FVCPAA SR&ED and Other Government Incentives David Spicer, LLB, CPA,CA, Partner, BDO Canada LLP October 1, 2015

Important Information

§  The information contained in this presentation is general in nature and does not constitute advice. It should not be relied upon without more complete advice and information.

§  BDO Canada LLP has made every effort to ensure the accuracy of the information

contained herein. However, the information is restricted to the specific facts as set out and is based on our interpretation of the Income Tax Act (Canada) and the Income Tax Regulations as they presently exist unless otherwise expressly noted. Other programs discussed can change rapidly and current information must be obtained on an ongoing basis.

Overview of the SR&ED Program Introducing Canada’s R&D Incentive Program •  Scientific Research and Experimental Development (SR&ED) is a tax incentive

program administered by the CRA •  The program is designed to encourage Canadian business of all sizes and in all

sectors to conduct R&D in Canada •  One of the world’s most generous R&D tax incentive programs •  Single largest Federal innovation funding source providing > $3 billion in tax

incentives to > 20,000 claimants annually

Overview of the SR&ED Program Benefits of Making a Claim •  Tax Deductions -  Deduct SR&ED expenditures from income for tax purposes

•  Investment Tax Credits (ITCs) –  ITCs can be refundable! –  Reduce taxes payable –  Carried over - 3 years back, up to 20 years forward

The changes to the SR&ED Program Federal Budget Changes – REMINDER

Year change implemented 2012 2013 2014 +

original transition fully implemented

1.  General ITC rate (non-CCPC) 20% 20% 15%

2.  Capital Equipment expense 100% 100% 0%

3.  Subcontractor expense 100% 80% 80%

4.  Overhead calculation (proxy method) 65% 60% 55%

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The changes to the SR&ED Program Federal Budget Changes - REMINDER

Key SR&ED Program notes affecting CCPC’s: 1.  Enhanced 35% federal ITC rate remains unchanged

2.  Expenditure limit remains at $3 million for enhanced rate -  Expenditures above $3M - 15% general tax credit will be applied

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Overview of the SR&ED Program Qualifying SR&ED Expenditures

Labour

Employees directly engaged in, or

supporting experimentation

Contracts/3rd Party

Directly engaged in, or supporting

experimentation

Materials

Materials consumed or transformed in a an

SR&ED project

Overhead

Incremental and directly related to

expenditures. Traditional or proxy

Overview of the SR&ED Program Recovery of Eligible Expenditures

ITEM SALARY MATERIALS CONTRACTORS

Eligibility 100% 100% 80%

Expenditure $100,000 $100,000 $100,000

Proxy overhead $55,000 0 0

Eligible SR&ED expenditure $155,000 $100,000 $80,000

BC ITC (10%) $15,500 $10,000 $8000

Federal (35%) $48,825 $31,500 $25,200

Total $64,325 $41,500 $33,200

64.3% 41.5% 33.2%

Qualifying Canadian-controlled private corporations (CCPC) – Proxy method

Overview of the SR&ED Program Recovery of Eligible Expenditures Other Entities and Large CCPCs – Proxy method

ITEM SALARY (incl. proxy) MATERIALS

CONTRACTORS (eligible 80% portion)

Eligible SR&ED expenditure $155,000 $100,000 $80,000

BC ITC (10%) $15,500 $10,000 $8000

Federal (15%) $20,925 $13,500 $10,800

Total $36,425 $23,500 $18,800

36.4% 23.5% 18.8%

Overview of the SR&ED Program What is SR&ED? A systematic investigation or search that is carried out: -  in a field of science or technology -  by means of experiment or analysis -  for scientific or technological advancement

Basic Research Applied Research Experimental Development

work undertaken for the advancement of scientific knowledge without a specific practical application in view

work undertaken for the advancement of scientific knowledge with a specific practical application in view

work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto;

Overview of the SR&ED Program Eligibility of SR&ED Projects - 5 Questions: 1.  Was there a scientific or a technological uncertainty? 2.  Did the effort involve formulating hypotheses specifically aimed at reducing or

eliminating that uncertainty? 3.  Was the overall approach adopted consistent with a 

systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?

4.  Was the overall approach undertaken for the purpose of achieving a 

scientific or a technological advancement? 5.  Was a record of the hypotheses tested and the results kept as the work

progressed?

