Innovation has become critical in the manufacturing industry. Global competition, the need to do more with less, and labour issues mean that companies must develop new ideas and processes if they want to stay in the game. In Budget 2012 the Canadian government announced a number of changes to the way it fosters innovation that could help manufacturers deal with the challenges they face.

1. 2012 Federal Budget Update
The new SR&ED tax credit
environment
Impact to the Manufacturing Sector

2. Introduction
Andrew Raphael, Partner
Director of Food & Ag Processing Division
Ryan P. Mackiewich, Taxation Partner
SR&ED Practice Leader
Andrew Pellizzari, Manager
SR&ED Technical Specialist

3. Today’s Discussion
y
1. Helping Manufacturers Meet a Complex
Competitive L d
C titi Landscape
2. Opportunities for SR&ED activities
3. Budget 2012
– Changes to SR&ED
– Additional Opportunities for Funding
4.
4 Tax Planning
5. Questions

4. Overview
• Manufacturing Sector consists of about 80,000
establishments with annual revenue of around
$500 billion.
• Sales have grown less than 1%from 2005 to 2008
before declining sharply in 2009 due to global
recession.
• Over 90% of manufacturers
employ fewer than 100.

5. Competitive Manufacturing Landscape
• Across all Canadian manufacturers, operating profits
average about 6 to 8% of sales
sales.
• Manufacturing costs (average):
– materials and supplies ~ 85%
pp
– production wages ~ 10%
– energy ~ 5%.
• Manufacturers spend $ billion annually on capital
$15
investments (machinery, equipment, and facility
construction)
)
– Average manufacturing plant in Canada operates for only
nine years and over half of new plants shut down within six.

6. Trends
• Appreciation Of Canadian • Weak Productivity Growth
Dollar -C
Canada’s productivity growth
d ’ d ti it th
• Competition From Imports lags most other
- Imports = $
p $340 Billion industrialized countries’
- Growing faster than exports - Output per employee in the
manufacturing sector was
• Demographics 27 percent lower than that of
- An aging population = the USA in 2008
shortage of skilled workers - Canada’s productivity gap =
reduced manufacturing
competitiveness.

7. SR&ED Considerations
 Efficient Production &  Regulations
Distribution – Innovate to respond to govt.
– Strong Loonie = time to regulations:
l ti
purchase & adapt • Air emissions
• wastewater discharge
D i M
Doing More With L
Less • disposal of hazardous
substances
– Retail & distribution
• cleanup of contaminated
consolidation impacts sites
– Being proactive ! • health & safety matters
 Inventory Control &  Packaging
Traceability – Product interaction with
– RFID packaging.
– User friendly.

8. SR&ED Considerations
 Sustainable  Energy Savings
Environmental
E i t l – Conversion & adaption
Practices
 Collaborative R&D With
- Going Green good for the
Customers & S
C t Suppliers
li
environment & good
marketing – Inventory control practices,
p
production efficiencies, and
,
 Web-Based Interactive sustainable practices
Services
 Get Export Ready
- Sales inventory feedback
Sales, inventory, feedback, – adapt for foreign needs
price discovery

9. Federal Budget 2012
• SR&ED = Scientific Research & Experimental
Development Tax Credit Program
• ITC = Investment Tax Credit (th “G ld” we want)
(the “Gold” t)
• CCPC = Canadian Controlled Private Corporation
• Proxy Amount = A notional gross up of labour costs
to
t cover overheads
h d

10. Federal Budget 2012
Changes to SR&ED Program
g g
(Effective January 1, 2013)
• Contractor costs for SR&ED reduced to 80%
of the contract payments
• Proxy amount reduced from 65% to 60%

11. Federal Budget 2012
Changes to SR&ED Program
(Effective January 1, 2014)
• SR&ED ITC reduced to 15% (from 20%)
– The enhanced ITC for CCPCs will remain at 35%
• Prescribed proxy amount reduced to 55%
(from 60%)
• Capital expenditures no longer eligible for
SR&ED
– Includes machinery and computer equipment

12. Federal Budget 2012
Example
Spend $100,000 on eligible SR&ED
• $50 000 wages
$50,000
• $25,000 contractors
• $
$25,000 materials

13. Canadian Controlled Private Corporations 10% ITC
New
Federal Tax Savings:
F d lT S i
Qualified SR&ED Expenditures 122,500
Provincial ITC 12,250
Federal ITC @ 35% 38,588
38 588
Total SR&ED ITCs 50,838
Prior
Federal Tax Savings:
Qualified R&D Expenditures 132,500
Provincial ITC 13,250
Federal ITC @ 35% 41,738
Total
T t l SR&ED ITC
ITCs 54,988
54 988
Change in Total ITCs Earned (4,150)

14. Non-CCPCs 10% ITC
New
Federal Tax Savings:
Qualified R&D Expenditures 122,500
Provincial ITC 12,250
Federal ITC @ 15% 16,538
16 538
Total SR&ED ITCs 28,788
Prior
Federal Tax Savings:
Qualified R&D Expenditures 132,500
Provincial ITC 13,250
Federal ITC @ 20% 23,850
Total SR&ED ITCs 37,100
37 100
Change in Total ITCs Earned
g ( ,
(8,313)
)

