SR&ED Update CATAAlliance March 2010

Russ Roberts
Senior Vice President,
Tax and Finance
  1. Importance of SR&ED to retaining Jobs and our Intellectual Property (IP);
    getting the SR&ED Program right - CATA Polling Results and Observations

  2. Current Progress on Policy Front - Feedback and Observations

  3. Changing CRA leadership - Unfinished Business. Again, it's time to let leaders know the importance of:

    - getting it right, once and for all, by creating a more effective and efficient legislative and administrative base for the credits.

  4. Action

Note: Please circulate the CATA SR&ED Update broadly. Items are linked to more detailed explanations. We welcome your views and participation in advancing Canada's high tech business growth.

1. Importance of SR&ED to retaining Jobs and our Intellectual Property (IP);
getting the SR&ED Program right - CATA Polling Results and Observations

CATA recently polled tax managers to determine the impact the high Canadian dollar is having on where their companies will be conducting their R&D, in Canada or offshore.

Forty percent (40%) of the respondents said it was likely that they would have to move their R&D offshore.

When respondents were asked about the importance of the SR&ED tax credits, it was clear that improvements to the SR&ED Tax Incentive Program would be significant factors in helping them maintain their R&D in Canada. Specifically, the poll and our work with the community show that:
  1. the legislation needs to be changed to permit all firms access to refundable tax credits; and

  2. a more inclusive definition of what is supported by the SR&ED tax credits is important. In this respect it is critical that:
    • the Department of Finance broaden the current definition of SR&ED to better support the full commercialization process for advanced technologies needed to improve our products and processes, and the elimination of Canada's innovation gap.

    • CRA reviewers consistently and predictably administer the tax credits to support the full range of technology development envisaged by Parliament.

      The SR&ED tax incentives were definitely intended to promote the technologically based advancements that improve Canadian products and processes, including those achieved in conjunction with other developments and through shop floor development. This component of SR&ED eligibility is one of the keys to promoting the successful commercialization of our technologies.

      Unfortunately, we continue to hear of CRA reviewers denying claims for technological work in commercial settings and/or when associated with commercial projects. This is puzzling, because when CATA's Expert Working Group has reviewed this issue with CRA policy leadership, the CRA appears to view eligibility from the same perspective as CATA.

      CATA has highlighted to the CRA and the Department of Finance the need for the CRA to communicate the full scope of the credits to their reviewers.
It is the position of the Board of Directors of CATA that:
  1. the Government should refine the legislation to permit universal access of all Canadian businesses to the tax credits; and

  2. legislative change must be accompanied by significant and lasting administrative improvements by the CRA to ensure, once and for all, that all claimants have access to their full entitlements for the SR&ED tax incentives, as envisaged by Parliament and as repeatedly promised by successive governments over the years.

Successive governments, including the current Government, have responded positively to calls for administrative improvements to more effectively support the full spectrum of SR&ED and to better align the program's policies and procedures with current business practices.

Unfortunately, the program continues to be characterized by ongoing cycles where the CRA has not, in actual fact, carried out governments' commitments to administrative improvements. For details of community input on administrative concerns provided to the CRA and the Department of Finance over the past 4 years, see End Notes below. The program has been in place for close to 25 years. Looking back, more than half of that time, the CRA has had difficulty in delivering the incentives consistently and predictably and to all claimants.

The concepts of the SR&ED tax incentives are strongly supported by the business community. The tax credits should be very effective in getting technologically based innovation into Canadian products and processes. But, unless the CRA can eliminate these administrative cycles with their associated uncertainties so that companies can be certain of their full entitlements as envisaged by Parliament and the legislation, these tax credits will remain of questionable value as incentives to many firms, even if the legislation is enhanced.

