Budget changes to R&D tax credit won't solve problems faced by companies: CATA

Budget 2012: SR&ED

The largest weapon in the government's arsenal for incenting business R&D is going to get smaller with several changes being proposed that could free up as much as $600 million in direct support for companies. Budget 2012 proposes reducing the general tax credit for the scientific research & experimental development (SR&ED) program from 20% to 15% effective January 1/14 and eliminating capital expenditures as an eligible expense in company claims.

The SR&ED program costs the government approximately $3.5 billion annually in foregone revenue and accounts for the majority of assistance currently provided to R&D performing firms. Shifting indirect tax assistance to direct support is in line with a key recommendation contained in the Jenkins Report (R$, October 31/11).

Yet the Budget didn't adopt nearly all the recommendations for SR&ED made by the Jenkins Panel, particularly its suggestion to make the tax credit program purely labour-based — first for small- and medium-sized enterprises and later for larger firms after consultation with industry and the provinces.

"The Budget is a work in progress and that includes SR&ED," says Dr Russ Roberts, a veteran SR&ED expert and senior advisor to the Canadian Advanced Technology Alliance.

Roberts and CATA did not support the Jenkins Panel's recommendation for a purely labour-based tax credit, and while the Budget chose to eliminate only capital expenditures, Roberts says such a move will disadvantage several types of legitimate R&D activity that will hurt companies.

"Companies focused on proving out through a prototype have significant capital expenses, especially in the area of biotech and the hard technologies in information technologies," he says. "We need to create a new type of incentive to provide them (tax credits) for companies right through to commercialization. Reward Canadian profits for Canadian inventions."

The Budget also did not move on the Jenkins Panel's recommendation to take action on reducing contingency fees, which have become increasingly commonplace as consultants charge as much as 30% of the value of a claim for preparing company applications. Instead, it called for a study "to better understand why firms choose to hire consultants on a contingency-fee basis and determine whether action is required".

Roberts says consultants offer many valuable services and while high fees are a concern, a more effective approach would be to eliminate retrospective claims for work long completed.

"We suggest looking at retrospective claims because that's where the predominant issues surrounding contingency fees occur. With older claims, documentation is often weak or missing and they're always problematic … They tend to be a windfall," he says, adding that retrospective claims are often brought forward for companies by consultants in a practice known as fishing.

The Budget did little to address industry concerns over Canada Revenue Agency's administration of the tax credit program. But Roberts says the intention to "work collaboratively with industry representatives to address emerging issues" is an encouraging sign, particularly after cancellation of the SR&ED Partnership Committee (R$, April 10/07). "Working collaboratively would be a very large positive," says Roberts.

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