INNOVATION January-February 2013

f ea t u r e s

Refund Rates

TABLE 1

Type of Company

ITC Rates 1

Current Expenditures

Capital Expenditures 2

20%

40%

40%

1 - Individual, incorporated businesses or certain Trust

2 - Qualifying Corporations (from 2010 or later tax years)

2a) Canadian-controlled private corporation (CCPC) with prior year taxable income of $500K or less Expenditures up to an expenditure limit of $3M limit 35% 100%

40% 40%

Expenditures over an expenditure limit of $3M limit

20%

40%

2b) CCPC with prior year taxable income between $500K and $800K Expenditures up to an expenditure limit of $3M limit 35%

100%

40%

Expenditures over an expenditure limit of $3M limit

20%

0%

0%

2c ) CCPC with prior year taxable capital (employed in Canada) less than $50 million Expenditures up to an expenditure limit of $3M limit 35%

100%

40%

Expenditures over an expenditure limit of $3M limit

20% 20%

0% 0%

0% 0%

3 - All other corporations not included above

4 - Partner of a partnership Only partners that are qualifying corporations, individuals, and certain trusts may be refunded their allocated ITC at the rate of 40%. The ITC allocated to a member of a partnership that is a corporation, other than a qualifying corporation, cannot be refunded.

20%

40%

40%

1 Changes to the SR&ED program effective January 1, 2014, prescribe that the basic ITC for taxpayers other than eligible CCPCs will be reduced from 20% to 15%. The enhanced 35% credit rate for claimable CCPCs remains unchanged. 2 As of January 1, 2014, capital expenditures will no longer qualify as claimable expenditures for both SR&ED deductions and ITCs. However, the costs for developing capital property will still be considered to be current expenditures.

If your company is involved in any activity that develops or improves the performance of an existing product, material, or process, that work may be claimable under the SR&ED Program. Incremental advancements and so-called unsuccessful projects must not be overlooked. Anything that involves working on new methods of production at lower costs, improving existing technology or finding new ways to do old things may be claimable. Claimable activities generally belong to one of the following three broad categories: (1) basic research, (2) applied research, and (3) experimental development. Basic research refers to work that’s done to advance scientific knowledge without a specific practical application in view, while applied research refers to work that is done with a specific intended practical application. Experimental development is work that achieves technological advancement and is undertaken in order to create new or improve existing materials, devices, products, or processes. More than 95% of claims fall under this third category. When the everyday challenges of engineering work lead to new and innovative solutions and improved design or processes, which in turn lead to technological advancements in your field, this work is eligible for SR&ED claims. Often this work is as simple as applying new sustainable development methods with regard to the environment or safety, studies that lead to extended lifespans of roads and bridges or increase equipment reliability, or developing and improving engineering tools.

Certain types of work are not eligible to be claimed, including market research and sales promotion; quality control or routine testing or data collection; research in social sciences or humanities; prospecting, drilling for or producing minerals, petroleum or natural gas; commercial production or use of a new or improved material, device, product or process; and style changes. Claimable SR&ED Expenses Claimable expenses for work that qualifies for SR&ED tax incentives may include the wages, salaries, and benefits of staff directly involved in the work, as well as some support staff and even contractors and consultants. Time and money spent preparing materials and equipment, collecting data, experimenting, and analyzing results may be claimed. Supporting activities such as engineering, design, operations research, mathematical analysis, computer programming, and testing may be eligible to be claimed. There are even various ways to calculate and include related overhead costs. Materials costs and equipment lease costs may be eligible, as well as capital equipment costs † 1 to varying degrees based on the use of the equipment. Even some expenditures for work performed outside of Canada can be claimed. † Effective of January 1, 2014, capital expenditures will no longer qualify as eligible expenditures for both SR&ED deductions and ITCs. However, the costs for developing capital property will still be considered to be current expenditures).

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J AN UA R Y/ F E B R UA R Y 2 013

i n n o v a t i o n