A Call for Political Leadership: Best ways to leverage the Canadian economy off the growth of Canada's innovative businesses.
February 2, 2016

CATAAlliance Advocacy Memorandum

 Attn: The Honourable William Francis Morneau, Minister of Finance
The Honourable Diane Lebouthiller, Minister of Revenue
The Honourable, Navdeep Singn Bains, Minister of Innovation, Science and Economic Development
The Honourable Scott Brison, Minister, Treasury Board
 From:
members, CATA Innovation Leadership Council
 Re: Leveraging the Canadian economy off the growth of Canada's innovative businesses


Dear Ministers

CATAAlliance is pleased to congratulate you and your colleagues on the results of the election. We are looking forward to working with you on the best ways to leverage the Canadian economy off the growth of Canada's innovative businesses.

Canadian Advanced Technology Alliance (CATAAlliance or CATA) is a not-for-profit organization representing and promoting Canadian innovation and high tech industries. As "Canada's One Voice for Innovation Lobby Group", we crowdsource ideas and guidance from thousands of opt-in members in moderated social networks in Canada. With our "Competitive Innovation Nation Campaign, CATA has a broad foundation for its advocacy campaigns, including our outreach to other associations across the country. See our white paper "Canada's Innovation Leadership: Others do better. Can Canadian governments improve on our investments in innovation & entrepreneurship?" at
http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr10121501.html

Specifically, we wish to comment on the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program. CATA has been one of the lead advocates on this program for close to 30 years. The Information and Communications Technologies (ICT) sector is one of the chief beneficiaries of the program and it is our members' primary source of government support.

Over the years, CATA has generally worked very much in co-operation with the CRA / Revenue Canada to help ensure that SR&ED policies are clear and reflect the reality of how companies in the ICT sector conduct research and development, and effectively innovate.

It is our experience that Ministers of National Revenue have found the SR&ED program challenging, because they have had to achieve a delicate balance between:

  • the perception that the CRA's normal focus is on compliance and tax recovery; and,
  • the need for the SR&ED program to function effectively as an incentive to technological innovation for both the larger firms and the smaller, private Canadian corporations that use the program. For example, smaller CCPCs (Canadian-controlled private corporations) have unique financing challenges. Cash refunds of SR&ED tax credits to them need to be timely; and these firms need reasonable certitude that once they receive a refund, the Agency will not snatch it back in a subsequent review.

Historically, some have seen SR&ED as a "giveaway" program. It is not. The business community do not see it this way. They do not support those who may abuse the program. Our experience is that the business community want us to support changes to the program to correct problematic claiming practices through clearer, more transparent policies and/or legislation. The key here is that the Agency needs to be transparent about problems, their sources, and potential solutions. There is a strong perception that, at times, the Government and the Agency have not been completely transparent over the last 10 years.

Although we are now seeing some change and improvement by the CRA, I continue to hear concerns from our members about:

  • the program's increased complexity;
  • the new, consolidated policy;
  • the review process itself; and
  • the independence of the redress / second opinion process.

We have not agreed with the focus allowed by the Government in the past decade that permitted the Agency to revamp and consolidate longstanding policies and management practices for SR&ED in ways that our members found to be less clear and more problematic than in the past. Nor do we find that recent changes by the Department of Finance to the legislation have achieved the substantive simplification that was in part the goal of the changes. There is a lot of room for clearer legislation and recent jurisprudence seems to support this contention.

I should temper what I have said and note that we are pleased that the current senior management of the SR&ED program are demonstrating greater sensitivity to balancing the incentive nature of the program with the compliance aspects of the CRA's mandate. They are more candid about the problems they are seeing and are now more willing to discuss issues than in the past. We see that current senior management are attempting to get to clearer expressions of their policies and are concerned about the consistency of their reviews. CATA is now working with the CRA's policy management team to develop an ICT specific webinar presentation to explain how the CRA see their new policies functioning in the ICT sector. We are looking towards April 2016 for the project's completion and its public release.

