$2-billion Tax Credit Program Needs Overhaul
November 15, 2006

Ottawa, November 15, 2006… Canada's largest high tech group has launched an SR&ED Advocacy Campaign focusing on fundamental structural improvements to the federal system of tax support for innovation. CATAAlliance argues that the $2 Billion Scientific Research and Experimental Development (SRED) tax credit program needs to be much better integrated with other tax measures and that the legislation itself needs updating and improvement if the tax system is to be a fully effective tool for promoting innovation by Canadian businesses in all sectors.

The Campaign is based on research reports and analysis developed through on-line consultations and Roundtable discussions that were carried out throughout the summer on how to improve the SR&ED tax credits:

  • 2006 Consultation Report, Improving Canada's Scientific Research and Experimental Development (SR&ED) Tax Incentive Program

  • Maximizing Canada's Investment in R&D, Opportunities for Improving Canada's SR&ED Tax Credits and Leveraging the Results

Partner associations who encouraged their members to complete an on-line questionnaire  include: CCPA - Canadian Chemical Producers' Association, CVMA - Canadian Vehicle Manufacturers' Association, FPAC - Forest Products Association of Canada, AIAC - Aerospace Industries Association of Canada, NAAA - North American Automotive Association and ADRIQ - Association de la recherche industrielle du Québec. Approximately 330 tax executives and managers participated from about 30 business sectors.

CATAAlliance President, John Reid stated that "the consultations clearly show that the SR&ED tax credit system needs to be improved so that all Canadian businesses have access to its benefits, and that it needs to be effectively integrated with other tax measures so that the results of Canadian R&D are exploited in Canada and create Canadian jobs, not elsewhere. As well, he noted that "participants argued persuasively that there was significant room for the Department of Finance to make the current legislation more effective and less confusing."

CATAAlliance has provided the Minister of Finance with options and recommendations for improvements. These recommendations call for:

  • significant refinements to the SR&ED legislation by the Department of Finance; and,
  • the SR&ED program to be effectively integrated into a complementary system of tax measures that stimulate investment in the successful commercialization of the resulting technologies by both early stage businesses and by mature businesses.

Specific topics and themes (see Annex A) covered include:

  • Refund ability: the availability of the "refundable" tax credits to a business in the form of cash refunds;
  • Scope: the range of activities and costs considered eligible in an SR&ED project;
  • Improving the legislation and policies, and associated administrative practices of CRA;
  • Interpretive issues related to the complexity of the legislation and associated policies;
  • The impact of CRA's administrative practices on the effectiveness of the SR&ED program, i.e., the effective delivery of the incentives to those who are entitled to them; and
  • Technical analysis on what other countries are doing with tax credits for R & D.

Reid commented that "if the government can come up with effective tax support for investments in sectors such as mining, oil and gas, and wind energy, why not technology innovation right through to its full implementation? The key is not to pick winners but to make the incentives available to all Canadian businesses that wish to grow their business through innovation and are willing to make the capital investments."

"CATAAlliance will continue to draw on its network of business and community leaders to further develop and implement the SR&ED Advocacy Campaign," he added. "Canada is already a leader in many business sectors. But to maintain and grow this leadership, we must create the necessary entrepreneurship, technology based innovation and risk taking in all sectors. This requires improved public policies, particularly tax policies, which reward those who invest in the capital phases for success".

The SR&ED Campaign is an integral part of the CATAAlliance, Innovation Nation platform, entitled "Setting the Gold Standard" -- Technology Agenda for Canadian Growth Aims at Building on Success -- Adoption Will Help Ensure Canada's Prosperity."

ACTION ITEM:
Copies of the Reports can be obtained by emailing John Reid at johnreid@attglobal.net Please approach your MP's, local media and business network to brief them on the SR&ED Campaign.

Annex A

Key Recommendations for Maximizing Canada's Investment in R&D

Observation:
The tax credits are of little to no use to many Canadian businesses, e.g., firms in a loss position, particularly those with significant pools of losses, as well as limited partnerships. For years, CATAAlliance has called for making the SR&ED credits universally accessible to all business entities.

CATAAlliance recommends that:

  • the federal government allows companies in loss position to access tax creditsrefundable in cash within limits. This change to the SR&ED regime will have theadded benefit of allowing companies with foreign parents located in a country with a foreign tax credit regime such as the United States to gain the benefit from the program;
  • the federal government let the credits be applied to other taxes besides income taxes, including to payroll taxes; and
  • the federal government makes the SR&ED incentives available to limited partners upto their "at risk amount".

Observation:The amount of SR&ED expenditures that is eligible for the high rate (35%)refundable credits have not kept pace with inflation. As well, the limits on taxable income and capital tax in the previous year in respect of the refundable credits are detrimentally limiting access to the refundable credits.

CATAAlliance recommends that:

  • the SR&ED expenditure limit for the high rate refundable credits be increased to at least $4 million;
  • the taxable income limit be increased from $400,000, as proposed for calendar 2007, to $600,000 for 2007, and in subsequent years to $800,000 such that the grind of the expenditure limit from current $10 of reduction in the expenditure limit for every $1 of taxable income in excess of the business limit would be reduced to a ratio of $5 to $1; and
  • the capital tax restriction be removed or at least the threshold at which the capital restriction applies be raised.

Observation:
The current contract payment guidance is complex, particularly when determining which party is entitled to claim the SR&ED that is associated with work related to a contract.

CATAAlliance recommends that:

  • to simplify the administration of these provisions and to avoid misunderstandings, the parties to a contract be allowed to elect in the contract which party will be permitted to claim any SR&ED. This election should be optional.

Observation:
It is often not possible or practical for all the work associated with an SR&ED project to be conducted in Canada. Yet, Canadians accrue the benefits of the intellectual property and the learning from Canadian led projects.

The CATAAlliance recommends that:

  • the Government allow a proportion of the work on a Canadian funded project carried on outside of Canada to be eligible for the incentives. If the project is funded and led from Canada, the intellectual property and learning will reside in Canada and Canadians can exploit the results.

Observation:
Canada has a poor record of leveraging and investing in the results of its R&D, i.e., successfully commercializing what it creates at home. There is a need to better reward companies that have developed technology during the start-up phase and to assist them in their ability to fully exploit these developments. There is also a need to better reward more mature companies that successfully invest their profits in Canada in the creationof leading edge technologies for their processes that set new standards for what is competitive globally. The result will be a more productive economy and the retention of our graduates many of whom are being lost, because of the lack of creative opportunities at home.

CATAAlliance recommends that:

  • the federal government develop an integrated set of tax measures that encourage investors to invest in start-up ventures aimed at leveraging the results of R&D into commercially successful businesses and that encourage more mature businesses to invest more of their profits in commercializing leading edge technologies in their business processes. The incentives should be universally available and not skewed to the benefit of particular sectors. A combination of flow through shares, accelerated depreciation rates and/or investment pools should be considered. This integrated package of tax incentives should be designed to encourage passive investment where the benefits accrue with the successes of the ventures.