2012 Federal Budget

The Minister of Finance, Jim Flaherty, today presented the 2012 Federal Budget. As with Tuesday's Ontario Budget, there are no personal income tax rate changes. However, there is a significant change to the age of eligibility for Old Age Security ("OAS") which will be pushed back to age 67 from age 65 for anyone who has not yet reached the age of 54 as of March 31, 2012.

There are no corporate income tax rate changes, however, there are various measures related to the Scientific Research and Development Program ("R&D") and taxpayer compliance.

Other than the OAS change for individuals and the R&D changes for corporations, I don't think there is much to get most people excited about in the budget. Thus, I am going to take the lazy way out, and link to my firm Cunningham LLP's budget summary (which I helped write) for those who want details of the budget.

As someone who is just below the OAS age cut-off, I feel like my year of birth, has been a little unlucky. It was bad enough that I was born too late for Woodstock and got stuck with Disco, now I get screwed on the OAS cut-off :).

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

2012 Ontario Budget

The Minister of Finance Dwight Duncan today presented the 2012 Ontario budget. There are no significant personal income tax measures in the budget. The corporate tax measures essentially relate to a freezing of corporate income tax rates that have already dropped significantly over the last few years.

The budget is heavy on spending cuts and government restraint; however, I will leave the political pundits to deal with those issues. Personally, I see little chance the Liberal government will eliminate the deficit by 2017-2018, because of the inherent issues the province has, essentially caused by the loss of the manufacturing sector.

Personal Income Tax Measures

Ontario Trillium Benefit

As noted in my blog last week, many Ontarians have been surprised that they are not receiving refunds upon filing their income tax returns, as the sales tax and property tax credits are now part of a monthly Ontario Trillium Benefit. Many Ontarians were unhappy with the monthly payment voicing complaints in this regard (at least in newspapers and blogs). In the budget the government notes that “Ontarians are now receiving their refundable tax credits earlier and more frequently than if they were paid as a lump sum when people file their tax returns”, however, they seem to have listened to the people and now say that they will look at options for providing a choice of a monthly payment or lump sum amount after the year has ended.  

Ontario Drug Benefit Program

Starting in August, 2014, single seniors with an income greater than $100,000 will now have to pay a deductible of $100 (the current deductible) plus 3 per cent of their income.

For couples with an income above $160,000, the deductible will rise to $200 per couple plus 3 per cent of the family income.

Healthy Homes Renovation Tax Credit

The government provides a reminder of its Healthy Homes Renovation Tax Credit for renovations that improve accessibility or help seniors with their mobility at home. Details of the credit are noted here.

The credit would be worth up to $1,500 each year, calculated as 15 per cent of up to $10,000 in eligible home renovation expenses that would help seniors stay safely in their homes. It could be claimed by senior homeowners and tenants, and people who share a home with a senior relative.

Corporate Income Tax Measures

The Ontario corporate income tax rate was scheduled to fall from the current 11.5% to 11% July 1, 2012 and 10% on July 1, 2013. The 11.5% rate is being frozen until the Ontario budget is balanced (thus, I guess this rate will be in effect forever :).

The corporate rate for Manufacturing and processing companies will also be frozen at 10%.
For Canadian Controlled Private Corporations, the corporate rate will be frozen at 4.5%

Business Education Tax

The government proposes to freeze the Business Education Tax (“BET”) reduction plan beginning in 2013. The government says they will ensure businesses building new facilities will benefit from the full implementation of the BET reductions.

Scientific Research and Development

Ontario did not make any changes to the Scientific Research and Development (R&D) program. They are essentially going to piggyback the Federal government. The budget comments that Ontario agrees with the federal panel that there is a need for greater federal-provincial collaboration regarding R&D tax support. As the federal panel suggested a reduction in federal R&D support, simplification of the program and a reduction in compliance costs, Ontario companies undertaking R&D will be impacted by any federal changes. It is expected the federal government will address R&D in Thursday’s federal budget.

Apprenticeship Training

The government says that it will review the effectiveness of the Ontario Apprenticeship Training Credit and consider linking support to the completion of apprenticeships.

