Lead to Win

Lead to Win

Optimizing SR&ED ClaimsJune 23, 2009

Kevin Goheen

Lead to WinSlide 2

SR&ED Program – Overview

• Canada’s largest federally supported program for industrial R&D incentives

• Program has existed since the 1980’s

• Over 19,000 claims made each year

• >$4 billion in tax credits

• Small and medium companies submit 75% of these claims, generally $20,000 to $2,000,000 in expenditures

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SR&ED Program - Overview

• Canadian Controlled Private Corporations (CCPCs) can earn refundable 35% investment tax credits (ITCs) on first $3M of expenditures

• Public companies (non-CCPC) can earn 20% ITCs, applied against federal tax

• 10% provincial tax credit for SR&ED performed in Ontario

• 20% Ontario Business Research Institute Tax Credit

• R&D costs CCPCs approx 30 cents/$ expenditure

• Individuals can also claim SR&ED

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What is R&D Practically ?

Indications that you MAY be doing R&D:

• Technical attempts to make things faster, cheaper, better

• Lower than average manufacturing yields

• Prototype failures

• Large warranty costs

Each case must be analyzed within the definition of eligible activity

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SR&ED – The Concept

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Point A‘base level’

Point B‘Technological Objective’

Barriers, Constraints, Uncertainties, Challenges

Work elements•Systematic•Uncertainty

•If?•How?

• Better yield• Less polluting• More capacity• More users•Faster response•Lower energy use•etc…

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Software Engineering

Some examples of advancement are:

• New architectures, algorithms or database techniques

• Performance increases (response time, speed, user or database scalability, reliability)

• Interfaces between two or more existing software packages• Development of new in-house development tools

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Mechanical Engineering

Some examples of advancement are:

• New packaging equipment and procedures

• Non-routine substitute of materials in injection molding

• Eliminating lead based solders in PCB manufacturing

• New fuels in cement manufacturing• Emission reduction in cement manufacturing• New hockey tape production equipment• Development of new in-house CAD tools• Developing new machinery to enhance production

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Other Sectors

Some examples of advancement are:

• Development of new pharmaceuticals

• New growing techniques for grape vines in cold climates

• New endodontic treatments

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Eligible Expenditures

• Labour• Capital goods• Contractors

– in many cases; be careful with wording• IP ownership

• Location

• Service vs. Product

• Management of R&D project

• Material• Overhead

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Timing

• SR&ED claims must be submitted within 18 months after the end of every fiscal period

• December 31, 2009 is the deadline for submitting claims for fiscal periods that ended on June 30, 2008.

• e.g. You can prepare two claims for your fiscal periods that ended on December 31, 2007 and 2008 at same time, and submit them both to CRA before June 30, 2009.

• CRA has committed in writing to help fix administrative omissions and errors if received 90 days prior to 18 month deadline.

• SR&ED cheques usually arrive ~3-4 months after CRA receives your SR&ED documentation.

• However if you have already submitted your T2, it will need to be amended. This will delay your first SR&ED cheque, so it arrives in ~6-8 months. Subsequent SR&ED cheques will likely arrive in ~3-4 months.

• The Ontario cheque (used to) tend(s) to arrive a few months later.• Many third parties will lend against filed SRED claims.• Note that there is no filing deadline for the Ontario Innovation Tax credit

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What’s New?

• New T661 form for YEs after Dec 31, 2008• Electronic filing• New terminology• Hard word limits on various sections of technical

descriptions; no pictures or graphics allowed• All projects to be filed after 2010 (not just top 20)• Explicit requirement for contemporaneous documentation• HINT: Not enough space to describe projects, hence will

be more audits. Write a long technical description, cut and paste into new form and keep the long form for the inevitable audit.

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CRA Web Site

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What is Involved in Filing a Claim?

• Scoping of projects

• Preparation of technical reports for each project

• Gathering and analysis of costs

• Preparation of tax R&D forms and attachments

• Submission of claim by 18 months following the year end

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Technical Descriptions

Five components

• A: Scientific or Technological Objectives

• B: Technology or Knowledge Base Level

• C: Scientific or Technological Advancement

• D: Description of Work in this Taxation Year

• E: Supporting Information.

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A: Scientific and Technical Objectives

• Preface this section with a brief description of the company and its commercial goals.

• What did you intend to achieve?

– Your work will qualify for SR&ED if you generate new knowledge to do new things and make technologies perform in unusual ways. You must intend to advance knowledge of your subject.

– Use numerical goals where possible.

– Emphasize the “methods and practices” that you wanted to develop.

• For multi-year projects, include a technology roadmap which you probably have from a business plan.

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B: Technology Knowledge Base

• Describe what you knew internally about the project before beginning and what other companies have done

• You are not expected to know “trade secrets” of others.• Area B is very important for software claims, where

common knowledge evolves rapidly. Is often challenged at technical review.

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C: Scientific and Technological Advancement

• Describe what achievements you hope to gain:

– “It would be an achievement if…”

• What was difficult? Stress uncertainty. Begin your paragraphs using these phrases:

– “We did not know how to…”

– “We were unsure whether we could…”

– “We could not understand why…”

– “Our problem was difficult to solve because…”

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D: Description of Work in Taxation Year

• For multi-year projects, described the status as of the first day of the FY

• What did your employees and contractors do?

– Describe the systematic way they investigated your technical challenges.

– Describe approaches they contemplated, but abandoned.

– What tests and analysis did they perform?

– Described what lessons you finally learned.

– Don’t use certain phrases (“trial and error”, “beta version”, “optimize”)

• Describe the status of the project on the last day of the FY and, for multi-year projects, your plans for the next FY.

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E: Supporting Information

• What documents exist? – high-level overview– functional specifications– Prototypes– source code– log books, bug reports– emails– minutes of meetings, etc…

• Just the titles. Do not submit copies of the documents to CRA.

• List all the contractors and describe what they did very briefly.

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New Documentation Requirements

Base Level Knowledge

Uncertainties Systematic Work Resources

Planning Docs X

Time Sheets X

Experiment Design X X X

Lab Notebooks X

Source Code, System Architecture, etc..

X

Trial Run Records X

Progress Reports, Minutes

X X

Test protocols, data and results

X X

Photographs and videos

X X

Prototypes, scraps X X

Contracts X

Others X X X X

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Preparing for your SR&ED Review

• Technical

– Prepare a slide deck from the T661

– Rehearse, rehearse, rehearse

– Let the reviewer present

– Don’t let the reviewer “wander around” your shop.

– Silence is your friend; shut up.

• Financial

– Can be extensive

– Examples

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Relationship with IRAP

• Advantages of having both– Usually SRED technical review goes better (or doesn’t happen)– Forces documentation– Cash flow improves 18 months– Financial risk drops– ITAs are usually on your side; CRA reviewers are not on your

side.• Disadvantages to having IRAP

– Reduces SR&ED claim, unless you get IRAP to pay for non-eligible activities

– e.g. R&D project with $50K salaries, $16.5 contractors, 65% overhead

• With $50K IRAP Small Project support, total cost to loss making CCPC is ($5060)

• Instead get IRAP to pay for marketing or IP; total cost to company will be ($27,060)

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10-minute Exercise

• Work in LTW Groups

• Define technical objectives

• Define technical uncertainty

• Define work performed

• Identify costs

• Identify documentation

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Thank you!

Kevin Goheen, PhD, P.Eng.

613.726.1010 X.227

kgoheen@mclartyco.ca