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CRA may look at third party penalties in order to deal with the concerns it has regarding incomplete, aggressive and withdrawn claims.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 

Healthy Homes Renovation Tax Credit

The Ontario government has introduced a new tax credit called the Healthy Homes Renovation tax credit.  This credit is a new permanent, refundable Personal Income Tax credit to assist with the cost of permanent home modifications that improve accessibility or help a senior to become more functional or mobile at home.  For the purposes of this tax credit, senior is defined as individual who have attained the age of 65 at the end of the tax year.

The credit is limited to the first $10,000 of eligible home renovation expenditures allowing for a maximum credit of $1,500 per household per year.  The credit can be claimed by senior homeowners, senior tenants or people who have a senior relative living with them.  There is no income test to be met to claim this credit.

Expenses that are eligible for this credit and the Medical Expenses Tax Credit can be included in both calculations. Expenditures that are reimbursed through other government programs would not qualify for the credit. The work can be performed by the homeowner or a professional. If performed by the homeowner the credit is limited to materials and supplies required for the project.

The initial claim period for this credit will include expenditures incurred after September 30, 2011 and before January 1, 2013.  These amounts will be claimed on the 2012 personal tax return.  Due to the extended period in the first year, the expenditure limit will be increased to $12,500 for 2012 tax returns.  All subsequent claim periods will follow a calendar year and be limited to $10,000 in expenditures.

Receipts will not be required to be sent with the initial return but as always will need to be available for CRA review upon request.

Eligible expenses include but are not limited to the following:

• certain renovations to permit a first-floor occupancy or secondary suite for a senior

• grab bars and related reinforcements around the toilet, tub and shower

Examples of ineligible expenses would include:

• general maintenance – such as plumbing or electrical repairs

• repairs to a roof

Devices would not be eligible. These include:

• equipment for home medical monitoring

Services would not be eligible. These include:

• security or medical monitoring services

For a complete list of eligible and ineligible expenses, please click here

Joshua Smith, CA

SR&ED Tax Manager

For more information about the Healthy Homes Renovation tax credit, contact Joshua Smith by e-mail at: jsmith@welchllp.com or by phone at: 613.236.9191.

Joint Ventures/Co-Tenancies – Impact of New Partnership Accrual Rules

As you are all aware, corporate partners of a partnership with a different fiscal reporting period than that of the partnership are now required to report income allocations from the partnership by way of a form of accrual basis. This has caused CRA to review a long standing administrative policy related to how income is reported by a member/co-tenant of a joint venture/co-tenancy. This administrative policy has allowed joint ventures/co-tenancies to report on the assumption that it has its own fiscal period (which is, technically, incorrect since a joint venture or co-tenancy is not a separate legal entity). If the administrative policy was to continue, the issue was whether or not the new partnership accrual rules would apply to joint ventures/co-tenancies.

CRA has now issued a technical interpretation on this issue applicable for the first fiscal reporting period of the particular member/co-tenant of a joint venture/co-tenancy that ends after March 22, 2011.

In summary, it appears that CRA is cancelling the administrative policy and it will now be required that all members/co-tenants of a joint venture/co-tenancy will be required to report their share of the revenue/expenses/income of the joint venture/co-tenancy based upon their own fiscal reporting period. There is relief (similar to the new partnership rules) only with respect to claiming a reserve and bringing in 2011 extra income over the next five years. This will apply both to corporate and individual members/co-tenants of a joint venture/co-tenancy. This will obviously require accounting/production of financial information for each reporting period for each member/co-tenant of each joint venture/co-tenancy.

- Don Scott, CA
Tax Partner
Welch LLP 

Did Quebec deserve $2.2 billion to “harmonize” its QST with the GST?

On September 30, the Quebec government announced plans to further “harmonize” its provincial sales tax with the federal GST.  The two taxes are already very similar, given that Quebec replaced its traditional provincial sales tax with the QST on July 1, 1992.  The Quebec government did not, however, receive any transfer payments from the Federal Government in 1992 and they are looking to be compensated for their harmonization efforts the same way that Ontario was recently compensated when it harmonized its PST with the GST in July of 2010.  In order for Quebec to get the close to $2.2 billion in compensation from the Federal Government, Quebec has agreed to match certain provisions in its QST with the GST legislation.  Most notably, financial services, which have always been “zero-rated” in Quebec will become exempt effective January 1, 2013. Quebec has also agreed to phase out its restrictions on input tax refunds for certain expenses starting in 2018 to mirror similar phase-outs in Ontario.

In my opinion, however, it is a misnomer to call this a “harmonized sales tax”.  This is because the QST is still governed  under separate legislation from the GST and it will continue to be administered by the Quebec government whereas every other harmonized province has their HST administered by Canada Revenue Agency.

The biggest issue for non-residents of Quebec who sell to customers in Quebec is that they are still required to determine if a separate registration for QST is required.  A business located in Ontario, for example, that sells to customers in Quebec is not automatically required to register for QST.  The registration rules are complex and depend on the nature of the customer (consumer or business) and the frequency or permanency of the business’ operations in Quebec.  For example, an Ontario business that does not sell goods to consumers in the province of Quebec, but does have business customers there, only has to register for QST if they are “carrying on a business” in the province of Quebec.  This concept is often misunderstood by businesses and they fail to register for QST when they should be so registered.

In every other province where harmonization of sales taxes has occurred (including Ontario, Nova Scotia, New Brunswick, Newfoundland and, for a short while more, British Columbia) if you are registered for GST, you are automatically registered for the HST in those provinces.  You simply apply the correct provincial tax rate to your sales, with the tax rate being based, generally, on where the customer is located.  You then remit the tax on your GST/HST return without needing to separate the tax collected in each province.  A simple system indeed.

In my opinion, Quebec has missed the boat on truly making their sales tax “harmonized” with the GST by not wrapping it into the GST/HST legislation.  For non-residents of Quebec, the QST will remain as dis-harmonized as ever.  Did Quebec really deserve their $2.2 billion in transfer payments when nothing has really changed??

By Garth Steele, CA
Partner
Welch LLP

Raising capital in Ottawa for high tech companies

At a recent OCRI breakfast meeting it was brought to my attention that it is not only technology becoming exponentially faster, but also the repayment demands of venture capitalists and angel investors. This has become an unfortunate truth that is making it more and more difficult for high tech startups to find funding.

VCs and angels are not stupid people and they realize that the time from idea generation to market exposure has decreased from years to weeks and as a result they want to invest in ideas that can meet this demand. Obviously, larger system based projects cannot meet these development commands making it difficult for a VC or angel investor to justify the extended payback period of these technologies. This results in these types of technologies being overlooked regardless of the potential outcome of the product. This change does however bode well for application and software developers as these types of products are often produced within the time limits required.

VCs and Angels have also changed there entry point into a company. Investments used to occur in the early stages of development or prototyping before any sales had occurred. Now, VCs and angels are waiting for a company to actually earn revenues before they will enter into a deal with it.

With this change in VC and angel entry points and repayment timing it is virtually impossible for startup high tech companies in Ottawa to get funded prior to product sales. As a result most entrepreneurs need to bootstrap (raising funds from family and friends) in order to get there business off the ground.

There is other funding available from various government programs like IRAP and SR&ED, both of these require documentation, planning and investment from the owner or others.

Overall, raising capital in Ottawa for a high tech startup has become more difficult and time consuming, but an entrepreneur who has a quality product and uses the resources available can still be successful in this industry provided that they manage their funding sources appropriately.

By Joshua Smith, CA
SR & ED Tax Manager
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