According to several economic studies, Canada continues to lag behind peer countries in terms of overall innovation performance.  This is particularly true for private sector investment in research and development (R&D) and the commercialization of research into products and processes—two sectors that create high-value jobs and economic growth.
It’s with these issues in mind that the Federal government has committed to a new approach with its 2012 budget, which aims to support innovation by focusing on better meeting private sector needs.
In its Economic Action Plan, the Canadian government will be injecting $1.1 billion over five years to directly support research and development, and $500 million in venture capital investment.  Greater envelopes will be granted, specifically to the Industrial Research Assistance Program (IRAP), and the Natural Sciences and Engineering Research Council of Canada’s (NSERC) industrial partnership programs.  However, these amounts will mainly derive from changes to the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program, and will reduce the budget envelope reserved for this program by $1.33 billion over five years.
Specifically, the government is proposing to simplify parts of the SR&ED tax incentive program and reduce the costs associated with the program by eliminating tax benefits for SR&ED capital expenditures.  These expenditures, as well as those related to the leasing of capital property, will no longer be eligible as of January 1, 2014.  Therefore, businesses will need to review certain planned capital investment decisions.
The government is also amending the SR&ED program by reducing the amounts that can be claimed in certain eligible expenditure categories, in particular by:
•    Reducing the prescribed proxy amount used to calculate overhead expenditures from 65% to 60% of salaries as of 2013, and then to 55% in 2014.  Therefore, businesses will need to more thoroughly monitor the overhead expenditures related to their SR&ED activities—the traditional method could be more favourable in certain cases;
•    Reducing eligible SR&ED arm’s-length contract payments to 80% as of January 1, 2013.  Therefore, certain businesses may find it useful to review their SR&ED contracts and promote internal labour instead; and
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•    Decreasing the general investment tax credit rate from 20 per cent to 15 per cent in 2014.  The enhanced investment tax credit rate for qualifying Canadian-controlled private corporations will remain at 35 per cent.
In addition to these changes, the government plans on instituting a pilot project with the objective of implementing an official project pre-approval process.  Furthermore, the Canadian Revenue Agency will improve the Notice of Objection process to allow for a second review of scientific eligibility determinations.
Despite these changes, the SR&ED program is still a viable tax incentive program to encourage innovation.
If you have any questions about the proposed changes to this program and how they will impact your particular situation, please contact your professional adviser.
This article was submitted by: Grant Thornton LLP, Suite 400, 35 Commercial Street Truro, Nova Scotia.

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