January--Important Pre-budget Advocacy--Update, including SR&ED Alert: Russ Roberts, Senior Vice President, Tax and Finance, CATAAlliance
January 26, 2012

Advocacy (Department of Finance, Industry Canada, PCO and PMO)

CATAAlliance, under the leadership of John Reid, CEO of CATA; Russ Roberts, Senior Vice President, Tax and Finance; and member executives issued a white paper in early December 2011 to help promote a more informed dialogue on all of the various, often conflicted, proposals floating around about what should be done with the SR&ED Program and the recommendations of the Expert Panel led by Thomas Jenkins on how the federal government should make its investment in support of business.

Our white paper argues that Canada cannot afford to maintain the status quo.  The paper attempts to provide a coherent framework for change and reference point for further discussion. 

For a copy of the white paper, please go to this URL:

https://docs.google.com/a/cata.ca/document/d/11fY0TzekoDNzx34ONDP3ndtGYxt4xqMhGd1JD1xkhvk/edit  

Extensive discussions are now occurring on the CATA social media sites on what Canada needs to do.  The discussions show a surprising degree of agreement that change must occur and they provide some very interesting ideas for the direction of needed change.

Please join these fully moderated discussions at this URL:

http://www.linkedin.com/groups?about=&gid=3246301

CATA summarized community guidance in a Pre-budget submission to Finance, Industry Canada, and PCO officials in mid-December.  Please go to this URL for a copy of this presentation:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr08101102.html

Also, just before Christmas, Messrs. Reid and Roberts met with Minister Flaherty's policy advisor on the file, Sophia Arvanitis, and reviewed this material with her.

As a result of these various discussions, we recognize that there is a need for a new, dynamic environment that provides overall portfolio leadership and accountability.  This simply does not exist today.  However, there is demonstrable resistance to change within the establishments in spite of all the indications that the status quo is not good enough.  It is apparent that the bureaucracy is not convinced of the importance of structural change and the advantages of a strong, integrated portfolio leadership.

CATA has strongly agreed with the Jenkins Expert Panel when they argue that a new, highly accountable, integrated leadership model is needed to manage Canada's economic development portfolio.  At the same time, we are very concerned that the Jenkins Panel’s recommendations lack a comprehensive view of what is needed for success, i.e., they do not go far enough and the pace of change they recommend is too slow and uncertain.

For example, if the recommendations of the Jenkins Panel for SR&ED are followed, the uncertainties created by the current problematic management of the SR&ED Program will not have been addressed and more uncertainty will have been created for many of the major performers of R&D.  Specifically, their truncated recommendations leave in limbo the ultimate treatment of SR&ED incentives for the larger firms. 

We have argued that it is time for the Government to move forward with a comprehensive vision and solution.

We believe that, at a minimum, the council which the Jenkins Panel recommended must have accountability, perhaps shared with Finance, for the success of the full portfolio of initiatives, including fiscal measures such as the SR&ED tax credits.  We have highlighted to the PMO that we do not believe that Prime Minister Harper’s commitment can be achieved otherwise.

As well, we have stressed that CATA believes that the SR&ED Tax Credit Program must be streamlined and modified to maximize its effectiveness.  CATA has identified more than $1 billion in inefficiencies in the SR&ED Program that could easily be dealt with and the monies moved from this program to other new initiatives without fundamentally damaging SR&ED in terms of what it is supposed to achieve.

CATA strongly supports the Prime Minister's commitment to improvements.  We believe that the current, relatively disconnected federal initiatives are often highly inefficient, and not adequately integrated and targeted to effectively promote the successful commercialization of Canadian innovations and the growth of Canadian firms.

Regarding our communications with the PMO, we noted to them that we see the upcoming 2012 Budget as a real opportunity for change.  We stressed that additional thinking is needed when examining the Government's support to business.

We are looking for ideas that go beyond those found in the recent reports on innovation in Canada by the Jenkins Expert Panel, the Mowat Centre, and the C.D. Howe Institute.  

Specifically, we have argued that the current focus on the "Innovation Gap" instead of on Canada's "Commercialization Gap" is wrong.  We argue that Canadians are innovators and that too often our businesses are not effectively growing their firms into internationally successes.  Too often, the full rewards of our innovations are leveraged offshore.

