Are You Getting Your Cut?
Written by Mahrie Boyle, Team Specialist, NorthBridge Consultants
Canada’s Scientific Research and Experimental Development (SR&ED) program is one of the most lucrative Research and Development (R&D) tax incentives in the industrial world. Along with regional development and business assistance, R&D comprises four cents of the Canadian tax dollar. SR&ED, a federal incentive program administered by the CRA, awards about $3.5 billion per year as tax credits on eligible R&D costs.
Recently, SR&ED has accrued labels as being overly complicated and was targeted for improvement in the 2012 federal budget. Responding to alleged dissatisfaction by stakeholders, the federal Taxpayer’s Ombudsman published the surprising results of its investigation in February 2012, finding no recommendations or complaints with the program within the scope of its mandate. Core revisions to the program announced in the budget are four-fold: capital costs in 2014 and later will no longer be eligible for the credit; proxy will be reduced 10 percent to 55 percent of direct labour costs to take effect in 2014; percent of third-party contract payments eligible will be reduced to 80 percent; and the investment tax credit for companies that do not qualify as Canadian Controlled Private Corporations (CCPCs) will decrease five percentage points to 15 percent beginning 2014. The budget acted on some of the recommendations laid out by the Jenkins report in October. Funds redirected from the SR&ED program are being allocated to direct funding efforts, including expanding the Industrial Research Assistance Program (IRAP) and Venture Capital funding.
SR&ED is the largest of about 60 incentive programs across Canada. Unique provincial incentives introduce some friendly competition, many stacking SR&ED credits.
The 2011 federal budget included a Digital Economy Strategy to support digital technology creation in Canada. Enter such incentives as the Digital Media Tax Credit and computer or digital animation and special effects credits, seen in similar forms across Ontario (OIDMTC), Quebec, B.C., Manitoba and Nova Scotia. DMTCs credit companies creating interactive digital media products such as interactive websites, mobile applications and video games to educate, inform or entertain via text, sound and image. Canada places third in the world in the video game development industry, and is continuing to grow with programs like PEI’s Video Game Labour Rebate.
Atlantic Canada is enticing entrepreneurs and innovators with a collection of encouraging programs. The Atlantic Innovation Fund provides 75% or 80% assistance with wages, salaries, capital and operating costs for commercial and non-commercial projects respectively. PEI has the Innovation and Development Tax Credit, a rebate equal to 37.5%, along with a Development and Commercialization Fund. Ontario is also trying to bridge the innovation-commercialization gap with the Ontario Tax Exemption for Commercialization.
One interesting incentive program is Quebec’s Financing of Refundable Tax Credits program, offering a loan or loan guarantee based upon repayment of capital through anticipated tax credits like SR&ED. While private financial services for tax credit loans exist across Canada, Quebec is the only province to offer this essential capital financing which can be critical for small business through the government.
There are dozens of incentive programs for each province and industry, so what else is Canada doing to ignite the flame? Last year’s federal budget focused on strengthening our research advantage, fostering commercialization and business innovation as well as implementing a digital economy strategy, with a total pledge of around $15 billion to various initiatives over the next five years. The Jenkins report further recommends establishing a whole-of-government business innovation authority by introducing an Industrial Research and Innovation Council, transforming the NRC into collaborative R&D institutes, increasing government supplied risk capital, optimizing government purchasing power, and providing a clear, federal voice for innovation.
The initiative needs to be two-sided, with Canadian business leaders adding their voices to Canada’s innovation effort. Knowing where and how your business can get funding support is one great way to gain advantage.
Mahrie Boyle is a SR&ED and OIDMTC specialist with NorthBridge, a full-service firm with extensive expertise in the Scientific Research and Experimental Development (SR&ED) tax incentive program. Contact NorthBridgeto learn more about how you might be affected by changes to the SR&ED program.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.