Burlington SR&ED Practitioners’ Conference held January 11, 2012

It is unfortunate that there wasn’t more new information introduced at the 15^th annual practitioners’ conference held in Burlington on January 11, 2012.  The most informative portion was at the very beginning when the new Director General of SR&ED, Ms. Susan Betts, discussed the top five SR&ED concerns from claimants and CRA.

The top five concerns of claimants were as follows:
1) CRA staff (specifically RTAs) not qualified to determine eligibility of claims
2) The narrowing of eligibility criteria
3) The increased complexity of forms and processes surrounding SR&ED claims
4) The amount of supporting documents required to prove a claim
5) Lack of consistency as to claim eligibility

The top five concerns of the CRA were as follows:
1) Personal attacks against CRA staff
2) Incomplete claims
3) Cost to claimants of hiring professional firms on a success fee basis
4) The increasing amount of aggressive and unfounded claims
5) Withdrawal of claims when audit requested by CRA

The new Director General then provided some analysis of the two lists.  She stated that she had reviewed the qualifications of the CRA staff and was confident that they were capable and qualified to determine the eligibility of claims.

Ms. Betts indicated that the 2^nd concern of claimants is not actually a narrowing of eligibility criteria but a clarification and definition of what is eligible. She further stated that this clarification is required in order to deal with the claimant concern of inconsistency and the CRA concerns regarding incomplete and aggressive claims.

Ms. Betts noted that the SR&ED program was set up to fund claimant research and development and that, in her opinion, the money being paid to practitioners on a success fee basis was not in line with the program’s intention.

Looking to the future, Ms. Betts indicated that CRA may look at third party penalties in order to deal with the concerns it has regarding incomplete, aggressive and withdrawn claims.  In my opinion, if the CRA were to apply these penalties in appropriate cases it would decrease the compliance time of CRA staff and in theory decrease the time it takes for a legitimate claimant to receive their refunds.

It was a surprise to many that there was little mention of the Jenkins report and no mention of the potential changes stemming from it. When we look at the facts, however, this makes sense as it is the Ministry of Finance that will make the changes. CRA will, of course, need to apply and monitor the changes but they are unlikely to know with any certainty what or when these changes will occur.

At the end of the conference, the lack of new information was disappointing. However, it was nice to talk to CRA advisors and other practitioners; the majority of whom were confident in the fact that the SR&ED program was going to change. After all, Prime Minister Harper stated early on that he would take the suggestions of the Jenkins report very seriously.

The only questions left now is how much the SR&ED program will change and when the changes will begin?

Joshua Smith, CA

SR&ED Tax Manager

For more information about SR&ED tax credits, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.

Be Proactive – Earn More SR&ED Tax Credits

Why be a reactive Scientific Research and Experimental Development (SR&ED) claimant when you can be proactive SR&ED claimant?  By reactive SR&ED claimant, I mean a business that waits until after year end to write and collect all information to complete a valid SR&ED claim.

In these cases, the business often doesn’t know if any of the projects they have worked on throughout the year would qualify for SR&ED credits.  It is at the end of the year that they start to discuss potential advancements they have seen and the obstacles they had to overcome. All of this of course relies on the memory of employees and management, and as we all know, memory can be faulty.

This is why I urge all businesses to take a proactive approach to the collection, documentation and writing of SR&ED claims.  There are a couple of ways to instigate a proactive approach; one approach would be to analyze every new project to determine if there are any potential technological advancements.  Another approach is to have a periodic meeting between employees, management and any other influencers to determine if any technological advancements or obstacles have arisen.  These meetings could be held quarterly, monthly or weekly depending on the type of business.

The meetings do not need to be lengthy or highly detailed. The idea is to capture new advancements or obstacles that are occurring in the workplace and determine whether or not they could be considered an eligible SR&ED project.  After the meetings, it would be ideal that an individual involved with a particular advancement or obstacle provides further documentation of the work to date.

