SR&ED Advocacy Alert and Call to Action (January 2008)
January 08, 2008

Background

The 2007 Federal Budget committed the Government to improving the Canadian system of SR&ED tax credits. More specifically, the 2007 Budget committed the Department of Finance and the Canada Revenue Agency (CRA) to consult with the business community on how to make improvements, not only through new legislative provisions but also through administrative changes. As a result, on October 5, 2007, the Department of Finance announced a joint Finance Canada-CRA consultation on improving the SR&ED tax incentives with a submission deadline of November 30, 2007. The results of this consultation are to be announced in the upcoming Budget of the Minister of Finance, The Honourable Jim Flaherty.

Over the last 2 years, the CATAAlliance has conducted extensive web-based consultations, interviews and focus group discussions on what is needed. For a copy of the 2007 consultations, please go to: http://www.cata.ca/files/PDF/CATAconsultations2007final.pdf

2006 consultations are also available at:

http://www.cata.ca/files/PDF/Resource_Centres/SRED/SRED2006ConsultRpt.pdf

The results of these CATA consultations have been reflected in our formal submission, including recommendations, to the Department of Finance and the CRA. Our December 5, 2007, SR&ED advocacy campaign update summarizes the key points we made in this submission and our discussions with officials of the Department of Finance on what needs to be done.

For the December 5, 2007, update, please go to:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr12050702.html.)

This discussion focused on the importance of the Government implementing a 3-step strategy that includes:

1. Clarification of the legislation where the CRA and claimants are not agreeing on the interpretation of the legislation;

2. CRA significantly improving the way they manage and deliver the SR&ED program so that they provide nationally consistent, predictable (consistent treatment of claims from year-to-year), cost-effective, timely and equitable delivery of claimants’ full entitlements; and

3. New legislative improvements that make it possible for all Canadian businesses to benefit from the credits when they seek to innovate their business through SR&ED (i.e., provide incentive for all Canadian business to innovate).

In CATA’s meeting with Finance officials, we emphasized that the difficulties claimants were encountering with the program’s administration were sufficiently severe that the first 2 steps needed to occur no matter how the credits were to be expanded. The Finance officials encouraged us to discuss these concerns directly with CRA officials.

Discussions with the CRA

John Reid, President, CATAAlliance, and Russ Roberts, Senior Policy Director, recently met with Hélène Dompierre, Director General, SR&ED Directorate, who is responsible for the SR&ED program’s administration in the CRA; and Peter Armstrong, Director, Stakeholder Relations Division, SR&ED Directorate.

CRA officials acknowledged the significance of the commentary they were hearing during the joint Finance-CRA cross-country consultations for the Budget. They noted that they had read the reports that CATA had developed in support of our submission and had found that their own consultation supported CATA’s observations. They emphasized that they were looking for solutions.

The discussions that the CATA SR&ED Team had were open and frank about solutions and their feasibility. The following is a high level summary of some of the key ideas advanced in this meeting:

  • The downward default by managers of their responsibilities to the reviewers and the problems it has created. The need: for Tax Services Office directors to be more knowledgeable about the program and more  involved in the resolution of disputes; to create an atmosphere that encourages claimants to discuss their concerns with senior management; and for an atmosphere where CRA staff see it as important for their management to be involved in finding solutions that provide second, sober, objective oversight.
  • Training to establish consistency in the reviews. Training is required to address both operational practices and interpretive policy application. Training likely needs to first focus on getting management comfortable with the program in ways that achieve the consistent delivery of entitlements, and not just on ensuring compliant claims.
  • The need for a management refocus, not simply a tweaking. If the program is going to continue to be managed through its current highly decentralized structure, local management really need to get their heads around the distinct nature of the work and how it contrasts with the CRA’s normal compliance activities. The staff need to understand this difference and need to know that they have the support of their senior managers in this broader operation focus.
  • The larger files seem to be a particular problem for many reviewers. Hélène and Peter both acknowledged the challenge as needing a solution. The discussion included dedicating a group of senior reviewers to these files.
  • The usefulness of creating a code of expectations for the CRA and preparers. Points included the diversity of the preparers and the importance of making certain that all the various groups be included in the development of the codes and that the groups buy into the result.
  • The importance of having a mechanism for the CRA to obtain effective, objective community input to the interpretive policy that is developed for the program. The CRA is clearly concerned about the objectivity of the “advisors”. We agreed that this is a real concern but that there are consultation models and policy development consensus models that deal with this issue. This issue is certainly a sticking point for the CRA. John and Russ agreed to get back to them on it.

