CCRA wants more businesses to take advantage of its R&D tax incentive program

*This is an expanded version of a summary that originally appeared in the October 2003 issue.

By William Stark

The SR&ED (Scientific Research and Experimental Development) program is Canada's largest tax incentive program, and arguably one of the best in the world. Despite the many improvements that have been introduced over the past several years, however, the program is still underused. The Canada Customs and Revenue Agency (CCRA) would like expand awareness, and is looking for CAs to help spread the word.

The goal of the SR&ED is to encourage Canadian businesses of all sizes to conduct research and development that will lead to new or improved technologically advanced products or processes. Currently, approximately $1.6 billion is provided to 11,000 claims per year. This is done through:

• Assistance in the form of investment tax credits (ITC) applied to Part I tax and/or cash refunds on qualified expenditures for eligible research and development work done in Canada. At the federal level, an entity can earn ITCs at either 20% or 35% of the qualified SR&ED costs, depending on the type of entity and the expenditure limit. Tax credits not used in the current year can be carried back three years and carried forward 10 years.
• Allowable capital expenditures under the program can be fully deducted in the year.
• Allowable expenditures remaining in the SR&ED expenditure pool that are not claimed in the current year can be carried forward indefinitely.

This requires proper tax planning as follows:

• Using deductions such as non-capital losses (which have only a seven-year carryforward for reducing taxable income) before using the SR&ED expenditure pool (which can be carried forward indefinitely).
• Ensuring the $2-million expenditure limit is not eroded due to prior years' taxable income or taxable capital employed in Canada.

The SR&ED program is open to corporations, individuals and partnerships in all sectors -- as long as they are engaged in qualified SR&ED activities in Canada. They can be public or private, Canadian or foreign controlled. CCRA has identified 12 technology sectors ranging from pharmaceutical to mining and computer software to agriculture, but the applicant's activity does not have to fall within these sectors. This truly makes the program the farthest-reaching and most flexible tax incentive program in Canada.

History
Since its introduction in 1983, the SR&ED program has changed considerably. Initially, the activity was pre-approved and money was received up front. Although many companies preferred this format, administration was a nightmare because unforeseen changes often occurred during the performance of the activities and it wasn't feasible to monitor claims constantly. Today, the SR&ED is based on the principle of cost recovery.

In the early years of the program, no filing deadline existed, so claimants could file as long the conditions for amended returns (i.e., the seven-year filing period as outlined in IC 75-7R3) were met. But in 1994, the Department of Finance imposed an 18-month filing deadline. This resulted in a barrage of back filings – claimants trying to get in under the wire before the change was implemented. In fact, many claimants were ill advised by external consultants to make claims whether they qualified or not, because CCRA would not be able to audit them all. CCRA then announced that all SR&ED claims would be audited; true to their word, they did audit more than 90% of the claims. Consequently, many entities stopped using the program because of the long time lags and consistency of the audits. CCRA acknowledged these problems, and began a series of steps to improve the program.

Program improvements
Since 1997, CCRA has brought greater consistency, certainty, predictability and timeliness to its assessment of the science activities. Improvements include:

1. National technology sector specialists, who have assumed overall responsibility for co-coordinating science reviews in the identified sectors to increase nationwide consistency.
2. Public information seminars aimed at educating claimants and accountants about the program.
3. First-time claimant service, which provides newcomers with the information, tools and assistance required to complete the claim.
4. Preclaim project review service, which gives the claimant an upfront review and preliminary opinion on the project's eligibility. This service is available before work is started, while it is under way, or before a claim is prepared.
5. Account executive service, which provides continuity and consistency of service from year to year, as well as a single point of contact for assistance.
6. Application policies, which provide greater clarification on specific areas of the program.
7. CCRA SR&ED website, which provides quick and easy access to all forms, bulletins, application policies, and services provided under the SR&ED program.
8. SR&ED Partnership Committee, composed of CCRA and industry representatives, which develops and implements the strategic direction for the program and ensures the needs of claimants and industry are being addressed.
9. Mandated timeframes requiring CCRA to prioritize SR&ED claims. Although these time frames are not legislated, CCRA has made a commitment to assess claims within 120 days as long as all filing requirements have been met.
10. The revised T661 form (effective June 30, 2003), which is aimed at better describing the SR&ED activities for experimental development.

These changes have greatly improved the quality of the SR&ED program, but CCRA has not stopped there. It is now in the process of finalizing a strategic business plan, which will be made public in the near future.

The greatest challenge
Peter Armstrong, director of the client liaison division for the program at the CCRA, says the biggest challenge for the agency lies in building awareness. CAs have an important role to play in this regard, he adds, because they are important sources of information to claimants – especially potential claimants.

This summary is the first in a three-part series on the SR&ED.

Next month: The scientific side.

William Stark, CA (bill@resdev.ca) is the president of ResDev Tax Consultants Inc. in Toronto.

For more details on the SR&ED program and phone numbers for SR&ED offices, visit the SR&ED Web site at www.ccra.gc.ca/sred.