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Tax and Revenue Administration
Alberta Corporate Tax Act
Special Notice Vol. 5 No.
35


Released: July 16, 2012
Produced by: Alberta Treasury Board and Finance, Tax and Revenue Administration
For more information: tra.revenue@gov.ab.ca

Vol. 5 No. 35 / June 2012

SPECIAL NOTICE - SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT TAX CREDIT

NOTE: This special notice is intended to provide advance information on legislation expected to be introduced this fall. Every effort has been made to ensure the contents reflect the intended legislation. However, if a discrepancy should occur in interpretation between this special notice and the legislation, the legislation will take precedence.


Summary

Changes to the Alberta Scientific Research and Experimental Development (SR&ED) program were announced in Budget 2012. Some additional technical changes will be made effective as of the start of the program on January 1, 2009. Although the legislation has not yet been introduced, this special notice provides awareness of the expected amendments so that SR&ED claimants can familiarize themselves with the upcoming changes.


Elimination of the Grind

As announced in Budget 2012, the reduction in respect of the federal investment tax credit when calculating Alberta’s SR&ED tax credit (called the “grind”) will be eliminated for taxation years ending after March 31, 2012.


Anti-Avoidance Rules

The timing of the grind elimination introduces an opportunity for tax planning to avoid the application of the grind. In recognition of this possibility, the following rules will be introduced:

  • where at the end of the year, the corporation had

    1. federal taxes payable or had paid federal taxes for the year or for any of the three prior taxation years, and

    2. federal investment tax credits are available to apply against those taxes,

the corporation is deemed to have applied the federal investment tax credits to reduce the federal taxes payable or to obtain a refund of the federal taxes paid in those years to the fullest extent possible starting with the earliest taxation year to which they could first have been applied, and

  • where, in the opinion of the Provincial Minister, the corporation has deducted amounts in computing income or loss for a taxation year (the “particular year”) for the purposes of the federal Act rather than applying available federal investment tax credits to reduce the federal taxes that would otherwise have been payable in the year, and one of the main reasons for doing so was to reduce the amount of the grind for purposes of calculating the Alberta SR&ED tax credit, the corporation is deemed to have applied its federal investment tax credits against any federal taxes that would have been payable had the corporation computed its income or loss for the particular year without making those deductions, and the Provincial Minister may calculate the Alberta SR&ED tax credit as if those federal investment tax credits had been applied.

Calculation of the Alberta SR&ED Tax Credit

While the grind will be eliminated for taxation years ending after March 31, 2012, a technical deficiency exists for all taxation years prior to its removal. In some cases, this deficiency causes an incorrect calculation of the grind for those taxation years. The upcoming amendments presented below correct this error by amending both the formula for determining eligible expenditures of a qualified corporation and the calculation of the credit itself:

Eligible Expenditures of a Qualified Corporation

A - B + C + D + E

where

A is the sum of those amounts included in federal expenditures of the corporation that are in respect of scientific research and experimental development carried out in Alberta after 2008,

B is the amount, if any, included in the amounts determined under the definition of A that is in respect of a prescribed proxy amount included in federal expenditures of the corporation,

C is the Alberta proxy amount, if any, for the taxation year,

D is the amount, if any, in respect of an Alberta SR&ED tax credit that reduced federal expenditures of the corporation in the taxation year, and

E is the amount of any repayment of either government assistance (other than the Alberta SR&ED tax credit) or contract payment in the taxation year that can reasonably be considered to relate to amounts included in A above in the taxation year or any prior taxation year.

Alberta SR&ED Tax Credit

For taxation years ending on or before March 31, 2012 (and in respect of SR&ED carried out in Alberta after 2008), a qualified corporation will be entitled to an Alberta SR&ED tax credit in a taxation year equal to 10% of the lesser of:

  1. the corporation’s eligible expenditures for the taxation year (i.e., the result of the formula A - B + C + D + E described above), and

  2. the corporation’s maximum expenditure limit for the taxation year,

and the corporation must repay a portion of the Alberta SR&ED tax credit it became entitled to receive in the immediately preceding taxation year equal to 10 per cent of the amount H (the “grind”).

