Government Incentives

Growing your private company webcast series

9 April 2014

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Meet the presenters

Dharmesh Gandhi BScEng, MBA

Senior Manager, National BTI PMM Leader

Leads EY’s PMM Government Incentives Practice to identify and access legislative and discretionary sources of government funds for our clients.

Denis Lajoie, CPA, CA

Partner, EY SR&ED and Business Tax Incentives Practice, Toronto

Leader, Ernst & Young’s Scientific Research and Experimental Development (“SR&ED”) practice for Central Canada, which involves managing and working with a team of technical and accounting professionals in SR&ED client service, quality, and claim eligibility.

Allan Bonvie, CA

Associate Partner, Tax Services

Creator & Leader of Ernst & Young’s Capital Asset Review (CAR) practice.

Allan and his team have completed over 130 CAR engagements in the past nine years, where these reviews have covered over $6.9 billion in capital expenditures resulting in over $181 million in client savings.

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Agenda

► SRED ► Legislative update► Administrative update

► Other Incentives► Other Incentive Programs► Capital Asset Review

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SRED - Legislative update

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Legislative Update

2012 Budget measures 2013 2014

Reduction in general ITC rate - from 20% to 15%

(Note the ITC rate for CCPCs remains at 35%)X

Exclusion of all capital expenditures X

Reduction of prescribed proxy amount – 65% to 55%X

(to 60%)X

(to 55%)

Reduction in inclusion rate of arm’s length/payments for SR&ED – from 100% to 80%

X X

2013 Budget measures 2013 2014

Additional disclosure of claim preparer information X

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SRED - Administrative Update

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Eligibility Policy

► The SR&ED Policy documents released on December 2012 are based on “Five Questions” from Justice Bowman’s Northwest Hydraulics case (98 DTC 1839)

► Applies for both scientific research in laboratories, and experimental development in all other venues, including software development

► The “due diligence” requires

► Why a scientific fact or technological ability exceeds prior limitations, including known adjustment methods

► How a new idea serves to close the gap

► How the work advances science or technology itself; not just for your need

► How work is planned and organized, with development, testing and analysis; and

► How records and evidence support ideas tested and how results of trials determined next steps of work

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Eligibility Policy

► CRA outlines in the document why a project may not be eligible despite: New or expanded features or functions Something that has never been done before Complex challenges, requiring advanced technology Your highly trained staff and contractors using specialized uncommon tools or Key required knowledge is held proprietary by others

► The Research and Technology Advisor expects a clear and documented basis for why: The claimant is CERTAIN prior technology is incapable, and how Evidence of a planned approach explores NEW idea analysis and experimentation

► The same standard of proof applies for all work including laboratory studies

► A new or improved product or process is not sufficient

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Eligibility Policy

► Increased emphasis on how the work was planned

► Problems during development or remedied with proven method are suspect

► Show how modifications for site conditions or specific variable exceed prior norms

► The “systematic process” recounts that a plan for the research was prepared

► Show work to exclude any prior conventional solution as “due diligence”,

► Show origin of the idea “hypothesis“ to be studied, and

► Recount post-experiment analysis needed to decide next steps.

► “Standard practice” is excluded from eligible SR&ED

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SR&ED Audit Changes

► Audit changes speed up the process with intent of maintaining fairness

► A more thorough basis of documenting why CRA allowed or disallowed claims

► Extensive re-training of CRA staff and new tools and procedures, and

Internal pre-audit stages have been altered for screening

Creation of initial standardized RFI “Request for Information”

Extended use of “Joint Review” by technical and financial reviewers

Additional standardized forms of RFI and confirmation letters to specifically identify

what is needed

► Deficiencies noted in fully audited projects generally to lead to costs disallowed in other projects

► The claimant must show evidence why conditions noted do not apply in other cases

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Other Incentives

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Range of incentive programs

► Non-tax legislated incentives: discretionary funds ► Examples include:

► Regional Development Fund ► NRC’s IRAP ► Sustainable Development (SD) Tech Fund

► Non-tax incentives:grants and assistance ► Examples include:

► Hydro One, OPG, Union Gas, Consumers Gas, others.

