3 need-to-know facts about OIDMTC

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The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit that allows companies to claim a 35-40% tax return rate on eligible expenditures related to the development of interactive digital media (IDM) products. In 2013-14 alone, the Ontario Media Development Corporation (OMDC) certified over 1100 products, amounting to $68 million in tax credits. If you’re thinking about applying to the program, there are a few things you should be aware of that will increase your chances of success.

The types of products that are eligible have changed

OIDMTC was first put in place in 2005, and the guidelines for eligibility were established to allow for exploration in a nascent industry. Previously, IDM products had to have a primary purpose of entertaining, educating, or informing the user to be eligible. The program was recently changed to only include entertainment products and educational products for children aged 12 and under. The development requirement previously indicated that the applicant must prove they were responsible for 90% of work related to “product development,” a nebulous guideline that could be left up to interpretation. The new rule states that the applicant must prove they were responsible for 80% of “product development expenditures,” composed of eligible remuneration and wages (25% of which must be attributable to wages.) Restrictions on promotional products were also tightened, and companies are now obligated to prove their eligible products have a revenue generating stream, including subscriptions, fee-for-use, in-product purchasing, and third-party advertising. For more information about the recent changes, read our last blog post about OIDMTC.

The companies that are now excluded can still claim retroactively

Companies who haven’t applied to the program previously may be reading the new rules and think they missed their shot. If you have products that were previously eligible under the former rules, you can still claim expenditures occurring before April 23, 2015. OIDMTC claims can still be submitted for any fiscal year within three years of the Notice of Assessment date for that particular fiscal year. The 80% development rule is being applied retroactively, but the primary purpose and promotional rules are not, so keep that in mind when doing your calculations.

It’s one of the largest digital media tax credit programs in Canada, but also one of the most complex

Provinces across the country have digital media tax credit programs, but Ontario is one of the most influential in terms of fostering growth in the IDM sector. Major game studios like Ubisoft and Electronic Arts have established development studios here in an effort to take advantage of the lucrative tax incentives and grant opportunities. Determining project eligibility in addition to calculating eligible expenditures can be a complex and multifaceted process, especially in light of the recent changes. The chances of success for an application are increased when you have experience applying in the past and understand the common pitfalls that many companies make.

All over Canada, provinces are focused on strengthening and sustaining the IDM industry. At BeneFACT, we have a dedicated team who can help you apply for these tax credits. To learn more about digital media tax credits in your province, call us toll free at 1-855-TAX-BACK (829-2225).

SR&ED audit survival tips: Justifying the scientific process

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When the Canada Revenue Agency (CRA) instigates an audit related to a particular SR&ED claim, the first step they take is to issue a request for information (RFI.) Claimants who do not have the right documentation exhibiting their scientific process at the ready are at a higher risk of getting their claim denied.

Claimants typically have 30 days to respond to an RFI, but responding at the eleventh hour indicates to the CRA that the process undertaken to prepare the claim may have been deficient. This can often lead to a more detailed review and a site visit by a Research and Technology Advisor (RTA) and / or a Financial Reviewer (FR.) The expectation by the CRA is that all the supporting documentation and evidence has already been collected, reviewed in detail, and organized during the claim preparation process.

In instances where a claimant has indicated on the S60 that they retain certain types of documents, but when the CRA requests to see those documents they are not provided or not available, this will significantly raise the risk profile of the claim.

The likelihood of a review is certainly higher if the technological uncertainty, systematic investigation or search, and technological advancement are not clear or non-existent in the S60 project descriptions. Excess “fluff” about features and functionality as well as “look-around-the-corner” technological uncertainties (“we did not know how to do it” or “this has never been done before”) should be avoided. Context about the business project should be minimal or completely removed. The focus should be on the scientific principles and experiments, not the business objective or product.