For survey results on the negative perspectives that many larger firms have on the effectiveness of the tax credits, see End Notes below. , A and B

2. Current Progress on Policy Front - Feedback and Observations

In spite of assurance last year from the CRA's current management and the Minister of National Revenue that CRA reviewers would respect the historical policy interpretations issued over the years, we are continuing to hear of some reviews where the historical fundamentals do not appear to be respected. For example, some CRA reviewers do not appear to be basing entitlement on the criteria of "technological uncertainty" and "technological advancement", as set out in public policy, an interpretation strongly reiterated over the years by the Department of Finance. The correct application of these criteria is essential to providing incentives that function in the commercial environment.


It seems clear from the common themes we see in the problems being encountered in some of the reviews that there must be some disconnect when it comes to the oversight and/or communication of interpretive positions. Whether it is due to structural defects, communication, or the invasiveness of the problems is very much unclear.

It is CATA's position that it is not the community's responsibility to find solutions to these problems. Rather, we see it as the responsibility of the CRA and the Government to acknowledge the issues, find the sources of these issues, and resolve them.

CATA was encouraged when the former Minister of National Revenue the Honourable Jean-Pierre Blackburn commissioned an indepth review of the SR&ED Program; and, early this January, announced some initial remedial actions, indicating that further initiatives were being developed. See Item 3 below.

3. Changing CRA leadership - Unfinished Business. Again, it's time to let leaders know the importance of:

getting it right, once and for all, by creating a more effective and efficient legislative and administrative base for the credits.

A great deal of change has taken place at the CRA over the last six months: a new Commissioner, and, most recently, a new Minister (the Honourable Keith Ashfield, Minister of National Revenue, Minister of the Atlantic Canada Opportunities Agency and Minister for the Atlantic Gateway).

CATA has been very supportive of the efforts of the previous Minister to come to grips with the program and its challenges. Just before his departure, Minister Blackburn announced that a series of actions were to be taken to address the community's concerns. CATA understands from the briefing we received that improvements target some important concerns, including:
  1. provision of effective redress processes;

  2. improved timeliness of reviews;

  3. the need for mechanisms to improve the consistency and policy integrity of the reviews; and

  4. "more". What these other improvements are was unclear. Based on the comment we are receiving, the improvements that have been tabled publically so far are generally considered to be tweaks.
The exception is the SR&ED Claim Review Manual which is creating some concern. Specifically, the concern is that the Manual may simply entrench practices currently emerging in reviews that make it very difficult for claimants to support their claims and which provide only very limited redress opportunities for correction.

CATA has written to Minister Ashfield, supporting the Government's commitment to the tax credits and his predecessor's efforts to understand the issues and find solutions.

We have advised Minister Ashfield that the community is looking for a cohesive and comprehensive plan that promises program stability, and a plan that addresses the need for significant improvements to the CRA's consultative methodologies.

Improvements in CRA's consultations methodologies are seen to be particularly important as the CRA moves forward on their "SR&ED Policy Consolidation and Clarification Project". The CRA's "SR&ED Policy Consolidation and Clarification Project" entered its consultations phase this fall. It is a massive project and it puts large demands for input on the community. CATA has advised both former Minister Blackburn and Minister Ashfield that CATA has been approached to set up a moderated web consultation site for the community. The objective would be to create a web platform to promote transparent community discussion, moderated by experts, to develop input on what the CRA posts for comment on their own website. There is concern that the CRA's current consultative methodology does not provide:

  1. the robust base and background needed for an informed dialogue on how to effectively clarify policy in a manner that assures that:
    • the historical tax policy integrity of the legislation is maintained; and
    • the clarifications achieve a product that is better aligned with how businesses conduct their R&D most effectively.

  2. transparency on the reasons why the CRA is consolidating/clarifying particular policies, i.e., what the CRA sees as the problems with the existing policies, the basis/logic for their solutions, and how it is grounded in the historical policy.

Given the significance of and the potential impacts of the SR&ED Claim Review Manual, we have suggested to Minister Ashfield that the Manual be tabled for a period of public comment before its implementation. The current plan is for it to become effective April 1st, without opportunity for public comment.

With respect to the Manual, we believe that it is important to determine:
  • how well companies will be able to adjust to the explicit and implicit documentation requirements created by the review methodology (i.e., will it unnecessarily raise the barrier by creating additional compliance costs for claimants?); and

  • how effectively the Manual promotes the determination of a firm's full entitlement as set out in public policy.

