Jenkins Report: SR&ED Tax Credits Overhaul

Jan 11 2012
By: boastcapital
Categories: R&D Tax
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Jenkins Report: SR&ED Tax Credits OverhaulStephen Harper is hinting that changes to the Scientific Research and Experimental Development (SR&ED) program will be announced in a few months. The SR&ED program is a generous 4 billion dollar tax incentive program aimed at encouraging Canadian research and development initiatives. However, the SR&ED program has been under review by the Canadian government’s conservative party. This review culminated with a detailed recommendation report prepared by the Expert Panel led by Thomas Jenkins, Executive Chairman of OpenText Corporation.

The Jenkins Report tried to address “a funding system that is unnecessarily complicated and confusing to navigate”. Among the recommendations are the following which will likely impact the administration of the SR&ED program:

“Create an Industrial Research and Innovation Council (IRIC), with a clear business innovation mandate (including delivery of business-facing innovation programs, development of a business innovation talent strategy, and other duties over time), and enhance the impact of programs through consolidation and improved whole-of-government evaluation.”

“Establish a clear federal voice for innovation, and engage in a dialogue with the provinces to improve coordination and impact”

The recommendations listed above, if adopted by the Harper government, will have a major impact on the SR&ED program as we know it. The current environment of high stakes CRA reviews and the insistence of adherence to very strict documentation requirements results in uncertainty regarding SR&ED funding eligibility. This forces businesses to overlook the benefits of the program at the onset of a project. Under these conditions the SR&ED program becomes a non-factor in go-no-go decisions regarding innovation in Canadian companies. Hopefully the creation of the Industrial Research and Innovation Council (IRIC) and the establishment of a clear federal voice for innovation will add much needed predictability (regarding project eligibility and review) to the SR&ED program.

So far so good! However, there is an elephant in the room. Let me ask the question that you are all thinking: won’t this result in an increase in SR&ED program funding? This next recommendation is the answer that we didn’t want to hear:

“Simplify the Scientific Research and Experimental Development (SR&ED) program by basing the tax credit for small and medium-sized enterprises (SMEs) on labour-related costs. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms.”

If this recommendation is adopted by the Harper government this could have a major impact on SME’s claiming SR&ED. Although there are a few more details outlined in the Jenkins Report, the end result of this recommendation is a reduction in SR&ED funding by reducing or eliminating potential R&D expenditures. The Jenkins Report recommends eliminating the contractor, material, lease, and capital expenditures from the SR&ED program’s eligible expenditures (with a few heavy industry based exceptions). They also recommend adjusting the refundability of the tax credits for SME’s and revaluating the Proxy amount eligible on labour-related costs (currently set at 65% of labour costs). This will result in SR&ED program “savings” for the federal government.

However before you start to worry, any SR&ED program recommendations will likely be slowly phased in over many years. There is also the possibility to file SR&ED claims for work performed in the past under the current SR&ED program legislation. You can file for SR&ED eligible work performed in a fiscal year up to 18 months past that fiscal year end.

At Boast Capital, we are strong believers that up-to-date knowledge of the SR&ED program will be the key differentiator between maximizing your claim and getting left behind. There is no doubt that some of the recommended SR&ED changes will become reality. The question is which recommendation will be adopted and how will it affect you. We will keep you updated on upcoming announcements and the potential impact to your business.

You can download the entire Jenkins Report as presented to the Minister here.

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