► Tax legislated incentives ► Examples include:

► Capital Asset Restructuring and Segmentation► Digital Media Tax Credits► Apprentice Tax Credits Program

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Value of Incentives

► Capital Asset Restructuring & Segmentation (>500K) ► Cold Storage/Warehouses► Data Centers

► Development Fund (>$1M) ► Windsor to Barrie and Niagara region ► Eastern of Toronto, north to Ottawa

► Digital Multimedia (outside of gaming industry) ► IRAP, SD Tech (>$500K) ► Green technology and environmental grants ► Training Grants

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Stage 1 – Defining a plan

► Review core objectives ► Determine grants and incentives that might apply

► Monetary value ► Timing, restrictions, risk, effort and availability of funds

► Optimizing “portfolio” of incentives ► Coverage of the expenses ► Determining overlaps that enhance your return ► Timing and resources required ► Audit requirements of funding agreement

► Developing a plan

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Stage 2 – Putting the plan in action

► Establish completion milestones► Confirm timing and each applications requirements

► Carefully review application guideline► Seek assistance

► Address overlap to ensure the best value► Use established templates for each initiative► Follow up and address any issues

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Capital Asset Review

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Why is there a CAR opportunity?

Major construction, renovation projects – distribution centres, manufacturing plants, refrigerated storage facilities, gas stations, grocery stores (corporate/franchise), office buildings, retirement homes, restaurants, hotels, auto dealerships, etc.

Limited client personnel resources/capabilities to conduct detailed CAR (mostly EY time with minimal client time)

Economic environment – external financing is more difficult

Limited taxation/capital asset accounting focus on project technical (engineering)

Internal financing source - CAR

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Example CAR Savings/Benefit

Net present value (tax shield benefit) of reclassifying $1.0 million of expenditures in 2014.

Savings even more if reclassify prior years re higher rates pre 2012. Also, more savings depending on ownership structure.

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Benefits of CAR to Businesses

Recurring savings – application to future capital acquisitions; typically 2% to 4% of gross expenditures reviewed

Knowledge transfer to client personnel

Minimal time commitment – client personnel

Minimize income taxes by accelerating CCA claims (tax depreciation) and maximizing current tax deductions around capital expenditures

Access other incentives – SR&ED expenditures, training credits, M&P investment tax credits

Access prior years asset classification opportunities

Maximize Ontario, Saskatchewan M&P profits deduction

Utilize CAR opportunities to offset CRA adjustments

Reduce level of bonuses to owner/managers

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Examples

Industry Type Client CAR CAPEX

Client Tax Savings/ NPV Benefit

M$ M$ % Manufacturing Plant – Prefab Cement Products

Reviewed construction/equipment costs

21.8 0.9 4.1

Perishable Goods Construction Dry / Refrigerated Facility – audited & accepted by CRA

32.1 2.4 7.5

Commercial building New hotel – construction/equipment 42.0 1.6 3.8

National Retailer Point of Sales Equipment 94.0 4.1 4.4

Aluminum Casting Plant Plant Construction Costs – audited & accepted b y CRA

73.0 2.3 3.2

Chain Department Store Store Equipment – CRA audited & accepted

98.0 0.95 1.0

Assisted Living Retirement home – structure planning

15.0 0.5 3.3

Packaging Manufacturer Corrugated Box Plant Construction 17.1 0.65 3.8 Grocery Retailer New Store – construction/equip. 6.5 0.25 3.9

Pulp & Paper Steam Reformer 33.1 1.1 3.3

140+ CAR ENGAGEMENTS COMPLETED

OVER $7.8 BILLION IN CAPITAL EXPENDITURES REVIEWED

CLIENT TAX SAVINGS/ NPV

BENEFIT over $200M+

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How to qualify a CAR opportunity

Has the business incurred significant capital spending in the last 3-4 years or plans to in the current or next couple years? That is, $5.0-$20.0 million or more for one or 2-4 projects.

Does a large portion of the capital spend include slow CCA/tax depreciation classes? – Class 1 building, Class 13 leaseholds (with long amortization period for tax purposes), Class 17 parking, etc. [See Schedule 008 corporate tax return]

Is the business taxable in the current, prior three years or will be in future? [or taxable income exists within a corporate group].

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Q & A

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Contact Us

Denis LajoieToronto BTI Leader(416) 943-3406

Allan BonvieNational CAR Leader (902) 421-6256

Dharmesh GandhiToronto PMM BTI Leader(416) 932-5755