The Scientific Research and Experimental Development (SR&ED) program, introduced in the 1980s, is a federal tax incentive program administered by the Canadian Revenue Agency, which provided $3.6 billion in tax assistance for research and development in 2011. In the past year, the SR&ED or SRED program was reviewed by a panel led by OpenText’s Thomas Jenkins which led to a series of recommended changes to the program presented to the federal government. Despite dramatic speculations of program overhauls in anticipation of the budget, the SR&ED program continues to be one of the most lucrative R&D incentive programs in the industrial world, with the enhanced Investment Tax Credit (for smaller businesses) rate maintained at 35%.
Current eligible SR&ED expenditures are based on salary and wages, materials, overhead, contracts, and capital expenditures. The 2012 federal budget proposed four core adjustments to the program. The proposed changes are as follows: the Prescribed Proxy Amount (PPA) method of overhead calculation is to be reduced from 65 to 55 percent of direct labour costs by 2014; capital costs will no longer be eligible for the credit in 2014 and onward; eligible third-party contract payments will decrease from 100 to 80 percent in 2013; and the General Investment Tax Credit (for large corporations and foreign-owned companies) will see a five-percent reduction from 20 percent to 15 percent in 2014.
Capital-intensive industries will be affected through the first two recommended changes. SR&ED overhead costs are calculated by one of two approaches: a direct method approach, and an indirect approach using a percentage of labour (proxy) expenditures. The Prescribed Proxy Amount (PPA) is seeing a 10-percent reduction to 55 percent in a two-phase implementation; the PPA will be reduced to 60 percent in 2013, and 55 percent in 2012. The elimination of capital from the SR&ED expenditure base will have an impact on industries reliant on the purchase and upgrade of equipment and machinery.
Currently, 100 percent of eligible sub-contract payments can be claimed as SR&ED expenditures, which will be marginally reduced 20 percent effective 2013. The largest SR&ED program savings will accumulate from the reduction of the general rate investment tax credit, applying primarily to larger corporations and foreign-owned entities. The general ITC was reduced from 20 to 15 percent. The recommendations will have limited effect on small- and medium-sized Canadian Controlled Private Corporations (CCPCs), as these companies will retain the enhanced 35-percent ITC rate on the first $3 million of expenditures. Overall, the changes to the SR&ED program will contribute to a simplified process, supported through additional funds allocated to improving the administration of the program.
This article was written by Mahrie Boyle, SR&ED and OIDMTC Team Specialist with NorthBridge Consultants.