Ms Dompierre indicated that the CRA wants the program and is committed to making it work. Messrs Reid and Roberts mentioned that while tax credits are the preferred way to provide these incentives, some in the community are saying that decisions about what is eligible should be made by a group outside of the CRA. Several models were mentioned in the discussion that followed.

Overall, it was a constructive discussion. CRA officials mentioned that there would be an announcement in the Budget and that the CRA would be producing a report on the administration. This will not be a consensus report by the 2 bodies.

Observations and Next Steps

++ Legislative Improvement – Call to Action

During our discussions with Finance officials in late November, it became clear that the bureaucracy does not support a broadening of the refundable tax credits so that the credits provide an effective incentive for most Canadian businesses.

Today, the current regime is simply not useful to a large number of Canada’s R&D performers, including many private corporations not able to meet the relatively restrictive requirements for limits on capital tax payable, taxable income and CCPC status, nor is it useful for companies in a loss position or those carrying forward significant losses. We have realized that in the end the Government would have to show leadership if major changes were to occur.

It is evident that the Government is backing away citing concerns about the cost and that they have already helped business as much as they can, given current economic trends. Specifically, Minister Flaherty appears to have already quashed the proposal that the credits be universally available to business, a proposal supported by a large segment of the community. See “Leaner budget ahead, Flaherty warns” (Report on Business, The Globe and Mail, Thursday, December 27, 2007, at https://secure.globeadvisor.com/servlet/ArticleNews/story/GAM/20071227/RFLAHERTY27

Minister Flaherty justifies this on the basis that the SR&ED tax credits already cost more than

$3 billion in forgone taxes and cost. Neither the Minister nor his officials provide no figures to back up their concerns nor do they appear to have looked at ways to phase in new provisions for refundability so that the cost of new claims is reasonably balanced out by the drop-off in tax credits carried forward from previous years.

Ironically, the Federal Government says the SR&ED program is the best in the world, but R&D spending as a percentage of GDP is actually decreasing according to a recent Statistics Canada Study. (For article “Loonie rises but not R&D, StatsCan says Canada falling short in research” by Tyler Brownbridge, The Windsor Star, Friday, December 21, 2007, please refer to

http://www.canada.com/windsorstar/news/business/story.html?id=d5ebc2e5-ead8-4778-8874-78e7729fb675 )

Given the current trends in manufacturing, and offshore competition for jobs in the knowledge economy, by the time many key sectors are again in a position to take advantage of the credits they may well be looking elsewhere for more supportive cost-effective investment climates in which to innovate.

++ Call for Action: It is time that the entrenched thinking of the bureaucracy be challenged. Contact your contacts in the Government and Minister Jim Flaherty and let them hear about the importance of getting Canada’s innovation climate right. CATA is convinced that a phased-in and capped program of refundable tax credits is achievable in a fiscally responsible way.

The issue should not be cost but rather coming up with a properly designed refundable program that is carefully phased in and monitored to ensure that cost assumptions are reasonable and benefits are tangible. The objective should be having a truly competitive investment climate for all Canadian businesses.

++ Administrative Improvement – Call to Action

Contact your MPs and Government contacts, particularly senior officials, including the Minister of National Revenue, The Honourable Gordon O’Connor, and his associates and senior CRA officials.

Over the years, the community has had to intervene repeatedly with the CRA to keep management focused on working with the community in order to keep the flow of credits moving and to provide predictable and consistent policy and application of the legislation. Once again, these issues are present and business is having to challenge whether the credits have any usefulness other than as merely a windfall contribution to the cost of innovating.

++ Call for Action: Please bring the situation and the consequence of it to the attention of your contacts and the Government. The CRA definitely says they want to be the administrator but many of our members are questioning the role of the CRA. It is important for senior CRA officials to step forward and explain how they intend to take control of the situation and assist their managers. You can help by letting them know the consequences of not doing so for your business.

Please provide your comments, observations and guidance to the CATA SR&ED Advocacy Team at email: info@cata.ca