Canada: The Government's SR&ED Budget

Back in July 2017, the Canadian Advanced Technology Association (CATA) published its update on SR&ED. Most of us are aware that in the 2012 federal budget, the federal government made cuts to the SR&ED program, through changes to both tax credit rates and eligibility rates for qualified SR&ED expenditures. These cuts were expected to amount to a total of $1.3 billion from program expenditures from 2014 to 2017, with a maximum annual reduction of $500 million relative to 2012.  

However, upon further examination, as per the Department of Finance's 2017 Report on Federal Tax Expenditures, the result is far in excess of the forecasted $1.3 billion cut. In actuality, the change from 2011 to 2017 is double the forecasted cut. This $2.6 billion cut decreases the overall program's budget by approximately 50%! Based on CATA's analysis, the Canada Revenue Agency (CRA) is spending more money on staff to administer program compliance. This increase was up by 60% since 2005 or equivalent to over 200 full-time staff on the CRA SR&ED administrative team. CRA leverages this team to disallow more from those claims that are selected for detailed review, also known as increasing tax recovery. These overall reductions have caused the number of annual claims to drop by 6,000 from a high of 29,000 in the 2011-2012 fiscal year.

The average recovery amount processed per claim increased by 17%, translating into $14,600 (2011/2012) and $17,130 (2015/2016). This figure relates to all claims filed, but not all claims are reviewed and therefore subjected to adjustment. Roughly 25% of claims are subjected to a detailed review, which means that the average adjustment through reduction for a claim selected for a site review was almost $70,000 in 2015/2016. Another report by CATA released in November 2017 cited that as of 2012-2013, the average SR&ED tax assistance per claimant was down to $156,522. Thus, we can infer that the average claimant subjected to a site review can expect to have their claimed SR&ED-eligible expenses cut down by approximately 40% when using the $70,000 reduction average.

Over the past year, the frequency of reviews appears to have increased and the change rate target (to achieve a recovery) for SR&ED reviews most recently reported to the Parliament by the CRA is now at 75%, so we can expect the amount of recovery per reduced claim to increase above the stated reduction average.

2018-2019 Ontario budget

Since the release of the 2018-2019 budget on March 28, 2018, a new Conservative government has been elected in Ontario. It is unclear if the new government will proceed with the following positive budget proposals:

Ontario Research and Development Tax Credit (ORDTC)

The ORDTC is a 3.5% non-refundable tax credit on eligible R&D expenditures. The budget proposes for companies that qualify for the ORDTC an increase to 5.5% on eligible R&D expenditures over $1 million incurred on or after March 28, 2018. The $1 million threshold will be prorated for short taxation years and the enhanced tax credit rate will be prorated for taxation years that straddle March 28, 2018.

Attention! This enhanced tax credit rate would not be available to businesses where eligible R&D expenditures in the current taxation year are less than 90% of eligible R&D expenditures when compared to the prior taxation year.

Ontario Innovation Tax Credit (OITC)

The OITC is an 8% refundable tax credit for small to medium sized companies on eligible R&D expenditures. The Ontario budget proposes to increase the OITC rate when analyzed against the ration of R&D expenditures to gross company revenue. With a ration of 10% or less, the 8% would continue to apply. However, at 10-20%, the rate is increased on a straight line basis between 8-12%. With a ration of 20% and above, the OITC jumps to 12%.

Attention! Both R&D expenditures and gross revenue must be attributable to Ontario operations and would be aggregated among associated corporations.

CRA's SR&ED service standards

The CRA has recently announced changes to its service standards for the processing of SR&ED claims, leading us to believe that the CRA has an increased focus on the efficiency on the turnaround of claims.

For non-refundable claims where the claim is not selected for audit, their new standard is to process the SR&ED claims within 60 calendar days from the date a completed claim is received. Conversely, non-refundable claims will no longer have their service standards reported. Previously, the standard of processing a non-refundable claim, regardless of whether it was selected for audit, was to process the claim within 365 calendar days from receipt of a completed claim.

For refundable claims selected for review by the CRA, the new standard is to process the refundable claim within 180 calendar days from the time a completed claim is filed.

These new service standards came into effect April 1, 2018. The CRA has an internal target of meeting these standards 90% of the time.

As for the other service standards, the following timelines remain in effect from receipt of a complete claim:

  • Refundable claims (not selected for review) – 120 calendar days
  • Non-refundable claims (selected for review) – 365 calendar days
  • Claimant requested adjustments to refundable and non-refundable claims respectively – 240 and 365 calendar days

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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