SR&ED Update and Observations (May 2010)
May 13, 2010

Please view Russ Robert’s video commentaries:

--SR&ED Canada’s Innovation Plan

--Call for Community Engagement



SR&ED Update and Observations

Where have we come from and where are we at?

When the Scientific Research and Experimental Development (SR&ED) Program was set up in the mid-1980s, the position of the then Minister of National Revenue, Elmer MacKay, and of his Deputy Minister, Harry Rogers, was that the administrative system was to be aimed at delivering incentives - not at compliance and recovery.  This is not to say that the program was to be a give-away but that the objective was to create a climate where the program’s clients could file materially correct claims and expect to receive their full entitlement.  This concept has been well supported in jurisprudence over the years. 

In our experience, this has also been the position of subsequent Ministers of both National Revenue and of Finance over the years.  For 25 years, Governments have worked to get the administrators of the SR&ED Program to recognize that their normal focus on compliance is wrong for this program. 

Specifically, the idea was that the SR&ED Program’s operational policies and procedures were to be focused on delivering an incentive where claimants understand their entitlement; the playing field is transparent - not based on personal relationships; and the environment minimizes the burden of developing and defending claims. 

Once again, the program seems to have strayed back to the CRA’s traditions and focus on compliance instead of on the effective delivery of an incentive program.  For whatever reason, the program’s leadership just cannot get it right.

 

Claude Demers, President of ADRIQ (Association de la recherche industrielle du Québec), has examined in detail where the CRA is now at compared to what the country needs to promote the innovation based economy that can address the challenges of today’s globalized markets.  As to the SR&ED Program, his conclusion is that change must happen. [1]  He argues that it is likely time to consider replacing this complicated, costly, unpredictable, and disconnected program with something else which effectively focuses on encouraging our businesses to compete through innovation.    

Mr. Demers argues that the program is not improving and that the CRA is increasingly taking a more restrictive and burdensome approach.  What we are hearing also reflects this.  While there are still many firms reporting positive experiences, some of them are expressing dismay at the current CRA SR&ED audit practices they are hearing about from their counterparts and also from some CRA officials.    

He does note that there have been times when the CRA and the community have been in synch and the program worked when administered as an incentive.   After 25 years of ongoing cycles of the program’s administration becoming restrictive, we agree that if this most important source of funding for business innovation cannot be stabilized once and for all, an alternative is needed.  

In 2008, the Government provided the CRA with an additional $10 million annually to improve their administration of the SR&ED Program, and committed the Agency to reviewing their policies and practices to see if they could be better aligned with current business practices. 

Since making this commitment, the Government has further committed that the review would clarify, but not change existing public policy. 


What seems to be happening?

Over the last year and a half, the CRA issued a new version of the T661 Form and Guide which CATA argues was poorly thought out and confusing, and increased the compliance burden on business.  The new versions of the Form and Guide seem to:

·        promote a model for how Experimental Development is to be conducted and documented that is more appropriate to University Research than to engineering developments;

·        create the base for transactional, compliance-oriented audits rather than for reviews; and

·        move the program’s focus to very much a Research orientation.

The CRA sought input on a new guidance document on SR&ED in Controlled Environments for Crop Production.  They received what we understand to be substantive comment that some of the concepts are not supported in public policy.  They have left the draft posted on their web site now for over a year without revising it or publishing responses to the community’s commentary.  The question now being asked is whether this draft has become the de facto policy for claims in this particular sector and, for that matter, whether the restrictive portions of the apparent de facto policy are to be migrated to other sectors.

As well, as part of the policy review announced in the 2008 Budget, the CRA is currently consulting on a number of the financial guidance documents.  The process is more one of collecting commentary than it is one aimed at:


·       
exploring the correctness of the key policy positions;

·        seeking clarity on how best to communicate them; and

·        ensuring that policies are applied to support claims in ways that are compatible with the way businesses conduct engineering developments. 

In spite of the ongoing consultations with the community, we hear more and more of policy positions and operational review practices being outlined in audits that are not consistent with historic, published policy and/or not consistent with the Government’s original intentions for the SR&ED incentives.  For example, the CRA has produced a new Claim Review Manual for internal use by SR&ED technical reviewers in conducting reviews of claims.  Officially, the Manual is not to be implemented until June 1, 2010, but we are being told that at least some technical reviewers are applying the Manual and citing management support for their policies and practices.       

Observations

The efforts of recent Ministers to encourage the CRA to have an open and transparent dialogue are hopeful.  However, we can understand why ADRIQ calls the SR&ED Program a masquerade.  Over recent years, the administration of the program has been insulting to the intellect of claimants and their professional representatives, and to governments. 

However, the real issue is that the Government’s economic agenda is being hijacked in the guise of managing a compliance program.  The questions seem to be:

·        can the program be fixed?

·        is the CRA willing and able to fix it?

·        is a new home needed for the program that is more consistent with the successful delivery of an incentive?

·        are other forms of incentives needed to motivate our businesses to invest in innovation?

Where can we go from here?  CATA’s Board has argued that the administration of the SR&ED Program needs to be fixed once and for all, along with making the credit universally accessible.  They argue that fixing needs to happen first.  Yet, how much time do we have to improve?  We are already hearing companies saying that they will withdraw their R&D from Canada to jurisdictions where innovation is respected and supported. 

CATA’s membership has strongly supported tax based incentives as the correct mechanism.  We consider that tax based incentives are critical to sharing the risk that businesses take on when investing in new, leading edge innovations; and that tax based incentives leave the key investment decisions in the hands of businesses rather than having governments pick winners.

At this point, we are discussing with senior private sector leaders what they see to be the parameters of any action plan that might turn this program around.  We do believe that, ultimately, it will be the CRA that must create an action plan.  But, is this realistic? 

In this respect, we believe that it will be important for the CRA to provide a convincing solution that addresses the complexities of being an organization responsible for delivering both tax compliance and Canada’s major program to promote innovation.


An idea worth thinking about would be to have the SR&ED tax credit tied solely to the labour component of SR&ED as is provided by the proxy method and to have a distinctly separate tax credit associated with R&D which companies normally capitalize.  Historically, the labour based approach to SR&ED seems to be much easier for the CRA to handle and the second incentive would provide a complementary but broader base of support than the current definition of SR&ED.  Of course, this idea would be feasible only if the CRA were to address its underlying conflict.

++Action Item

At least two different Federal Government reviews are ongoing at senior levels on how to most effectively promote innovation.  These reviews are in preparation for the next Budget.  Of course, cost effectiveness will be a consideration given current budgetary constraints. Fundamentally, the issue is not how to support government employment but rather how to nurture innovation in Canadian businesses. 

We compliment the current Government for listening to the community and continuing to encourage a dialogue on solutions.  

Your comments, guidance, and ideas are important to our SR&ED Advocacy team.  Please address them to CATA’s Senior Vice President, Tax and Finance, Russ Roberts at e-mail, ruroberts@cata.ca.




[1]L’innovation au Québec, Le financement de l’innovation, specifically section 4 on page 4, “Les incitatifs fiscaux, Les crédits d’impôt” at: http://www.adriq.com/LinkClick.aspx?fileticket=FQ3NRNiMYho%3d&tabid=39