Barry McKenna has written two articles in the Globe and Mail on the SR&ED program, the most recent on March 11, 2011. We understand he’s a journalist, not an expert on SR&ED. That’s why we thought we’d provide some assistance to Barry for his next article.
A Flawed R&D Scheme?
R&D activity is a leading indicator of economic growth. As a result, most OECD countries encourage R&D through tax incentives. This fact contrasts with the statement in the article that “Unlike most other developed countries, Canada chooses to pump cash into business (sic) R&D indirectly, through tax breaks.”
In a paper on incentives for R&D in thirty six (36) developed nations, available on the Ministry of Finance web site, all 36 countries surveyed do in fact provide “tax assistance for investment in R&D through generous tax depreciation allowances and 12 countries provide ITCs.”
The Globe and Mail complains that “Money is often paid out to decidedly low-tech and routine manufacturing, such as baking gluten-free cake, making injection-moulded auto parts or growing potted roses.” This complaint stems from a misunderstanding of the way countries define R&D.
There are two side of the SR&ED ampersand: SR and ED. SR, on the left, is what we traditionally think of as R&D. It is pure research, performed mostly in universities, and applied research, performed in universities and technology labs that result often times in papers publishable in scientific journals.
On the other side of the ampersand is ED which is industrial R&D performed during product development, process improvement and the like. This kind of R&D is shop-floor R&D and, it may come as a surprise to the Globe and Mail that, this is the R&D that most government incentive programs are designed to encourage. (The baking of a tasty, commercial gluten-free cake is no mean feat. Just ask my relatives with celiac disease. It’s been four decades and still they have not seen a tasty commercially available gluten free cake.)
R&D is not defined as the Globe and Mail would suggest. Instead, there is an internationally recognized definition of R&D presented in the Frascati Manual. When we say that Canada lags other countries in the amount of R&D performed we are using the Frascati Manual’s definition of R&D as a means of comparison. Most of the R&D activity measured using the Frascati definition of R&D is the gluten-free cake variety, industrial R&D.
Canada’s tax incentives for R&D are generous but not the most generous. According to the same research, Canada has the third most generous R&D tax regime in the comparison group of countries, behind France and Spain.
It is also not true that Canada does not incentivize R&D through “grants, investments or government purchases.” R&D is encouraged through the provision of grants (see NRC-IRAP), zero-interest loans (for a listing see funding.revenueservices.ca) and government purchases through the CICP program which acts as a beta-site for new technologies (see buyandsell.gc.ca).
However, the SR&ED program remains the most effective of all of these programs because it has consistent, internationally recognized criteria for funding, and service standards for adjudicating claims. This means it offers the most predictable outcomes and is the most dependent on objective criteria of all the programs available to companies for funding R&D and the least dependent on the whims of a judiciary. This is a good thing. It is difficult to encourage R&D if company projects are put on hold, as is the case with grants and loans, while waiting for a judiciary to make a decision. And because a decision on grants and loans is made six to eight months after application date companies are often put off applying for funding for fear of missing the business opportunity the market presents at a specific time.
We know of many businesses that perform SR&ED only because the risk and cost of doing so is partially offset by the government. That is what an incentive program is designed to do. Incentivize.
The SR&ED credit is available to all companies that meet the criteria set out by law. But not all companies that meet the criteria for a credit know that the credit is available. As a result, many companies have not received tax credits they were legally entitled to receive. This is alot like a company not deducting business expenses, because they didn’t realize they could, or not claiming a tax credit for creating childcare spaces for children of employees because they didn’t know that such a credit existed.
SR&ED consultants and accountants are the agents of democracy. They, more than the CRA’s publicity, have helped inform the thousands of business that qualify for SR&ED. The result is that each year fewer businesses that qualify for the SR&ED credit are left out. The SR&ED incentive is designed to be inclusive. SR&ED consultants make it so. Just as it is not the CRA’s mandate to compile tax returns so it is not the CRA’s mandate to complete SR&ED returns. Parliament makes law, the CRA administers the law and those who are in the business of compiling tax returns or completing SR&ED returns are important intermediaries for converting the law and knowledge of the law into business practice.
The Globe and Mail article talks of fraudulent claims being made by unscrupulous consultants. Fraud has no role in any sector of business activity. The problem is not with the program but with the fraudsters. When Joseph Rothe allegedly defrauded the government out of GST, it was not the Excise Tax system at fault.
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