Overview of the SR&ED Program Policy Review - 2010 Consultation Process Ø  CRA had almost 80 assorted policy documents •  Some topic specific •  Some industry specific •  Many examples had become out of date •  Inconsistent references to the same topic

Ø  2010 Public Consultation with •  Industry •  Practitioners •  Program users

Ø  Currently now have 22 policies & glossary •  Costing topics •  Science issues

The changes to the SR&ED Program Eligibility Policy

Evidence is needed of:

A.  Due diligence & available technology -  Recorded your initial due diligence activities and that shows that

available technology could not overcome the technological problem or obstacle that you faced;

B.  Plan to overcome the technological problem or obstacle; -  Recorded the plan you subsequently devised to overcome the

technological problem or obstacle;

C.  Preservation of the new technological knowledge -  Preserved the new technological knowledge gained by the company that

was generated or created during the systematic search or investigation to create technological advancement;

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The changes to the SR&ED Program Claim Review Manual / Financial Claim Review Manual

Ø Claim Review Manual Comprehensive Guide for CRA Research & Technology Advisors (RTA)

- Guidelines and policies for how they conduct reviews - Introduced in 2010 - More detailed and demanding reviews - Form letters for information requests - More need for documentation to support claims

Ø Financial Claim Review Manual Detailed Guidance for Financial Reviewers (FR)

- Introduced in 2012 - Increased level of review and information requests

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Overview of the SR&ED Program You Should Investigate the SR&ED Program IF you...

•  Employ engineers, scientists and/or experienced technical personnel

•  Manufacture products, transform materials or develop applications

•  Developed an automation project

•  Built a pilot plant or performed a production scale-up project

•  Improved a product / process •  Have a specialized knowledge base

developed internally

•  Filed for a patent •  Developed high performance

software •  Have previously made SR&ED claims

Overview of the SR&ED Program Claim Process •  SR&ED claims are submitted electronically in a corporate tax return (T2) using

Sch 32 and 60 (Form T661), and related schedules (31, 425)

•  Amended returns must be submitted within18 months after FYE

•  Processing time: -  120 days if refundable submitted with current year return -  240 days if refundable and submitted as amended return -  365 days if non-refundable

•  Based on their evaluation of risk, CRA might need more information to make an eligibility determination. If so, CRA will make a Request for Information (RFI) and proceed to site visit review

Research Funding in Canada: Budget 2015 Highlights – Support for Canadian Research

•  Since 2006, Federal Government invested >$13 billion in new funding •  Economic Action Plan 2015 proposed >$1.5 billion in new resources over

5 years -  New, long-term support for Canadian Foundation for Innovation ($1.33

billion over 6 years, staring in 2017-18) -  Digital research infrastructure -  Additional $46 million to support Granting Councils in 2016-17 (NSERC,

SSHRC, CIHR, RSF) -  Thirty Meter Telescope Project - $245.5 million over 10 years -  TRIUMF - $45 million over five years (2015-16) -  Atomic Energy of Canada - $72.3 million in 2015-16 -  Council of Canadian Academies - $15 million over 5 years starting in 2015-16

Research Funding in Canada: Budget 2015 Highlights – Support Business Innovation

•  Supporting commercialization of space technologies •  Extending participation in International Space Station •  Fostering business-driven R&D at National Research Council -  $119.2 million over 2 years to support industry-partnered R&D at NRC

through IRAP (Industrial Research Assistance Program)

•  Internships for next-generation R&D leaders -  $56.4 million over 4 years starting in 2016-17 to Mitacs in support >6,000

new graduate-level research and development internships focused on business-related challenges (Accelerate Program)

•  Streamline and simplify business access to R&D support (NSERC) •  Foster international science and technology partnerships ($1 million /

year) •  Modernize Canada’s intellectual property framework

Research Funding in Canada: A Sample of Programs For Different Business Needs

Type About

Technology Development New products, processes, and/or prototype development

Collaborative Research Funding that links your business to other institutions and researchers

Training and Skills Funding for trainees or salary support for employees to gain experience

Environmental Funding related to the sustainability

Business Expansion Facilities & equipment

Global Growth Export market development

Research Funding in Canada: Available Research Funding: Technology Development

Sponsor Grant About

National Research Council

Industrial Research Assistance Program (NRC-IRAP)

For SME undertaking technology innovation. Funding for the development and commercialization of technologies. Work with ITA.

Government of Canada

Build in Canada Innovation Program (BCIP)

Helps companies bridge the pre-commercialization gap by procuring and testing late stage innovative goods and services within the federal government before taking them to market.