The Underground Economy

Ontario plans to adopt measures similar to Quebec to address the tax leakage from the underground economy. These measures include:

· measures to mitigate the use of point-of-sale software to conceal sales.

· Measures to enhance information sharing across Ontario ministries and with the CRA.

· Measures to help identify those who facilitate or participate in tax evasion schemes.

Corporate Tax Avoidance

Again, using Quebec as the model, Ontario will consider implementing various measures used by Quebec to fight aggressive tax planning. It should be noted Quebec measures include a requirement for taxpayers to disclose any transaction in which they retained an advisor and there was a tax benefit of at least $25,000, or the taxpayer’s income was affected by $100,000 or more. Thus, some real “Big Brother” measures.

Employer Health Tax

Ontario plans to strengthen its administrative practice in the determination of whether an employer-employee relationship exists. In common language, watch out if you engage contractors.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Can R&D or Mining save Ontario?

In the February 20th edition of the Globe and Mail, John Ibbitson had an article titled “Other provinces have no cause to gloat over Ontario’s woes.” The essence of the article is summarized in his final paragraph in which Mr. Ibbitson says “If things go badly, Ontario’s problem could become everyone’s problem, with a vengeance.”

The irony of this article was not lost on me, as recently over dinner, some friends and I debated the quality of Dalton McGuinty’s leadership and Ontario’s woes. We also discussed how Ontario can remain prosperous with a diminished manufacturing sector. Since my friends are huge McGuinty supporters, which I am not, they sarcastically asked me for my brilliant solution for Ontario’s issues.

I responded that I had not given this issue the proper thought, but that as part of the solution Ontario needs to expand its Research and Development sector. I suggested that Ontario be more targeted in its R&D program and cut-out fringe R&D claims. I proposed monetizing R&D credits which would allow companies who have unutilized R&D credits to sell or exchange them for cash, thus ensuring true R&D companies can further fund their development.

The irony of this situation continued when I reached for the business section. Staring at me on the first page was an article by Barrie McKenna titled “A glaring need to determine what is legitimate R&D.” ( If you wish a SR&ED primer, you can read my two blogs, The benefits of undertaking SR&ED and SR&ED-ing the Misconceptions).

In the article, Mr. McKenna discusses Federal Taxpayers’ Ombudsman Paul Dubé’s probe into the $3.5 billion annual SR&ED tax credit. Mr. McKenna notes that rather than identifying what was wrong with the program, Mr. Dubé quietly closed the probe into SR&ED with a truncated paper on the tax agency’s website explaining that there were too few complaints and insufficient evidence to reach any conclusions. Mr. McKenna further surmises that the closing of Mr. Dubé’s report will allow Prime Minister Stephen Harper to make the changes his government desires in the upcoming March 29th budget. Mr. McKenna notes that the Prime Minister embraced a report headed by Tom Jenkins, chairman of Open Text, that urged the government to limit SR&ED’s refundable credits, tighten the rules and then use the savings to support more strategic financing of R&D.

It will be interesting to see if the next federal budget addresses the SR&ED issue. From a more macro perspective, what impact would targeted R&D have in assisting Ontario to morph its economy?  As I have given the idea more thought, I think the reality is R&D would only form a small part of any solution.

So what other alternatives does Ontario have? Many including the Premier think maybe the "Ring of Fire" a mining area in Northern Ontario can stimulate the Ontario mining sector, as his government describes it as "the most promising mining opportunity in Canada in a century."

Maybe Ontario will never recover or replace its manufacturing base? Is Ontario as Mr. Ibbitson states destined to become two Ontario's. "The first Ontario is Toronto, a Canadian New York whose economy is powered by financial services, education, biosciences, cultural industries, tourism and more" and a second Ontario, "outside Greater Toronto that is a whole lot of Ohio, as the manufacturing sector follows other Great Lakes economies into rustbelt status."

What do you think? How would you re-make Ontario?

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

SR&ED-ing the Misconceptions: What most Businesses don't know about SR&ED Credits

On Tuesday, I wrote about the financial benefits of claiming Scientific Research & Experimental Development (“SR&ED”) expenses. Today, I have a guest blog on SR&ED claims by James McDermott, the director of marketing & business development of the BeneFACT Consulting Group Inc. (“Benefact”) a SR&ED consulting company. My firm Cunningham LLP , has worked with various R&D consultants including Benefact over the years to assist clients in maximizing their SR&ED claims. This blog clarifies several points of confusion in regard to the SR&ED program and provides examples of qualifying SR&ED in industries you would not expect a SRED claim.