Yet, too often, I am still hearing from businesses that in practice they are finding the program just too complex and dependent on specialists, even the right specialists, for them to be comfortable with it. Some specialists are echoing these comments, particularly in reference to the reviews.

We encourage you to:

  • support more CRA efforts, like the ICT webinar session, that are aimed at communicating more clearly and directly with specific business communities what the program is about in the context of their sectors;
  • have the CRA do more with the actual users in the business community, drawing more effectively on community leadership than in the recent past. The users of the program should be the true target of all their efforts; and
  • examine the legislation to determine how it can be made clearer and simpler with the aim of reducing the program's dependency on specialists and improving the ROI for Canadians.

Although we see tax based incentives, including the SR&ED program, remaining the key mechanism of business support for the ICT sector, we think that there is a real opportunity for improvement. We are calling on the Government for an indepth, detailed, comprehensive microeconomic review of the SR&ED program. The evaluation should focus on what tax provisions are effective, how effective they are, what can be improved, and what funds can be freed up for other initiatives to support innovation with a better return on investment for Canadian taxpayers. For an opinion piece we have recently prepared as background, please see:
http://docs.google.com/document/d/1ZQ2B6ZYoItt0k_CqWtwTbdfyLNY5mO8VkDdglJEQR-Q/edit?usp=sharing.

I am asking that Russ Roberts, CATA's Senior Vice President, Tax, Finance & Advocacy; and other select experts meet with you and your team to discuss our experiences with the SR&ED program and our thoughts on the program's future. We can then explain the importance of our suggestions, as well as amplify on the evolution of the program and the imperatives of a full review.

Russ is considered one of the country's leading experts on the SR&ED program, having helped frame much of the historical interpretative policy of the program for the CRA / Revenue Canada over the years. His perspective reflects extensive public and private sector experience with the program's evolutions.

At this time, we ask that your team in the CRA consider the following two improvements for the SR&ED program that we believe would be well received by the community.

  1. create and implement a mechanism that provides a truly independent, efficient and objective crosscheck of:
    • the positions taken by CRA technical reviewers; and
    • the policy applications / interpretations used by both the technical and financial reviewers of a claim.

    The CRA's current second opinion and redress processes do not meet these standards. There needs to be available an independent, third party review of the fact sets being tabled by claimants to support the eligibility of their claims and the fact sets of the CRA reviewers. Both should be referenced to relevant CRA policies so that the consistency of the Agency's positions can be established.

    The need for objective, independent redress in an incentive program of this nature was very strongly supported as far back as 2008 by the consultant to the Minister of National Revenue Jean-Pierre Blackburn in a review and report on the Agency's administration of the program. It is also reflected in the caution that the courts are showing towards using the opinions of the CRA's technical reviewers, and accepting at face value the positions put forward in Agency policies.

  2. reinstate the former, longstanding policy supported by repeated Governments over the years that the CRA would not take back a cash refund once they had given it to a claimant using the refundable program. The exception was, of course, fraudulent claims.

    It is critical for smaller CCPCs that depend on these cash refunds as an important component of their funding to have assurance that once assessed, refundable credits will normally not be revisited. Historically, the fiscal risk was considered small compared to the risk of damaging viable, emerging firms claiming under the refundable portion of the program.

Each year, we are asked to facilitate the resolution of a number of cases like this. Historically, governments have simply not wanted to allow this problem to occur

Implementing these improvements would signal the Government's intention to take ownership of the SR&ED component of the innovation portfolio and to see that SR&ED is managed by the CRA with a more balanced focus than during the last decade. We consider that these improvements are essential for an effective, credible, and reliable tax incentive, whatever other improvements a review of the program may subsequently determine to be important.

Yours sincerely,

John Reid
President & CEO, CATAAlliance
jreid@cata.ca

c.c.: Russ Roberts, PhD, Senior Vice President, Tax, Finance & Advocacy, CATAAlliance