2012 Federal Budget — Impact on SR&ED

As expected, the budget presented by Finance Minister Jim Flaherty on March 29 included changes to the Scientific Research & Experimental Development (SR&ED) tax incentive program. Changes to the program have been expected since the release of an expert panel review of federal support for R&D in Canada in October 2011 (i.e., the “Jenkins” report). However, the actual changes in the budget differed from the report’s recommendations in many important ways.

The top-level outcomes from the budget can be summarized in the following way:

  • The SR&ED program will remain as the federal government’s primary instrument for funding R&D.
  • In total, $1.3 billion will be removed from the SR&ED program, of which $1.1 billion will be transferred to grant-based direct funding programs (including IRAP and venture capital initiatives).
  • The changes affect the way the credit/refund is calculated, but does not change the criteria for technical eligibility.
  • Certain recoverable costs have been scaled back or removed.
  • Some SR&ED stakeholders will see a larger impact than others.

For your convenience, here is a summary of the specific changes to the SR&ED calculation, which will take effect over the next two years:

Federal SR&ED Rate:

  • The enhanced SR&ED rate of 35% will remain unchanged for qualifying Canadian Controlled Private Corporations (CCPCs).
  • The general rate for all other corporations will drop from 20% to 15% for tax years ending after December 31, 2013.


  • Capital purchases for the purpose of R&D will no longer be eligible after December 31, 2013.
  • This includes capital purchases made by contractors doing SR&ED on the taxpayer’s behalf.

Overhead Proxy on Labour

  • The current rate (65%) will drop to 60% in 2013 and to 55% in 2014 and thereafter.
  • For companies with fiscal years that span across calendar years, these rates will be prorated.

Contract Payments

  • The recovery rate for eligible SR&ED contract payments will drop from 100% to 80% in 2013.
  • The rationale for this change is to exclude contractor profit from consideration.
  • As mentioned above, capital purchased by a contractor as part of their SR&ED work will no longer be eligible as of 2014.

In addition to these changes, the federal government will spend $6 million over the next two years to improve CRA’s administration of the program in the following ways:

  • Conduct a pilot project to determine the feasibility of a formal pre-approval process.
  • Enhance the existing online self-assessment eligibility tool.
  • Work with industry representatives to address emerging issues.
  • Improve the Notice of Objection process to allow for a second review of scientific eligibility determination.

Finally, the government will conduct a study, including consultation with taxpayers, to better understand why companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims.  The result of this study will determine whether any further action regarding contingency fees will be required.

Empyrean’s Role

The Empyrean Group remains committed to helping stakeholders gain the maximum benefit from the SR&ED program to which they are entitled. In terms of the 2012 budget, we can assist you in the following ways:

  • We are available to answer any questions you may have about the changes to the program.
  • We can work with you to develop strategies to minimize their impact.
  • Together, we can determine how you might benefit from other direct funding R&D initiatives.

We hope this information has been helpful.

If you have any questions, please feel free to contact me (416-576-6154) or our Vice President, David Bodi (519-944-3949).

– Frank Naccarato, President

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