June 24, 2017

Calling On the Honourable Navdeep Bains Minister of Innovation, Science & Economic Development: Canada’s SR&ED Program

June 27, 2017

The Honourable Navdeep Bains
Minister of Innovation, Science and Economic Development
Hill Office, House of Commons
Ottawa, Ontario, Canada
K1A 0A6

Dear Minister Bains

Re: Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

I am writing to you as the CEO of the Canadian Advanced Technology Alliance and on behalf of CATAAlliance’s Innovation Leadership Council. We have more than 15,000 opt in members and advisors participating in our social media networks, including a special Tax, Finance and Innovation Group with more than 1,300 members with interest specifically in our SR&ED advocacy..  

These networks are all focused on various aspects of how Canada supports innovation. Our National Spokespersons are: Terry Matthews, Chair, Wesley Clover International Corporation, Michael J Kelly, Dean, Lazaridis School of Business & Economics, Josh Blair, Executive Vice-President, TELUS Health, President, TELUS Business Solutions West and Chair, TELUS International; and, Ian Rae, Founder & CEO, Cloudops.

As you can appreciate, our members are very interested in the success of the two reviews of government programs and the SR&ED program announced in the March 2017 federal budget.  Since these reviews were announced, we have attempted to obtain a clear idea of how they will be conducted and how the community can best provide input.   

Unfortunately, we have had no success and I am writing to you to request a meeting with you so that we can discuss CATA’s advocacy agenda.  It is intended to complement the work of the Government’s Advisory Council on Economic Growth.  

Also, I would like to discuss how our members can most effectively contribute to the reviews.  I understand that others are equally concerned by the opaqueness of the reviews and maybe we can help with the communications.  

As you know, we strongly support the federal government’s focus on improving Canada’s business environment by increasing the effectiveness of the support provided to business.  Our members indicate that there is a lot of room for improvement.  We have applauded the work of the Government’s Advisory Council on Economic Growth and we see the March 2017 federal budget as an important work in progress.  However, for the transformation envisioned by the Government’s council to succeed, much more work on building a consensus seems to be needed.    

CATA is now reaching out to our communities for guidance on where future federal budgets need to go. For your information, I am appending CATA’s recent release (http://cata.ca/2017/future-budgets/) authored by Russ Roberts, a 30 year public policy veteran and recognized tax expert who is working with a team of experts on this issue.  

Yours sincerely,

On behalf of the CATA Innovation Leadership Council
Signed — John Reid, CEO, CATAAlliance
jreid@cata.ca  tel: 613.699.8209

Annex:

Where Federal Future Budgets Need To Go authored by CATA Senior Vice President, Tax, Finance & Advocacy, Russ Roberts and based on guidance from CATA advisors in the field of tax, finance and innovation.

The Canadian Advanced Technology Alliance (CATAAlliance) applauds the Government’s initiative to move forward on the core ideas and recommendations of their Advisory Council on Economic Growth in the 2017 budget.  The budget recognizes that Canada’s support for business innovation needs to be overhauled.  This has been a key thrust of CATA’s commentary in recent years.  See links to some of CATA’s papers on the Scientific Research and Experimental (SR&ED) Tax Incentive Program:

– January 17, 2017, CATA paper calling for the creation of an independent administrator for all government tax incentives for innovation and for the overhaul of Canada’s system of tax incentives for innovation – http://cata.ca/Advocacy/CATA-Update-of-Proposals-Indp-Administrator-Jan17-2017.pdf

– November 22, 2016, paper on the size and cost of the SR&ED program – http://www.cata.ca/files/PDF/Statistics_SRED_November22_2016.pdf

– November 24, 2011, “Canada as a Competitive Innovation Nation: What Needs to be Done: CATAAlliance 2012 (White Paper)” – http://catalogca.ca/Media_and_Events/Press_Releases/cata_pr11241101.html.

CATA recognizes that this is a huge undertaking that cannot be addressed in a single budget or even two, for that matter.  It means challenging old conventions. Specifically, the Advisory Council called for the creation of new funding programs.  The call challenges many historical  business practices, how the bureaucracy works, and how programs are evaluated.  It will take discussion and consensus-building to successfully achieve the changes recommended by the Advisory Council. So far, our members do not see clearly how the Government intends to foster the needed consensus-building, both within the Government and in the community.

