Call to RethinkTax Framework Support for Digital Innovation
January 29, 2014

The SR&ED Tax Incentive Program is currently the primary support mechanism used by the federal government to encourage digital innovation.  In its current orientations, this tax incentive is like a square peg in a round hole and somewhat of a distraction, as far as many in the digital sector are concerned. 

The key to the sector’s success – and, some would say, its survival – relies less on technology advancement and on research (the focus of SR&ED); and more on the creative and rapid adaption and adoption of existing technologies in products and processes to create innovations that win markets and improve Canadian processes.

For Adobe's VP Shawn Cruise's take on the immediate challenges facing the sector's businesses and the consequences for Canadian businesses of not addressing them, please go to:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr01171401.html

In addition, even for those in the sector who do find the program useful, the SR&ED Program has taken a real hit when it comes to federal support. Somewhere around $400 million or more in annual SR&ED tax support has been lost to the sector since 2009.

This loss is in part the result of the CRA’s increased orientation to research when determining what projects will be accepted.  It is also due to the CRA’s new documentation requirements which are very much out of step with the way digital developments need to be integrated into the full development effort to achieve the agility and efficiencies required to compete in this dynamic environment.  For details, please go to:

http://cata.ca/media_and_events/press_releases/cata_pr05131001.html

The loss is also due to changes to the program announced by the Government in the 2012 Budget that significantly reduced the value of tax incentives.

(For additional analysis of these losses to the sector, please see “What’s happened to SR&ED support for the Digital Sector?”, which can be viewed at this URL:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr01291402.html)

While, ultimately, the solution to the challenge for Canadian businesses to innovate can only lie with businesses themselves, CATA argues that the tax environment, which very much influences how businesses are rewarded and who is rewarded, needs to be carefully looked at now.  

Canadians are very good at technology innovation.  We do not believe that the tax framework for business is optimized to successfully deal with the challenges of today's fluid economy and to grow our innovation capabilities to their fullest.

We ask whether refinements in the tax system can be found to better reward those who grow their firms successfully through innovation in Canada to the advantage of the whole economy.  We have some concern that the current system favors the off shoring of our innovations and their exploitation.  A more even playing field may be needed. .

We are suggesting that a panel of independent experts be struck to report publically on how best to stimulate the required business focus on innovation and growth in time for the 2015 Budget consultations and deliberations.  We argue that the large re-orientation and reductions in the SR&ED Program, while frustrating for many, provide savings that create an opportunity to rethink the tax framework so it better rewards Canadian businesses that are willing to think innovation and grow through innovation.  The advantages to the Canadian economy could be significant. 

We believe that failing to signal changes and to move Canadian businesses forward to embrace innovation and its exploitation to its fullest sense can only have significant impacts on the long-term productivity of the sector and of the country. 

We would hope to see the discussion move to concrete proposals for the 2015 Budget. 

In the past, we have suggested that the possibility of an "Innovation Box" be looked at.  Done right, we still see this as an attractive approach and one being tried by many of our competitors.  We do not see broad based, accelerated capital allowances as a solution for achieving the required comprehensive shift in business perspectives. 

For details, please go to:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr01091301.html

and: http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr11291201.html.


++ Action Item: Please provide comments to:

Russ Roberts, 
Senior Vice President, Tax, Finance & Advocacy
CATAAlliance
Email: roberts-bishop@sympatico.ca