4. Action

It is CATA's position that it's important to get the administration of the program:
  1. fully in synch and compliant with the historical policy; and

  2. well aligned with business practices to minimize unnecessary compliance costs.
The Government and all MPs need to hear that you support efforts to find solutions, that your companies need solutions now, and that you see it as the CRA's and the Government's responsibility.

Getting the tax credits right from both an administrative and a tax structure perspective could be a key step in eliminating Canada's much talked about innovation gap. Almost $4 billion dollars annually is involved. We believe it imperative that these dollars be as effective as possible. For this to happen, businesses must be able to look at the tax credits as a reliable, predictable incentive that does not create unnecessary burdens on their businesses. The tax credits must be useful for all firms thinking of innovating through developments requiring technological advancements. Currently, this is simply not the case for many firms.

If you agree, these points should be made to the Government's Ministers and your local MPs.

Your frank input to CATA on your experiences with the CRA has been invaluable to us in shaping our advocacy efforts this fall. We need your input and advice as we go forward. Your comments and thoughts, both positive and negative, on what you are experiencing with the CRA are important.

Please send your comments to Russ Roberts at

Russ Roberts
Senior Vice President, Tax and Finance

End Notes

1 Input from the community over the past 4 years has included:
  • the CRA`s own claimant satisfaction survey in 2005 in which firms with revenues greater than $50 million indicated significantly low levels of satisfaction with the administration of the program;

  • online surveys conducted by CATA in 2006 and 2007. The 2006 survey focused on legislative issues but generated comments on many administrative issues as well. Accordingly, the 2007 survey focused on administrative issues.

  • input from claimants, associations, and practitioners to the joint Finance-CRA consultations "on how to make the scientific research and experimental development (SR&ED) tax incentive program more effective for Canadian business and allow it to play an even greater role in fostering a more competitive and prosperous economy";

  • numerous submissions by CATA to and meetings with both Department of Finance and CRA officials to work with them to resolve the issues; and

  • numerous submissions by CATA to the Minister of Finance and the Minister of National Revenue. Meetings and discussions with their officials to make them aware of the extensive, ongoing concerns with the administration of the program; and to offer insights, suggestions, and possible solutions.
  1. The CRA's own 2005 Claimant Satisfaction Study shows that larger firms, i.e., firms with revenue over $50 million, have significantly low levels of satisfaction with the SR&ED tax incentives and their administration:

    Satisfaction with the CRA's administration of the SR&ED Program (Exhibit 10, Question 35)
    • Only 51% of respondents for claimants with annual revenue over $50 million were satisfied.

    Effectiveness of SR&ED Program - Encouraging companies to conduct more R&D in Canada (Exhibit 16, Question 40)
    • Only 60% of companies with annual revenue over $50 million found SR&ED Program effective.

    Effectiveness of SR&ED Program - Encouraging companies to stay in Canada (Exhibit 16, Question 40)
    • Only 48% of companies with annual revenue over $50 million found SR&ED Program effective.

    Concern resolution - respondents said they had a concern regarding their most recently reviewed SR&ED claim (Section 5.8 of the full report)
    • 34% of respondents from companies with revenue over $50 million had a concern.

    For the full "Survey Report", see SR&ED Tax Incentive Program, Claimant Satisfaction Study, Final Report, dated May 10, 2006, at

  2. Hausch, de Luca & Hill, "SR&ED Program, 2008 - A Year of Consultations and Change", presentation at the 2008 Annual Tax Conference, Canadian Tax Foundation, including results of a survey of 43 multi-national R&D performers. These companies represented:

    • 25% of all R&D carried out in Canada;

    • 15% of all R&D employees in Canada; and

    • 17 of the global top 50 R&D performers. Nineteen (19) of the 43 companies interviewed cited issues with the administration of the SR&ED Program as a reason why they do not consider the incentives in making decisions on investing in R&D.