ARCHIVED – Budget 2012 - Scientific Research and Experimental Development (SR&ED) program

1. What change is proposed by the budget to the general rate for ITCs?
2. How will the change to the general rate for ITCs affect how much ITC my Canadian-controlled private corporation (CCPC) can earn?
3. As a business that is not a CCPC, how will the change to the general rate for ITCs affect how much ITC my business can earn?
4. Will this change to the general rate for ITCs affect the ITC cash refund my business can receive?
5. What changes are being made to the overhead expenses my business can claim?
6. What changes are being made to the capital expenses my business can claim?
7. What changes are being made related to contract payments?
8. Where can I get more information about the changes to the SR&ED program?
9. Where can I get more information about the study on contingency fees charged by tax preparers for SR&ED claims?

Under the SR&ED program, you may be able to deduct SR&ED expenditures to reduce your tax liability in the current year or carry these expenditures forward indefinitely to reduce your tax liability in future years. You may be eligible to receive benefits in the form of a refundable investment tax credit (ITC), a reduction of taxes payable, or both.  Unused ITCs may be carried back 3 years or carried forward 20 years.

The budget proposes several changes to the SR&ED program. These proposals do not change the work that is eligible for the SR&ED program or the filing deadline for a claim.

Q1. What change is proposed by the budget to the general rate for ITCs?

A1. For taxation years that end after 2013, the budget proposes to decrease the general rate for ITCs from 20% to 15%. When part of the taxation year of a business is in 2013 and part is in 2014, the decrease will be prorated so that it only applies for the latter part of the taxation year.

Q2. How will the change to the general rate for ITCs affect how much ITC my Canadian-controlled private corporation (CCPC) can earn?

A2. ITCs will be earned at a reduced rate of 15% for expenses claimed that are greater than the CCPC's expenditure limit (which is up to a maximum of $3,000,000 depending on the nature of the company). The enhanced rate of 35% that applies to the expenses claimed up to the expenditure limit remains unchanged.

Q3. As a business that is not a CCPC, how will the change to the general rate for ITCs affect how much ITC my business can earn?

A3. Your business will earn an ITC at the new general rate of 15% on all expenditures as your business is not eligible for the enhanced ITC rate.

Q4. Will this change to the general rate for ITCs affect the ITC cash refund my business can receive?

A4. Corporations that are not CCPCs do not receive ITC cash refunds.
Other businesses could have received a maximum cash refund of 40% of ITCs earned at the general rate of 20%. The budget will be reducing this maximum cash refund amount to 40% of ITCs earned at the general rate of 15%. Since the enhanced ITC rate remains unchanged, the ITC cash refund for CCPCs will not be affected for claimed expenses that do not exceed the expenditure limit.

Q5. What changes are being made to the overhead expenses my business can claim?

A5. Instead of itemizing overhead expenses for SR&ED purposes, a business can elect to use a simplified proxy method formula and claim a prescribed proxy amount. The rate used to calculate this prescribed proxy amount is currently 65%. The budget proposes to reduce this rate to 60% for the 2013 calendar year, and to 55% for 2014 and later calendar years.

Q6. What changes are being made to the capital expenses my business can claim?

A6. For expenses incurred after 2013, the budget proposes to exclude capital expenses from the SR&ED program. Capital expenses will also refer to lease payments for any property that would have been a capital expense if the business had purchased it directly. These expenses may still be claimed as regular business expenses if they otherwise meet the conditions for that treatment. Capital expenses that are included in contract payments will also be disallowed for the payer (before the 80% reduction described in question 7).

Q7. What changes are being made related to contract payments?

A7. For expenses incurred after 2012, the budget proposes to restrict the ITC claim for contract payments to 80% of the cost to the payer. For expenses incurred after 2013, capital expenses that are included in contract payments will also be disallowed for the payer (before the 80% reduction is applied).

Q8. Where can I get more information about the changes to the SR&ED program?

A8. The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2012 documents for details.

Q9. Where can I get more information about the study on contingency fees charged by tax preparers for SR&ED claims?

A9. The Government of Canada announced in the budget that a study would be conducted to better understand the practice of businesses hiring consultants on a contingency-fee basis to prepare their SR&ED claims, and to determine whether any action is required. The consultations have been launched and input from stakeholders is being accepted by the Department of Finance until October 1, 2012.

Additional information about this study can be found on the Department of Finance's Web site:

• News Release: Harper Government Launches Consultations on Contingency Fees for the SR&ED Tax Incentive Program