Innovation has become critical in the agri-food industry. With retailers demanding that processors do more with less, new regulatory demands, and increased consumer focus on health, 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 agri-food processors deal with the challenges they face. If you’re doing R&D to provide the same product at a lower cost; improve packaging, environmental sustainability, or web-based customer interaction; establish traceability; or develop functional or anti-allergenic foods, you may be eligible for the SR&ED tax credit.

1. Budget 2012 – SR&ED
Impact to Food & Ag Processors

2. Introduction
Andrew Raphael
Director of Food & Ag Processing Division
Ryan P. Mackiewich
R an P Mackie ich
SR&ED Practice Leader
Andrew Pellizzari
SR&ED Food & Ag Processing Specialist
F d A P i S i li t

3. Topics
1.
1 Helping Processors Meet Complex
Consumer Demands
2.
2 Food & Beverage Processing
Opportunities
3. Budget
3 B d t 2012
4. Opportunities for Funding
5. Tax Planning
6.
6 Questions

4. Building a Sound Growth Strategy
Benefits to your Business
– Minimizing your taxes
– Managing Risk
– Controlling Costs
– Enhancing your Performance
– Maximizing your Human Resources
–RRegaining Fi
i i Financial C t l
i l Control
– Financing Change

5. Can Help Processors Meet Complex
Consumers Demands
Food safety & Consumers
quality are essential are paramount
• Aging population • The value of time
• Increased health • Higher rate of women working
awareness Convenience • faster pace lifestyle
• Demand for natural & • Smaller household
organic foods
g Health & Wellness
• Demand for functional
foods & nutraceuticals
• “Food as medicine”
• More novel foods • Educated & sophisticated
consumer
• Fun & entertaining
Pleasure Value • Declining food expenditure
• Comfort • share
• Ethnic & exotic • Demand for premium
• Indulgent & guilt free • private label p
p products
• Premium & prestigious • Income distribution & gap
• Price consciousness of lower
income consumer

6. SR&ED Opportunities for
Food Beverage P
F d&B Processors
• Equipment
q p
– Strong Loonie = Time to Purchase & Adapt
• Flavour Formulations
– T
Trans Fats, Sodium, Sugar
F t S di S
– New taste demands
• Doing More With Less
– Retail Consolidation Impacts
– Be Proactive
• Packaging
– Product Interaction With Packaging

7. SR&ED Opportunities for
Food Beverage P
F d&B Processors
• Going Green
– Bi d
Biodegradable P k i
d bl Packaging
– Storage
– Delivery Systems
• Traceability
– RFID
• Web Based Interactive Services
– Sales Inventory , Feedback , On Line Auctions
Sales, Auctions,
• Functional Foods
– R&D, Testing, Proving Claims
• Anti Allergies
g
– Gluten Free & Peanuts
– R&D, Testing, Proving Claims

8. 2012 Budget
• SR&ED = Scientific Research &
Experimental Development
• ITC = Investment Tax Credit – the “Gold”
Gold
we are going for
• CCPC = C Canadian C t ll d P i t
di Controlled Private
Corporation
• Proxy Amount = A notional gross up of
labour costs to cover overheads

9. 2012 Budget
Effective January 1 2013
1,
• Contractor costs for SR&ED reduced to
80% of the contract payments

10. 2012 Budget
Effective January 1 2014
1,
• SR&ED ITC reduced to 15% (from 20%),
– Th enhanced ITC f CCPCs will remain at
The h d for CCPC ill i t
35%.
• C it l expenditures no l
Capital dit longer eligible f
li ibl for
for SR&ED
• Prescribed proxy amount reduced to 55%
(from 65%)

11. 2012 Budget
Example
• Spend $100,000 on eligible SR&ED
– $50 000 wages
$50,000
– $25,000 contractors
–$$25,000 materials

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

13. Non-CCPCs 10% ITC
New
Federal Tax Savings:
Qualified R&D Expenditures 122,500
Provincial ITC 12,250
Federal ITC @ 15% 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
Change i T t l ITC Earned
Ch in Total ITCs E d (8,313)
(8 313)

14. 2012 Budget
• These changes result in $1 3 Billion in
$1.3
savings
• Savings used for funding various R&D
Initiatives

15. 2012 Budget
• The government will spend $6 million over the
next two years to implement changes to the
administration of the program through the
following measures:
– The CRA will 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
–IImprove the Notice of Obj ti process to allow f a
th N ti f Objection t ll for
second review of scientific eligibility determination.
– Increase the number of technical reviewers

16. 2012 Budget
• Providing additional training and
establishing coordinated technical support
for the technical reviewers
reviewers.
• Devoting more time to program services.
• E h
Enhancing th quality assurance
i the lit
methodology.
• Reviewing dispute resolution procedures
to ensure their effectiveness.

