Get your slice of the calorie-reduced SR&ED pie.
August 14, 2012
by Glenn Fraser and Ryan Cressman
The federal budget may have cut the Scientific Research and Experimental Development (SR&ED) pie into smaller pieces, but it’s also offering small and mid-sized processors and manufacturers some fresh slices that are certainly appetizing.
In an attempt to address Canada’s growing innovation gap by boosting R&D investment, Finance Minister Jim Flaherty announced several changes to the program, among them lower tax credits and more direct grants. The focus is shifting from pure research to “business-driven, industry-relevant applied research.” The National Research Council’s Industrial Research Assistance Program will get an additional $110 million added annually to support R&D projects by smaller businesses. And businesses in the western provinces will have access to a new Western Innovation Program.
The government is also supporting collaborations between companies and universities to better target research based on needs that delivers clear economic advantages. Small and mid-size businesses will have access to university level researchers and receive SR&ED credits on funds paid to support this. To achieve economies of scale, companies will form consortiums to pursue common research, share results and receive SR&ED credits for the funds they contribute.
Evolving consumer expectations and food retailer requirements present some particularly tempting propositions for food and beverage processors, including the following:
• Creating new recipe formulations to address emerging consumer preferences (such as reduced sodium, natural ingredients, sugar substitutes) while maintaining acceptable flavour profiles, product presentation and shelf life.
• The rising popularity of functional foods that deliver health benefits requires testing nutritional benefits.
• As interest in anti-allergenic foods (gluten-free, peanut-free) increases, there’s a need to test products and prove claims.
• The push for environmental sustainability is impacting packaging (biodegradable, recyclable) as well as storage and delivery systems.
• There’s growing interest in tracking food products and ingredients throughout the supply chain.
• Pressure on margins and retailer consolidation continue to drive the need for production efficiencies to deliver products at a lower cost.
• Technological advances, demand for web-based interactive services and cost concerns also require processors to develop more productive IT systems and processes to support their businesses.
The government made changes to the program to save costs. They could affect your company.
Simplified tax credits
Expenditures that qualify for SR&ED tax credits currently include wages, subcontractor fees, overhead, materials and capital equipment. To simplify the tax credit base, the government will eliminate capital expenditures from eligibility for SR&ED deductions and investment tax credits by the end of 2013. With this deadline approaching and the current strength of the loonie, consider purchasing new equipment that qualifies for SR&ED credits, prior to the cessation of eligibility.
There are two federal input tax credit (ITC) rates for SR&ED: a general rate and an enhanced rate of 35% on expenditures up to $3 million for qualified Canadian-controlled private corporations (those with prior-year taxable income below $500,000 and prior-year taxable capital below $10 million). To improve the cost effectiveness of the program, the government is reducing the general rate from 20% to 15% beginning Jan. 1, 2014. The 35% enhanced rate remains the same. Companies that qualify for the general rate should evaluate SR&ED potential and factor this into your return on investment calculations.
There are two ways to claim SR&ED overhead expenses: identifying each item individually or claiming overhead expenses for 65% of the total salary and wages of employees engaged in SR&ED. Most companies find the latter method simpler.
The government has reduced the prescribed proxy rate to 55%. When claiming expenses, carefully evaluate which option may be most beneficial.
Only 80% of sub-contract payments are eligible to claim as expenditures. If you have contractors who are working almost full-time on SR&ED work, it may make sense to convert them to employees so the company can claim associated overhead expenses.
Despite these cutbacks, the value of SR&ED tax credits for most participating Canadian businesses will only be reduced by approximately 7%, depending on the province of residency.
Consider how SR&ED will make your company more competitive and profitable, then serve yourself a slice of that pie and enjoy.
Glenn Fraser is a partner and leader of MNP’s GTA region Food & Ag processing team. Ryan Cressman is a partner, SR&ED Consulting, who works in MNP’s Waterloo, Ont. office.
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This article appears in the July/August 2012 edition of PLANT