Feds ‘clawed back’ $4.2B in SR&ED credits, Ottawa-based tech group says

As the federal Liberals continue to tout plans for an “innovation agenda,” one of the country’s leading technology industry advocates is calling on the federal government to reverse the dramatic decline in tax credits aimed at encouraging research and development.

The Ottawa-based Canadian Advanced Technology Alliance, or CATA, released a report Tuesday that analyzed the value of credits distributed through the federal Scientific Research and Experimental Development – better known as SR&ED – tax incentive program.

It found that after hitting a high of $4.1 billion in 2008-09, the value of SR&ED tax credits dropped to $3.3 billion the following year and have since fluctuated between $3.1 billion and $3.6 billion annually.

According to CATA’s calculations, the cumulative decline adds up to $4.2 billion.

CATA president and CEO John Reid said it appears that new, restrictive interpretive and administrative policies are behind the decline.

He suggested that there’s been an overreaction to cases where companies have failed to assemble the proper documentation.

“You’ve had a few companies muddy the water and the reaction has been disproportionate to the point where it has affected the predictably and integrity of the program,” Mr. Reid said.

In a statement, the Canada Revenue Agency said it does not comment on third-party reports.

However, it noted the SR&ED Program underwent changes in 2012, some of which were in response to "aggressive positions taken by claimants in their credit applications" that included inflated expenditures.

As part of the 2013 budget, the CRA said it received an additional $15 million for compliance activities.

"As a result, the amount of tax credits to support research and development as part of (SR&ED) has declined," the CRA said.

Criticism and debates

SR&ED was officially introduced in 1986 but existed in other forms for decades.

It’s the single-largest federal program in support of business research and development and is widely used by technology companies in Ottawa.

According to the Canada Revenue Agency, the program generally provides a tax credit worth 35 per cent on the first $3 million of eligible R&D labour, equipment and overhead costs.

It’s refundable, which means that even unprofitable companies that don’t pay corporate taxes can recover a portion of their R&D expenses.

Mr. Reid said the program has helped small businesses with their cash flow as well as encouraged multinationals to expand in Canada. However, he says those gains are now being jeopardized by the current “unpredictability” of SR&ED applications.

SR&ED has also faced more broad criticism over the years by its supporters and detractors alike.

Some argue that the program lacks focus, and that rather than investing in strategic sectors, the money is spread too thinly across too many companies in too many industries to make a meaningful difference.

Critics also say a disproportionate amount of the financial benefits are accrued by consultants and advisers, rather than being allocated for actual R&D.

Last month, CATA renewed its calls for SR&ED to be administered by a new government agency, rather than the CRA.

CATA argues that the CRA focuses on compliance, rather than incentivizing R&D. It believes a new agency could be staffed by independent individuals with private-sector experience tasked with increasing the return on tax-based investments.

CATA is firmly against replacing an equal opportunity tax credit system with government subsidies for specific industries that some equate to the government picking winners and losers.

“You do not want to be in the business of predicting (which) sectors succeed,” Mr. Reid says.

However, that opinion is far from universal.

A 2011 report by OpenText chairperson Tom Jenkins recommended that SR&ED funds be redeployed “to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms.”

More recently, Jeffrey Dale – the former president of the Ottawa Centre for Research and Innovation – said SR&ED needs to stop trying to be all things to all companies and should instead be broken up to achieve different results.

In a January OBJ column, Mr. Dale said the first component should be a non-refundable program for startups to offset a portion of their initial development costs, followed by a program offsetting tax and other levies for research initiatives linked to new product or service developments.

Finally, Mr. Dale said there should be “a generous corporate granting program that supports our industrial strategy and requires an academic and corporate partnership for the development of disruptive innovation.”