1. SR&ED: WHY IT MATTERS TO YOUR STARTUP AND HOW TO BEST USE THE PROGRAM 1 ©TSGI – All Rights Reserved - November 2011

2. SR&ED: Why it Matters to Your Startup and How to Best Use the Program Prepared for Innovate Calgary November 3, 2011 Graham Smith Vice President – Business Development TSGI This summary is not sufficient for unassisted tax planning 2 ©TSGI – All Rights Reserved - November 2011

3. What Is The SR&ED Program? 3 Scientific Research & Experimental Development A Federal tax program to encourage R&D in Canada Most provinces have complementary programs The largest industrial R&D incentive in Canada: delivers >$4B/yr

4. Why Does it Matter? 4 Primary benefit: Investment Tax Credits (ITC) – Either a cash refund or pre-paid tax Federal ITC is – 35% for CCPCs* (partly refundable) – 20% for all others entities (partly refundable) Provincial credit depends province * Qualfied Canadian Controlled Private Corporations

5. Why Does It Matter? (cont’d) 5 AB Provincial Tax Credit is a nominal 10% – Refundable for corporations (capped $400k) – Partnerships are NOT eligible for AB ITCs The New Math: combined benefit in AB is: – CCPC: Up to 41.5%* cash back – Public Co’s: Up to 28%* partly refundable – Partnerships: 20% partly refundable * Year 1 face rate; an AB grind effectively reduces this in subsequent years

6. How Does SR&ED Work? 6 Program is a tax program, not a granting system: – You must execute your research and pay your costs. – Then submit a claim as part of your taxes – Claims can be submitted up to 18 months after your fiscal yearend (typically - no allowance for late filing!) – Refunds usually issued 3-14 months after filing

7. What Work Is Eligible? 7 A) Basic Research B) Applied Research C) Experimental Development See section 248(1) of the Tax Act summarized as: – Purpose is to achieve Technological Advancement – For creating new, or improving existing, materials devices, products, or processes – Incremental improvements specifically allowed

8. What Are The Eligibility Criteria? 8 Eligible projects must meet 3 technical criteria: Technological Advancement – The technology being sought does not pre-exist within the company or public domain Technological Obstacle/Uncertainty – A qualified person could not predict if, or how, a project could succeed on the basis of previous knowledge (i.e. existing proven methods) Systematic Approach – Qualified personnel working in a systematic manner with documentation

9. What Work Qualifies? 9 Engineering Design Operations research Mathematical Analysis Computer Programming Data Collection Testing Psychological research Work undertaken by or on behalf of the taxpayer with respect to: But does not include (per 248(1)e-k): Market research Quality control Research in Social sciences/humanities Commercial production Style changes Routine data collection Prospecting/drilling for minerals, petroleum or natural gas

10. What If My Project Fails? 10 Failure IS an option ! Failed projects can submit successful claims! The program supports the attempt to advance technology.

11. What Costs Can Be Claimed? 11 Eligible projects can claim these cost categories: Labour Materials Leases (equipment) Contractors Capital Items Overhead Most work must be in Canada

12. Is Our Industry Eligible? 12 The program can support projects in many fields of science and technology but excludes the social sciences (incl. bus. processes) We have seen successful claims in: - Manufacturing- Medical Tech. - Oil and Gas- Communications - Software/gaming- Agriculture - Clean Tech.- Consumer Products

13. How to Get The Most Benefit 13 The SR&ED program is a generous and exceptionally effective incentive… But you must know how to integrate it into your business without interfering with your work

14. How to Get The Most Benefit 14 # 1 Make Sure You Apply If You Are Eligible! – Many Alberta companies make the mistake of not filing - don’t let that be you! – Make a realistic assessment of the eligibility of your technical work and the relevant costs

15. How to Get The Most Benefit 15 #1 Cont’d: Indicators of SR&ED Eligibility - You do not need a lab coat and goggles! Does the company: Employ B.Sc, M.Sc, P.Eng, or Ph.Ds? Receive IRAP funding? Publish or present technical findings? Have patents? Incur cost overruns or failures for technology reasons? These are good indicators of SR&ED!

16. How to Get The Most Benefit 16 #2 Be Proactive! Once you’ve decided you might have a SR&ED claim set things up properly: – Choose the right business structure to execute – Keep appropriate technical and financial records – Make sure your paperwork is in order!

17. How to Get The Most Benefit 17 #3 Document, Document, Document (but not too much) SR&ED claims must be substantiated Documentation must be contemporaneously generated Achieve documentation target with the least possible effort

18. How to Get The Most Benefit 18 #4 Ensure it is Your SR&ED Claim Make sure it is clear who gets the SR&ED if contractors, 3 rd parties, partners etc are involved CRA uses several tests to determine based on the laws It is not sufficient to simply write it in your contract

19. How to Get The Most Benefit 19 #5 Choose Employees vs Contractors (where appropriate) The program offers preferential treatment for employee wages for companies claiming overhead costs using the Proxy Method. You can get up to ~ 68% of a SR&ED employee’s wages

20. How to Get The Most Benefit 20 #6 Be Fiscally Prudent Beware of over optimism in estimating your SR&ED benefit: – Claims are often assessed at a lower value than what is claimed – Many claims (or portions thereof) are non-refundable! Recall that you must submit your taxes in order to file a claim Approval time is usually reasonable, but can be lengthy (don’t get caught…)

21. How to Get The Most Benefit 21 #7 Get Help When You Need It! Call for help if your spend exceeds ~$150K/yr – or would if you paid yourself/staff fair market value Or you have complex situations – i.e. agreements, partners, commercial production etc Call early: forensic tax accounting is no fun! Call a SR&ED Pro – this is a specialty area according to the ICAA

22. What Should You Remember? 22 If you are doing R&D in Canada you cannot afford to ignore this program because… YOUR COMPETITORS ARE ALREADY USING IT !

23. What Is the Future of SR&ED? 23 The future is unwritten….SRE&D will likely change The academics have weighed in: – The Jenkins Report (148 pages of light reading) – The Mowat Centre Report (another 22 pages) – Key recommendations include: Simplification of the program (don’t hold your breath) Redirection of SR&ED money to IRAP and others grants The Federal Government hasn’t tipped their hand

24. Contact information: Graham Smith Telephone 403-451-3376 Email graham.smith@tsgi.cagraham.smith@tsgi.ca www.tsgi.ca 24