SR&ED dominates pre-Budget lobbying as major funding programs seek renewal

Enhancements to the scientific research and experimental development (SR&ED) tax credit program are shaping up as the hot-button issue in pre-Budget lobbying for changes to Canada's R&D and S&T environments. The chorus of calls for SR&ED changes was bolstered earlier this month with the release of a report from the House of Commons Standing Committee on Industry, Science and Technology (IST).

SR&ED is the federal government's main mechanism for stimulating private sector R&D, with an estimated $2.6 billion in tax expenditures in 2005. But Canada's business R&D track record is far from satisfactory, lagging behind nearly every other advanced nation as a proportion of overall R&D performance.

The IST Committee report, entitled Manufacturing: Moving Forward — Rising to the Challenge, is only the latest indication that consensus is emerging around an issue that's long been the focus of organizations like the Information Technology Association of Canada (R$, July 28/06) and the Canadian Advanced Technology Alliance.

Now another organization — the Business Group for Improved Federal SR&ED Tax Credits — is singularly focused on making the credits fully refundable, warning that more Canadian tech firms could be taken over if the situation isn't resolved.

The 12 companies commissioned a report by Secor showing the creation of 10,000 jobs and $200 million in additional tax revenue for every $1 billion in tax credits that flows back to firms. They have also engaged in a flurry of meetings with Cabinet ministers and senior government officials to press their case.

The companies comprising the group come from the sectors that conduct the vast majority of private sector R&D in Canada — information technology, biopharmaceutical, aerospace and pulp and paper. The companies are: CAE Inc, Nortel Networks Corp, Abitibi-Consolidated Inc, Bell Helicopter, Bombardier Inc, Cascades Inc, CMC Electronics Inc, Héroux-Devtek Inc, Kruger Inc, Neurochem Inc, Rolls-Royce Canada and Tembec Inc.

"SR&ED is targeted to profitable companies but many businesses are cyclical and the government has no tools to assist companies that are not profitable," says Frank Alessi, Abitibi's director of government relations.

Nathalie Bourque, VP global communications, CAE, says 24 associations have endorsed the Group's recommendation, reflecting broad consensus for change. She warns that if the status quo prevails, more Canadian companies could shift their R&D operations offshore or be sold to foreign interests. "We are Canadian companies committed to Canada but at some point the economics speak for themselves," says Bourque. "In other countries like India, it's much cheaper to do R&D."

The 12 companies within the Group are currently sitting on more than $1.8 billion in unused R&D tax credits. Bourque says full refundability retroactively applied is an expensive proposition, so the Group has laid out a number of options for government to consider.

"There could be a mechanism to allow companies to start accessing them partially or as a percentage of current R&D activity. Or they could offset other taxes we pay to government," she says.

ist committee report

Yet the report from the IST Committee, chaired by Conservative MP James Rajotte (Edmonton), indicates that changes to SR&ED enjoys all-party support. SR&ED ranks high among its 22 recommendations, many of which advocate funding for other key S&T programs and initiatives as a way to staunch the bleeding in the manufacturing sector (see chart). It calls for SR&ED tax credits to be made fully refundable, exclude investment tax credits from calculation of the tax base, provide an allowance for international collaborative R&D, and expand the credits to cover the costs of patenting, prototyping, product testing and other activities deemed pre-commercial.

hefty price tag

Changes to SR&ED won't come cheaply. The IST Committee estimates that it would cost between $5 billion and $10 billion over five years to extend "full refundability of SR&ED ITCs to all firms and all types of expenditures". The department of Finance estimates that excluding the tax credits from the tax base will cost the treasury between $1 billion and $4 billion over five years, while an allowance for international collaborative R&D would carry a price tag of $2.2 billion over five years. The IST Committee was unable to obtain costing data for its recommendation to extend the tax credit to a range of pre-commercialization activities but it would likely add billions more in foregone revenue.

The IST Committee also weighs in on energy policy and wholeheartedly endorsed several recommendations made by the National Advisory Panel on Sustainable Science and Technology (R$, November 27/06). It calls on the government to review its policies and fiscal and regulatory measures pertaining to energy to boost anemic R&D by both governments and the private sector and enhance support for companies and provinces undertaking R&D.

While the IST Committee's endorsement of the Canada Foundation for Innovation is not unexpected, its support for 4th pillar organizations is particularly welcome. These organizations, including CANARIE, Precarn Inc and CMC Microsystems, have proven invaluable in breaking down silos between government, industry and academia.

In the case of CANARIE, a major portion of the Canadian research enterprise is dependent upon it and its CAnet 4 broadband research network. CANARIE's funding runs out at the end of March, while two of CMC Microsystems' three main programs remain unfunded. Last year, Precarn was refunded in 2005 but at a dramatically reduced level, constraining its ability to stimulate the robotics and intelligent systems industries (R$, March 9/05).

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