1. WWW.TSGI.CA SR&ED: A CRITICAL SOURCE OF INNOVATION FUNDING IN A TOUGH FINANCING MARKET TECHNOLOGY OPPORTUNITIES IN HYDRAULIC FRACTURING IN WESTERN ALBERTA PTAC SEPTEMBER 16, 2015 GRAHAM SMITH TSGI CHARTERED ACCOUNTANTS This presentation is not sufficient for unassisted tax planning Operating through TSGI Professional Corporation ©TSGI-CAs 2015/09/15 All rights reserved 1 TOUGH FINANCING MARKET AHEAD

2. 2 WHAT IS THE SR&ED PROGRAM? WWW.TSGI.CA The largest industrial R&D incentive in Canada A federal program but most provinces have add-ons A retroactive tax credit program, not a granting system Benefits are delivered as Investment Tax Credits (ITCs) ITCs can be refundable (cash) or non-refundable (pre-paid tax) depending on organization status $3-5 BILLION/YEAR IN BENEFITS

3. 3 ELIGIBILITY CRITERIA WWW.TSGI.CA Categories: Basic Research, Applied Research, Experimental Devel. Eligibility Tests (5 Questions or 3 Criteria) Must be attempting new or improved technology The new technology must be technologically uncertain Approach must be systematic with documentation Comments Primary purpose must be to attempt a new tech, not ROI The uncertainty must be in the technology, not just the market acceptance, business outcome, or local geology Pilot Project Status: if achieved allows most costs to be claimed

4. 4 HIGHLIGHTS – PART 1 WWW.TSGI.CA 1)Benefits range from 15 - 64.3% 2)SR&ED is available to all industries Oil and gas claims can be touchy but are definitely allowed! 3)There is no budget cap or limit on the size of a claim SR&ED is an entitlement program: If you meet the criteria, the government must give you the funding 4)Advancements do not have to be enormous Incremental improvements to technology are specifically allowed! 5)You can claim to reinvent technology that already exists As long as the technical know-how is not published available

5. 5 HIGHLIGHTS – PART 2 WWW.TSGI.CA 6)Projects do not have to succeed to receive SR&ED funding 7)18-month deadline to file Claims can be submitted up to 18-months after corporate year-end Claims for Dec ‘14 must be submitted by June 30 ‘16 (no exceptions) You may have tax credits built up waiting to be claimed! 8)Claims typically approved in 2-6 months (current data for CCPCs) 9)SR&ED is non-dilutive and compatible with other sources of funding (eg: NRC-IRAP, AITF, etc)

6. LABOUR MATERIALS OVERHEAD CONTRACTS WHAT CAN BE CLAIMED? 6 Development and testing cost allowed Costs must be in Canada (one minor exception: 10% external labor now allowed) Preferential treatment of labour (claim 155% of labour in some cases) WWW.TSGI.CA

7. 7 SR&ED BENEFITS IN ALBERTA WWW.TSGI.CA Corporation Type SR&ED Expenditures Amount Federal ITC rate Alberta ITC rate (1) Net Benefit in AB (1) after Jan 1, 2014 Canadian Controlled Private Corporations (2) Up to Expenditure Limit (3) 35.0%10.0%41.5% Canadian Controlled Private Corporations Expenditures over Expenditure Limit 15.0%10.0%23.5% Other CorporationsNo limit 15.0%10.0%23.5% Partnerships/TrustsNo limit 15.0%0.0%15.0% (1) Alberta benefits capped at $400K/year (2) Also known as CCPCs. Many SME’s are CCPCs. (3) Limit is $3M unless prior year taxable income exceeds $500K or taxable capital exceeds $10M (4) Benefits on labour can be as high as 64.3% on the labour portions of a claim

8. 8 THE ROLE OF SR&ED IN PETRO-TECH WWW.TSGI.CA Most Co’s in prairie region are now using SR&ED Virtually all petroleum technologies have benefited Hydraulic fracturing and resource plays have been major beneficiaries of SR&ED funding in the last decade. All related technical disciplines have benefited: New petrophysical and exploration techniques Novel drilling and completion technologies Water treatment, recycling and handling systems Operational improvements (HSE, concurrent ops etc.) Software applications

9. ANY PROJECT THAT IS DEVELOPING A TECHNOLOGY SOLUTION THAT IS BEYOND ROUTINE PRACTICE IN YOUR INDUSTRY IS POTENTIALLY ELIGIBLE HOW TO RECOGNIZE SR&ED IN O&G 9 WWW.TSGI.CA Hints You May Be Eligible For SR&ED: Provincial experimental well status External technology funding – IETP, NRC, SDTC etc Patents (or patentable solutions – an actual patent is not necessary) Publishing or presenting in technical journals/conferences Funds contributed to university or consortium research (eg PTAC) Low project RORs or failures for technology reasons

10. CONCLUSION 10 WWW.TSGI.CA SR&ED PROVIDES A 15 - 64.3% FUNDING ADVANTAGE USE IT OR BE OUTCOMPETED BY THOSE WHO DO! Questions: Graham Smith 403-451-3376 graham.smith@tsgi.ca