Make SR&ED refundable for all companies

The Information Technology Association of Canada (ITAC) has joined a growing chorus of organizations calling for refundability under the federal tax incentive program for R&D expenditures to be extended to all companies. ITAC contends that universal refundability and four other changes to the scientific research and experimental development (SR&ED) program are essential if Canada is to become one of the top five R&D performing nations by 2010 (see chart).

The ITAC recommendations are based on a study of the information and communication technology (ICT) sector by the Conference Board of Canada (CBoC). The CBoC study of ICT business leaders showed that, while SR&ED is viewed positively, changes are urgently required to maintain Canada’s status as a favourable jurisdiction for conducting R&D.

CBoC conducted focus groups in Toronto and Ottawa with senior personnel from 13 ICT firms. The sample group was half Canadian and half foreign-owned, and included companies of varying sizes.

The ITAC call for universal refundability follows a similar recommendation by the Canadian Advanced Technology Alliance (CATA) (R$, May 22/02). CATA is also urging that the SR&ED administration be combined with those of Technology Partnerships Canada and the Industrial Research Assistance Program, and that the government make the elimination of capital taxes as the first item of its innovation strategy.

In recent years the number of competing nations to introduce or strengthen existing R&D tax incentives has grown rapidly, prompting concerns that Canada’s declining share of direct foreign investment will continue to fall.

“It is becoming more and more difficult to justify investment in Canada,” says Shirley-Anne George, government programs executive with IBM Canada Ltd. “It’s the reality that other countries are doing more to attract investment. It’s not just Australia and the UK, but it’s Singapore and India and China. Canada does not have a natural marketplace that the US and China have, that drive investment by the size of the domestic market.”

Of the five ITAC recommendations, the issue of refundability is considered key.

“Ironically, at the time when they (companies) most need financing and it’s most important to reduce the cost of their R&D, the tax credit is of no use,” says Karen Wensley, chair of ITAC’s tax and finance committee. “The recommendation is to look strongly at introducing a refundable credit, which means you get it as cash when you earn it. You don’t have to wait until you have tax to apply it against.”

Currently, Canadian controlled private corporations (CCPCs) earn a 35% tax credit for R&D performed, which they receive as cash regardless of profitability. But refundability is currently not offered to public corporations, CCPCs with more than $2 million in annual sales, or small start-ups controlled by foreign venture capital sources.

ITAC is also urging the government to consider reducing the dilution of the tax credit for foreign multinationals. Currently, SR&ED reduces the Canadian corporate income tax payable, but it also increases a foreign corporation’s income tax liability at home. Making the tax credit refundable may solve the problem. But the CBoC report also asks the government to consider allowing foreign firms to claim the tax credit against non-income taxes or levies, which would maintain the amount of the tax credit.

“(SR&ED) was established in 1985 and since then the innovation environment has changed dramatically,” says Gilles Rheaume, CBoC’s VP policy. “Given that Canada’s innovation strategy and the federal government are going through that process at this time, I think it’s an opportune time to review the objectives and make the changes that are appropriate given the new investment climate that we have.”

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