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Bateman Viner R&D Tax Specialists Submission in Response to Joint Finance Canada Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:

November 7, 2007

Ms. Nancy Horsman and Mr. Peter C. Armstrong
Joint Finance Canada - CRA SR&ED Consultations
140 O'Connor Street
Ottawa ON K1A OG5

Dear Ms. Horsman and Mr. Armstrong,

re: SR&ED Consultations

This letter is provided in the spirit of cooperation and to make a good program even better. We provide you with the required data to give you permission to post this letter on your consultation WEB site. This data is available elsewhere in the letterhead of this letter. We the principles of Bateman Viner have been involved with the SR&ED program since inception of the program and we feel the SR&ED program is an essential part of the growth of the Canadian economy. It is even more important now that the Canadian manufacturer is under such extreme exchange rate pressure.


Canada was the clear leader in SR&ED incentives internationally as recently as the mid 1990's; now many countries have a program that is equal or better. The importance of this issue may only concern the large international company selecting a country for growth, resulting in Canada no longer being the clear choice on these criteria. But, this is also important to the Canadian company expanding internationally. This company is deciding between keeping its development center in Canada and sending this competence out into its new subsidiaries. Now this is not such a clear choice and Canada is the poorer for it.

Our conclusion was that Canada needs to improve the SR&ED program for both sectors to remain competitive as a country.

Small vs. Large

The SR&ED program is very beneficial to small companies even though this benefit hasn't improved since the 1980's but not always so valuable for the large ones. The rate of credit falls and the refundability of the credit stops for larger corporations. There are many rules to make otherwise small companies large for this purpose.

We would propose to enrich both the small and large companies and try to simplify this process at the same time.

Now small companies that perform a lot of SR&ED are limited to the first $2,000,000 for the enhanced credit. This limit has remained constant for over 20 years.

We recognize that if the limit was adjusted for inflation it would now be a little over 5 million.

Therefore, we propose either a lifting of the cap to $6,000,000 or a more complex change to enhance the credit for the small performer according to the following table. These thresholds are based on expenditures. All levels up to $6,000,000 would be refundable and one method of a phase out method is the existing one based on taxable income where the phase out starts at $400,000 to $600,000 where all refundability ceases.

Expenditure Credit Rate

0 - 2,000,000 40%
2 - 4,000,000 35%
4 - 6,000,000 30%
above 20%

This is an improvement compared to today for all of the ranges: the 0-2 million range get 5% more tax credits, the 2-4 million range get 15% and the 4-6 million range get 10% more tax credits.

Currently, these credits are not refundable if the company is successful in two measures, the accumulation of taxable capital and if the prior year taxable income is over a fairly low threshold. Both of these are very hard to plan and other forces like banks often prevent the company planning around them.

We also notice a severe falling off of interest in the documentation of SR&ED when a company goes over these limits and loses refundability.

We would propose a totally different model as one alternative. Our new model would be that if the company had less than 300 employees and that this was 75% or greater of its world wide employment the company would be eligible for refundable treatment for all the tax credits earned up to $6,000,000 on the above chart. If the labour force increased by 25 people a proportion of the refundable treatment would vanish. Let's say this would be 25% of the table for the 40% down to the 20% credit level.

Further refundability would be reduced for each incremental increase of 25 people until it was gone at 400 employees.

In the alternative we would keep the taxable income model but increase the threshold from the current range of $400,000 to $600,000 and change it to a new range of $750,000 to $1,000,000. The first number is the level at which the company enjoys 100% refundability, the last number is when refundability is totally gone. We would also suggest that the second test of taxable capital be removed.

We conclude in the small versus large area, that on the world stage a small company is far larger than what we think in a Canadian context. Therefore we should help the middle sized company in some way to get out into the world by encouraging them with one of the above two changes.


If a company currently fails the refundability test due to having too large a taxable capital amount but has experienced reversals such that it is currently losing money there is no relief or benefit in this program.

We suggest that either the taxable capital amount be eliminated as stated above in our prior point qualifying the company for full refundable treatment of its earned tax credits or after two years of losses, i.e. in the third year, the company should be able to use its ITC pool to not just pay corporate income taxes but also to pay withholding taxes for its employees, encouraging continued employment in this challenged company.

Eligible Expense Modifications

1. Currently if a Canadian resident employee, taxable personally in Canada, goes to witness a test of a prototype in a foreign country for his Canadian employer his time is technically not eligible in the program. Further if he is involved in an international R&D program with the core R&D performed outside Canada and his associated effort preformed either in Canada or outside, this time is not eligible because it is not associated with a Canadian project.

In both cases our Canadian Researcher is learning something and bringing knowledge to Canada. We believe in these cases that this time should be eligible SR&ED. The credit is in fact funded by the tax on the researcher's salary.

2. A further eligible expense area is the "almost fully engaged" researcher. Currently the rules give a company 100% of this researchers total cost as eligible if he is all or substantially all involved in SR&ED. This phrase is not defined in the Act but CRA administratively sets it at 90%. The courts have set it at a variety of numbers as low as 80% and the US in its programs uses 80%.

We suggest that this value should be 80% and further that this value should be in the legislation to ensure consistency of application across Canada.

Review and Administration

We recommend that the CRA and this directorate be allocated the resources to expand the number of reviewers. This would allow CRA to process the files faster with these qualified people.

In the alternative, it may be possible to vary the risk model with the help of additional analytical staff. This would allow more files to be down screened reducing their time in the system.


We recognize that our point of view is to enrich the program and the government's point of view may be to restrain costs.

So in the question of balance, if some of the above ideas to enrich the program were introduced, we thought about what we would be willing to give up.

One suggestion that we have is to eliminate the possibility of claiming capital in the SR&ED program. We realize that there are a few cases where this is a good concept. But overall capital is less than 5% of the program's eligible expenditures. The removal, eliminates a complication but that elimination does not save the government much money. This elimination would hurt the perception that the program finances capital for long term prosperity even if it is actually very difficult to claim fully supported SR&ED capital. This change would also remove a major complication – the recapture of the ITC credit earned on capital when that capital is sold or disposed of for funds. This area is not used by taxpayers correctly and its removal would be a blessing.

This letter is presented in the spirit of keeping and making the SR&ED program stronger. Please assist us in doing this.


Gary L. Bateman, B. Sc. EE, P. Eng., M.B.A., C.A., T.E.P.

Earl Viner, H.B.A., LL.B.