We support the next version of the Innovative Solutions Canada Program that was announced in the budget and believe that it should adapt the best elements of the U.S. Small Business Innovation Research Program (SBIR) into the Canadian initiative.

We strongly support the creation of a new organization to provide leadership for the new business-facing programs.  However, we would argue that the plan does not go far enough.  The new organization needs to include the management of at least the refundable tax credit portion of the SR&ED program, if not all SR&ED-like tax based incentives. We believe that over its 30 years as the manager of SR&ED, the CRA has demonstrated that it cannot provide a stable balance between compliance/dollar recovery and delivering the consistent, predictable, timely and cost-effective incentive that the SR&ED program is supposed to be. (The Federal System of Income Tax Incentives for Scientific Research and Experimental Development: Evaluation Report, December 1997.  See page xi. http://www.collectionscanada.gc.ca/webarchives/20071127091048/http://www.fin.gc.ca/resdev/fedsys_e.pdf.)

We are pleased that the budget announced the review of all business-facing programs currently in place, and also announced that the SR&ED program would be similarly reviewed in a separate exercise. The review of the SR&ED program is a key call of CATA: http://cata.ca/Advocacy/CATA-Update-of-Proposals-Indp-Administrator-Jan17-2017.pdf and  http://www.cata.ca/files/PDF/Statistics_SRED_November22_2016.pdf.

While the SR&ED program clearly works well for some CATA members, we find an unacceptable level of frustration and criticism being expressed by many members.  We understand that this review will not be led by Finance.  We find this likely to be a positive, as it could allow some new ideas to emerge.

We are concerned that, at this point, there seems to be no plan that the Government’s officials are able to table or even outline to us.  We believe that it would be inappropriate for a review of this importance to thousands of businesses to be conducted in the dark without appropriate consultations.  The consultations should:

  • seek new ideas from business on how to improve the effectiveness of the SR&ED credits as an incentive; and
  • commission the development of new and up-to-date analytics on what is actually being supported in which sectors.  This would require access to the CRA’s and Finance’s core statistics on SR&ED claims.

For CATA, with our focus on the ICT sector, a fundamental question is whether what is currently being supported is targeted appropriately to provide the maximum return on government investment.  For example, we have strong reservations about the cost-effectiveness of some of the SR&ED claims in the ICT sector which are often identified well after the “SR&ED” work has been conducted.  Over the years, CATA has heard from various company executives about whether these retrospective claiming practices are just generating windfall revenues for firms rather than providing an actual incentive to carry out R&D and innovation that would not otherwise be done.  And, CATA has repeatedly raised this issue with governments.

We have argued that better, more consistent and productive targeting could be achieved for the sector with a refined tax credit, at least for the refundable program.  We do not support simply eliminating tax based support, but rather refining it.  Tax based incentives should be one of the tools in any complete package of business-faced support.

So far, no attention seems to have been given, at least publicly, to the overall framework that governs the way businesses are taxed and the IP (intellectual property) they create is protected for the benefit of the firms and Canadians.  Specifically, the Government needs to address the elements of the tax system that discourage business growth and lead to business models where innovative successes are sold long before their true commercialization potential has been achieved in the context of the Canadian economy.  Over the years, CATA and other organizations have identified issues with the SR&ED system and potential solutions.  We are calling for a full discussion and evaluation of ways to promote the greater exploitation of Canadian innovations to the benefit of the Canadian economy.  In this respect, we recognize that the challenge goes beyond simply reshaping some aspects of the tax system.  Issues about the current treatment of IP and its impact also need to be addressed.

Finally, we receive considerable commentary about the programs that attempt to encourage the interface between academics and business. Too often we hear that the academics see these programs as simply a way to obtain additional research support.  We believe that these interface programs are extremely valuable; but we also believe that more work needs to done to draw the academics further into the technology challenges of achieving the real potential of the innovations.  These challenges are often as complex and demanding as coming up with the initial discoveries.  The current focus of the Government on commercialization is seen to be appropriate and important.

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Contact: CATAAlliance CEO, John Reid at email jreid@cata.ca, tel: 613-699-8209, website: www.cata.ca, tags: Innovation. Leadership, Entrepreneurship, Advocacy