There are numerous benefits to proactive documentation including:

• Higher quality information (not relying on memory)
• Capture of more SR&ED projects
• Capture of more cost related to the projects
• Better documentation available if a CRA review is requested
• Ability to direct funds to qualifying projects
• Earlier completion of the technical report allowing for earlier filing

I know it is not always possible to document everything proactively but with a little bit of training, organization and effort any business could adopt a proactive system that would hopefully provide a more efficient and larger SR&ED claim.

Joshua Smith, CA

SR&ED Tax Manager

For more information about SR&ED tax credits, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.

2012 Predictions

With 2011 in the “books”, what can we expect in 2012? Hopefully some stability will return to the economy, but, I would not count on it. With my financial bias in mind here are a few predictions:

1. Access to capital, particularly early stage companies that present the most risk and biggest opportunity, will continue to be a challenge. However, 2012 will be a transition year where new sources of capital will emerge and renewed interest in investing. 2013 and 2014 are the years where we will see funding flowing.
2. M&A activity will be steady or increase as companies with strong balance sheets struggling to grow revenue capitalize on the challenges mid market companies have to compete in the global economy. The acquisitions of mid market companies will provide liquidity to investors that will fuel the flow of funds beyond 2012.
3. Government rationalization of spending will put pressure on government incentives resulting in changes in 2012 that will impact 2013 and beyond. Lobby now for those incentives you believe should continue.
4. US accounting standard setters will agree to not adopt International Financial Reporting Standards and continue to maintain their own set of accounting standards.
5. The Canadian accounting professions will merge into one Canadian accredited accounting designation.

Pricing pressures will continue in 2012 as companies focus on protecting their bottom lines. To compete effectively, goods and services will need to be priced competitively and offer tangible benefits.

- Bryan Haralovich, CA, CPA (Illinois)
Assurance Partner
Welch LLP 

Welch LLP’s new downtown Toronto office

I recently read an article that quoted a PWC Survey (Cities of Opportunity) wherein they found Toronto to be the second best city in the world for economic opportunities, second only to New York City. I was very excited to read this as we’re launching our Toronto office July 2011.

I was particularly interested to see the high ranking in the areas of “positive entrepreneurial environment” and the “ease of starting a business”. This represents two major focus areas of our practice: providing the expertise required of today’s established entrepreneurs, as well as the budding entrepreneur.  

We are very aware of the first class professional advisors already in Toronto. However, we are confident that we can make an impact on the SME market with our full range of client services.

We look forward to hooking up with all our associates, clients and friends in the Toronto area and working with them to help integrate our new office into the Toronto scene.

-  Micheal Burch, CA, CFP
Managing Partner
Welch LLP

The Apprenticeship Tax Credits – leveraging your employees

As a business owner, you are focused on sales and customers the majority of your time as these items drive the success of your business.  As a good business owner you recognize the fact that without your supporting suppliers and workers you would not have been able to achieve the successes you have had in the past or attain the goals you are reaching for in the future.  This understanding has led you to create strong relationships with your suppliers and a dynamic and rewarding workplace for your employees.

As a great employer you would take that employee relationship one step further and at the same time you would put money into your pocket through the use of the apprenticeship tax credits at both the federal and provincial level.  By providing on the job training to your employees you are rewarding them with knowledge that will benefit you as the more knowledgeable employee will make better decisions on the job and provide additional insight to those surrounding them.  This will make the employee feel more valuable to the company which can ultimately lead to increased gains for your company.

While these benefits are enough to encourage training on the job, the benefits of registering your employees in a certified program that qualifies for the apprenticeship tax credits makes the training even more beneficial and you may be surprised to find out what training will qualify for the Ontario credit.

In Ontario there are over one hundred and twenty different trades that when registered for will qualify for the apprenticeship tax credit.  The trades range from sales to tractor trailer commercial driver and are included in four separate categories; Service Trades, Motive Power Trades, Construction Trades and Industrial Trades [Appendix A].

Once you have registered with the appropriate body you will be eligible for up to $10,000 per year for the first four years of the apprenticeship. What makes this credit even better is that to achieve the maximum credit you only need to pay salary of $22,222 to that employee assuming you receive the highest refundable credit rate.

