CATAAlliance SR&ED Update & Observations (February 12, 2008)
February 14, 2008

Over the last 8 weeks, we have been hearing that the Government intends to announce improvements or at least changes to the incentives available to Canadian businesses for R&D. Concrete details are not available but indications are that these may include some new mechanisms to promote the more effective commercialization of innovations. Also, there does seem to be recognition that the administration of the SR&ED tax credits themselves needs improvement. On a negative note, we are hearing that the provision of the refundable tax credits to a broader spectrum of businesses, a proposal strongly supported by many sectors, is considered too risky and costly.

To get a better understanding of the thinking, the CATA SR&ED caucus met with the staff of both the Minister of Finance and the Minister of National Revenue over the last several weeks. These discussions have been frank and probing. We have been pleased by the thoughtfulness of the questions being raised. Both Ministries are clearly concerned about the SR&ED program and are talking about what can be done to improve it. We have had a good opportunity to explain the thinking around CATA’s submission to the consultations of Finance and the CRA on how to improve the credits and their administration. (For CATA’s submission, go to:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr11300701.html

In particular, we have emphasized that just tweaking the administration is unlikely to lead to effective results in the long term. For details of CATA’s thinking, see CATA’s January 2008, update at:

http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr01080801.html

In addition, we have challenged the idea that refundable credits carry undue risk when they are designed correctly. In our opinion, the issue should not be refundable credits but rather how Finance designs the credits and how they integrate with other support mechanisms, both federal and provincial.

We have pointed out that provision of up to 40 percent of the credits has not raised concerns in the past. We queried the Department of Finance about their view. We have highlighted our members’ frustration with the lack of hard statistical information from the Department of Finance on who uses the credits and which provisions drive the costs. We have emphasized that only with such information can a truly knowledgeable discussion take place.

There has been some discussion around the idea of moving to a labour based system of credits as a means of simplification. We have stressed that this would lead to an unacceptable level of skewing of the incentives to a narrow group of beneficiaries and that CATA, like many other organizations, cannot support such a proposal.

Observations:

We understand that the consultations generated approximately 150 submissions. To date, the Department of Finance has posted 24 submissions at

http://www.fin.gc.ca/activty/consult/sred_e.html.

The importance that Canadian businesses give to the Government’s commitment to improve the tax credit system is clear from this limited sample. We have been encouraging Finance to complete the posting of submissions. It is unfortunate that more than two months after the consultations were completed much of the community’s commentary is still not being shared.

As we approach the Budget, we are encouraged to hear of change but until proposals are tabled, albeit with any idea about whether the community’s call for substantial improvements has been heard. Certainly, some in the bureaucracy express resistance to change. On the other hand, several senior CRA officials have expressed a great deal of interest in understanding the solutions we have being putting forward for discussion.

++ Action Item:

At this point, we must look to the leadership of the Government and all parties to promote the needed changes. Let your contacts know of the importance that you give to change and to these credits. If you wish to discuss matters or for further briefing on CATA consultations, please email info@cata.ca with SR&ED in the Header. Our Senior Director, SR&ED, Russ Roberts will then contact you to set up a briefing venue.