Pitre, Rafuse

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Pitre, Rafuse Mulcahy Inc.

• SR ED Consultants
• Phillip Rafuse, FCGA Craig Mulcahy
  William Pitre, FCGA
• Visit our Website
• www.wtpitre.com

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Pitre, Rafuse Mulcahy Inc.

• The Pitre, Rafuse Mulcahy Inc. consulting team
  is comprised of highly accredited professionals.
• Each member brings a unique mix of executive
  management and hands-on experience from many
  specialized fields of business and industry.
• Our pool of resources has proven to be an
  enormous benefit to our clients.
• You can depend on us for honesty, integrity and
  discretion.

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Overview of the SRED Program

• Canadas largest single program for providing
  assistance for industrial RD performed in Canada
• Approximately 3 Billion distributed annually in
  the form of tax credits (ITC) among 18,000 SRED
  performers
• It is an Entitlement program

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Objectives of the SRED Program

• The objective of the Canada Revenue Agency (CRA)
  SRED Investment Tax Credit program is to promote
  and stimulate Canadian research and development.
  They do this by making these incentives available
  to all companies that carry out eligible work.
• The objective of Pitre, Rafuse Mulcahy Inc. is
  to promote this relatively unknown program and to
  assist all eligible companies in creating and
  submitting successful SRED claims. We do this
  by working with and understanding our clients
  businesses and helping them optimize their
  submissions.

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Federal and Provincial ITC for SRED

• Federal
• Small medium enterprises
• 35 refundable
• Large corporations
• 20 non refundable
• Provincial Credits differ per Province.
  (discussed later)
• Taxable income from prior year will determine the
  ITC rate

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RD vs. SRED
Concept
Functional specifications
Evaluate technology
Detailed specifications
Risk analysis
Project plan
Developmental Phase
Pre-production
Quality assurance
Production trials
Product launch
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RD vs. SRED
Concept
Functional specifications
Evaluate technology
Detailed specifications
Risk analysis
Project plan
Developmental Phase
Developmental Phase SR ED ?
Pre-production
Quality assurance
Production trials
Product launch
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RD vs. SRED
Concept
Functional specifications
Evaluate technology
Detailed specifications
Risk analysis
Project plan
Developmental Phase
Scientific or technological barriers
Options
Pre-production
1. Do nothing
Quality assurance
2. SRED
Production trials
Product launch
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Definition of SRED

• Subsection 248(1) of the Income Tax Act defines
  SR ED as
• A systematic investigation or search carried
  out in a field of science or technology through
  experimentation or analysis

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Eligible Work

• To be eligible for SRED incentives, work must
  fall into one of the following categories
• (1) Basic research - No specific application
• (2) Applied research - Specific application. For
  example cancer treatment drug.
• (3) Experimental development To develop new
  technology for improving a product or a process
  beyond what is public knowledge or current
  practice.
• (4) Support work - Engineering, design, data
  collection, testing, etc

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Work not covered under the SRED Program

• Market research or sales promotion
• Quality control or routine testing of materials,
  devices, products, or processes
• Research in the social sciences or the humanities
• Prospecting, exploring, drilling for minerals,
  petroleum or natural gas
• Commercial production of a new (or improved)
  material device, or product, or the commercial
  use of a new (or improved) process
• Style changes
• Routine data collection

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The Work Must MeetThree Eligibility Criteria

• Scientific or Technological Advancement
• Scientific or Technological Uncertainty
• Scientific and Technical Content

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SRED Criteria

• Scientific or Technological Advancement
• Must seek to generate information to advance the
  underlying knowledge base of science or
  technology
• (Success or failure is not a consideration)

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SRED Criteria

• Scientific or Technological Uncertainty
• This means whether or not a given result or
  objective can be reached
• How to achieve it is not known, based on existing
  knowledge and experience and,
• Includes only uncertainties related to technical
  considerations.

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SRED Criteria

• Scientific and Technical Content
• Must involve systematic investigation by
  experiment or analysis
• Documentation is essential (state objectives of
  the SRED project, method of experimentation or
  analysis, how uncertainties were addressed, and
  the results)
• Work must be done by qualified personnel

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Experimental Development

• Characteristics of Experimental Development
• Eligible activities that generate information
  that advances our understanding of technical
  relations or technologies
• A key distinction is the difference between
  experimental development, and development that is
  based solely on standard practice
• 
  

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Standard Practice

• Standard Practice (IC 86-4R3)
• Directly adapting known engineering or
  technological practice to a new situation
• Based on commonly available experience
• Development activities based on standard practice
  are not eligible
• 
  

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Routine Development

• Routine Development (IC 86-4R3)
• Application of known technology to new or unique
  situations
• No technological uncertainty or advancement
• In business context of the firm
• 
  

