Industry views changes to SR&ED as shift from innovation incentive to compliance

Sweeping changes made unilaterally to the biggest federal R&D incentive program by the Canada Revenue Agency (CRA) are being viewed by tax analysts as a significant shift away from an incentive for innovation towards a mechanism for compliance. The changes — mainly in the level of detail required when filling out the new T-661 form — are considered to be the biggest change in the administration of the scientific research & experimental development (SR&ED) tax credit program since 1994.

The changes are being viewed by business — especially larger firms — as contributors to the time, cost and level of difficulty required to comply with the program, which now accounts for more than $4 billion in foregone tax revenue. According to an analysis by Ernst & Young, this is especially true for firms whose SR&ED claims involve more than 20 projects, involve large multi-year projects, projects to incrementally improve existing products or processes and those involving shop-floor R&D.

The changes have been made in response to the dramatic increase in the number of claims from smaller companies, which make up nearly 80% of the 18,000 claims now being received annually. They include the introduction of an online self-assessment tool that claimants can use to determine eligibility for specific aspects of less complex R&D projects.

"It is the magnitude of numbers of claimants that actually is a serious issue for CRA," says Dr Russ Roberts, CATA's senior VP of tax and finance policy director and a senior director with Deloitte and Touche. "What they've done is mix one problem in with the larger firms which are skeptical about the effectiveness of the credits."

increased emphasis on diligence

Analysts are warning R&D performing firms that they must be far more diligent in documenting R&D that they plan to claim under the program, ensuring a strong focus on R&D and technological aspects of the projects rather than its commercial objectives. Adding to the difficulty of compliance is a new word limit for describing a project – a challenge especially for shop-floor projects, process-based claims or those involving incremental improvements.

"These changes and some of the policy changes that we read in the documents significantly change what has historically been treated as eligible. It also sets a much higher standard for the documentation, some of which is not consistent with the way that businesses currently are able to manage development, particularly in the software sector and the manufacturing sectors," says Roberts in a CATA YouTube posting. "They are looking for documentation that's actually produced very much within the classical concept of an R&D project centred in that management zone of a larger project."

Part of the reason for the near-unanimous negative reception to the CRA changes could be the manner in which they were formulated and introduced. More than one analyst has noted that the changes were made unilaterally, in reference to CRA's widely condemned cancellation of the SR&ED Partnership Committee (R$, April 10/07). The industry advisory body had been popular with industry and credited with helping maintain relatively cordial relations with government. Since then complaints about the SR&ED program — particularly with regard to consistency of application — have risen steadily.

FMI: www.cra-arc.gc.ca/sred/

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