15. Federal Budget 2012
• Th
These changes will result i $1 3 billi
h ill lt in $1.3 billion
in savings
• Savings used for funding various
additional “direct” R&D initiatives

16. Federal Budget 2012
g
Improvements to SR&ED Administration
• CRA to conduct a pilot project to determine the
feasibility of a formal pre-approval process
• Enhance the existing online self-assessment eligibility
self assessment
tool
• Work with industry representatives to address
y p
emerging issues
• Improve the Notice of Objection process to allow for a
second review of scientific eligibility determination.
• Increase the number of technical reviewers

17. Federal Budget 2012
Improvements to SR&ED Administration
• Providing additional training and establishing
coordinated technical support for the technical reviewers
• D
Devoting more ti
ti time t program services
to i
• Enhancing the quality assurance methodology
• Reviewing dispute resolution procedures to ensure their
effectiveness

18. Federal Budget 2012
Additional changes in R&D support
• Budget 2012 implements some of the
recommendations of “Jenkins Report”
• Savings from SR&ED p g
g program will support more
pp
“direct funding” of research to support innovation
• $1 1 billion “directed” over next 5 years
$1.1 directed
• $500 million for venture capital

19. “Direct” Funding to Support Innovation
Direct
• $400 million to support creation of large-scale
large scale
venture capital funds
– promote private sector investments in early-stage risk
early stage
capital.
– structure yet to be determined
• $100 million to the Business Development Bank
of Canada to support venture capital activities
– New or existing mandate? Details to be determined

20. “Direct” Funding to Support Innovation
Direct
• Western Innovation Program
g
– Announcement for financial support of
innovative SMEs in Western Canada
– Like Programs offered in Quebec, Atlantic
Canada and Southern Ontario
• Forestry Innovation and Market
Development Support
– $105 million over 2 years

21. “Direct” Funding to Support Innovation
Direct
• Doubling support to the NRC-Industrial
NRC Industrial
Research Assistance Program (IRAP)
– IRAP helps support R&D salaries and
contractor costs
– Additional $110 million per year
• $205 million to extend the temporary hiring
credit f S ll B i
di for Small Business

22. “Direct” Funding to Support Innovation
Direct
• Supporting Private & Public Sector
Research Collaborations
– $ million over two years to double the
$14
Industrial Research and Development
Internship program
– Labour cost sharing initiative with private
sector partner
t t
– Integrate researchers into the labour market

23. “Direct” Funding to Support Innovation
Direct
• Business-Led Networks of Centres of
Excellence program
– Industry-led research consortia
• Forestry
• Aerospace
• Drug discovery
Dr g disco er
• CleanTech
• C t sharing arrangement with private
Cost h i t ith i t
sector partner

24. “Direct” Funding to Support Innovation
Direct
• Connecting innovative SMEs to federal
departments through procurement
– Canadian Innovation Commercialization Program
($95 million over three years)
• Refocusing the National Research Council
– $67 million in 2012–13 to support business-led,
industry-relevant research
y

25. “Direct” Funding to Support Innovation
Direct
– Emphasis on leveraging private & public R&D
efforts
– Movement away from market-based, industry-
led R&D to more institutional-targeted R&D
– “Grant-style” funding programs could increase
administrative b
d i i i bureaucracy and ‘ d tape’
d ‘red ’
• Companies will need to apply for a program and
wait for approval
• Process will involve an inherent lag period

26. Federal Budget 2012
What does this all mean for R&D ???
– Decrease to the value of SR&ED ITCs
~ 7% for CCPCs
~ 20% for non-CCPCs
– More “direct” R&D funding opportunities
– More complex administrative landscape
– Increased scrutiny by CRA
– More ways to disagree with CRA
– Tax Planning important !

27. Federal Budget 2012
Tax Planning
• Contractors vs. Employees
– Do the math – Employees much more valuable !
– $100,000 spent on Employees results in
$ , p p y
$64,000 of ITCs vs. $33,000 of ITCs for the
same amount spent on contractors
• Capital Spending
– Have all purchases completed by end of 2013
p p y

28. Federal Budget 2012
Tax Planning
g
• Performance Bonuses
– Accrued by December 2013
• Project Spending
– Rates drop starting Jan 1/14
– Factor in to ROI

29. Building a Sound Growth
Strategy
Benefits to your Business
– Minimizing your taxes
– Managing Risk
g g
– Controlling Costs
– Enhancing your Performance
– Maximizing your Human
Resources
– Regaining Financial Control
– Financing Change

30. Contacts
Andrew J. Raphael
1.877.688.8408
1 877 688 8408
andrew.raphael@mnp.ca
Ryan P. Mackiewich
1.877.475.5678
ryan.mackiewich@mnp.ca
Andrew Pellizzari
1.877.251.2922
andrew.pellizzari@mnp.ca