CATA report captures dramatic improvement in management of SR&ED program

Inconsistencies and problems remain

A three-year effort to improve the delivery and consistency of Canada’s flagship R&D tax incentive program appears to be bearing fruit, according to a recent survey conducted by CATA Alliance. The CATA report shows that more than half of the firms contacted say that the management of the Scientific Research and Experimental Development (SR&ED) program has improved in the past 12 months. And the SR&ED program itself claims that the measures taken since a watershed meeting in Vancouver in 1998 has resulted in a host of enhancements, including “meaningful progress” in the timeliness of processing claims.

The survey polled firms late last year and early this year on five performance metrics and found that 52% of respondents have experienced an improvement in the management of the SR&ED program. That compares to just 24% when CATA’s initial survey was conducted in February 2000.

While the CATA report stops short of providing a glowing endorsement of SR&ED — it notes several “residual problems and concerns” reported by a significant number of companies — it marks a dramatic turnaround for a program that was once reviled as slow, inconsistent and often unfair in its treatment of applicants. Regardless of those criticisms, however, SR&ED continues to play a central role in the development strategies of many Canadian firms, with at least $1.5 billion in tax incentives provided annually to companies conducting a wide variety of R&D. As administered by the Canadian Customs and Revenue Agency (CCRA), a significant attempt has been made to make the program more responsive to users, particularly those that are new to the process.

“The SR&ED program is going through a major cultural shift from a audit and enforcement perspective to an incentive program. It’s a new model with client orientation and accountability,” says Dr Russ Roberts, CATA’s senior policy director. “CCRA is committed to ensuring that the structural shift will go ahead although it’s only now moving out of the enforcement mentality. The shift is only really apparent in the last four or five months.”

While the majority of respondents noted that the program’s management had improved or significantly improved, the glaring exception was Toronto Centre, arguably the largest hub of R&D activity in Canada. In that region, 20% of respondents said management had gotten worse while 47% noticed no change. That contrasts with the rest of southern Ontario, Ottawa and indeed the rest of the country, where a majority of respondents felt improvements had been made (see chart).

“There was a positive response to most of the questions, but underneath there is a residual set of comments from groups that still have real problems with it,” says Roberts, adding that they vary from region to region among the various SR&ED branch offices. “There has been encouraging overall improvement but there are still problems.”

SR&ED was also rated poorly in the Toronto region in the assessment of science reviewers in terms of consistency, as well as as the CCRA’s interpretation of eligibility. But when it came to CCRA’s fairness in allowing eligible expenditures, Toronto was closer to the national average.

“When compared to other southern Ontario Tax Service Offices, who have shown considerable progress, Toronto Centre seems to have a more pervasive problem,” states the report.

Norine Hestleton DG of the SR&ED directorate, says she’s pleased that the report acknowledges the improvements of the program since an action plan was developed three years ago, but she admits that the changes being made in consultation with industry must be applied uniformly.

“On a national basis, consistency is probably our biggest challenge,” she says. “Technology evolves quickly and as a result the program will always be in a continuous state of improvement.”

Indeed, the CATA survey uncovered a host of regional inconsistencies. BC firms were most dissatisfied with the SR&ED science advisors, while Ottawa firms were most dissatisfied with the helpfulness of the program’s financial auditors. And while Toronto firms seemed dissatisfied with most of the variables examined in the survey, the majority of other southern Ontario companies took exception to the program’s treatment of expenditures. Science advisors came in for the most dissatisfaction in terms of consistency in every region except Ottawa. And their rating in terms of helpfulness still reflect problems although there has been improvement since the first survey.

It’s been a long haul for the SR&ED program since a landmark two-day conference in June 1998, which laid out five areas targeted for improvement: a client-centred focus, codes and standards, dispute resolutions, interpretive policies and minimizing complexity (R$, July 8/98). Since that time, SR&ED officials have been meeting on a monthly basis with industry representatives through the program’s steering committee, and Hestleton says the results of that collaboration are becoming readily apparent.

“There is a real shift and it is occurring. At the 1998 conference, I was on the industry side and the Revenue Canada minister was under attack. It was not a pleasant atmosphere,” she says. “Now we’ve moved away from the notion of audit to review, from enforcement to building awareness. We’ve created a culture of partnership.”

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