1.Tax Credits Scientific Research & Experimental DevelopmentFebruary, 2014

2. Todays Agenda 47 Who is Richter Scientific Research & Experimental Development (SR&ED) Tax Credits Eligible SR&ED Expenses How to Qualify Example SR&ED Credit Calculation Recent Changes to the SR&ED Program Optimizing your Eligible Costs Tax Planning to Maximize the Benefits of SR&ED Other Credits2 3. Who is Richter? 47Strategic accounting, financial advisory, and business consulting firm specializing in privately held, entrepreneurial companies60+ partners, with offices in Toronto and MontrealA wide range of services including, but not limited to: Audit Tax Business Valuations, M&A, Litigation Support Wealth Management Insolvency Restructuring3 4. Whats in it for You? 47Why should you care about SR&ED? Increase your business working capital and cash flow Get cash early on, instead of later Many eligible companies are either not claiming SR&ED or are severely underestimating their claims Your competition is claiming these credits4 5. What is SR&ED? 47Scientific Research & Experimental Development Tax Credits Canadas tax incentives for industrial research are among the most generous in the world. (Canadian Council of Chief Executives) In the global, knowledge-based economy, firms that invest significantly in R&D are more likely to thriveby offering their customers new or significantly improved products and services. (Innovation Canada)5 6. What is SR&ED? 47 The Government reimburses companies that invest in innovation that results in new or improved products or processes Approximately $5 Billion to be allocated by the Federal/Provincial governments Claimed by over 24,000 companies in Canada 75% of claimants are SMEs all growth is related to this sector6 7. Eligible SR&ED Expenses 47Federal Salaries Sub-contractors Material Overhead Salaries Sub-contractors (50% in QC) Overhead salariesProvincial7 8. Types of SR&ED Credits 47 How the SR&ED program works: Companies are reimbursed: 15% or 35% Federally 17.5% or 37.5% Provincially with: Non-Refundable Tax Credits or Refundable Tax Credits = Cash Did you know that a $100,000 SR&ED claim could translate into a reimbursement of up to $70,000 in cash?8 9. How Do You Qualify? 47 Tell-tale signs of a potential claim: You have created or modified a process or product You developed some form of custom equipment or machinery You are in a start-up or growth phase You are planning to change an existing process or develop a new product in the near future You tried to create a new product/process/technology but failed in the attempt i.e. something blew up9 10. How Do You Qualify? 47 Three Basic Criteria: 1.Uncertainty/Obstacle 2.Technological obstacles to overcome a scientific risk Must be unknown whether the project will succeedScientific Content 3.Evidence of qualified personnel must exist Systematic approachAdvancement (Scientific or Technological) An attempt to generate new knowledgeFailure is acceptable10 11. How Do You Qualify? 47 The 5 Questions: 1.Was there a scientific or a technological uncertaintyan uncertainty that could not be removed by standard practice?2.Did the effort involve formulating hypotheses 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?4.Did the process result in a scientific or a technological advancement?5.Was a record of the hypotheses tested and the results kept as the work progressed?11 12. Common Myths Debunked 47 Many companies are doing itbut why arent they claiming it? Just part of my business Secrets will be revealed Lab coats/PhD required Automatic, full-blown audit by CRA Failure = no claim SR&ED claim is an onerous process12 13. The ABC Case Study 47 Eligible for SR&ED because Expenditures Wages Material Subcontractors Overhead 55% proxyTotal SR&ED Claim: $166,000Total Cash Refund: $87,17413 14. Example SR&ED Credit Calculation 47ExpensesFederal Rate of 35%Provincial Rate of 37.5%Salaries Sub-Contractors Material Proxy (55%)$100,000 $10,000 $1,000 $55,000$100,000 $5,000 -Total Expenses$166,000$105,000Less Provincial Tax Credit Eligible Expense for Tax Credit SR&ED Credit Total Tax Credit(39,375) $126,625$105,000$44,319$39,375 $87,19414 15. When to File a SR&ED Claim 47 Up to 6 months / 18 months after Fiscal Year End No claims may be submitted or adjusted thereafter Claims filed within 6-month Corporate Tax Return deadline get processed faster 120 days Claims filed within 18-month amended Tax Return deadline get processed slower 240 days Can amend an already-filed Tax Return15 16. Recent Budget Changes to the SR&ED program 47 Capital equipment excluded after 2013 Overhead proxy percentage reduced To 60% in 2013 (down from 65%) To 55% in 2014 Starting in 2013, only 80% of subcontracted expenses can be claimed (down from 100%) The general 20% rate (for large and/or foreign corporations) has been reduced to 15% in 201416 17. Tax Planning to Maximize the Benefit 47 Better to have T4 employee costs vs. subcontracted costs Maximizing shareholder remuneration to enhance claims Pay yourself Must consider tax implications of SR&ED claim in one year on the following years income Some projects may have components that qualify for multiple tax credits carried out in Canada17 18. Keys to Remember 47 Documentation Contemporaneous Meeting Notes Challenges / Failures Timesheets or equivalent18 19. Other Tax Credits 47E-Commerce (CDAE)MultimediaDesign TaxOntario Interactive Digital Media Tax Credit (OIDMTC)19 20. Other Tax Credits: E-Commerce 47 For the development of electronic commerce Must obtain a certificate of eligibility from Investissement Qubec (IQ)30% of eligible salary (maximum salary of $66,666) - Tax credit is refundableRevenue test where 75% must be from E-commerce activities (based on NAICS activity codes)Must have at least 6 full time employeesMust apply for certificate (attestation) eligibility with IQ within 15 months of fiscal year endMust apply for tax credits with Revenue Quebec within 18 months of fiscal year-endExample Codes/Activities: 334110: Computer and Peripheral Equipment Manufacturing; 511210: Software Publishers; 51821: Data Processing, Hosting and Related Services; 541510: Computer Systems Design and Related Services.20 21. Other Tax Credits: Multimedia 47 For the development of Multimedia Titles Must obtain a certificate of eligibility from Investissement Qubec (IQ)26.25%, 30%, or 37.5% of eligible expenditures - Tax credit is refundableTo be eligible, a multimedia title must satisfy the following conditions: it is produced by the corporation; it includes an appreciable quantity of three of the following four types of data in digital form: text, sound, fixed images and animated images. it is produced on electronic media and controlled by software that allows for interactivity.21 22. Other Tax Credits: Design Tax Credits 47 Must obtain a certificate of eligibility from Ministre des Finances et de l'conomie (MFE) Fashion Design Industrial DesignMax 30.0% Tax CreditMax Admissible Salaries (ex: $60,000 for a Designer)22 23. Other Tax Credits: OIDMTC 47 OIDMTC is a refundable tax credit claimed by qualifying corporations for their work on interactive digital media products 40% of labour expenses plus marketing and distribution expenses Or 35% of labour expenses of a specified product The product must be interactive digital media Primary purpose is to educate, inform or entertain the user Achieves the primary purpose using 2 of: Text Images Sound23 24. Summary 47SR&ED tax credits existDocument your work and testingNo expenses, no creditsAdditional Credits can be claimedFederal and provincial credits are available24 25. For More InformationMitchell Weiss, Eng. R&D Manager mweiss@richter.ca 514.934.3503 Earl Forman Partner eforman@richter.ca 514.934.3558Richter LLP 1981 McGill College Montreal, QC H3Z 0G6 www.richter.ca