17. Innovation Canada
A Call to Action: Jenkins Report
• Shift resources from indirect support through the SR&ED
pp g
tax incentive program to direct forms of support,
including the Industrial Research Assistance Program.
• St
Streamline th G
li the Government’s support for business
t’ tf b i
innovation.
• Simplify the SR&ED tax incentive program and improve
cost-effectiveness, predictability and accountability.
• Make business innovation one of the core objectives of
procurement. t
• Refocus the institutes of the National Research Council
on demand driven applied research.
demand-driven
• Help high-growth innovative firms access risk capital.
• Establish a clear federal voice for innovation

18. Opportunities for Funding
• Helping High-Growth Firms Access
Risk Capital
• Increasing Direct Support for Business
Innovation
• S
Supporting Innovative Businesses in
ti I ti B i i
Western Canada
• Supporting Private and Public Sector
Research Collaborations

19. Opportunities for Funding
• Helping High Growth Firms Access
High-Growth
Risk Capital
• $400-million fund to help increase private
$400 million
sector investment of early-stage
p
companies
• Access to capital In shorter supply in
Canada (affects ability to hire).
( y )
• Details won’t be announced for a few
months.

20. Opportunities for Funding
• $100-million for the Business Development
$100 million
Bank of Canada
• Energy/Cleantech, Health, Information
gy , ,
Technology, and Communications.
• Unclear what the increased money will go
toward.
– Is it a continuation of the current mandate?
– O will BDC reach out t companies which, f
Or ill h t to i hi h for
whatever reason, hadn't been supported in the
past?

21. Opportunities for Funding
• Increasing Direct Support for Business
Innovation
• Doubling the Industrial Research Assistance
g
Program (IRAP)
• additional $110 million per year.
– Financial support for firms
– If proposal accepted IRAP provides up to 80% of
the payroll costs and 50% of the applicable sub
sub-
contractors fees for a project up to $100k
contribution.

22. Opportunities for Funding
• Supporting Innovative Businesses in
pp g
Western Canada
• Launch of the Western Innovation
Program
– Financial support to innovative small and
medium-sized enterprises in Western C Canada
– Like Programs offered in other Quebec,
Atlantic Canada and Southern Ontario
– Ontario: $20 million for food and beverage
processing sector and export development

23. Opportunities for Funding
• Supporting Private and Public Sector
Research Collaborations
• Integrating High-Quality Researchers
High Quality
Into the Labour Market
– $14 million over t
illi two years t d bl th
to double the
Industrial Research and Development
Internship program
– 1:1 cost sharing with private sector partner

24. Opportunities for Funding
• Business-Led Networks of Centres of
Excellence program
• Industry led research consortia
Industry-led
• 1:1 cost sharing with private sector partner

25. Opportunities for Funding
• Supporting Innovation Through
Procurement
– Canadian Innovation Commercialization
Program
• (additional $95 million over three years, starting in
2013–14,
2013 14 and $40 million per year thereafter)
• Refocusing the National Research
Council
– $67 million in 2012–13 to support the
business-led, industry-relevant research.
, y

26. Opportunities for Funding
– Cuts to the federal tax incentive program,
p g ,
expected to be nearly half a billion dollars a
year, outweigh new investments in grants
– movement away f from market-based, i d
k b d industry-
led research and development to institutional-
targeted research and development
– The right direction we should be going in?
– Grant program cou d increase red tape
G a t p og a could c ease ed
– Apply for a program, wait for approval, there
is an inherent lag period.

27. 2012 Budget - Summary
• What does this all mean???
– Decrease to the value of SR&ED ITCs
~ 7% for CCPCs
~ 20% for non-CCPCs
– More Funding Opportunities
– More complex landscape
– Increased scrutiny by CRA
– More ways to disagree with CRA
– Tax Planning

28. Tax Planning
• Contractors vs Employees
vs.
– Employees much more valuable
• $64 325 ITCs for Employees vs $33 200 ITCs for
$64,325 vs. $33,200
Contractors
• Capital Spending
– Have all purchases completed by 2013

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

30. A Recipe for Rewarding Innovation
• To ensure you get the most from your claim, it is important to work
with professionals who understand your industry and the intricacies
of the SR&ED program
• Advisors deliver insight to help you:
– Identify eligible projects
– Develop accurate project descriptions
– Review your claims
– Train your team
– P ti i t in CRA reviews
Participate i i
– Strategic tax planning

31. Contacts
Andrew Raphael
604.637.1567
604 637 1567
andrew.raphael@mnp.ca
Ryan P. Mackiewich
1.877.475.5678
ryan.mackiewich@mnp.ca
Andrew Pellizzari
416.515.3915
416 515 3915
andrew.pellizzari@mnp.ca