Further to the Ontario credit, there is also a Federal credit on certain apprenticeships [Appendix B].  This credit is significantly less than the Ontario credit but can still produce $2,500 per year for the first two years of the apprenticeship.

- Joshua Smith, CA
R & D Tax Manager
Welch LLP 

Want to free yourself from tax? Try a Holding Company

Trying to decide whether an investment holding company is appropriate for your money? First, you need to understand how income earned by corporations can be taxed, and the opportunities available to make the most of these tax systems.

Investment income earned by a corporation is generally taxed at rates slightly higher than those applicable to individuals, this higher rate can be outweighed by other tax benefits in certain situations.

You can establish an investment holding company by transferring your personal investments to a corporation on a tax-deferred basis, but before you do, these are things you should consider:

Income Splitting

You may be able to create a structure whereby family members own shares of the holding company, either directly or indirectly through a family trust.  If these individuals are in lower tax brackets than the transferor, the family’s overall tax bill can be reduced by paying dividends from the holding company to these family members.

This type of planning is typically most feasible for splitting income with adult children and grandchildren, and may be an efficient way of paying for their post-secondary education.

Estate Planning

When you own a personal investment portfolio, your ultimate tax liability upon death will continue to increase along with your investments.  If you transfer this portfolio to a holding company, it may be possible to limit the value on which you will ever be taxed and the tax liability attributable to any future increase in value may be deferred to the next generation.

This structure may also eliminate Ontario probate fees and US estate tax on the value of one’s investment portfolio. It may also give you control of your personal income level and avoid or minimize the impact of the Old Age Security clawback annually.

Clearly, the use of an investment holding company may provide significant advantages.  These advantages should be weighed against the costs of implementing and maintaining an appropriate structure.

- Zoran Vranjkovic, CA
Tax Manager
Welch LLP 

Give your life insurance, not your life, to your work

While the decision as to the best way of owning a life insurance policy will depend on the specifics of each situation, it is generally accepted that there may be certain advantages to a corporate-owned life insurance policy, such as tax-efficiency in funding annual premiums and as an opportunity to reduce tax upon one’s death.  However, if you own your own insurance policy, transferring the policy to your corporation may provide additional advantages.

$200,000, Tax Free 

Consider the example of Bob, a 55 year old individual who owns a corporation, but personally owns a Term 100 life insurance policy with a death benefit of $1 million.  Assume that based on Bob’s age, health, life expectancy and specific terms of the policy, the fair market value of the life insurance policy is $200,000.  However, being a Term 100 policy, it is likely that the policy has a cash surrender value of nil.

Bob may transfer the life insurance policy to his corporation for proceeds of $200,000 (i.e., its fair market value).  The corporation may pay this amount in cash or may issue a note payable for that amount.  However, for tax purposes, Bob will be deemed to have sold the policy for proceeds equal to the policy’s cash surrender value of nil.  As a result, there will be no taxable income resulting to Bob from this transfer, but he will be able to withdraw $200,000 from his corporation on a tax-free basis.

Prior to undertaking this type of planning, it is important to consider the type of life insurance policy involved, the specific terms of the policy and which corporation the policy should be transferred to.  It is also important that the fair market value of the policy is supported by an actuarial valuation.  Lastly, the beneficiary of the policy should be changed to the corporation after the transfer.

- Zoran Vranjkovic, CA
Manager, Ottawa Tax Group
Welch LLP

Marketing for Professional Services – it’s important!

Many professional services firms overlook the importance of investing in marketing. Instead of looking at time spent of marketing as investment, they label it as non-billable hours and shudder to think that time could have been spent generating revenue.

But marketing activities are crucial to generating revenue. Even when these activities don’t directly translate into new clients or increased billings for an existing clients, it is impossible to measure the extent to which increased exposure in your community boosts revenues.

Welch LLP recently hosted an open house for all the tenants in our building. Our Hallowe’en-themed event was planned in hopes of meeting our neighbours and generating some good will in our building. It remains to be seen whether or not the event brought in any new clients, but it definitely generated positive conversation in the building.

Here are some photos of the room from before the guests arrived: