The ex­tended hori­zon for ex­ploit­ing re­search and de­vel­op­ment-re­lated tax strate­gies can pro­vide flex­i­bil­ity now, when you need it most


Don’t take Sci­en­tific Re­search and Ex­per­i­men­tal De­vel­op­ment tax cred­its for granted


cat­a­lyst for M&A ac­tiv­ity in the oil patch. But with the sheer vol­ume of com­plex tax-re­lated is­sues to be dealt with in such trans­ac­tions, it’s easy to un­der­stand how the gov­ern­ment’s Sci­en­tific Re­search and Ex­per­i­men­tal De­vel­op­ment (SR&ED) tax cred­its could be over­looked. The ben­e­fits of claim­ing SR&ED go be­yond the 23.5 to 41.5 per­cent com­bined Canada-Alberta tax credit. In­stead, the ben­e­fits could—and should—be strate­gi­cally in­te­grated with a com­pany’s over­all M&A strat­egy.

SR&ED is an in­cen­tive pro­gram in­tended to fos­ter the ad­vance­ment of science and tech­nol­ogy in Cana­dian busi­ness. Fed­eral SR&ED in­vest­ment tax cred­its (ITCs) earned in a fis­cal year can be ei­ther re­fund­able (cash), or non-re­fund­able (tax credit). In the case of the lat­ter, the ben­e­fit may be car­ried back three years, or for­ward up to 20 years and ap­plied against taxes payable. SR&ED ITCs from Alberta are re­fund­able for all for-profit cor­po­ra­tions.

Why, then, are some pub­lic com­pa­nies quick to dis­miss SR&ED, be­liev­ing that they have no use for non-re­fund­able tax cred­its? This per­spec­tive over­looks the uni­ver­sally re­fund­able tax cred­its from Alberta (10 per­cent of qual­i­fied ex­pen­di­tures up to a max­i­mum of $400,000 in ITCs), and is an overly sim­plis­tic opin­ion that could sig­nif­i­cantly im­pact cor­po­rate val­u­a­tion.

This is be­cause, for merg­ers and ac­qui­si­tions, the SR&ED ITCs can be used af­ter the change of own­er­ship, pro­vided the ac­quirer is a for-profit en­tity in the same or sim­i­lar busi­ness. The SR&ED ITCs have real value as they can be di­rectly ap­plied to the ac­quirer’s taxes payable, or car­ried for­ward to a fu­ture year. The deemed yearend re­sult­ing from the ac­qui­si­tion of con­trol burns one of the carry-for­ward years so, for ex­am­ple, if there are 15 years re­main­ing on the ac­quired com­pany’s SR&ED ITCs at the time of ac­qui­si­tion, the ac­quirer can carry these for­ward for up to 14 years. Thus, for com­pa­nies that are or could be a po­ten­tial ac­qui­si­tion tar­get, the ben­e­fits of claim­ing SR&ED go be­yond the cur­rent cash in­fu­sion from re­fund­able ITCs; any non-re­fund­able ITCs will in­crease val­u­a­tion. De­pend­ing on the level of SR&ED oc­cur­ring in the com­pany, the im­pact can be sig­nif­i­cant.

An ad­di­tional ben­e­fit of fil­ing a SR&ED claim is that it can gen­er­ate a “SR&ED qual­i­fied ex­pen­di­ture pool,” as long as the ex­penses are not needed to im­me­di­ately re­duce tax­able in­come. This pool can be ap­plied in much the same way as a non­cap­i­tal loss pool. The key dif­fer­ence is that the amounts cap­tured in the SR&ED pool can be car­ried for­ward in­def­i­nitely. Like the SR&ED ITCs, the SR&ED pool can also be used af­ter the ac­qui­si­tion, pro­vid­ing ad­di­tional value.

No­tably, the SR&ED ITCs and SR&ED tax pool are in play only where the com­pany it­self is ac­quired. As­set ac­qui­si­tions do not al­low the ac­quirer to ben­e­fit from the ac­cu­mu­lated ITCs or SR&ED pools; where there is SR&ED as­so­ci­ated with a di­vested as­set, any ac­cu­mu­lated SR&ED ITCs re­main with the orig­i­nal com­pany. That said, if the ac­quir­ing com­pany con­tin­ues to per­form SR&ED on its newly ac­quired as­set, it would be en­ti­tled to claim the as­so­ci­ated ex­pen­di­tures from the time of ac­qui­si­tion.

Com­pa­nies poised to ac­quire an­other can ap­ply ITCs di­rectly against taxes payable—im­me­di­ately or in the fu­ture—or can use non-cap­i­tal loss pools ahead of the newly-ac­quired, non-ex­pir­ing SR&ED pool. Cur­rent mar­ket con­di­tions make the risk of ex­pir­ing loss pools a more press­ing con­cern in the near term. But hav­ing a back­stop such as the SR&ED pool can prove pru­dent in the long run.

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