ITAC and OCRI join forces

A new report on Canada's R&D tax credit program is calling on the federal government to provide full refundability to all claimants and undertake a comprehensive review of the program's objectives to determine whether it's effective in boosting incremental industry spending. The report represents consensus stemming from the analysis of key recommendations by 13 industry organizations and is aimed addressing the current government's declared intention to explore an expansion of the scientific research and experimental development (SR&ED) tax credit program to cover a broader range of innovative activity.

Entitled Improving Productivity Through Changes to the Federal SR&ED Tax Program, the report was commissioned by the Information Technology Association of Canada (ITAC) and the Ottawa Centre for Research and Innovation (OCRI) and prepared by Bill Toms and David Watters of the Global Advantage Consulting Group Inc.

"Advocacy on this issue has suffered from a lack of cohesion, so why don't we come together to do something jointly and see how many others we can embrace in this call for reform," says ITAC senior VP Lynda Leonard. "There are some indications that they (the government) are serious about focusing on Canada's S&T capacity and Canada's place in the knowledge-based economy. I'm encouraged by that."

The report's main short-term proposal — representing a consensus of previous submissions — is to broaden the current refund provisions and provide direct refunds to all R&D performers. Such a change will add approximately $1 billion to the government‘s cost of offering SR&ED, which is projected to account for $2.7 billion in foregone revenue in 2007 (see chart).

Full refundability would benefit firms that are not in a taxable position due to lack of revenues or annual losses. Nortel Networks Corp, for example, is rumoured to be sitting on more than $1 billion in unused SR&ED tax credits. But the report authors acknowledge that "it is probably unrealistic to expect full refundability" and propose alternative measures. These include extending refunds from small Canadian-controlled private corporations (CCPCs) to medium-sized ones, allowing the credit to be offset against a pre-income tax levy such as Employment Insurance premiums, and some form of flow-through share structure allowing some or all of SR&ED benefits to be transferred to other corporations or new equity investors.

In the longer term, the report calls for a major review of the program to determine its effectiveness in stimulating increased industrial R&D, the first time SR&ED has been subject to such scrutiny since its creation in the mid 1980s. A recent Finance Canada report estimates that, for every $1 of support put into the SR&ED program, $1.38 in additional R&D spending by companies is generated. In addition, the program's original objective of stimulating increased industrial R&D has widened to include its use by early-stage firms as a form of financing, and by later stage companies as a form of tax breaks.

"We've gone 20 years now and we haven't really examined what SR&ED is supposed to be doing," says Leonard. "If we are really serious — and I think we are –—about building a strong S&T-based commerce culture in Canada, it's time to look at some of the key instruments that are guiding public policy toward that end."

OCRI president Jeffrey Dale says the government can't be completely blamed for failing to act on previous recommendations in the past, as they were presented in a scattershot manner from a bewildering array of organizations. He contends that the new report's attempt to build consensus, combined with the current administration's desire to re-visit the program, bodes well for action in the near future.

"If you're a government and you have 13 different requests for change and industry doesn't come back to you with some sort of solidified approach, you can very easily say there's no consensus," he says. "We're trying to define the common denominators that everyone can rally around. Let's make it as simple as possible."

Adds Leonard: "It's not whining. The report contains actual experience of what is working and what isn't in the program. Any continuously improving organization takes that input and works with it."

While ITAC and OCRI intend to focus mainly on the report's two central recommendations, it contains several others that are offered for consideration. The report authors says new tax measures to improve innovation could include higher capital cost allowance rates to encourage the acquisition of new equipment and machinery and a tax reserve account to promote innovation. The latter is called a registered innovation fund (RIF) and is modelled on the federal registered retirement saving plan (RRSP). The RIF would allow corporations to contribute to the fund to finance future innovation activity on a tax deferred basis.

The report also weighs in on SR&ED's delivery by the Canada Revenue Agency. It notes that the Finance department has not conducted a major evaluation of SR&ED since 1997 and says the program has become complicated and suffers from a lack of transparency. Recent changes to the SR&ED Partnerships Committee — established to provide industry advice on the program — have exacerbated the situation. There are fears the committee's mandate is being reduced or eliminated and the report calls for a broadening of its mandate to ensure an appropriate conduit for industry input.

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