CATA renews call to improve tax-based incentives for successful technology innovation

Canada’s use of tax based incentives for supporting business R&D should be expanded and administered by a new agency to manage their delivery, according to a new report from the Canadian Advanced Technology Alliance (CATA). The report focuses on the needs of the information and communications technology (ICT) sector – the largest user of the scientific research and experimental development (SR&ED) tax credit program – and argues that ICT firms should be further assisted by a new digital innovation tax credit (DITC) and innovation box incentive (R$, June 23/16).

SR&ED is currently administered by the Canada Revenue Agency, which has been long-criticized for its dominant emphasis on compliance rather than incentives. A new agency – reporting to the Finance department and the innovation component of the department of Innovation, Science and Economic Development (ISED) – would be populated with “senior, independent leaders with private sector experience” and assessed according to its ability to increase returns to Canada from tax-based investments.

“It will depend on who manages it (the agency) but it can be a lot easier than the current system,” says report author Dr Russ Roberts, CATA’s senior VP tax and finance. “We haven’t got there yet so we have to remove the fear of an agency. We could still go with CRA but major changes are essential. We can’t keep denying problems.”

The SR&ED program currently costs about $3.3 billion in foregone revenue (down from a high of $4.1 billion in FY07-08 and FY08-08) and is provided to companies with refundable or non-refundable financial support. But users have long complained that its administration by CRA is cumbersome, time-consuming and costly.

It’s estimated the use of external advisors by firms has climbed from 50% to 70% in recent years and 30% of total SR&ED?expenditures relate to making retrospective (past) claims. The paper calls for the elimination of those types of claims to free up about $700 million that can be used to implement the innovation box proposal.

CATA favours tax-based mechanisms over direct support to incent ICT firms – a perspective that runs counter to the recommendations of the panel that produced the Review of Federal Support to Research and Development, headed by Tom Jenkins (R$, October 31/11).

Roberts says tax mechanisms are best suited for giving all firms encouragement to innovate and the freedom to define innovation free of government bureaucracy, adding that Canada needs to commercialize whatever is produced free of government directives or intervention.

The CATA report argues that its proposed DITC would be based on benchmarking best practices to “help companies focus and better see where to invest their creative efforts”.

“Benchmarking would be done by people in the firm that understand the status of companies’ technologies and that of their competitors,” says Roberts. “They can help describe how new innovations will open up new business opportunities with sets of facts to validate what you’re doing.”

The DITC would be complemented by an innovation box (also known as a patent box) allowing firms to pay lower taxes on products or processes that incorporate intellectual property.

“It’s a mechanism to lower the tax rate on what you’re investing in and growing, allowing companies to maximize earnings on a particular stream of innovation,” says Roberts. “It would be for companies that are eligible to receive the digital innovation tax credit. That’s our approach: reward companies. It’s predicated on eliminating retrospective claims.”

The report is one of several that CATA has submitted to the Innovation Agenda consultations. Roberts says CATA has been promoting its recommendations with officials in Finance and ISED and that “they understand the necessity of an effective, successful Innovation Agenda”.

“For 25 years, Canada hasn’t done anything to improve SR&ED. It’s a structural and mandate issue,” he says. “We understand the disconnect between software and digital development and the definitional problems CRA has with this sector.”

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