Contact:
CATAAlliance, 207 Bank Street, Suite 416
Ottawa, ON K2P 2N2, (613)236-6550 info@cata.ca
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. Government Promises New High-Tech Plan1
CATA is seeking your thoughts, ideas and input given the potential impact of this initiative.
Tony Clement, Minister of Industry, has committed the Federal Government to tabling a High-Tech Plan that defines a government-wide approach to the promotion of business innovation.
How this can be achieved is very unclear, lots of suggestions and lots of interested parties with a limited budget. While the how is unclear, one key objective seems to be to find ways to more effectively use Government programs. Being mentioned is a "revamped and refundable" Scientific Research and Experimental Development (SR&ED) tax credit. The Government is said to be studying how best to deliver tax based incentives to "research-oriented" firms. This is a very narrow focus compared to the current SR&ED tax credits.
This rethinking of the incentives is occurring in an environment where new questions are being raised about just how effective this $4 billion investment is compared with what is being achieved in other countries. The tax credits represent the primary source of Government funding for business innovation. While Canada spends more as a percent of GDP than the U.S., Japan, the U.K., the Netherlands, or Australia, we get much less back in terms of business innovation. For a detailed discussion of Canada's Innovation System, see:
1Shawn McCarthy, "Canada's Race for a High-Tech Strategy - Industry Awaits Ottawa's High-Tech Plan", The Globe and Mail, Report on Business, Saturday, August 1, 2009, pages 1 and 4.
Background
It is somewhat confusing that this new review comes on top of the recently completed major cross-Canada review by the Department of Finance Canada and the Canada Revenue Agency (CRA) of the SR&ED Tax Incentive Program and the major commitments in the 2008 Federal Budget to significant improvements in the program. Specifically, the joint Finance Canada-CRA consultations in the fall of 2007 had identified both administrative problems and the limited nature of the refundable provisions as critical impediments to the SR&ED Program's success.
The consultations did confirm that the community strongly believes that tax based incentives, including the SR&ED tax credits, are the correct form of assistance to promote business innovation. However, stakeholders argued that tax credits can only be effective when companies are confident about how claims will be treated by the CRA and that the credits will be delivered in a timely fashion. For many of the firms consulted, particularly the larger firms, this was clearly often not the case. (For the link to the public submissions to the consultations, see Department of Finance Canada website at
http://www.fin.gc.ca/activty/consult/sred_-eng.asp.)
In response, the Government invested an additional $10 million annually to enable the CRA to improve the administration of the SR&ED program. Commitments were made to improving the program's administration through policy clarification and consolidation, improved claiming processes and forms, a review of redress processes, and increased training. Specifically, the Government committed to ensuring that the program's policies and procedures "are aligned with current business practices and applied in a consistent manner across the country." After a year and a half, this effort is very much a work in progress.
The CRA is now engaged in a highly complex exercise with its staff to understand and address the community's concerns about:
the consistency of managerial oversight of the reviews;
the capacity of the redress processes to deliver objective, knowledgeable second opinions that effectively redirect reviews to avoid uncalled-for conflicts in audits; and
consistency between the CRA's expectations and effective development practices.
The Board of CATA still believes that universal accessibility to refundable credits for all Canadian businesses is needed to effectively promote business innovation. The credits can be very influential when companies are stressed and need to change, and this requires that refundable credits be available universally to all Canadian businesses.
The Board of CATA does not support a narrower research orientation.
It is also the position of CATA's Board that the problems identified in the Finance Canada-CRA consultations are sufficiently concerning that they must be fixed for any structural changes in the program to be effective.
CATA has suggested that this can likely be achieved best through a combination of legislative clarification by the Department of Finance Canada and through improved operational and interpretive practices by the CRA.
Clearly, the Government is signaling that significant changes are possible within the construct of new Tax policy shaped to better promote business investment in innovation. The challenge to CATA members is to identify what the appropriate mix of tax policy instruments is and how that mix can be most effectively delivered. As well, it is important that you consider the implications for your firms of any refocus of the SR&ED program to a greater research orientation.
Call for Input
Over the next month, CATA will be shaping its ideas for submission to the Government in the fall. We would like to hear your ideas about what form of tax policy changes you believe are needed to more effectively use the Government's investment in business innovation.
Other countries use a mix of tax instruments ranging from tax holidays, accelerated right-offs, labour based credits, innovation and productivity tax credits, special tax relief for designated foreign workers, etc.
Also, we need to understand the implications for your firms of a research focus, and what you believe is a correct focus.
What Do You Believe is the Effective Mix of Tax Instruments?
Please provide us with your thinking on what is best and your experiences with the incentives being offered to you and/or to your competitors offshore.
As well, what appeared to be a major restrictive policy shift when the term "technological obstacles" was used in the fall of 2008 in the newly introduced SR&ED Eligibility Self-Assessment Tool (ESAT) has been corrected. The explanation of the term "technological obstacles/uncertainties" has been changed in the current version of the ESAT so that the terminology is consistent with the term Technological Uncertainty as defined in Information Circular IC86-4 (section 2.10.2). Specifically, it is now clear with this change that the historically less restrictive definition applies. Specifically, the ESAT now says that,
"Technological obstacles / uncertainties are shortcomings and/or limitations of the current state of technology that prevented you from developing the new or improved capability. This implies that you cannot know whether the technological goals can be achieved at all or the route by which they can be achieved without undertaking a program of experimental development. Technological obstacles / uncertainties are the technological problems or unknowns that cannot be overcome by applying the techniques, procedures and data that are generally accessible to competent professionals in the field.
Whether or not you were successful in achieving your technological goals is not sufficient to demonstrate that a technological obstacle / uncertainty exist. Uncertainty related to business or commercial success or failure is not a technological obstacle / uncertainty"
Finally, a continuing dialogue is occurring to understand other critical interpretive issues. See below about section 248(1), definition of "SR&ED", where some audit practices appear to some to be very much out of synch with historical policy and the Department of Finance Canada's explanation of what they intended. These discussions stem from feedback we have received from members and from other associations such as the Canadian Electric Association (CEA). Specifically, a potentially serious policy disconnect between the CRA and leading policy experts on how to approach eligibility and the boundaries of what work to include in the envelope of SR&ED has been the most recent centre of discussion.
Observation
CATA has expressed its support for the simplification and clarity that could be achieved with the new concept for the T661 claim submission form and with policy clarification where policy is unclear.
CATA has been encouraging the CRA to look for processes and mechanisms that ensure policy integrity, its functionality, and its consistent communication and delivery as the CRA moves forward with its initiatives.
We have been assured by Hélène Dompierre, Director General of the SR&ED Program, that full details establishing the transparency of the process for policy clarification and consolidation will be tabled to stakeholders. We understand that this is being worked on and will be out soon.
