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N.J. Robbins Consultants Inc. Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:
Fostering a "team canada"approach to sr&ed
"Improving the scientific research & experimental development tax incentives"
"I believe that Canada's SR&ED program may be the best way our government can foster development of industrial technology in and for our nation. I believe that a "total team" approach to SR&ED– with a reviewing agency (CRA), industry taxpayers and specialists all working together –s the best practical way of achieving the goals of the program." Nigel James Robbins, November 2007
Why have we prepared this document?
We have prepared this document because we believe that the SR&ED program has an essential role to play in the economic development of Canadians, Canadian companies and the Nation.
We also wish to continue advocating and supporting the R&D activities of our industrial clients. Our clients view the SR&ED program as an essential element of their on-going efforts to increase the profitability and stability of their companies through technological research and development.
We believe that the SR&ED program must be continuously improved in order that Canada and Canadian companies can thrive in the global marketplace. We want to help in this process.
Who are we?
We are SR&ED technical specialists. Since 1996, we have been quietly helping a growing group of technology-based companies obtain SR&ED tax refunds and organize their R&D work. Our client companies operate in diverse fields and include manufacturers, inventors, software developers and more. We have prepared more than 200 SR&ED technical reports for nearly 50 client companies.
We go well beyond the preparation of SR&ED technical reports: our focus is to forge comfortable, trusted, long-term business relationships with our clients. Our approach is scientific but simple, rigorous but relaxed, accurate but advocating, strategic but sensible. We also take much vicarious pleasure from our clients' successes!
Our offices are based in Sudbury, in northern Ontario, but we also serve a few clients in southern Ontario. We have a staff of four, plus several subcontracted technical writers strategically located throughout the province. Our employees enjoy a relaxed professional atmosphere, and have a generous benefits package. We are a stable and established part of our community.
Our Approach in this Consultation
Since we are primarily technical SR&ED practitioners who deal directly and daily with our industrial clients, our focus herein is to comment on the administrative issues that directly affect the review of our clients' SR&ED claims. Our remarks are based on our own experiences with the program.
What do we mean by the "Team Canada" approach?
We believe that the SR&ED program will operate best using a "Team Canada" approach. Unfortunately, the current approach can become somewhat adversarial, whereas our real adversaries are foreign interests. All of us working in the SR&ED field must work towards our common goal - that of making Canada a more productive, technologically advanced and secure place to live and work.
We believe that the reviewing agency (currently CRA), claimant companies and SR&ED specialists all have a vital and complementary role to play in the smooth and effective operation of the SR&ED program. The SR&ED eligibility criteria generally support technological development. We believe that a spirit of true cooperation will permit the SR&ED program to better serve this goal.
We are convinced that with the right leadership, this team approach will work. However, team cooperation among all players must begin with a high level of mutual respect.
We reviewed the Consultation Paper, the request for submissions and the corresponding media release dated 24 October 2007. The Consultation Paper provided much relevant and useful material, and contained interesting statistical information about the SR&ED program. Those who prepared the documents deserve commendation.
However, we are surprised that data from the most recent "claimant survey" appear to have been accepted for administrative evaluation without regard to statistical significance. Even if the questions were crafted to elicit a sufficient range of answers, the 1400 respondents represent less than 8% of total SR&ED claimants (19,685 in 2004). Can this response rate generate sufficiently accurate data?
The overwhelmingly positive response to the claimant survey was also surprising to us, since we hear a much greater range of anecdotal comments from our clients and other companies about their experience with the SR&ED program and process.
We were also surprised that the "service standards" referred to in the Consultation Paper were restricted to claim processing duration, rather than a measure of whether the administration of the program actually served – and advanced – the goals of the SR&ED program.
CATA Alliance 2006 Consultation Report
Although the CATA document predates the current consultation process, we see it as a precursor to this process, and as a valuable resource for the implementation of the consultation. We are certain that CATA will provide extensive consultation based on its independent survey.
However, we were surprised to learn of several discrepancies in opinions of CATA's members with regard to the SR&ED eligibility limitations. It appears that knowledge of the SR&ED program may be incomplete, even among the ranks of the advanced technology members of CATA. This finding may indicate that improvement is necessary in clarifying the terms of SR&ED.
Response to the consultation 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?"
Our clients, especially those who are experienced claimants, evaluate the contribution of their prospective SR&ED tax credits when they plan for upcoming technological research. They typically see the SR&ED program as a valuable resource that is an essential component of their research investment. Most of our clients will ask us specifically "will this planned R&D work be eligible for SR&ED credits?". We cite a few examples of our clients' questions from the past two weeks alone:
An Investment Decision
A current SR&ED claimant company is negotiating equity investment from an offshore group; the investor asked us if the new R&D work planned by the company would be eligible for SR&ED tax credits. Since a significant research budget was envisioned, the prospective investor stated that availability of SR&ED tax credits would be a major factor in his decision to invest in our client's company. The investment decision looks very positive, but is still pending.
A Decision to Begin Research
A first-filing SR&ED claimant company (the previous taxation year will be its first claim) asked if their prospective development of a new process would be eligible for SR&ED tax credits. Based on our review of the company's research plans during a regular site visit, we were able to inform the company that their plans would likely meet all SR&ED eligibility criteria. The prospective availability of this financial "boost" provided sufficient incentive for the company to pursue the project.
A Decision to Continue Research
An experienced SR&ED claimant company has received SR&ED tax credits for its R&D work in developing a new material. The President of the company called me during my vacation to ask whether the costs associated with patenting and licensing their new product would be eligible for SR&ED credits. Although my answer to that question was "no", we identified specific research that was needed on the practical applications of this new material. Since the new research would be highly technological in nature, it would likely be eligible for SR&ED credits; the company has decided to continue its research work.
b)"Are there features of the SR&ED tax incentives that impede the growth of small and medium sized innovative Canadian companies, and how?"
In our experience with our clients, the legislated features and requirements of the SR&ED program are reasonable and achievable. The features appear to encourage industrial research and development. However, we are certain that our clients would welcome any expansion of the SR&ED mandate to include protection of intellectual property, acquisition of market intelligence and partial compensation for initial penetration of markets with new technological advancements.
Our experience has indicated that administration and interpretation of the SR&ED program may not meet the original intentions of the tax credit incentive concept. Most complaints we receive from clients involve the administration or interpretation aspects of the program. We discuss this in greater detail in "d" below.
c)"How could more private sector R&D be leveraged?"
We do not wish to comment directly on this question. We believe that improvements in the administrative aspects of the program will indirectly encourage greater involvement in SR&ED.
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?"
We applaud the intent that administrative improvements are sought, but we are at a loss to identify improvements that are "already implemented". Our experience with our clients' claims appears to indicate that the practical application of the program has not improved over the past two years or so; some of our clients may feel the opposite has occurred. For example, cutbacks in the Account Executive Program in the past year have deprived many of our northern Ontario clients of their sole trusted link to CRA.
If claim processing duration is the only measure of improvement (as indicated by the four "service standards"), then we acknowledge that this aspect has improved over the past few years. However, it is our opinion that administrative performance must be measured in success of delivery, not just in time elapsed for processing a claim.
We believe that the SR&ED program will operate best using a "Team Canada" approach. The current approach can become somewhat adversarial, whereas our real adversaries are foreign interests. We believe that the reviewing agency (currently CRA), claimant companies and SR&ED specialists all have a vital and complementary role to play in the smooth and effective operation of the SR&ED program.
We are convinced that with the right leadership, this team approach will work. However, team cooperation among all players must begin with a high level of mutual respect. In addition, this approach will require appropriate training, clear communication and an independent claim appeal process.
In the interests of brevity, we summarize our recommendations in three categories, but do not necessarily assign the implementation to any particular agency:
Training and Accreditation
1. Select technical reviewers (RTAs) who have open minds, familiarity with the Canadian business culture, can recognize the validity of shop-floor research and are self-confident enough to celebrate the successes of other Canadian businesses.
2. Train technical reviewers (RTAs) in the requirements of the SR&ED program, but also in how to take a positive and respectful approach in interpreting technical research work of industrial taxpayers, especially that involving shop-floor R&D. The duties of a RTA (Research & Technology Advisor) should be an accurate representation of the designation.
3. Develop and deliver training for SR&ED technical reviewers (RTAs) and practitioners. Require accreditation of RTAs and SR&ED preparers/practitioners by an independent examination body;include continuing education as a component of accreditation. Impose appropriate professional accountability as part of the accreditation process.
4. Improve the SR&ED knowledge level of industrial taxpayers and their employees. This will increase the level of compliance to eligibility criteria, foster improved tracking of SR&ED activities, reduce the workload of RTAs and avoid disappointing reviews of claims. This is especially important for claimants who conduct shop-floor R&D since their work may not always appear to be eligible without full understanding of the practical aspects of the work.
5. Ensure a professional and respectful working environment for RTAs and Science Officers. This is essential in order to attract and keep staff who can really make the SR&ED program work.
Clear Communication & Trusted Relationships
6. Establish a secure SR&ED tracking system for claims under review. This system should be easily accessed by a claimant or a designate. This will foster transparency in the review process, permit claimants to identify delays and allow claimants to project receipt of their credits or refunds.
7. Strengthen and expand the Account Executive Program. The AE program is a simple way to ensure smooth operation of the SR&ED program, and in our view, forms an indispensable component of the "Team Canada" approach to SR&ED delivery. It is especially important to revitalize the AE program in more remote areas such as northern Ontario, where claimants have less availability to all services than claimants in major centres. In general, the benefits of the AE program include:
a trusted, visible link between CRA and claimants
periodic education of the claimant in the SR&ED program
periodic update of the RTA in a claimant's research
8. Increase the transparency of the review process by making RTA reports available to claimants during the review process.
9. Provide a letter of acknowledgement to each claimant as soon as a claim is deemed "complete". This letter can also include a commitment to a review completion date or review duration, and could even designate the RTA and financial auditor who have been assigned to the claim.
10. Foster a "Team Canada" approach among CRA staff, claimants and SR&ED practitioners. Develop ways to actively combat the adversarial approach that can easily distract from the primary function of the SR&ED program.
11. Develop and deliver an electronic filing system for the technological aspects of claims (including technological documentation).
Independent Appeal Process
12. Develop an independent process for appeal or mediation of contentious claims, possibly with the inclusion of a SR&ED "ombudsman".