++ Action Item: We presented to the Standing Senate Committee National Finance yesterday as part of our Competitive Innovation Nation advocacy. For a copy of our Submission notes and a full transcript of Russ Roberts testimony, please contact CATA CEO John Reid at firstname.lastname@example.org
Excerpts from Senate Committee National Finance
Russ Roberts, Senior Vice President, Tax and Finance, Canadian Advanced Technology Alliance (CATA Alliance National): Thank you for inviting us to attend. I will give you my background because it may be relevant to shaping some of your questions. I enjoy answering questions, so I am looking forward to that section of our talk.
My background is that when the tax credits were created, I was brought in from the National Research Council to help set it up. I have seen the policy development process, particularly as it was related to what is eligible SR&ED. I followed it for almost its total period of evolution over time. I have followed its administration, the shifts in it and how it has worked over that same period of time. Eventually, I spent about 8 or 9 years in the private sector working on claims themselves, so I have seen the other side of the story as well.
Maybe that will be useful to you. I will try to explain my observations from that perspective as we go.
In terms of SR&ED and innovation policy, which is where we were last year when the budget was brought forward, we were pleased by some changes that we saw in the discussion. We saw the discussion had shifted very much from focus on research to a focus on commercialization: How do we achieve commercialization? How do we get businesses to focus on taking the IP that they develop here and doing something with it here in Canada?
Our concern was that most of the discussion previously had focused on research, getting more money into research and more researchers creating IP, yet, what were we doing with the IP? It was moving offshore often.
We conducted a discussion on our website for about three months before the budget, and we were surprised by the feedback. It was really focused on whether there was too much going into research. How do we take advantage of all these skill sets? It was not a lack of innovation; it was a lack of ability or willingness to commercialize what we had here.
In that respect, we were strongly in favour of the tone of the budget. It was moving in that direction, but when we looked at the changes that took place in the SR&ED program, we did not see how all this meshed together as a result. Particularly, when we looked at the way the program was being managed by the CRA, what we were being told but also what we saw, the program has been shifting much more to an orientation that is directed at research rather than what engineers do to create innovative and advanced technologies.
It is not getting less complex, in our opinion and in our members' opinion. In that sense, we were not necessarily comfortable with the direction of the changes unless there was more to come with the next budget. That was our fundamental position. Where is all of this going? Can it pick up the slack that is being created by these changes in the budget? Are there opportunities? We think so. Could these changes all mesh together? Yes. One of the ideas that we have looked at is a patent or innovation box, which is being developed in other countries. It is being looked at closely. It is a way of encouraging companies to actually commercialize their IP. The credit actually applies on the profits when it occurs, so it is a pull by rewarding success rather than using the push approach. We are very much in favour of that.
Our members are also less likely to be comfortable with direct grants or direct funding. They much more prefer the tax mechanisms, tax credits or lower tax rates. The innovation box approach definitely has merit for them.
To balance the losses to SR&ED with this budget proposal, the way it has been shaped, we see that you need something like the innovation box. We also see that the extension of the facilitated write‑offs helps because the major impact of these changes is around the incentive for expenditures in capital. That is where the biggest impact occurs, in the large firms as well. That is why it picks up there, will actually pull forward on it and help pick up the gap. That is what we are saying.
Even so, unless we figure out how to get the tax credits to be managed efficiently and effectively, we still have concerns about the effectiveness of the program. The direction it is going in is very much focused on research, and that is a criteria. I can explain that later on if you wish, but that is what is happening and has been happening for a number of years.
We had identified a different way of going at this rebalancing. About a third of the claims are termed retrospective. What occurs is that, as a practitioner, I would go into a firm, go through all of their development projects, figure out where their R & D lay and I would file it after the fact. Our contention is that those are not working effectively as an incentive, so we asked ourselves if there was a better way of doing this. Could we get rid of that group of claims ‑‑ somewhere between 500 million and a billion ‑‑ and come up with a more effective incentive itself which does not have the same type of structural impacts of the current proposals? We think we could. We do not think there was enough time to get at those questions in the discussions, and we are just now beginning to see people talk about it as we go out into the community
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