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MPB Technologies Inc. Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:

SR & ED Tax Credits: General

The tax regime should be the preferred method of administering government funding for innovation. Of the current approaches, the SR & ED tax credits are the most desirable and effective mechanism for government to foster innovation. Attention should be given to making this program more effective.

Improving the Program

SR & ED tax credits should be made fully refundable in the year incurred. Currently, when the SR & ED tax credits are not fully refundable, they DO NOT provide the timely, critical assistance which R & D intensive firms require. This often results in a pool of credits with NO practical or immediate value. Furthermore, they do not address a Company's cash flow, since the expenditures on R & D have been made. Any backlog of accumulated SR & ED tax credits should equally be refundable and not depend on the immediate profitability of the performer.

Canadian high technology manufacturing Companies are critically dependent upon export sales. These markets are seriously threatened by the recent high rise in the value of the Canadian dollar and by the increasing competition from the Asian giants notably China and India. With the high wage rates in Canada and the small size of the local market, the only open avenue is export sales . Here, innovation based on intensive R & D provides the best opportunity. Innovation encompasses not only the R &D but also the protection of intellectual property arising from the R &D and the development of export markets. Both of these require significant investment to establish and maintain.

Therefore, it is recommended that the SR & ED tax credits be expanded to include protection of the resulting intellectual property and the development of foreign export markets. In this way, the tax credit system would address innovation and not just R &D which is only one component of innovation.

A back-up [but not desirable] position on the accumulated tax credits is to make them available to offset the costs of export development, intellectual property protection and the costs of other federal taxes such as those associated with payroll.

Administration of the SR & ED Program

In our experience, the competence of the SR &ED tax auditors has covered the extreme limits of the capability spectrum from excellent, knowledge-able individuals to those with little understanding resulting in an enormous waste of time for everyone. We suggest that a minimum standard of knowledge and understanding be required by all SR & ED auditors hired by Revenue Canada, and that a Company has the right, without prejudice, to a change in auditors in situations where the parties are too far apart and do not appear to be making progress.

Conclusion

I would be pleased to discuss any of the above in greater detail as required. Please, feel free to post or otherwise communicate the above observations and recommendations.