For small Canadian-controlled private corporations (CCPCs), the good news is that the SR&ED investment tax credit rate will remain at 35%, and the current requirements for refundability will be maintained. Put another way, on your first $3 million of eligible R&D spending, if you are a small corporation, you can get a 35% federal credit. Most provinces also offer an additional R&D credit.
Also, early-stage companies will have access to new capital that will enable them to grow to the next stage and compete globally. This includes a $400-million commitment to help increase private sector investments in early-stage risk capital and to support the creation of large-scale venture capital funds led by the private sector. As well, $100 million of additional funding will be made to the Business Development Bank of Canada to support venture capital financing, Canada’s Industrial Research Assistance Program will receive an additional $100 million annually, and the Canada Foundation for Innovation will receive $500 million over five years, starting in 2014.
The government appears to be more heavily backing small to medium-sized business than large corporations by implementing smaller cuts to SR&ED and establishing new funding for early-stage ventures.
Starting in 2014, capital expenditures will not be included in the SR&ED calculation. That sounds like a major change, but it is not. According to government statistics, only 5% of claims are made of capital expenditures.
A bigger change is proposed to the prescribed proxy amount that is used to calculate the tax credit for companies of every size. It is currently 65% of each $1 of eligible labour. It will be reduced to 60% in 2013, and 55% after 2013.
Another change affects claims around sub-contracted R&D. Currently the inclusion rate is 100% eligible for the credit. Starting in 2013, that rate will fall to 80%.
We advise businesses large and small to do their homework, as the federal government looks to shift incentives from indirect measures such as tax credits to more direct funding and leveraging risk capital. Companies need to be aware of the many government-funded options for R&D and innovation, especially those that support entrepreneurial ventures.
It is also crucial for businesses to understand the requirements of a given incentive or funding program so that they can apply for them in the proper manner and have the necessary information in their files to demonstrate compliance.
Businesses also need to adopt a more all-encompassing or holistic approach toward business incentives, rather than look at them in isolation, in order to optimize the results. In some cases, for example, some planning and foresight might be required to maintain small CCPC status.
Speak to your EY advisor for additional advice or assistance regarding the SR&ED incentives. In addition, see this month’s case comment, "Unanimous shareholders’ agreement saves CCPC status.”