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Certified Management Accountants Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:
Tax Incentives for Scientific Research and Experimental Development Submission to the Joint Finance Canada-Canada Revenue Agency
November 30, 2007
Who we Are
The Society of Management Accountants of Canada (CMA Canada) is pleased to participate in the public consultation process on the Scientific Research and Experimental Development (SR&ED) tax incentive program undertaken jointly by Finance Canada and the Canada Revenue Agency.
CMA Canada is the Canadian governing body that grants a professional designation in strategic management accounting. It is responsible for standards-setting, accreditation and the continuing professional development of Certified Management Accountants (CMAs), regulating its members under the authorization of provincial legislation. CMA Canada represents more than 38,000 CMAs and 10,000 CMA Candidates. Our members range from senior level managers in the public and private sectors to sole practitioners operating as business consultants and auditors.
Working in organizations of all sizes, CMAs provide an integrating perspective to business decision-making, applying best management practices in strategic planning, finance, operations, sales and marketing, information technology, and human resources to identify new market opportunities, ensure corporate accountability, and help organizations maintain a long-term competitive advantage.
Canada's Scientific Research and Experimental Development (SR&ED) program is a vitally important instrument of public policy aimed at attracting capital investment in research that will develop the technologies of tomorrow, encouraging innovation in our economy. Innovation is one of the key drivers of productivity, together with investments in human and physical capital. CMA Canada has long advocated a mix of policy measures aimed at boosting Canada's productivity performance. We do so because we believe that productivity growth is paramount to improving the living standards of Canadians – one of the core policy objectives of our tax system must be to improve the lives of Canadians.
The global economy is undergoing a profound transformation, influenced by, among other things, low-cost/high-quality offshore labour pools, soaring energy demand and costs, and complex non-tariff barriers erected in many countries. The impact of the rapid rise in the Canadian dollar presents new challenges.
At the root of the tectonic shifts in the global economy is the movement of massive amounts of investment capital across national borders. Where these investments flow will determine whether Canada becomes a relevant participant or remains on the sidelines. Canada's relative place in this world will be determined by the policy response of the Government of Canada. The SR&ED program is a key component of that response.
SR&ED – The Experience Today
The SR&ED program is the federal government's flagship program that encourages the business community to perform research and development in Canada. Introduced more than two decades ago, the SR&ED is popular due to the following:
- It is well-known in the business community.
- It is delivered through the tax system rather than as a less predictable government grant.
- It has a low cost of program delivery with well established procedures.
- Evidence of abuse in minimal.
The number of corporations earning SR&ED tax credits exceeded 19,600 in 2004, with a large majority of claimants being small and medium-sized businesses.
The SR&ED tax credit has benefited from changes announced in Budget 2006; namely, to raise the taxable income for full-refundability claimants from $300,000 to $400,000, and to extend the carry-forward period for unused tax credits from 10 to 20 years. Despite these positive changes, Canada continues to under-perform in business research and development. We firmly believe the program must be enhanced to ensure that Canada is poised to receive new investment capital, as well as better lever the impact of the tax credits' spillover benefits into other sectors of the economy.
Marketplace realities make the SR&ED tax credit less attractive than it appears to be. The following examples highlight some of the challenges faced by the business community as its leaders consider whether to invest in research and development in Canada:
- Although the tax credit program is generous from the perspective of nominal tax rates, the reality is that many companies do not have sufficient taxable income to take immediate advantage of the tax credits. Consequently they accumulate pools of earned but unclaimed tax credits.
- According to testimony provided to the House of Commons Standing Committee on Finance by the SR&ED Tax Credit Coalition – consisting of major companies from across Canada representing virtually every sector of the economy – its members have accumulated SR&ED credits well in excess of $2 billion. The aggregate number of banked credits is much larger. These banked tax credits do not attract any additional investments in Canada, do not lead to a new technological breakthrough, and do not create a single new job in the country.
- Business decision makers will heavily discount the tax credits to reflect the time lag between the research and development investment and the use of the tax credit. This discounted value has a negative impact on investment decisions because it is uncertain whether the credits will ever be claimed.
- After-tax costs of R&D spending increase if companies are unable to use their tax credits at the time they make their investments. The practical consequence is to make Canada a less attractive place to make R&D investments than those countries where companies can immediately access R&D incentives. This can also have a direct impact on a company's ability to raise new capital.
- Companies with large accumulated pools of unused tax credits can be attractive takeover targets because the acquirer can use the credits to, at least in part, help finance the acquisition. The reality is often that foreign-based enterprises become the unintended beneficiaries of taxpayer-funded incentives.
Recommended Solution – Full-Refundability for All
Several policy and administrative improvements can be made to the SR&ED program that would enhance Canada's productivity performance and improve the well-being of individual Canadians. This consultation process will no doubt attract many such suggestions. While other measures may be desirable, and we would likely support those that would increase productivity, CMA Canada urges the government to focus on one central policy issue – refundability.
We recommend that the Government of Canada enhance its support of research and development by extending the refundability provision currently available only to smaller businesses to claimants of all sizes. As an alternative, the government could permit larger claimants to apply the tax credit against other federal government levies such as EI premiums. We recommend that this important change to the operation of the SR&ED tax credit be made available for credits earned in 2007 and every year thereafter. Claimants should also be permitted to use their accumulated but unused tax credits first to offset taxes applied this year and in subsequent years, until the pool has been used up. Companies would thereby be able to draw down their existing pools of earned but unclaimed credits over time, with minimal impact on the federal government's treasury.
This single enhancement to the tax credit would significantly improve the operation of the SR&ED program, encourage more innovation, enhance Canada's productivity performance, improve the living standards of individual Canadians, and help ensure that Canada has a seat at the global economic transformation table.