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Media release: New Model for delivering Innovation Tax Incentives will determine Innovation Minister’s Success in building Canada as a global centre for innovation, says CATA’s Innovation Leadership Council
Our mandate for this work has focused primarily on improving the Government’s impact on the tax based incentives available to the Information and Communications Technologies (ICT) sector. However, with few exceptions, we believe that the real opportunity is in the extension of many of these approaches to all sectors contributing to Canada’s innovative economy.
We strongly encourage the Government to strengthen Canada’s tax based incentives for innovation. The intent should be to maximize the return on these investments (ROI) to the Canadian economy. Focusing simply on direct funding and not dealing with the weaknesses in Canada’s tax based incentives is not enough. Other countries are doing better with their tax based incentives and we should be doing the same. Our competitors recognize the critical role of focusing on developing results-oriented, effective tax incentives in the support of innovation. If the Government does not seize this opportunity, Canada will continue to earn a low ROI on these major investments in innovation.
Some argue that what is currently being achieved with the Scientific Research and Experimental Development (SR&ED) tax incentives is good enough. Our concern is that the leaders of the current Government’s innovation agenda may not be getting the message that improvements to SR&ED can be achieved. They appear too focused on creating new programs, not realizing that they cannot get it right unless they get Canada’s tax based incentives (including the SR&ED tax incentives) right.
Yet no one really knows what is being achieved. It’s been decades since the current, often cited numbers for the SR&ED program were developed. Some reports do suggest a positive return. However, today’s SR&ED program in no way reflects the SR&ED program of the past nor the program that was evaluated a couple decades ago where most of the positive support for the program comes from. Even the amount of the credits themselves has been reduced.
Today, the revised legislation and the CRA support a very different spectrum of SR&ED activities. Over the past decade, the CRA has set more stringent expectations and uses a more limited view of what will be supported and how to do so. This is simply not the same SR&ED incentive program that was evaluated years ago. It is much narrower, more science oriented and a more difficult program for many in the ICT sector to use; and, for that matter, for many in any area of manufacturing to use. Today, the broader understanding of what is experimental development is not well supported by the CRA.
The federal government is currently spending around $3 billion (down from $4.1 billion in 2008-2009) for tax incentives to encourage companies to do science oriented “SR&ED”. Of this amount, a significant portion is for work that firms would carry out in any event without any incentives. How much is associated with these “retrospective” claims is unclear – the CRA has not released the numbers. However, many in the business community believe that these windfall credits are not appropriate to an incentive program.
CATA believes that it’s time to move on and discontinue the rhetoric about historical evaluations. We argue that government should assign the delivery, management and evaluation of federal tax based incentives to promote innovation and the development of better incentives to a new administrator. The philosophy should be one of proactive evaluation, continuous improvement, and benchmarking of the Canadian system against the best international practices. The focus should be on making the innovation support provided through tax mechanisms as effective as possible as incentives through continuous improvement.
The proposals we have developed address major issues with the current system of tax incentives for innovation, particularly where the current system itself is a barrier to the: growth of emerging technology firms; and effectiveness of credits as influencers of businesses to invest in innovation, growth, commercialization and exports.
There are, of course, other approaches one might consider and that might work to address these issues. Fixing them represents a real opportunity to better support Canada’s innovation efforts. Further, it is imperative to the success of the current Government’s innovation agenda.
The UK and others do much better and so can Canada by using a more proactive approach to tax based incentives for innovation…
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The Canadian Advanced Technology Alliance (CATAAlliance) is Canada’s One Voice for Innovation Lobby Group, crowdsourcing ideas and guidance from thousands of opt in members in moderated social networks in Canada and key global markets. (No Tech Firm Left Behind) Contact: CATA at email@example.com