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Routine Engineering

• Routine Engineering (IC 86-4R3)
• Design, manufacturing, and evaluation requiring
  in-depth knowledge of engineering science and its
  safe and proper application
• Does not involve appreciable scientific or
  technological uncertainty
• 
  

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Trouble-Shooting

• Trouble-Shooting (IC 86-4R3)
• Is routinely correcting equipment or processes by
  identifying problems
• Does not generally lead to scientific or
  technological advancement
• May give rise to an SRED project, but is not
  SRED in itself
• 
  

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SRED expenses

• Salaries ( directly engaged )
• Materials consumed ( no value )
• Contracts
• Equipment leases
• Overhead
• (Traditional vs Proxy of 65 )
• Capital expenditures ( 90 )
• Third party payments

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Filing a SRED claim

• 18 months from fiscal year end (amended returns
  accepted)
• Prescribed forms
• - T661 - Schedule 31(T2038 for individuals) -
  T2 (T1 for individuals) - Other information as
  described under the checklist from page 1 of
  Form T661 (ex detailed project description)

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SRED claim preparation

• 1- Financial data
• 2- Detailed technical description of projects A.
  Scientific or technological objectives B.
  Technology or knowledge base level C. Scientific
  or technological advancement D. Description of
  work done E. Supporting documentation Note
  Generally, in 4 pages or less

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Points to note about the SRED Program

• Unlimited funding
• Applying for SRED credits is done through income
  tax return (credit is earned on laid-down costs
  of SRED incurred over the year)
• Tax credits (ITC) that can either be applied to
  your taxes payable, received in form of refund (
  cheque ) or both
• Fiscal integrity is essential to the Program

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Restrictions relating to expensesqualifying for
ITC

• Unpaid amounts ( 180 days following fiscal year
  end )
• Government or non-government assistance
• Contract payments
• Non-arms length contracts

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Example Tax credit calculation

• Salaries 40,000
• Materials consumed 15,000
• Contracts 10,000
• Capital equipment 10,000
• Overhead 26,000
• Less Govt. asst. (ex. Grant / Conditional
  loans) (10,000)
• Qualifying expenses 91,000
• Federal ITC (35 x 91,000) 31,850

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A PRM Project Review

• Advisory service regarding SR ED Program
• Provides an up-front review and preliminary
  opinion on the eligibility of projects for SR
  ED Tax incentives
• Designed to help you in your planning and
  investment decisions

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What are the benefits to your company?

• more up-front certainty about the eligibility of
  RD projects for SRED tax incentives
• the opportunity to receive a preliminary opinion
  without having to generate extensive paper work,
  thus, potentially reducing claim preparation
  costs
• open and informal discussions about the
  eligibility of RD work for SRED tax incentives
  
• a better understanding of the SRED program and
  of the type of RD projects that qualify

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Provincial Comparisons

• New Brunswick and Nova Scotia 15 rate same
  rules calculated on qualifying eligible
  expenditures per Federal rules across the board
• Ontario 10 on current expenditures (40
  refundable on capital)
• Bonus 20 on payments to research organizations
• Quebec 35, 17.5 on direct salaries 2 Million
  cap and Asset cap
• 50 of Contracted costs eligible _at_ rates
• 40 of approved research done by Universities
  (80 of expenditure cap)
• 50 of overhead salaries for SRED if using
  ordinary method (99)
• Alberta 10 on qualified expenditures to a
  maximum of 4,000,000

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Some examples of loans that are considered to be
Assistance

• No set terms for repayment
• Repayment is based on a conditional event or
  certain conditions
• Repayment is based on a of gross sales
• Repayment is based on a of sales of the product
  being created
• 1st payment may be many years down the road
• Minimal payments with balloon payment in year 10
• Repayment schedule is not defined or may lead to
  irregular payments
• Repayment plan is based on of sales for a fixed
  period and if not paid by then the amount must be
  repaid either at the end date or over another set
  period.
• What happens if they dont pay or dont meet the
  conditions

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How to reach us

• William (Bill) Pitre, FCGA Phillip Rafuse, FCGA
• Consultant Consultant
• Telephone [phone] Telephone (902)
  569-5640
• Toll free [phone] Toll free
  [phone]
• Fax [phone] Fax
  [phone]
• Mailing address 239 Birkallum Dr. Mailing
  address 239 Birkallum Dr.
• Box 5258 Mermaid Box 5258 Mermaid
• Charlottetown, PE C1A 7J8
  Charlottetown, PE C1A 7J8
• E-mail Bill_at_wtpitre.com E-mail
  Phill_at_wtpitre.com
• Craig Mulcahy Lou MacDonald
• Consultant Marketing
• Telephone [phone] Telephone (902)
  569-5640
• Toll free [phone] Toll free
  [phone]
• Fax [phone] Fax
  [phone]
• Mailing address 239 Birkallum Dr. Mailing
  address 239 Birkallum Dr.
• Box 5258 Mermaid Box 5258 Mermaid