Here's our synopsis of two of the items the federal budget made significant changes to.
Unfortunately the federal budget has significantly impacted two programs that have been providing many of our clients with considerable tax savings. On the positive side corporate tax rates for small business will remain as low as any in the G8 group of countries and companies engaged in research and development will have access to more grants and venture capital.
New restrictions on the Employee Profit Sharing Plans (EPSP's) will make these plans much less valuable as ways to spread income amongst family members with lower tax rates. Starting on March 29, 2012 payments received from profit sharing plans are limited to 20% of an employee's salary if the employee is a significant shareholder or does not deal at arm's length with the company. If the 20% is exceeded then the excess bonus amount is taxable at the highest federal and provincial tax rates. On top of that deductions and credits cannot be claimed against the excess amount. As a result EPSP's will no longer have the desired effect on the total tax paid by a family.
The federal government is shifting its funding of research and development from indirect support in the form of tax deductions and investment tax credits to direct grants from programs such as the Industrial Research Assistance Program (IRAP). Effective January 1, 2013, only 80% of arm's length contract payments will be eligible for SR&ED tax credits instead of the current 100%. Beginning in 2014, more substantial changes to the SR&ED program become effective. These include the elimination of capital expenditures' eligibility for SR&ED credits and a reduction in the proxy rate for overhead expenses used by small businesses. Research endeavours that require significant investments in machinery or equipment will be affected the most because capital expenditures will no longer be eligible for the credit. Many smaller businesses now estimate overhead expenses as 65% of direct labour costs. This proxy percentage is being reduced to 55% as of January 1, 2014. The enhanced investment tax credit rate applicable to small and medium-sized businesses remains unchanged at 35% but the general investment tax credit rate will be reduced from 20% to 15% in 2014.
To make things easier for companies engaged in R&D projects the government plans to improve its online self-assessment tool and the objection process.
Start-ups and small and medium-sized companies engaged in research and development should find it easier to obtain funds directly from the federal government. It will be doubling the money available through the National Research Council's IRAP with an increase of $110 million. On top of allocating $400 million for venture capital funds, the federal government will also increase the Business Development Bank 's venture capital funding by $100 million. Other funds will support areas such as applied research, the commercialization of innovation, R&D internships, expanding market opportunities and centres of excellence.
Grants of $50,000 for up to 100% of internal labour costs plus items like patent application costs
The National Research Council has run the Industrial Research Assistance Program (IRAP) for a number of years. Companies which are eligible for SR&ED credits have also received IRAP funding, but IRAP reduces the amount of the SR&ED credits. However, IRAP’s new Small Project Accelerated Review Process may offer companies the ability to get support from both programs. This program can fund up to $50,000 and covers up to 100% of internal labour costs (with 65% overhead added), 75% of external contractor costs and 75% of total costs. The most important change is that the IRAP covers a wide variety of activities beyond those eligible for SR&ED. These would include patent application costs, financial restructuring, competitive market intelligence studies and many other activities. A company can ask IRAP to fund these activities which complement the SR&ED eligible activities, thus still allowing the full financial advantage of each program.
This blog entry provides two quick tips regarding SR&ED claims.
The first one has to do with broadband lines and access equipment.
Remember to include the leasing costs of broadband lines and access equipment in your SR&ED claim. The amount that can be claimed will depend upon whether it is: used All or Substantially All (ASA; > 90%) for SRED; it is Shared Use Equipment (SUE 50% < x < 90%); or neither.
The second tip has to do with Ontario Investment Tax Credits.
Companies in Ontario should remember to also claim the Ontario Investment Tax Credit while they are claiming their federal SR&ED credits. Failure to do so will be expensive, as CRA will automatically assume that the company has applied for this the previous year and will include this in the next year’s federal SR&ED submission as “Government Assistance”, thus reducing the current year’s claim. McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program please contact Kevin Goheen.
This blog entry is about the Canada Revenue Agency’s new version of the T661 form.
Every SR&ED claim involving a taxpayer’s fiscal year which ends on or after January 1st, 2009 MUST use this revised T661.
There are two significant changes in the new T661.
CRA has demanded substantive changes from taxpayers with regards to “Evidence…(the taxpayers) have to support (their) claim” which they have generated WHILE the SR&ED was in progress, in that it must be declared to belong to one of 12 categories.
These documents must prove:
the technological advancement sought;
the technological obstacles;
the work done;
the start and end dates; and
the employees or contractors involved.
CRA has indicated which types of documents support which types of filing requirements e.g. records of trial runs cannot substantiate technological obstacles.
As a result, contemporaneous creation of correct project documentation is crucial.
Another major change is the elimination of free format technical descriptions. Instead, projects must be described in two or three text boxes, with severe word limits on each section. In our opinion, this word limit does not allow taxpayers to either describe the business context of their SR&ED projects nor describe the systematic aspects of complicated projects involving manufacturing trials or complicated software development cycles.
We anticipate that as a result, many more technical reviews will be performed, as CRA seeks further information about the projects. As a result, the prudent way for taxpayers to proceed is to write their technical descriptions as was done in previous years, then cut, paste and edit the appropriate material into the new T661, but retain their original technical description, as it will be useful information to give to the CRA technical reviewer.
McLarty & Co’s SR&ED team provides its clients with documentation templates that assist in the claim and audit process. To learn about the latest administrative changes to the SR&ED program, please contact Kevin Goheen.