1. WWW.TSGI.CA IMPACT OF THE 2012 FEDERAL BUDGET ON TECHNOLOGY FUNDING IN CANADA PRESENTATION FOR CCAT THE LEADING EDGE OF SR&ED AND TECH FUNDING APRIL 18, 2012 TSGI – Chartered Accountants Graham Smith This presentation is not sufficient for unassisted tax planning ©TSGI-CAs 2012/04/18 All rights reserved 1

2. CONTEXT AND THEMES 2 WWW.TSGI.CA WHAT IS DRIVING THESE CHANGES? Canada is underperforming in innovation Specifically, we have a commercialization gap The Jenkin’s report recommended significant changes to R&D funding. Mandate was revenue-neutral recommendations WHAT ARE THE THEMES OF THE BUDGET? Simplification of SR&ED and reduction in SR&ED funding Increased use of direct subsidies Use of government procurement to drive innovation Improved access to venture capital Focus gov’t funded organizations towards industry relevant R&D

3. CURRENTLY: CCPC’s receive an enhanced ITC rate of 35% on their expenditures below their expenditure limit (often $3M/year) CCPC expenditures above their expenditure limit and expenditures by non-CCPC’s receive the general ITC rate of 20% PROPOSED: As of Jan. 1, 2014 the general ITC rate will be reduced from 20% to 15%. (Enhanced rate not affected!) The ITC rate will be prorated for non Dec. 31 st yearends CCPC: Canadian Controlled Private Corporations ITC: Investment Tax Credits 1) GENERAL SR&ED ITC RATE REDUCED 3 WWW.TSGI.CA

4. CURRENTLY: SR&ED capital expenditures may be deducted 100%in the year incurred They are also eligible for ITCs PROPOSED: As of Jan. 1, 2014 capital expenditures will no longer be SR&ED deductions and will not be eligible for ITCs Lease payments on the right to use capital property are also excluded Applies to property acquired on or after Jan 1, 2014 or lease payments paid or payable after that date 2) SR&ED CAPITAL EXPENDITURES ELIMINATED 4 WWW.TSGI.CA

5. CURRENTLY: Contracts for SR&ED by arm’s length contractors are 100% eligible for ITCs PROPOSED: As of Jan. 1, 2013 arm’s length contracts will only be claimable at 80% Also: capital expenditures incurred by a SR&ED performer will be subtracted from the contract amount before applying the 80% ratio (in 2014 when the capital rules come into effect) SR&ED performers will be required to inform the payer of their capital expenditures on SR&ED 3) SR&ED CONTRACTS REDUCED TO 80% 5 WWW.TSGI.CA

6. CURRENTLY: Claimants may choose to claim overhead costs by the “traditional” method or by the “proxy” method The proxy method allows a 65% increment on labour costs for employees directly engaged in SR&ED. PROPOSED: As of Jan. 1, 2013 the proxy increment will be reduced to 60% As of Jan. 1, 2014 the proxy increment will be reduced to 55% Claimants with non Dec. 31 fiscal yearends will prorate their proxy claims according to the number of days in appropriate period 4) SR&ED OVERHEAD PROXY RATE REDUCED 6 WWW.TSGI.CA

7. PROPOSED: $6 million in additional funding to the CRA to improve the predictability and administration of the program: Enhancing the online self-assessment tool Feasibility study of more effective Pre-Claim Project Review Work more collaboratively with industry More frequent use of “tax alerts” Improvement of the Notice of Objection process to include a second science review Commitment to study SR&ED consulting fees 5) ADMINISTRATIVE CHANGES TO SR&ED 7 WWW.TSGI.CA

8. 6) OTHER INNOVATION FUNDING PROPOSALS 8 WWW.TSGI.CA IMPROVED ACCESS TO CAPITAL $100 million to the Business Development Bank Canada $400 million for private sector early-stage and venture capital INCREASED DIRECT GOVERNMENT FUNDING OF R&D $110 million/year to double the highly acclaimed NRC-IRAP Launch of the Western Innovation Program (regional mandate) INCREASED SUPPORT FOR R&D VIA GOV’T PROCURMENT Expansion of the Canadian Innovation Commercialization Program (CICP) $95 million for 3 years starting 2013 $40 million/year thereafter

9. 6) OTHER INNOVATION FUNDING PROPOSALS 9 WWW.TSGI.CA INCREASED FOCUS ON COMMERCIALLY ORIENTED PUBLIC- PRIVATE R&D COLLABORATION $67 million to NRC to re-focus activities on industry-driven R&D $12 million/year to make the Business-Led Networks of Centres of Excellence program permanent $105 million over 2 years to support forestry innovation $37 million to post-secondary granting organizations to support industrial-academic research collaborations The Budget contains additional changes not listed here!

10. WHAT DO THE SR&ED CHANGES MEAN TO CO’S? 10 WWW.TSGI.CA Changes reduce SR&ED funding by $500 M/year (13.9%) Impact will be highly variable depending on corporate expenditures mix Realistically, TSGI statistics indicate: CCPC’s can expect a 5-10% reduction Non-CCPC’s can expect a 30-35% reduction No substantial change in complexity to date The new capital rules re contractors may add complexity Changes to proxy may increase traditional overhead claims The federal changes may be partially offset by AB changes (~1.5%)