of company Develop strategy to maximize value of tax credit claim Conduct project interviews with all key individuals Prepare the technical submission FINANCIAL Capture all expenses for each project Integrate the expenditures with each technical project Identify misplaced, hidden or operational qualifying expenditures Work with tax preparer to ensure proper integration into the T2 return COMMUNICATION WITH GOVERNMENT Handle communication with all levels of government Remain current with latest regulations and policies Adjust to governments current legislation and changing interpretations AUDIT Manage audit process (financial & technical) Review and organize project documentation Full audit dress rehearsal with key client staff Facilitate and defend the R&D claim during the audit Follow-up and closure of the audit process 40

41 Q&A 41

42 Professional. Personal. Alma Consulting Group Canada manages the entire SR&ED claim process on behalf of its clients. We deliver the confidence that claims are optimized based on our commitment, expertise and the implementation of a credible, efficient & replicable methodology. Thank You! PETER McCUSKER T x138 pmccusker@almacg.ca 4141 Sherbrooke St. West, Suite 410, Montréal, QC H3Z 1B8 42

TMT TAX UPDATE. Several changes aim to restrict research expenditures that qualify for a credit. Smaller

TMT TAX UPDATE. Several changes aim to restrict research expenditures that qualify for a credit. Smaller ISSUE 2012-01 WWW.BDO.CA TECHNOLOGY, MEDIA AND TELECOMMUNICATIONS TMT TAX UPDATE Following provincial and federal budgets tabled in March 2012, there were several changes made to certain tax rules applicable