Maximizing Legitimate SR&ED Claims

OVERVIEW Who are we, Who am I? What is “Scientific Research & Experimental Development” or SR&ED What is eligible? Working with other parties on SR&ED projects Questions

WHAT IS SR&ED? “Scientific Research & Experimental Development” Started in the 1960’s Tax incentive program to encourage Canadian Businesses to invest in developing and expanding their technological knowledge and capabilities Every dollar invested in the Program by the Gov’t creates a greater return Supported by both the Federal and most Provincial Governments Over $3.6B in Federal Credits Annually (plus Provincial) Over 23,000+ claims per year What is SR&ED?

WHAT IS SR&ED? “scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is a)basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view, b)applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or c)experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto, and, in applying this definition in respect of a taxpayer, includes d)work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer, From the Income Tax Act:

WHAT IS SR&ED? The Canada Revenue Agency administers the Program and applications are made through your corporate T2 tax filing. CRA set the policy, expectations, etc.. based on the Income Tax Act (ITA) and Jurisprudence They review the claim submissions to ensure technical eligibility & financial integrity The CRA seem to have an objective of visiting claimants every 5-7 years, and the first year of a claim (FTCRS) Who Administers the SR&ED Program?

WHAT IS ELIGIBLE? Dec 2012, CRA Released a New Eligibility Policy (aka “The 5 Questions”): 1.Was there a scientific or a technological uncertainty? 2.Did the effort involve formulating hypothesis specifically aimed at reducing or eliminating that uncertainty? 3.Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses? (not trial and error) 4.Did the process result in a scientific or a technological advancement? (Even a failure can be an advancement of knowledge) 5.Was a record of the hypotheses tested and the results kept as the work progressed?

WHAT IS ELIGIBLE? Was there a scientific or a technological uncertainty? It is very important that you can identify (via some kind of documentation) when you realized that you had to begin experimentation or analysis to ‘learn something new’ otherwise, CRA could conclude all you were doing was following your standard practice without any “uncertainty” that the goals could be achieved, or how they could be achieved (due to missing or insufficient knowledge) When we draft the technical reports, we ask our clients questions to try and pull out this ‘missing knowledge’ that you gained at the end of the project. Clients think product, we focus on the science behind the development. Failure is eligible: you still learned something

WHAT IS ELIGIBLE? Note: A recent tax court ruling has widened the CRA’s view of eligibility as well as their acceptance of indirect evidence to support SR&ED development. Contact me if you would like more details.

What does the CRA really want? They want to ensure that taxpayer’s money is spent wisely on projects that will improve the IP of companies in Canada. They do this to: – Maintain highly skilled jobs in Canada – Employment – Keep Canada competitive in the world technology market – Encourage companies in Canada to take technological risks to stay ahead of international competitors In A Review, the CRA will: – Want to ensure projects meet the 5 questions criteria for eligibility – Labor and other expenses are commensurate with the quest for knowledge – Want to make sure the financial side of the claim adds up properly.

What’s the Payback? For Canadian CCPC’s 64% of Labor (T4) (including bonuses for non specified employees) 40% of Materials Scrapped and Rendered Valueless in experimentation 33% of Canadian Contracted Expense. ……….in cash !!!!!!!*

‘SIGNS’ OF SR&ED Projects requiring experimentation or analysis to gain new understanding of how things work, interact, etc., to achieve an objective that currently is not achievable, or you don’t know how to achieve it (no useable information exists in the public domain). Projects that used far more resources or time then anticipated due to unexpected failures or results Projects that cause a lot of stress and “I don’t know what to do next to make it work!” or “this result doesn’t make sense!” Projects that exceed “typical” efforts Painful projects!!!

WORKING WITH ANOTHER PARTY ON SR&ED PROJECTS

WHO HAS THE ENTITLEMENT TO CLAIM SR&ED OVER ANOTHER PARTY? Who has the rights to the intellectual property through agreement? Which company has taken the technical and financial risk of the project? Who can exploit the intellectual property developed? Note a company can own the IP can allow the other to exploit it at no charge.

Claiming Contractors Determine if arms length or non arms length – Ownership (control) or relatives can affect how SR&ED is claimed Arms LengthNon Arms Length – Company can claim- Each company must contractor’s expense claim their own expenses

Claiming Contractors (your company claims the contractors expense) Contractor has to be a part of the advance of scientific knowledge. Cannot be doing routine work that is not in support of the project. i.e. Project has to be a challenge for them as well. We highly recommend an IP agreement be in place before SR&ED begins. CRA are always cautious of company and contractors double dipping.

Working Collaboratively with Another Company on a SR&ED Project. Arms length or non arms length does not matter In this case each company will claim their own expenses in the single project. Important to separate costs to avoid duplication leading to a review.

Working Collaboratively with Another Company on a SR&ED Project. We highly recommend an IP agreement be in place before SR&ED begins that highlights that each company owns its intellectual property and that both parties will be claiming their own expense. The each company has to be named on the other’s SR&ED submission so the CRA can link.

COMMENTS/ QUESTIONS? Contact: Ron Vanderwees Cell: