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PH Farmer Consulting Ltd Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:
SR&ED Program Improvement Submission
November 30, 2007
To: The Department of Finance and the Canada Revenue Agency
From: Paul Farmer, CMA - President
PH Farmer Consulting Ltd.
11 Trafalgar Court,
Bedford, Nova Scotia
T: (902) 433-0558
F: (902) 434-7902
Permission is hereby given to post all or part of this submission on the Department of Finance website.
PH Farmer Consulting Ltd. is a privately owned consulting firm that assists companies located primarily in Atlantic Canada in preparing and submitting claims under the SR&ED incentive program.
Our company has been in operation of over 5 years and the owner, Paul Farmer has over 12 years experience with the SR&ED program (including 5 years working in the Halifax TSO of CRA as a Financial Reviewer).
Our client base encompasses a wide variety of industries and a variety of small, medium and large sized firms. We also have clients who are owned by private, public and foreign individuals and companies. Over the last 5 years we have successfully prepared SR&ED claims for millions of dollars in Investment Tax Credits (ITCs) on behalf of our clients.
As requested we are submitting comments to the following questions:
a) How do the SR&ED tax incentives affect the performance of R&D in Canada, and how can they contribute to increasing private sector investment in R&D?
It has been our experience that the SR&ED tax credits do play a significant role in encouraging and supporting R&D activities in Canada. Almost all of our clients express their appreciation for the support available and indicate that the credits they receive do factor significantly on their decisions to conduct R&D and hire staff to support their efforts.
Obviously if the rates were increased this would encourage additional R&D activity – especially for the small and medium sized firms.
To support R&D conducted by public or foreign owned firms I believe that making the 20% tax credit refundable would make them much more attractive and further encourage many of the foreign owned companies to conduct more R&D in Canada (as opposed to other countries).
Another item that might be considered would be to offer an additional 5-10% for companies located in more rural locations with a smaller population base to further assist them to create employment in their areas and to develop products that would enable the companies to grow their operations and hire more employees.
In regard to the impact that the SR&ED tax credits have upon the decisions by foreign companies to locate/move their R&D activities to Canada as opposed to other countries I can speak from personal experience, having been involved in presentations to executives of large companies, that the Canadian incentives do impact upon their decisions. Recently I made a presentation to a large foreign corporation (that include many of the facts presented in your Consultation Paper) to explain the SR&ED incentive program to them, what is had to offer, and how it compared with the incentives offered by other countries. The information presented was very well received and I believe will be a major factor in their decision process. Although we are still waiting for their decision it is our belief that without the SR&ED program the option of locating their R&D branch in Canada would not be seen as a very attractive option in comparison to the incentives offered by other countries. I can say for a fact that the executives specifically inquired about Canada's R&D incentives and wanted to know how they compared to those offered by other countries. The fact that Canada offers investment tax credits in addition to enhanced deductions appeared to carry a lot of weight when compared to incentives offered by other countries that were limited to deductions against revenues.
b) Are there features of the SR&ED tax incentives that impede the growth of small and medium sized innovative Canadian companies, and how?
Generally I believe that the SR&ED program offers significant, effective and tangible economic support to SME firms conducting eligible SR&ED activities.
To further enhance this support I believe that the following suggestions are worth considering:
1) For purposes of calculating the "Grind" of the $2,000,000 Eligible Qualified Expenditure Base for the 35% Enhanced ITC rate, the prior year taxable income threshold should be increased to $500,000 or $1,000,000. This would provide an incentive for companies conducting R&D to commercialize the work without fear that the revenues they receive will reduce their future ITCs and cause some of them fall into the non-refundable (20% ITC rate) category. In effect the lower threshold acts as a penalty for firms that are seeking to commercialize the results of their previous R&D efforts. The higher threshold would reward firms for successfully developing their new technology. The increased revenues usually are reinvested in further development activities in later years, and the hiring of additional employees.
