The Federal Budget introduced today contains a number of the recommendations in the Jenkins Report. The table on the next page summarizes the main changes.
The good news is that the program has fundamentally remained the same, although it is somewhat less generous. It still remains a strong incentive for companies to take risks in advancing the boundaries of technical knowledge in their field of endeavour.
The only significant disappointment is the reduction in the amount of an arm’s length contract that can be included in eligible expenditures.
The Government has also indicated that it will add technical advisors and take steps to improve training so that claimants can expect consistent treatment, no matter who is their Technical Reviewer.
Table 1: SUMMARY OF SR&ED CHANGES
|Capital Expenditures||Removed from expenditure base in 2014||We have been counselling our clients against claiming Capital unless it was a major expenditure. It results in no effective long term cash effect.|
|Labour, material contracts overheads||No change||Jenkins recommendation re: “labour-only” basis not accepted.|
|Prescribed Proxy Amount (65% of labour)||Reduces gradually to 55% and completed January 1, 2013.||This actually makes sense and we have often wondered why it was set at 65% in the first place. At 55% it is still a very good incentive as it assumes that the overhead ratio is now 55%. Most companies could not survive with a 55% overhead rate..|
|Arms-length contracts||Reduced to 80% of expenditures effective January 1, 2013||This will remove the so-called “profit element” from eligible expenditures. If you use contract employees, it makes the use of employees paid through the payroll much more attractive.|
|General SR&ED credit rate||Reduced from 20% to 15% effective January 1, 2014.||Matches reduction in corporate tax rate. No a change in the rate for CCPC’s (35%) on expenditures less than $3 million..|
|Use of Notice of Objection||Extends the use of the NOO process to include a second review of scientific eligibility determination.||This is an excellent change. Presently one needs to go to Tax Court to get a second look at the scientific eligibility of a claim.|
|Contingency Fees||The Government will conduct a study over the next year to determine why claimants prefer to hire consultants on a contingency fee basis.||None of our clients pay contingency fees, even though we offer the option.|