Features | From Pivot Magazine

Canada needs to streamline its tax incentive programs: here’s why

And this is how our partnership with the CRA can help us get there?

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Colleagues brainstorming and drawing on boardTogether with the CRA, CPA Canada has established a framework agreement designed to foster collaboration as a means of “ensuring a well-running tax system for Canada” (Getty Images/Compassionate Eye Foundation/Gary Burchell)

In the final months of the Second World War, the Canadian government began using tax policies to encourage private businesses to invest in research and development, hoping the move would drive productivity and innovation across the country. Today, that early policy’s descendent—the Scientific Research and Experimental Development tax credit, or SR&ED—is still a boon to the nation. The program, which allows Canadian businesses of all sizes in all sectors to claim full or partial refunds on qualified expenditures, is Canada’s single largest source of R&D funding to the private sector, responsible for delivering more than $3 billion in tax incentives each year to firms. In short, SR&ED underwrites all sorts of activities that help Canada compete in the global knowledge economy.

Yet the program has had its challenges. Applicants and government officials have disagreed over what constitutes an eligible expense. Many mid-market firms have dropped out of the program, dissuaded by compliance requirements and a perceived lack of benefits: in 2014, 30,000 firms made SR&ED claims, compared to just 20,000 in 2019. What’s worse, many of the dropouts lost access to the credit just as they commercialized and scaled, a stage of development where Canada has a well-documented gap. The March 2019 budget helped ease this problem by eliminating the restriction based on prior year taxable income, but policy fixes aren’t the only way the CRA will enhance the SR&ED program.

One of our concerns is that the Canada Revenue Agency may be administering the SR&ED program solely through the eyes of a tax administrator. It’s understandably difficult for the CRA, an organization responsible for collecting tax revenues and ensuring taxpayers comply with the law, to also administer billions in incentives. There is a risk that the CRA could assess claims in the same way it examines someone under a mainstream tax audit, with a higher degree of scrutiny than other government agencies that dispense grants or subsidies. However, the CRA is moving in a positive direction with the SR&ED program, with a renewed focus on service and a collaborative spirit.

The accounting profession is playing a key role in the ongoing reform of SR&ED. Together with the CRA, CPA Canada has established a framework agreement designed to foster collaboration as a means of “ensuring a well-running tax system for Canada.” One of the areas of focus as part of this agreement is the SR&ED program. Based on frontline feedback from our members, we’ve told the CRA that the SR&ED program not only needs further modernization, it also requires a tune-up to speed up claims, reduce application complexity, resolve inconsistencies and provide better guidance to practitioners. 

We want to help the CRA make policy nimble enough to address the questions that invariably arise: if you are an entrepreneur developing a new product, there will generally be some technological uncertainty. However, evaluating whether there is enough uncertainty to qualify for SR&ED incentives has become more difficult over time. For example, do innovations based on novel or experimental combinations of existing technologies qualify or not? Anecdotally, we’ve heard that some tech and AI startups that apply for SR&ED credits receive pushback. Their products may be innovative, but they don’t meet SR&ED guidelines because they didn’t have to overcome any scientific or technological uncertainties. [See 3 questions to ask before applying for SR&ED tax incentives]

Through our partnership with the CRA, CPA Canada has also participated in and sponsored SR&ED symposia and a “design jam,” where stakeholders proposed improvements to the application process, the information provided to applicants and the pace of processing. As discussed at a recent symposium, the CRA implemented three key priorities that will guide the delivery of the SR&ED program: clear eligibility, efficient operations and service by design. The goal is for businesses to be able to easily assess whether they qualify for SR&ED by referring to sector-specific examples and user-friendly tools for self-assessment, and for CRA officials to be able to respond to applications in a more timely and consistent way. With a renewed focus on service, the CRA intends to promote and raise awareness of the SR&ED program through its outreach efforts, engage directly with claimants to improve their experience, and offer the support stakeholders need to successfully claim SR&ED activities.

Beyond the technical details, it’s important not to lose sight of the big picture. The smooth operation of the SR&ED program plays an important role in encouraging international firms to locate sales centres, distribution operations and active innovation labs in Canada. But, as it stands, SR&ED-like tax credits in other countries tend to be easier to access, meaning that innovation-minded firms may choose to locate their R&D operations elsewhere.

Of course, SR&ED isn’t the only factor that innovative firms will consider, nor is it the full extent of our collaboration with the CRA. CPA Canada is working with the agency in many other ways, such as enhancing electronic services like Efile and Auto-fill, helping the agency combat the underground economy and improving tax advisers’ experiences with the CRA more generally. All of these activities, conducted within the context of our framework agreement, serve to improve Canada’s tax system, which is good for both taxpayers and our members. Our partnership has borne fruit with SR&ED, and we’re confident it will continue to make the tax-filing process clearer and more efficient in the years to come. However, these improvements can only go so far—an independent, comprehensive review of Canada’s entire tax system is urgently needed. 

CPA Canada wants to hear from members about outstanding tax issues they would like to see addressed. Send your feedback to bball@cpacanada.ca.

STAY IN THE KNOW

Learn about the fundamentals of SR&ED in Canada with CPA Canada’s online course that includes an overview of the federal and provincial SR&ED programs, expenditure categories and compliance requirements.