2) Expenses related to the conducting of necessary tests outside of Canada should be treated as eligible costs – provided that 75% of the R&D activity and costs have taken place in Canada. We have had claimants who, for reasons beyond their control, have had to conduct tests in locations outside of Canada in order to gather information to use in future R&D work in Canada, or to perform field trials to verify whether they have resolved the challenges and achieved the advancements they were seeking or not. It seems unfortunate that these claimants should be denied the ability to claim these costs when they have a direct impact upon the R&D activities being planned or conducted primarily in Canada, by Canadians.
c) How could more private sector R&D be leveraged?
One suggestion in regard to this would be to allow fees paid by Canadian corporations to purchase/license technology that has been developed by the Public or Academic Sectors (Universities, Community Colleges, etc.) to be considered eligible expenses for SR&ED. This would encourage more private companies to seek out more opportunities to partner with and/or purchase new intellectual property (IP) and other technologies from these institutions that could be further developed and commercialized. The Public and Academic Sectors have a major role to play in supporting and participating in the development of new technologies and in the enhancement of existing technologies, however it usually falls to the Private Sector to take the lead in commercializing it. In this manner the Private Sector would be encouraged to seek out new or advanced technologies that they could commercialize and the payments to the Public and Academic Sector institutions could be directed to fund further R&D activities.
d) Given the improvements already implemented or under study, how could administration of the SR&ED tax incentives be further improved and their complexity reduced?
On the whole, over the last 12-18 months we have noted significant changes and improvements in the manner and speed in which the majority of the claims submitted by us on behalf of our clients have been handled by the CRA.
We enjoy a very positive relationship with the CRA officials who review and process these claims and have generally found them to be responsive, open minded, and professional in the way they discharge their duties.
However there are still some areas to consider to further improve the administration of the SR&ED program:
1) Often when requests for additional information or preliminary Science/Technical Review Reports are issued the wording in them if still fairly bureaucratic and confusing. Frequently we get asked by the claimants to tell them what the documents mean and to explain what additional information the CRA is requesting.
2) We have been informed that if a project description is missing when a SR&ED claim is filed close to the 18 month limit, and is not noticed prior to the passing of the 18 month filing deadline, that the project and related costs would be ineligible. In instances where the costs have clearly been listed and claimed and it appears that the project description has been omitted due to a clerical error (or lost by the CRA at their Taxation Centre or at their Tax Service Office) there should be some latitude for Ministerial relief on an administrative basis – especially if the claimant or preparer have a proven history of compliance with the SR&ED program. Therefore I believe that the authority to exercise their discretion in accepting/correcting unintentional errors or omissions should be given to the local Directors. I believe that the decisions would be made responsibly by the individuals involved and that this would increase the CRA's ability to effectively and fairly administer the SR&ED program.
3) The practice of not accepting tax returns and SR&ED claim submissions and date stamping them by the officials at the TSOs of CRA created a significant increase in the risk level on the part of the claimants and their preparers. The ability to get a date stamped copy of the T661 form is critical in being able to show that the claim was submitted on time and prior to the filing deadline. This was seen as a substantial and arbitrary reduction in CRA's service level by almost all of the professionals in the accounting sector as well as their clients. I am glad that CRA has since reversed their decision and has started offering this service again.
4) In relation to the issue of clarity and consistency, I have had situations where the official from CRA has taken a position that appears contrary to the treatment laid out in Application Policy documents issued by the CRA. When this discrepancy was pointed out to the individual their response wasn't to explain why they were trying to treat the item in question in a different manner than the way it was being treated in the Application Policy and to justify their position and reason for apparently taking a contrary position, their response was: "Well, the Application Policies and Interpretation Bulletins don't have the force of law" and to dismiss the discrepancy. This ignores the fundamental fact that these documents were prepared and issued by the CRA themselves, usually by their Head Office after a significant amount of consultation with industry and other stakeholders. These are their own documents that they are contradicting – not ours. The documents were originally issued to provide guidance and clarity to the general public. Surely we should be able to expect that CRA will administer the SR&ED program in a manner consistent with their own stated policies and interpretations?
In closing I feel that the SR&ED incentive program is a great benefit and support to the private sector in Canada. I am glad to see this acknowledged by the Federal government. I appreciate having had the opportunity to contribute my comments and suggestions for the improvement of this valuable and effective program.