SR&ED-ing the Misconceptions: What most Businesses don’t know about SR&ED Tax Credits by James McDermott

The SR&ED program is among the most generous R&D tax incentives in the world, paying in excess of $4 Billion (CDN) to more than 20,000 eligible claimants every year. Based on program criteria, participants can receive significant cash refunds or tax credits to offset a portion of qualified projects. Eligible expenditures include salaries and wages, parts and materials, subcontracts and capital expenditures. In most cases, SR&ED tax credits are fully refundable for small and mid-sized businesses, even if no taxable income is present.

While the program is generous in its application, claimants often struggle with qualification criteria and face a litany of program misconceptions. In dealing with prospective SR&ED participants we regularly encounter intelligent professionals that are utterly baffled by the program. The good news -- nearly all of the collective confusion is based on inaccurate information and a widespread lack of awareness. Businesses that take steps to educate themselves and clarify their eligibility are typically pleasantly surprised by the outcome.

According to CRA’s own statistics, only 25% -33% of SR&ED eligible businesses actually file claims. These estimates, among many things, provide strong evidence that a large segment of eligible Canadian businesses are missing the boat. With overwhelming advantages for claimants (see Mark’s blog of Tuesday), why is the program underutilized? What are the factors that prevent program participation?

In our experience, there are a few recurrent “confusion points” that continue to stand out.

Do we really conduct SR&ED?

Businesses have a difficult time determining whether they actually carry-out SR&ED eligible activities. Without dedicated R&D facilities or labs devoted to research, businesses falsely assume they cannot apply for SR&ED credits. Potential claimants should instead consider time and cost overruns, difficult one-off jobs, recalls or onsite trouble-shooting as strong indicators of qualifying work.

Our work is “not new”

 For work to be considered SR&ED eligible, claimed projects do not have to be “new” to their relative industry. If the underlying technology is not accessible in the public domain and is new to the claimant’s organization, grounds for eligibility exist. Most notably, commercial success or failure is irrelevant so long as technological knowledge is gained. Incremental changes to existing products, methods or processes (regardless of the outcome) can be typically considered SR&ED eligible.

We have $0 in taxable income

Potential claimants often assume that losses preclude them from program participation. This is a myth. For most (small and mid-sized) organizations without taxable income, SR&ED credits are fully or partially refundable.

Outside of the three scenarios listed above, there are also numerous businesses that disqualify their own eligibility based entirely on industry identification. Although some are correct in their assumptions, it is prudent for businesses to fully investigate their eligibility. To support this, below are few interesting examples of often ignored SR&ED eligible work.

Occupational Therapy

While it is recognized by the CRA as an eligible field of science, the SR&ED program remains almost totally ignored by occupational therapy practices. Despite this, opportunities are found (especially in larger practices) where new test protocols, outcome measures and treatment techniques are being developed. Examples include, but are not limited to: Speech-Language Pathology, Orthopaedic Services, Maxilo-Facial Surgery, Audiology and various forms of Physical Rehabilitation.

Insurance industry & Financial Services

Outside of claimed IT projects, SR&ED is typically overlooked within insurance and financial services firms. Potential claimants in this area should also consider efforts in actuarial and mathematical modelling. The development of predictive algorithms or data correlation (through statistical modelling) can be leveraged into a SR&ED claim.

Construction & Civil Engineering

Construction and civil engineering businesses traditionally undervalue their eligibility and often go without filing claims. Most firms in this field incorrectly discount their development efforts due to the fact that a majority of their projects are regulated by “code”. In reality, exceptional value exists in work related to the use of new materials and the creation of more efficient processes. Environmental factors and site- specific conditions, as an example, introduce the type of technological obstacles that can form the base of a strong SR&ED claim.

For further assessment of your SR&ED eligibility, visit http://www.benefact.ca/ or contact James McDermott, Director, Marketing & Business Development at james.mcdermott@benefact.ca

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.