H is the product of the formula
(P + Q) x Y/Z

where

P is the product of the formula R x 35%,
Q is the product of the formula S x 20%,
R is the lesser of T and U,
S is the lesser of V and W,
T is the lesser of:

    1. the amount of eligible expenditures for the immediately preceding taxation year less the amount of the Alberta SR&ED tax credit before considering the amount calculated for H for the immediately preceding taxation year, and
    2. the amount of the maximum expenditure limit for the immediately preceding taxation year less the amount of the Alberta SR&ED tax credit before considering the amount calculated for H for the immediately preceding year,

U is the product of the federal expenditure limit of the corporation for the immediately preceding year and the ratio of eligible expenditures for the immediately preceding year less the Alberta SR&ED tax credit for that year to federal expenditures of the corporation for the immediately preceding taxation year,

V is the greater of:

      1. the amount of eligible expenditures for the immediately preceding taxation year less
        • the amount of the Alberta SR&ED tax credit for the immediately preceding year, and
        • U,

      and

      1. zero,

W is the greater of:

    1. the amount of the maximum expenditure limit for the immediately preceding taxation year less

      (A) the amount of the Alberta SR&ED tax credit calculated under clause (a) for the immediately preceding year, and
      (B) U,

      and

    2. zero,

Y is the amount of federal investment tax credits earned in the immediately preceding year that were refundable, or applied to reduce federal taxes payable, for that year, and


Z is the amount of the federal investment tax credits earned in the immediately preceding taxation year.

Where a qualified corporation has applied federal investment tax credits from more than one taxation year to the immediately preceding taxation year, a separate calculation of H is required for each originating taxation year.

For each separate calculation of H:

  • a reference to the amount of eligible expenditures, Alberta SR&ED tax credit, maximum expenditure limit, federal expenditure limit as determined by subsection 127(10.2) and (10.3) of the Income Tax Act (Canada), and federal investment tax credits is a reference to that amount for the particular year, and

  • Y is the amount of federal investment tax credits earned in the particular year that were applied to reduce federal taxes in the immediately preceding taxation year.
When separate calculations of H are required, H is the total of all the calculations of H computed for all federal investment tax credits applied or deemed to have been applied in the immediately preceding year.

Removal of Grind

For taxation years ending after March 31, 2012, a qualified corporation is entitled to an Alberta SR&ED tax credit in a taxation year equal to 10% of the lesser of:

  1. the corporation’s eligible expenditures for the taxation year (i.e., the result of the formula A - B + C + D + E described above), and

  2. the corporation’s maximum expenditure limit for the taxation year.


Extension of Filing Deadline

The time for Alberta Treasury Board and Finance, Tax and Revenue Administration (TRA) to receive a claim for an Alberta SR&ED tax credit will be extended from 12 months to 15 months after the corporation’s filing due date of the corporate income tax return for the year. As this change is expected to be made effective January 1, 2009, some claims for the Alberta SR&ED tax credit that had been rejected because they were not filed on time may become eligible for processing.

Claims for the Alberta SR&ED tax credit that were previously rejected by TRA for not being filed within 12 months of the filing due date of the corporate income tax return for the year, but were originally filed within 15 months of the filing due date of the corporate income tax return for the year, may be resubmitted to TRA for review and consideration by sending to TRA a copy of the respective AT1 Schedule 9 along with a letter advising that the application had been previously filed on or before the revised filing deadline.

Previously rejected claims that are resubmitted and processed may result in the recalculation of the Alberta SR&ED tax credit in subsequent taxation periods, as well as the recalculation of federal investment tax credits for SR&ED.

Functional Currency

The amount of any Alberta SR&ED tax credit paid to a corporation reporting in functional currency will be converted from the functional currency to Canadian dollars at the average exchange rate for the taxation year as defined in the regulation.

Processing of SR&ED claims

TRA will be revising the SR&ED tax credit form to reflect the above changes and will post the revised form on TRA’s website once it becomes available. Computer system changes are also required, that are not expected to be in place until November 2012. Until the system changes are made, processing of SR&ED claims affected by the above changes may be delayed.

Additional Information

For additional information on the changes to the Alberta SR&ED program, contact TRA at 780-427-3044 (call 310-0000 then enter 780-427-3044 for Alberta toll free) or email TRA at tra.revenue@gov.ab.ca.

 

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