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SR&ED Changes: What Do They Mean for You?

27/10/2011


While there is much support for the goal of the report—come up with the right mix of incentives and programs to achieve a better social return from innovation—there has been mixed response and a lot of concern about the recommended changes to the Scientific Research & Experimental Development (SR&ED) program. Here is an overview of what’s happening.

First, nothing is being changed yet. The Jenkins Commission is just making recommendations. If the recommendations are implemented, you’ll see the following changes:

  • Small and medium enterprises (SMEs) would only be able to claim labour-based costs (direct labour, 50% SR&ED contract costs, and third-party payments). Materials and capital costs would no longer be claimable
  • The rate would be increased to account for the lost material/equipment costs.
  • The tax credit would only be partially refundable for SMEs.
  • CRA's Pre-Claim Project Review process would be improved.

The recommended changes are intended to simplify the claim process for small to medium enterprises. They are also intended to make CRA more accountable for program administration.

It is hard to know how these changes, if they become reality, will affect businesses. The changes propose to eliminate some costs that are currently eligible but an enhanced tax credit may offset this. For many SMEs this new regime may be more beneficial.

But one thing is certain: the panel wants to target R&D dollars to support growing businesses. It wants the SR&ED program to move toward more of a performance-based approach, giving profitable businesses incentive to continue improving.

The panel recommended that the changes be implemented through a phased-in approach in consultation with the provinces. This will give businesses time to adjust. It is possible that we won’t see any changes to the program for some time. At any rate, changes won’t be implemented until there is a federal budget and the earliest that will happen is February 2012.

Unfortunately, the report doesn’t address the overall issue with the SR&ED program. At MNP, the vast majority of issues we face in dealing with CRA concern technological eligibility and we were hoping to see this addressed.

The report also doesn't address the fact that justifying labour has become a huge issue with CRA, who require more and more evidence to support claimed labour. The interpretation of eligible labour has been contentious in the past few years. With these changes, it could become even more so.

Please remember that we at MNP are committed to helping our clients manage these changes. If you have any questions, please do not hesitate to contact me at 1.877.475.5678 or [email protected]

Read the full report.