Industry lines up to push for changes as part of SR&ED tax credit program review

Refundability promises to dominate the federal government's long-overdue review of its highly touted R&D tax incentive program. Announced October 5, consultations on possible changes to the scientific research and experimental development (SR&ED) program will likely generate consensus that extending refundability to all R&D-performing companies is the minimum the business community is willing to accept.

A report commissioned last year by the Information Technology Association of Canada (ITAC) and the Ottawa Centre for Research and Innovation estimated that full refundability would cost the government an extra $1 billion in foregone revenue, in addition to the approximately $3 billion the program now costs annually.

"Fundamentally we believe all R&D investors should have meaningful access to the credits," says ITAC senior VP Lynda Leonard. "For instance, there are still a huge number of investors recovering from the downturn of four years ago that still have huge tax credit pools they can't use."

While there's some concern that the government may find such an increase excessive, many assert that the returns would far outweigh the cost.

"One billion is not too rich for what they (the government) can get out of it," says Russ Roberts, senior director tax R&D with the Canadian Advanced Technology Alliance (CATA) and senior director R&D tax services with Deloitte & Touche. "It doesn't seem too outrageous to consider it from the point of view of return on investment to the Canadian economy and commercialization and stimulating the innovation of businesses."

Roberts adds that Ottawa must reintroduce an external advisory body into the program. Earlier this year, the government axed the SR&ED Partnership Committee as a cost-cutting exercise (R$, April 10/07).

CATA is preparing a submission to the SR&ED review that will focus on three areas: refundability, a mechanism that helps to achieve the commercialization of Canadian ideas and the perennial problem of the program's administration.

"For the past 20 years, the CRA (Canada Revenue Agency) and the community have been trying to get the administration policy right but it's still confusing," says Roberts. "The government needs to clarify those areas of the legislation."

Leonard says the proper weighting of CRA's audit function with the program's objective of providing businesses with an incentive to conduct R&D is essential if SR&ED is to be effectively utilized by the greatest possible number of firms.

"The program often operates like it's on a pendulum between the audit approach and a true incentive program," she says. "Recently it's swung back to pure audit but there's got to be a balance between the two factors."

While changes in the refundability status are likely, it's not clear that the government is willing to implement more far reaching changes such as extending SR&ED to innovation activities closer to the marketplace. These would include applying the tax credit to activities relating to market research (beta customer care), design and software usability.

"We would like to see these further down the road," says Leonard. "There are issues around the administration of those kinds of activities that would have to be looked at very closely."

The review marks the first time in a decade that the government has conducted a major analysis of SR&ED, its effectiveness and options for improvement. For the current review, Finance Canada generated two major papers — An Evaluation of the Federal Tax Credit for SR&ED and An International Comparison of Marginal Effective Tax Rates for Investment in R&D by Large Firms.

The findings of those papers are included in a consultation paper prepared for the review. They include the conclusion that SR&ED benefits the economy as a whole through spillovers and generates a net economic gain. It also found that, for every dollar spent on the SR&ED tax credit, a net economic gain of 11 cents is realized.

The government is accepting submissions until November 30 and is also offering to post submissions on the Finance web site with permission from the submitting individual or organization.

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