Western Economic Diversification

Western Innovation Initiative (WINN)

Repayable contribution to commercialize a viable and innovative technology-based product, process or service.

Research Funding in Canada: Available Research Funding: Collaborative Research

Sponsor Grant About

Natural Sciences and Engineering Research Council of Canada (NSERC)

Collaborative Research and Development Program (CRD)

To support focused, long-term research projects conducted jointly by academic researchers and private sector partners. Funds provided on a yearly basis, 1-5 year term. Focus is on new technology.

NSERC Applied Research and Development Grants (ARD)

To provide Canadian companies access to Canadian colleges’ expertise and knowledge and to train students in essential technical skills. Funds provided on an annual basis and program can last for up to 3 years. Company matching required with minimum amounts as cash.

NSERC Engage

Funds a 6 month R&D project with a university or college expert to find solutions addressing a specific, short term challenge. Funding is up to $25,000.

Research Funding in Canada: Available Research Funding: Collaborative Research

Sponsor Grant About

MITACS Accelerate Connects companies and other organizations with the vast research expertise in Canada's universities. Graduate students and postdoctoral fellows work on business-related research challenges at the company and on campus. $15,000 program (50%/50% cost split) and can be clustered.

MITACS

Elevate Two-year training program for postdoctoral fellows, to lead and undertake an industrially relevant research project including time in the industrial environment. MITACS provides minimum $50,000 stipend per year to the fellow.

Research Funding in Canada: Available Research Funding: Training and Skills

Sponsor Grant About

Government of Canada

Canada Job Grant BC program provides 2/3 of the cost to train up to $10,000 per grant.

Service Canada Career Focus Provides funding to entities who offer work related experience programs to youth aged 15 to 30. May cover 80% of the programs costs.

NSERC Industrial Undergraduate Student Research Awards

Offers grants to undergraduate students who would like to gain research work experience in an industrial setting to complement studies. Award is $4,500 for 16 weeks and must be 25% matched by employer/host organization.

CRA Apprenticeship Job Creation Credit

Credit of 10% of salary capped at $2,000 per apprentice per year.

Research Funding in Canada: Available Research Funding: Environmental

Sponsor Program About

Sustainable Development Technology Canada

SD Tech Fund Supports cleantech projects such as sustainable natural resource development, combustion free energy conversion, sustainable agriculture. Supports the development and pre-commercial demonstration of cleantech solutions. Funds on average 33% for a project.

Sustainable Development Technology Canada

SD Natural Gas Fund Supports the late-stage development and pre-commercial demonstration of new downstream natural gas cleantech solutions that will generate cleaner energy.

Research Funding in Canada: Available Research Funding: Environmental

Sponsor Program About

BC Hydro New Construction Program

Various funding opportunities for Energy Efficient Lighting Design, System Design (major retrofits), Whole Building Design, New Plant Design. Example funding of 100% of energy modeling study.

BC Hydro Powersmart Express May cover up to 75% of energy efficiency upgrades.

Natural Resources Canada

ecoENERGY Innovation Initiative

Provides financial assistance to produce and use energy in a more efficient way. Example UVic and project partners received $1.6 Million for wave energy studies.

Research Funding in Canada: Available Research Funding: Business Expansion

Sponsor Program About

BDC Equipment Purchase Program

Flexible financing solutions to assist with the purchase of equipment over 12 months or deferral for a year and repayment over 5 years.

Industry Canada Canada Small Business Financing Program

Loan guarantees to financial institutions to assist with purchasing land, building or equipment used in the business.

Research Funding in Canada: Available Research Funding: Global Growth

Sponsor Program About

EDC Export Guarantee Program

Help you secure financing from banks with a government guarantee on your export-related activities or foreign investments.

EDC Foreign Buyer Financing Can provide guarantees or loans to your international customer so they can buy your product.

Research Funding in Canada: A Sample of Programs For Different Industries

Type About

Agriculture Growing Forward 2 – Federal and provincial incentives and initiatives

Digital Media Credit to support interactive digital media technology development

Film & Television & Sound Recording

Film & Television Credit, Production Services Credit, Digital Animation or Visual Effects Credit, Foundation for Assisting Canadian Talent on Recordings

Book Publishing BC Book Publishing Credit supplements Publishers Contributions under Canada Book Fund

Questions

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David Spicer

dspicer@bdo.ca