Natalia, a resident of Canada, owns 100% of the shares of New Age Limited (NAL). NAL carries on scientific research and experimental development (SR&ED) activities with respect to finding the ingredients for a cream which will reduce fat and tone muscles when massaged into the skin.
During its fiscal year ended December 31, 2012, NAL incurred the following costs related to its SR&ED activities:
Salaries for research technicians and assistants ................................... $600,000
Materials consumed .................................................................... 200,000
Supplies consumed ...................................................................... 40,000
Small equipment purchased for the laboratory ...................................... 80,000
A special machine purchased to mix the ingredients in a temperature....................
Controlled environment ............................................................... 100,000
The machine and the lab equipment will have no value when the research project is completed.
Additional overhead costs were incurred in 2012 because of the SR&ED project. The accounting system was not sophisticated enough to properly allocate these expenses. Overhead expenses for the year totaled $500,000.
NAL paid Natalia a bonus of $40,000 in 2012 in addition to her salary of $80,000. Natalia spent 25% of her time on the SR&ED project in 2012.
NAL does not expect to have any taxable income for 2012. It had taxable income of $100,000 in 2011. Its taxable capital does not exceed $10,000,000. It is not associated with any other corporation.
REQUIRED
(A) Which of the above costs incurred by NAL in 2012 qualify for deduction under subsection 37(1) as qualifying SR&ED expenditures?
(B) Determine the amount of ITCs and refundable ITCs for 2012.