Release of Taxpayers' Ombudsman's Report Imminent

The CATA Advocacy team has strongly communicated to Government officials CATA's frustration with the delayed release of the Ombudsman's report to officials.  It is now a year overdue.  The community made a comprehensive effort to communicate and document their concerns, and the delay in the report raises serious issues for all of us.

We now understand that the Ombudsman's report on their systemic review of the SR&ED Program will likely be released the week of January 30th or shortly thereafter.  We understand that the Report of the Ombudsman is now with the Minister and that the report will be publicly posted as a special report on the Ombudsman's site at this URL: http://www.oto-boc.gc.ca/rprts/thr-rprts-eng.html.

Hopefully, this is correct.

Update on SR&ED Policy Consolidation Project

Over the last month and a half, we have had the opportunity to discuss your comments on the draft SR&ED Eligibility policy, as well its impact on your firms, with senior CRA officials, including Sue Betts, Director General of the SR&ED Directorate.

Our team has highlighted the implications of issuing a policy that establishes rigidly the "Scientific Method" as one of the definitive criteria for eligibility.  This is simply not the way engineering projects are conducted nor expected to be conducted.  We have shown the correctness of this point and highlighted its impact on engineering claims.  Fundamentally, CRA is simply out of step with how Experimental Development projects should be managed to be effective in many engineering disciplines.  Examination of the literature, including academic, on how engineering studies should be managed to be effective demonstrates the correctness of this observation.  Also, we have focused on the inappropriate treatment of the concept of a "Technological Uncertainty" contained in the draft policy.

We have emphasized that the idea that claimants should have exhausted all available potential solutions before starting a project is not consistent with the historical definition of a "Technological Uncertainty" in IC 86-4 R3, section 2.10.2, and is inappropriately limiting. 

We have stressed that the new guidance best supports the development of core technology rather than the extension (adaption) of technologies to new challenges where the know-how does not exist with any certainty. 

As well, we have also highlighted to Finance officials the impact of these positions and others in the draft CRA policy on eligibility. In our discussions with both senior CRA officials and Finance officials, there seems to be some sympathy that there is a problem; certainly, the incorrectness of these positions of CRA is being tacitly acknowledged.  We have been encouraging the rewriting of the policy and have argued that further consultations, using a more effective consultation methodology, are a must to verify that CRA has got it right.  So far, it is unclear what will or can be done.

In our discussions, CRA's senior management has alluded to the loss of control in the program.  We can only speculate that this has given the SR&ED group the moral authority to ignore CRA's responsibility to deliver an effective incentive and, instead, to focus on pure compliance.  

In our discussions, we have been informed that the current input from the community has not been substantive.  In fact, in the public CRA sessions we have attended, participant comments have generally not been of a substantive nature.  This does not provide the senior management of CRA with the tools needed to address the issues you have been raising with CATA.  It is unclear whether this dichotomy in messaging is because the community is afraid of the institution or what.  CRA senior management needs to hear what you are telling us and the impact of inaction.

++ ACTION REQUESTED:
We strongly urge you to make it clear when you have the opportunity to talk or write to senior CRA officials, regionally and nationally, that the current draft policy needs to be rewritten and carefully validated before it is finalized.  Please highlight the impacts of not doing so.  We believe that senior management, nationally and regionally, needs to hear this message clearly, and that simply releasing the current version or a version II without careful validation is unacceptable.  We have highlighted your support for CRA and willingness to help if an effective environment can be found.

++ ALERT:  The SR&ED Directorate has issued three more draft policies (see URLs below) for comment.

The deadline for input is February 20th, 2012.

All 3 of these papers cover very important subjects.  We urge you to review them and comment to CRA by their deadline.

Please share your comments with your colleagues in the SR&ED LinkedIn group at this URL:
http://www.linkedin.com/groups?about=&gid=3246301 .

For copies of the draft policies, please go to

  [2011-12-22] Public Consultations - Materials for SR&ED Policy (Draft)

  [2011-12-22]
Public Consultations - SR&ED Policy on the Development of an Asset (Draft)

  [2011-12-22]
Public Consultations - SR&ED Policy on Running Production Trials (Draft)


++ Contact:
 For additional details on this Communique, please contact Russ Roberts, Sr. VP, Tax & Finance, CATAAlliance  at email:   ruroberts@cata.ca