1. Helping you obtain SR&ED benefits William Stark, CA ResDev Tax Consultants Inc. www.resdev.ca bill@resdev.ca 416-250-9603 © 2004 ResDev Tax Consultants Inc. All rights reserved.

2. 1 Agenda About the SR&ED program What Is SR&ED? Experimental Development Systematic Investigation Documentation –Activities –Expenses Questions

3. 2 About the SR&ED Program Largest Incentive program and administered by CCRA Purpose – to encourage research and development in Canada that will lead to new or improved technologically advanced products or processes Used by over 11,000 companies annually Achieved by ~ $1.6 billion/year in tax credits, with no cap Started in 1984, with unfavourable results (i.e. - 1994) Today – Ottawa is trying to increase the program’s exposure and usage to $2.5 billion/year Reflected by – T661 change and new business plan

4. 3 What is SR&ED? SR – Scientific Research –Purpose – to obtain an “advancement in scientific knowledge” which encompasses Basic and Applied category under ITA 248 (1) –“work done predominately in a laboratory” –Your “cure for cancer” work –Accounts for less than 10% of the claims submitted ED – Experimental Development –Purpose – to obtain a “technological advancement” –“work done both in and outside the laboratory” –Work done with a commercial focus in commercial setting –Accounts for the other 90% of the claims

5. 4 Experimental Development - Defined Experimental Development is –Attempt to achieve –Technological advancement –For the purpose of new or improving existing –Materials, devices, products or processes –Includes incremental improvements –Follows a systematic investigation –Occurs in a commercial setting –Includes Support work Experimental Development is not –Trial and error testing where the success is a foregone conclusion

6. 5 Technological Advancement An increase in the technology base of the claimant from the beginning to the end of the project How did the knowledge or know-how of the claimant increase/what did he learn Success/failure are irrelevant – work done is criteria Consider existing technology base –Existing technology in the company (what they have done in past) –Information available in the public domain Restrictions –Advancement must be in business context of claimant –Must follow systematic approach/search by experiment

7. 6 Systematic Approach Work is carried out or led by trained personnel The work follows an approach of –Business objective –Hypothesis/Conceptualization –Approach/Drawings –Build, Test and Analysis –Results The process by which the work is performed and the work itself - must be documented

8. 7 BUSINESS OBJECTIVE TECHNOLOGICAL OBJECTIVES are DEFINED -What do we want to achieve -Existing base (what do we know) -What are the problems we will encounter -How to deal with problems WORK/ACTIVITIES UNDERTAKEN TECHNOLOGICAL OBJECTIVE is RESOLVED Addressed by Stage / Phase Conceptualization / Planning Experimentation / Analysis Results Systematic Approach/Documentation Start of SR&ED End of SR&ED Start of R&D

9. 8 Documentation - Activities Chronological Events –Feasibility –Design –Implementation –Deployment Challenges and Solutions Supporting Documentation, examples –Bug tracking –Design docs –Meeting notes –Etc.

10. 9 Documentation Wages – most significant component T4 salary preferred due to proxy Owners – must be T4 Documentation requirements: –T4 salary –Technical qualifications –Start / finish date –Time and Description of SR&ED activity (all possible projects) Initial conceptualization Experimentation – design/coding/testing

11. 10 Documentation - Subcontract (Non T4 staff) Work must be physically done in Canada Subcontractor must be a taxable supplier in Canada Who can claim - Who owns the IP Includes support activities Documentation requirements: –Invoice from contractor Description of activities – design work Date and amount –Contract cost + basis Description of SR&ED activities –Technical qualifications of subcontractor

12. 11 Documentation - Materials Materials things that are either consumed or transformed Consumed – destroyed, such as scrap after a test run Transformed – incorporated into the new product/process – Example – object code that is incorporated into new software No restrictions – can buy from anywhere Straight purchase “off the shelf” item – if it includes development then it is subcontracting Documentation requirements: –Invoice – with brief description of what was purchased –Relation of how the material was incorporated