Scientific Research and Experimental Development SR&ED: Evolution and Opportunities: Russ Roberts, Sr VP, Tax and Finance: Calling on the community for feedback and guidance
May 26, 2011

++ Action Requested: Please review Dr. Robert's Report to the CATA AGM  and provide feedback and guidance, either  by email to sredcomment@cata.ca or through the CATA SR&ED Group on Linkedin (500 members) at: http://www.linkedin.com/groupRegistration?gid=3246301&csrfToken=ajax%3A1916469626814329915

The Report  alerts the community of changes to SR&ED, notably their implications for the ICT Sector.

Also note that CATA is updating its Innovation Nation program, a comprehensive set of advocacy recommendation developed to assist the industry with its growth. Please feel free to add your recommendations and or provide guidance on our comprehensive program.

Report to the CATA AGM: A Year of Change

Last year, CRA released new instructions to their reviewers on how to conduct an SR&ED review and more stringent criteria about what is required as evidence for reviewers to sign off. 

Additionally, CRA has continued the debate about what is a “Technological Uncertainty” as they introduce the new term “Technological Obstacle/Technological Uncertainty” to befuddle the understanding of what the SR&ED incentives support beyond initial core technological developments. 

To quote the CRA:

Technological obstacles/uncertainties (TO/TU) are the technological problems or unknows that cannot be overcome by applying the techniques, procedures and data that are  generally accessible to competent professionals in the field (bold add for emphasis) Source: Gudie to Form T661, Scientific Research and Experimental Development Expenditures Claim, SR&ED Glossary.

Apparently, the CRA’s idea is to identify as standard practice and hence to make ineligible any projects that use existing techniques, procedures and data to resolve problems - even if no one had any idea how to solve the problems and even if the result would be a breakthrough.  Whereas the actual issue here is the prior existence of and availability of knowledge of viable solutions - not whether generally accessible “techniques, procedures and data” are used to  resolve the problems for which solutions were unknown. 

Using CRA’s explanation of a TO/TU, the work to develop the knowledge of how to:

·        enrich uranium in the Manhattan Project;

·        develop the Canadarm; and

·        develop hybrid automotive engines and associated software 

would not be eligible for SR&ED. 

These projects all rely on the extension and integration of existing approaches (i.e., known techniques, and processes) to solve problems where the solutions were unknown, i.e., what would work. 

To be consistent with historical interpretations of the law and to be logical, the CRA should have referred to the knowledge of available solutions to the problem as the delineator.

To be fair, some CRA reviewers are cautious about applying this rule too rigorously, realizing that this is not the way most engineering and scientific advancements are made.      

On the other hand, from what we are hearing, in many offices, a common position is that real SR&ED is about developing new core technologies in environments relatively dedicated to that purpose. 

At least, that’s where the SR&ED incentives seem to operate most effectively, not in the integrated project environments often needed to effectively develop new products and processes.  Specifically, we are hearing more and more that this is the case in ITC claims.  As well, we are seeing numerous examples of where the reviewers are using concepts of how experimental studies are conducted that are incompatible with the way software projects need to be managed for speed and efficiency, i.e., in highly integrated development efforts.

The result

The result is a program whose primary focus is enforcement and one that is more and more out-of-step with what is needed to encourage firms to do the R&D to commercialize technologies and to rapidly leverage the results.  A program more attuned to fostering the creation of new core technologies for others to exploit offshore than the commercialization of these successes in Canada!

Actions taken 

CATA, working with a small group of leading national associations, has facilitated discussions between the Minister, his staff, senior CRA officials, and the Taxpayers’ Ombudsman on the impacts of the current SR&ED management practices on companies, their investment decisions, and the economy.  The companies involved have been able to table privately very substantive examples of what is going on with their claims and the consequences.   

The CRA and the Minister have made it clear to us that they recognize that a problem needs to be fixed.  Albeit, it is unclear whether the solution lies within the CRA or in new approaches.  Nor, is it clear what the time line for solutions is.    

We are told by a spokesperson for the Taxpayers’ Ombudsman that the Ombudsman is “prepared” to table his report on the systemic review of the program, this summer. 

To a certain extent, efforts to seek solutions seem likely to have been delayed by the need to pause for the election and likely interest in what is recommended by the independent expert panel which is carrying out an in-depth review of federal support to research and development (R&D).  The Panel is chaired by Tom Jenkins.  The report by the Expert Panel is expected to be released in October 2011. 

CATA CEO, John Reid and I have been encouraging the Expert Panel to understand the challenges of the SR&ED Program and the benefits of identifying and eliminating its inefficiencies.  We have been emphasizing the importance of having a truly effective tax based incentive.  For a copy of CATA’s prebudget open letter to the Panel and key Ministers, please download the full version of the Open Letter at: 

http://www.cata.ca/files/PDF/Resource_Centres/SRED/Open-letter-TomJenkins-and-Ministers-fi-Feb13-2011.pdf

What’s next 

The challenge we see with the review from the discussions we have had both with Ministers and others in positions to influence is that there seems to be a strong view that it is the work on core enabling technologies and research that is productive.  I am hearing little recognition of the economic leverage to be gained by supporting the evolutionary exploitation of these core technologies even though this is a significant component of commercialization.  This is where the rapid wins can occur.

We believe that there is a real risk here for CATA members if they do not get across to the Panel and to many in the Government the importance of not taking a myopic view of how innovation occurs and economies are grown.

As part of this effort, we are looking at promoting a discussion of what would be a real commercialization incentive and whether there are enough efficiency dividends to be gained from refining and improving SR&ED legislation to effectively support further tax measures.