2012 Federal Budget: Where Next: an ICT Transformational Partnerships Program?: Russ Roberts, Senior Vice President, Tax, Finance & Advocacy, CATAAlliance
June 25, 2012

This is the initial paper we plan to issue on topics of concern to the ICT sector.  A second paper on the topic of “financing”, including Crowdfunding, is also available for review. 

Our expectation is that these papers will serve as a platform to promote dialogue on the issues confronting the ICT (Innovation) sector, and where the ICT sector needs to go. 

As we indicated in our analysis of the 2012 Budget, http://cata.ca/Media_and_Events/Press_Releases/cata_pr04051201.html,

the Budget was clearly a work-in-progress that did not address many of these issues the sector is facing.  For example, the Budget did not address the unfavourable tax treatment of the non-refundable tax credits encountered by some multinational corporations and the need to have the credits booked “above the line” to make them more effective.  In fact, the Budget substantially reduced core support by SR&ED for the ICT sector, raising considerable cost challenges for important R&D efforts being conducted by a number of ICT firms.  We believe that less invasive changes could have made to achieve even better results

On the other hand, the 2012 Budget did make some important commitments to an improved direct financing environment for R&D, and additional funding for IRAP.

We encourage ICT businesses and their representatives to come forward as participants in CATA’s social network discussions with their ideas to address these concerns.


SR&ED – Where Next?

The ICT sector took possibly the largest hit of any in the 2012 Budget.  At least $300 - $400 million in ICT support has been lost when one considers the implications of the significant Budget changes to the SR&ED Program, and CRA’s draft policies on eligibility and their new standard for how claims must be supported.

Yet, the ICT sector has a key role in leading the transformation of the world’s businesses and social structures.  In fact, studies indicate that a significant portion of Canada’s lagging industrial 

productivity is because Canadian companies are failing to adopt ICT solutions within their business at the rate of the U.S. and other countries. 

This paper sets out a proposal to show how the ICT sector and Canada can define their roles in this dynamic, and provide Canada with better leverage of the sector’s innovativeness and creativity to enhance our productivity.  We draw your attention, in particular, to the proposed ICT Transformational Partnership Program.

Pre-Budget discussions as reflected in the 2012 Budget

Last fall, as part of our pre-Budget consultations done through its social media network, CATA explored whether the current status quo for government support in the ICT sector was acceptable, and, if not, what were the directions for improvement.  Participants in these discussions were clear that the status quo was not acceptable.  Specifically: 

·        after years of interventions, CATA members still felt that the SR&ED Program was not delivering what it should (CRA’s administration of the program generally being mentioned as a central culprit); 

·        the growth of viable, commercially successful businesses was seen to be very much hampered by the lack of venture investment; 

·        the lack of entrepreneurial vision about what could be achieved and how, combined with the dearth of marketing talent in Canadian tech companies, were cited repeatedly;

·        many indicated that the ICT sector’s performance was subpar and that too many of the investments made in creating or building out ICT companies were being lost before their full potential was leveraged at home; and  

·        confidence was expressed in Canadians as technology innovators.  Innovativeness was not the issue in spite of the public rhetoric to this effect.  Rather, the real issue was our limited success at commercialization and gaining the full benefits of our innovativeness.

The government seems to have picked up on this messaging to some extent in the month leading up to the 2012 Budget and in the Budget itself – but clearly not sufficiently, given the magnitude of the net reduction in ICT sector support and the impact of the Canadian dollar on the viability of major Canadian ICT investments. 

While everyone recognizes that the government has concluded that spending restraint is essential until the current deficit is eliminated, the reality has yet to ‘sink in’ for many observers and firms that the 2012 Budget resulted in what appears to be a net decrease in total government support for the ICT sector.  

All of this reduction is happening even though there was a way to free up, not just $400 million, but close to a $1 billion of SR&ED funding to be more effectively allocated.  This would not have harmed SR&ED as incentives – simply better targeted it, lowered compliance costs, and lowered CRA's administrative costs. 

Clearly, the industry and its associations, including CATA, have not adequately communicated to decision makers the urgency of ensuring a viable Canadian ICT sector.

