UPDATE ON SR&ED AND OTHER FEDERAL INNOVATION FUNDING IN CANADA MARCH 15, 2013 PRESENTATION FOR THE CNSX Graham Smith TSGI – Chartered Accountants This presentation is a summary and is not sufficient for unassisted tax planning ©TSGI-CAs March 2013 All rights reserved 1

CONTEXT OF RECENT CHANGES 2 DRIVERS OF CHANGE Canada is underperforming in innovation (repeated studies) Specifically, Canada has a technology commercialization gap Allegations of abuse of the SR&ED program VEHICLES OF CHANGE Legislative changes from 2012 Budget (enacted Dec 14, 2012) Administrative changes (announced Dec 19, 2012) IMPACTS OF CHANGE Simplification of SR&ED and reduction in SR&ED funding Redistribution of innovation funding through other channels Not all new funding will be open to CNSX-listed Corps.

2012 BUDGET CHANGES (LEGISLATIVE) 3 CHANGES EFFECTIVE JAN 1, 2013 A.Reduction of SR&ED Contracts from 100% to 80% (Surprise application to 3 rd –Party Payments also) B.Reduction of Proxy Overhead Allowance from 65% to 60% CHANGES EFFECTIVE JAN 1, 2014 C.Further reduction of Proxy Overhead Allowance to 55% D.Elimination of Capital Expenditures from eligibility E.Reduction of General ITC Rate from 20% to 15% (ITC change affects all PublicCos and CCPCs* with large spends, typically >$3M) *CCPC: Canadian Controlled Private Corporations

ADMINISTRATIVE IMPROVEMENTS 4 GENERAL Pilot of Formal Pre-Approval Process (FPAP) Enhancement of the online Self Assessment Tool (ESAT) $6 M in new funding to the CRA for admin. improvements CONSOLIDATED POLICY REVIEW PROJECT RELEASE 24 policy and background documents effective Dec 19, 2012 In particular Eligibility of work for SR&ED investment tax credits Introduces as policy a 5 Question equivalent test for establishing the 3 Technical Criteria Possibility that the eligibility and documentation standards are being raised CRA contends there is no change

CRAs VIEW OF THE FIVE QUESTIONS TEST 5 Five Questions Test Adapted from Northwest Hydraulics Case 1998 Equivalent Three Criteria From CRA literature (IC86-4R3) 1. Was there a scientific or a technological uncertaintyan uncertainty that could not be removed by standard practice? Scientific or technological uncertainty 2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty? Scientific and technical content 3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses? Scientific or technological content 4. Did the process result in a scientific or a technological advancement? Scientific and technical advancement 5. Was a record of the hypotheses tested and the results kept as the work progressed? Scientific and technical content Source:

FEDERAL INNOVATION FUNDING VEHICLES 6 SELECTED CHANGES Program Funding Uptick Pubic Co. Eligibility Comment NRC-IRAP $110 M/yr Open to SMEs under 500 employees Canadian Innovation Commercialization Program (CICP) ~ $40 M/yr Promotes commercialization through Govt procurement BDC Venture Capital $100 M X Targeted pre-IPO Venture Capital Action Plan (VCAP) $400 M X Targeted pre-IPO Misc. Programs >$100 M/yr? ? / Fed. programs directed to increase private/public collaboration

IMPACT OF CHANGES ON CNSX LISTEES 7 SR&ED SR&ED funding reduced by $1.3 B/yr (approx. 40%) Public companies with large capital spends hit hardest (30-45% average ITC reduction vs 5-10% for CCPCs) The SR&ED implications of going public just got more severe (57% ITC reduction vs 43% previously. Note refundable/non-refundable issue) Predict stiffer application of eligibility and documents criteria OTHER FUNDING: Unclear that all SR&ED savings reinvested via other channels Opportunity here? But not all other funding channels open to CNSX listees

THE FUTURE AND FURTHER INFORMATION 8 FUTURE DEVELOPMENTS New revisions of the T661 and Guide to the T661 (T4088) are expected in October 2013 Expectations for Budget 2013: No reliable data available FURTHER INFORMATION posted-march / posted-march / posted-april / posted-april / secondary-institutions-posted-nov / secondary-institutions-posted-nov / Graham Smith at or