January 10, 2018
Feds Fail to Ignite Budget Promises of a SR&ED Review (2 Page Brief to Kickstart Consultations)
On What is Needed for an Effective Review of the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program and Associated Tax Instruments to Promote Business Innovation and Economic Growth
The Government needs to provide a clear and fully transparent explanation of the SR&ED review announced in the February 2017 federal Budget, including:
- Which ministries are responsible for what, contacts, process, and key elements on which the Government needs input.
- Goals / measurable targets for proposed tax instruments, including immediate and long-term impact on how businesses grow their business, on the Canadian economy, and the costs.
- Third party, independent evaluations of where we are at and what the options are for improvements. Presumably, these could be public discussion papers.
- Impact of changes to SR&ED on the international competitiveness of the Canadian tax environment and investments; and,
- Clear projections of where reductions in SR&ED are being transferred from SR&ED to other programs versus to the reduction of federal tax expenditures, i.e., deficit reduction. And projections of the net benefits to the economy of these transfers – not simply the provision of subsidies for activities that businesses would undertake anyway.
Topics for Evaluation and Consultation
Note: the SR&ED program has been changed by the previous government and by the CRA’s management practices to such an extent that we strongly question whether historical analysis are applicable.
- What does the SR&ED program cost in terms of tax; aggressive filing (sources and solutions); and compliance efforts of all parties, including the CRA and business?
- What is the return on these tax investments and how do they vary as a function of the instrument, and sector? The aim should be to identify opportunities to improve the contribution of business innovation to the Canadian economy?
- What is currently being supported by the SR&ED program, e.g., what sectors, what kinds of projects?
- Dollar value and quantity of claims received by type of project, sector, provincially, and the amount that is ultimately determined to be eligible for SR&ED incentives after any reviews have been finalized.
- Dollar value and number of problematic claims by issue, by sector, and by province. Likewise, similar information on Notices of Objection and/or appeals to court.
- The kind and size of the projects which SR&ED supports in the Canadian Information and Communications Technologies (ICT) sector.
- The number and nature of retrospective claims filed each year and analyses of whether the SR&ED incentives are merely a windfall after-the-fact for claimants that succeed in obtaining the SR&ED tax credits; and to what extent the credits actually incentivize businesses to undertake innovation they otherwise would not have undertaken
- Whether the administration of SR&ED is as effective as it could be and where improvements are possible. (Note: the Jenkins Expert Panel on Federal Support to R&D addressed legislative improvements, but not administrative improvements); and,
- Whether what SR&ED delivers is important to the Canadian economy; that is, return on investment to Canadian taxpayers and the extent the Canadian tax system encourages Canadian companies to create jobs in Canada and to compete internationally.
For recent detailed analysis see: CATA briefing note on “What has Happened to SR&ED in the Last Decade?” July 14, 2017, http://tinyurl.com/yc4o5zck
CATAAlliance – On How to Develop a More Effective Tax Environment that Promotes Business Innovation and Economic Growth
- Establish a new, independent Administrator to oversee (i.e., deliver, manage, evaluate and improve) all federal government tax based programs in support of innovation, including the SR&ED Tax Incentive Program.
- Set up an independent working group to consult on, and develop the details for the proposed Independent Administrator; a new, refundable labour based Digital Innovation tax credit; and a new Innovation Box incentive for commercialization and export.
- Create a new labour based Digital Innovation refundable tax credit for smaller businesses coupled with a new Innovation Box incentive to support the commercialization and export of SR&ED and Digital innovation tax credit successes. Consider phasing out the refundable credits for the ICT sector as experience is gained with the new tax credit.
- Create outside the SR&ED program a new Innovation Box incentive to support commercialization and export of SR&ED and Digital Innovation tax credit successes for both small and large businesses. Claimants would have the option of applying the incentive to reduce the grind on the availability of refundable credits or to reduce income taxes.
- Modify the non-refundable SR&ED program to support Above-the-Line (ATL) Accounting (booking) of the credits.
- Develop cost estimates and full details of CATA Proposals.
- Improve the SR&ED Tax Incentive Program by:
- Eliminating Retrospective claims for SR&ED tax incentives;
- Permitting non-refundable claims to be made at the program level, as well as at the project level, from a technological perspective;
- Requiring Initial Submission of Technology Benchmarking and Plans for all projects (and/or “programs” in the case of non-refundable claims) for SR&ED before the start of a project/program or within 3 months of its start; and.
- Implementing effective, timely, independent, and authoritative third party redress of problems as they arise in the reviews of SR&ED claims.
For recent detailed analysis see:
CATA briefing note on “What has happened to SR&ED in the last decade?” July 14, 2017, http://tinyurl.com/yc4o5zck
CATA research paper on the size and cost of the SR&ED program, http://www.cata.ca/files/PDF/Statistics_SRED_November22_2016.pdf
CATA research paper calling for the creation of an independent administrator for all government tax incentives for innovation and for the overhaul of Canada’s system of tax incentives for innovation, http://cata.ca/Advocacy/CATA-Update-of-Proposals-Indp-Administrator-Jan17-2017.pdf
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