With the exception of promoting increased support for venture investment, the sector and its advisors focused on protecting what they knew best SR&ED.  This was in spite of the government’s clear call in preparation for the 2012 Budget for a rebalancing towards direct funding programs.  CATA was no exception; we strongly supported tax based improvements, particularly the management of the SR&ED Program.  In contrast, other sectors had developed significant proposals for program support. 

We continue to believe that eliminating retrospective claims and the associated windfall credits could likely have saved a billion dollars, with minimal impact on industry, giving the government more scope to support technology sectors in other ways.  Unfortunately, as far as we know, there was very little to no discussion of this proposal, its advantages, and/or disadvantages in any of the pre-Budget consultations.  So, the proposal may simply have not been understood.

Post-Budget discussions with officials

After a month of listening to CATA members about the very real impact of the SR&ED changes in the Budget, and both John Reid and I having had the opportunity to discuss the Budget results with those knowledgeable of Prime Minister Harper’s agenda, we believe it could be useful if the ICT sector were to bring forward fresh ideas that would represent a win-win for all not one

We hear that further SR&ED proposals could be a tough sell to this government.  Often, strange looking claims and media reported program abuses are highlighted to us in our discussions with government and political officials when we bring up SR&ED.  Perhaps, there is a belief that too many claims are on the edge and that avoiding this is difficult, unless a very hard line by the CRA is supported and a commensurate tight line on eligibility is maintained.  We suggest that group over another.  without the clarified legislation that industry called for, or at least a return to CRA/industry jointly agreed standards (both of which Finance failed to address with this Budget), the officials could be correct.  Uncertainty just invites creative and often aggressive claiming practices.  I have certainly seen the issues in some claims I have reviewed.

Moving forward: An ICT Transformational Partnership Program

Is it not time to move forward, as many of the participants in the CATA social media networks said before the Budget?  While we prefer a tax based mechanism, this may not be the time. 

At this time, what is likely needed is a proposal for a properly funded and co-ordinated ICT Transformational Partnerships Program.  Such a program should probably meet the following criteria:

·            ++  be attractive to, beneficial to, and available to a large spectrum of ICT sector businesses that wish to leverage innovations not just to a relatively narrow group of firms;

·            ++  promote the anchoring of the partnership to a transformational multi-market initiative  where the synergism of membership is a key leverage to business success; 

·            ++  promote synergies that encourage commercialization successes amongst all participants.

·             ++  encourage the use of business-relationship models for the effective sharing of IP, market intelligence, etc. that have already been tried and tested so that partnerships can focus on achieving commercial successes and leveraging common synergies;

·            ++   target transformational/enabling technologies of ICT sector businesses that have the potential of accruing to the Canadian economy tangible, reasonably long-term benefits;

·             ++ create anchoring relations and clusters of associated partners focused on exploiting core enabling technologies in a collective ‘shared innovation’ approach in their market domains; and 

·             ++ be demonstrably achievable and have the potential for tangible returns in the short term. 

Obviously, the implications of these criteria need to be thoroughly examined and tested. 

This concept of technology partnerships being created to extend and exploit core technologies in a multiplicity of complex market conditions is not at all new to the ICT sector.  The model has been very successful for many Canadian firms that have been early adapters and exploiters of emerging core technologies.  For example, companies that work together on refining and exploiting new Beta platforms for business enterprise technologies.  The idea would be to formalize support for these initiatives in a program that focuses on the most important and viable projects.

We  suggest that the sector seek federal support in the form of a pool of funding that would, in total, reflect the $300 to $400 plus million that has been lost as a result of this Budget and of CRA’s ongoing restrictive actions to control the growth and cost of SR&ED tax expenditures.    

One of the attractions of such a program is that it would pick up where CRA's new restrictive focus on core technologies leaves off, i.e., where extensions are needed to create viable applications, given real world constraints and performance expectations.  In other words, in the area that comes after R&D – often referred to as ‘pre-commercialization’ and 'commercialization'.

Next steps

·        Develop sector leadership to promote and refine proposal.

·        With the University of Ottawa and partners, develop a short review and study of transformational relationships and Canadian experiences to identify success factors and to expand on and refine the proposal.

·        Expand on the following model for transformative partnerships:

Model for a

Transformative Partnerships Knowledge Flow 

Primary Transformative Anchors

Primary Core Technology: Enablers

Primary networks: market, knowledge, technology extenders & adapters

Users: Real life requirements