Research tax credits elusive: CRA conjuring up new requirements for eligibility as it goes along: Don Cayo, Vancouver Sun
November 27, 2010

Research tax credits elusive 

The Canada Revenue Agency is conjuring up new requirements for eligibility as it goes along, critic says; Research tax credits elusive


The way tax credits for research are granted or denied is so capricious and unfair that an industry group fears a federal review will take too long -- even though it has already begun -- to fix the flaws.

These tax credits fall under the Scientific Research and Experimental Development program (SRED) and, according to an analysis by the Canadian Advanced Technology Alliance, the companies it is aimed at have been unhappy with it for years.

Now, "the problem is getting worse and the usefulness of the credits more debatable," the CATA says.

In a nutshell, CATA vice-president Russ Roberts tells me, the Canada Revenue Agency, which decides who qualifies and who does not, seems to conjure up new requirements as it goes along.

Companies that do practical research on the job, as opposed to theory in the lab, are supposed to receive tax credits of up to 35 per cent of the eligible spending by small firms and 20 per cent by big ones.

But first the big firms, and now the small ones too, find themselves being turned down for things that were always okay in the past, Roberts says.

This creates a situation worse than a mere crapshoot.

It would be bad enough if some got a windfall and others did not based more on luck than on any clear criteria. But the problem is made worse because companies have invested in plant and equipment based on past rulings about what's eligible and what's not. Thus, when a sudden change of rules costs them their sizable tax breaks -- in many cases retroactively, going back three or four years -- it can throw a serious wrench into what looked like a good business plan.

Also, capriciousness is the worst possible policy for going forward.

The whole point of these tax breaks is to persuade innovative companies to invest in Canada.

Whether you like these kinds of incentives or not, most developed countries offer them and they've become a big aspect of international competitiveness.

Yet, Canada's tax breaks will lose any appeal they might have had if investors don't know what will be eligible and if they fear the rules may suddenly change.

This isn't a small stakes game -- SRED is worth $3 billion-plus a year -- and its shortcomings have been evident for quite a while.

Last month, the government set up an expert panel with a mandate to report back on its whole $7-billion-a-year worth of research-spurring initiatives, but their report isn't due for a year.

Meanwhile, the taxpayers' ombudsman has launched his own review, expected to be complete by February.

It stems from a stack of complaints that made it clear there was, in the words of his staff, a "systemic problem" in the way SRED is administered.

I've written about many CRA problems in past, and in many ways this one sounds typical.

Roberts describes not only ever-changing rules, but also an us-versus-them ethos. Auditors seem driven to save money rather than to determine what rewards have been earned. Disagreements are fobbed off to a prohibitively costly and time-consuming appeal process rather than being resolved collaboratively.

"We are hearing that, at times, CRA reviewers are telling claimants they are looking for outright reductions of 15 per cent to 50 per cent in the amounts of their claims based on predetermined targets," the CATA analysis says.

The result, Roberts says, is this approach undermines the spirit of the act.

And, I would add, it wastes the money that the taxman forgoes if it doesn't in the end entice more companies to do more research.

Read more: