Note: see also Call to Rethink Tax Framework Support for Digital Innovation and then join the SR&ED/Tax & Finance conversation.
(contact Russ Roberts, Sr VP, CATAAlliance at: email@example.com)
After more than 5 years of fiscal constraint, budget reduction, ministerial review, and the Jenkins Expert Panel on Federal Support to R&D, the orientation of the SR&ED Tax Incentive Program has changed and its contributions have been muted for many firms in the digital sector.
Specifically, federal support for innovation through the SR&ED Program has decreased by $1 billion or more a year from its 2007-2008 and 2008-2009 levels. This is comprised of:
· a reduction of around $600 million in “tax assistance” by the CRA; and
· a redirection by Finance of $500 million in funding out of the SR&ED Program to other programs.
The annual “tax assistance” provided by the CRA through the SR&ED Program, as reported in CRA’s Annual Reports to Parliament, has been reduced by approximately $600 million annually in the 5 years from 2008 to 2013. 
This reduction is consistent with the current Government's focus on “research” and the CRA’s new emphasis on classic research models in their new, consolidated policy. It is also consistent with how the CRA now expects claims to be supported. These expectations often conflict with effective engineering and software development methodologies where integration fully within the product development process can be critical for them to be effective in the real world. These changes to the program have been introduced unofficially and officially since the mid-2000s.
The Minister of National Revenue had committed publicly to no changes in long standing policy; and the new, consolidated CRA policy for SR&ED does have some greater clarity than long standing prior policies. Nonetheless, the consolidated policy is a substantive change for the digital sector that very much impacts on what can be claimed and the size of claims for firms in the sector and firms developing products and processes involving digital advancements.
It is interesting to note that the annual growth of the SR&ED Program was also a concern of the Revenue Minister's consultant in his 2009 appraisal of and report on the program. The report indicated that the program had a compound annual growth rate of over 11% between 2004-2005 and 2008-2009.  That growth rate plummeted to a negative 19.5%, as “tax assistance” reported by the CRA fell from about $4.1 billion in each of 2007-2008 and 2008-2009 to $3.3 billion in 2009-2010. Thereafter, the growth rate was 6%, 2.7% and 0% in each of the succeeding years to 2012-2013 where “tax assistance” stands at $3.6 billion. 
In addition to the $600 million annual reduction in SR&ED “tax assistance” implemented by the CRA, the Government has redirected out of the SR&ED Program an additional amount of approximately $500 million to other programs, as announced and projected by Finance in the 2012 Budget. The report of the Jenkins Expert Panel on Federal Support to R&D, issued in October 2011, seems to be the basis for this. The redirection of approximately $500 million was fully effective in 2014 and the full impact will be reflected in 2015-2016 and subsequent years. 
The digital sector has absorbed a disproportionate share of this reduction in CRA’s “tax assistance” through the program. A conservative estimate of the impact on federal support for the digital sector compared with what it would have been without these changes is likely more than $400 million annually (40% x $1 billion.) 
Given the disproportionate impact of the new CRA polices on the digital sector’s ability to claim, $400 million annually is likely to be an underestimate.
In fact, considering the previous 11% compound annual growth rate highlighted in the appraisal of the program for the Revenue Minister, almost $500 million annually could have been lost to the sector by 2010-2011.
Muller, Paul Daniel, SR&ED Tax Incentive Program, An Appraisal, Full Report, 30 November 2009. Section 3.3.1, “What are the numbers saying?” (This report, which is redacted, was obtained from Finance Canada under the Access to Information Act.)
The above documents show that CRA “tax assistance” fell from around $4.1 billion in each of 2007-2008 and 2008-2009 to $3.3 billion in 2009-2010; and then rose to $3.5 billion in 2010-2011, and to $3.6 billion in each of 2011-2012 and 2012-2013. The impact was a reduction of $800 million in 2009-2010; $600 million in 2010-2011; $500 million in 2011-2012; and $500 million in 2012-2013 from the $4.1 billion levels in each of 2007-2008 and 2008-2009.
 Muller, Paul Daniel, SR&ED Tax Incentive Program, An Appraisal, Full Report, 30 November 2009. Section 3.3.1, “What are the numbers saying?” (This report, which is redacted, was obtained from Finance Canada under the Access to Information Act.)
 Canada’s Economic Action Plan 2012, Jobs, Growth and Long-Term Prosperity, tabled in the House of Commons by the Minister of Finance, March 29, 2012. Annex 4, Table A4.1.
 It is estimated that 40% of all SR&ED claims are associated with software development. This is consistent with my more than 25 years of experience with the SR&ED Program and with a comment by a CRA official in a recent public meeting in Toronto.