A landmark case which outlines the requirements for determining whether work qualifies for SR&ED was Northwest Hydraulic Consultants Limited v. The Queen (“Northwest Hydraulic Case.”) They made some key assessments in favour of claimants regarding documentation of the scientific process:

Keeping contemporaneous records and verbal testimony

It has been determined that for scientific investigation to have occurred, documentation must have been consistently maintained throughout the process. That said, the claimant isn’t obligated to provide one singular and all-encompassing document, and records may take multiple formats to meet the criteria. Verbal testimony can also be considered as a legitimate means to support a claim when determining the “totality of the evidence” in relation to SR&ED criteria.

The results you achieve matter

In the Northwest Hydraulic Case, it was determined that the achievement of a technological advancement is sufficient grounds to infer and conclude that SR&ED has taken place.

Repeatability is not the definitive test of evidence

Another landmark case was RIS Christie v. The Queen, which involved a Tax Court of Canada ruling that the claimant did not produce sufficient evidence showing scientific investigation and technological advancement. This ruling was later overturned by the Federal Court of Appeal, which asserted the need for a more balanced test of the evidence than “repeatability,” on the grounds that making the nature and detail of the documentation a definitive proof was to do a disservice to the validity of “all other evidence pertaining to scientific research.” The Income Tax Act (the “ITA”) defines records as “an account, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map, a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containing information, whether in writing or in any other form.”

This definition is broad enough to include the kinds of supporting evidence claimants normally retain to substantiate their SR&ED claims.

Whether you are a first-time claimant or have claimed SR&ED in the past, BeneFACT provides comprehensive SR&ED services from claim preparation and filing, to supporting Claim Justifications. We are Canada’s largest independent SR&ED firm with a full-time staff of over 60 employees. If you have any question(s), please do not hesitate to give us a call toll free at 1-855-TAX-BACK (829-2225).

SR&ED for the Food and Beverage Industry: Are you missing out?

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The Scientific Research and Experimental Development (SR&ED) tax credit is a valuable financing resource for Canadian firms, but SR&ED for the food and beverage industry is commonly overlooked by companies who don’t believe their work qualifies. The name itself can be misleading, as it implies work must be done in a lab by scientists, and commercialized products are excluded. The food and beverage industry is constantly innovating to more effectively and efficiently make their products and deliver them to customers.

The food and beverage industry across Canada is thriving – Ontario is the 3rd largest food cluster in North America, with over 100 craft beer breweries in the province and the established wine region in Niagara; Atlantic Canada is internationally recognized for the quality and innovation of their seafood industry; and British Columbia is rated in the top five worldwide for its greenhouse vegetables industry, which is both high tech and highly successful. The industry is constantly innovating, and there are a few types of projects that companies can claim SR&ED credits on.

Developing new products and recipes

If your company is experimenting with using a new combination of ingredients or discovering new ways to make your food products more nutritious and delicious, you are likely conducting experimental development work.  The use of new natural ingredients continues to be a major focus for food and beverage companies. Extensive experimentation can be required to develop effective recipes and processes that utilize these new raw materials. One example is if a company is attempting to develop a line of frozen pastries that, when thawed, wouldn’t experience a reduction in quality and taste.

Improving shelf life and durability of products

Being able to properly transport and increase the shelf life of products is a key challenge for companies looking to increase profits, and it can lower prices for consumers as well. As a result, there is significant experimental development work being performed related to innovative packaging solutions.  Improving shelf life of products, while at the same time reducing the use of stabilizers and preservatives, is a primary example of work that may be eligible for SR&ED. One key instance is for meals that need to be mass produced and shipped long distances without the use of a refrigerated truck.

Improving food safety checks and processes

Food safety is one of the most highly regulated aspects of the food and beverage industry. It can often require significant technological advancement related to automation, cleaning processes and isolating processes from the manufacturing environment.

At BeneFACT, we help eligible food and beverage companies uncover, claim and maximize their SR&ED tax credits. Our reputation, knowledge and successful track record are widely recognized by our food & beverage clients and the Canada Revenue Agency. To learn more, call us toll free at 1-855-TAX-BACK (829-2225).