For years, Russ Roberts has argued that despite its much-vaunted “innovation agenda,” Canada’s federal government has functionally reduced innovation spending by billions of dollars by reducing Scientific Research and Experimental Development (SR&ED) tax incentives – and now, he says, he has the numbers to prove it.

On Wednesday Roberts, who serves as senior vice president of tax, finance, and advocacy for the Ottawa-based Canadian Advanced Technology Alliance (CATA), and his wife, CATA research director Catherine Bishop, released – in the organization’s words – a “pithy” report concluding that between 2009 and 2016, Canada’s government reduced its innovation funding by $5.3 billion by steadily reducing the value of Canada Revenue Agency (CRA)-issued SR&ED tax credits.

That’s nearly four and a half times the value of the $1.2 billion strategic innovation fund announced by the federal Liberals earlier this month.

Yet despite their report’s provocative premise – and the combative tone of CATA’s accompanying release – Roberts and Bishop’s message is not an angry one: Rather, he wishes to spur a discussion between the tech industry and federal government about the positive impact of tax incentives on Canadian-led innovations in the past, and how they might be put to better use once again.

CATA senior vice president of tax, finance, and advocacy Russ Roberts believes the federal government could be making better use of tax credits to spur innovation.

“As a tool, we think the tax system can be used to achieve a lot of improvements when it comes to supporting business innovation, and we think that discussion’s terribly important,” Roberts tells ITBusiness.ca.

More importantly, the time is right: In its 2017 budget, the federal government announced it would be reviewing its SR&ED incentive program, though right now, he says, the tech community isn’t being updated on the review’s progress, or even what form it will take.

“We see this review of SR&ED as an opportunity,” Roberts says. “We’re hoping it can be expanded beyond an acronym into a productive system of tax incentives that encourages economic growth through innovation. And we want to make sure it covers the entire topic, not just a few aspects, and really addresses the issue of making it work effectively across the country.”

A longstanding crusade

Roberts’ campaign to revise the SR&ED program is nothing new: As recently as February he was calling on the federal government to re-examine the program, arguing that Canadian businesses had lost more than $1 billion in potential support thanks to recent well-meaning but flawed measures such as the implementation of new, restrictive administration practices; narrowed SR&ED eligibility criteria; mandating the CRA to increase its focus on non-compliance in claims reviews; and revoking its historic policy of not further reviewing claims once a company had received its refund.

“If legislation is written unclearly, or open to interpretation, it’s very easy to become overly restrictive on one side or the other,” Roberts says. “For example, if you’re measuring people based on the amount of revenue they recover, which in SR&ED they are not, the result is a more restrictive program.”

In fairness to the Liberals, one of the leading culprits was introduced by the former Conservative government, which began reducing the federal funds available for SR&ED-related tax incentives in its 2013 budget – first by $35 million, then by $315 million in 2014, then by $480 million in 2015.

But it was the Liberals who decided to further reduce the amount of available SR&ED funding by $500 million in 2016, Roberts and Bishop’s report says, and the Federal Department of Finance is now projecting the total value of SR&ED tax credits earned in 2017 to reach only $1.8 billion – a significant drop from the $2.3 billion in SR&ED tax credits awarded four years earlier, in 2013.

In addition to those numbers, Roberts and Bishop’s report outlines how expensive the program has become over the years: In 2005 it was run by 520 full-time employees, who collectively provided $1.8 billion in tax assistance at a cost of $53 million. By 2016, approximately 725 employees were required to administer the program, at a cost of $85 million.

Meanwhile, the number of claims processed has dropped: in 2011 the CRA processed around 29,000 SR&ED claims, leading to $3.6 billion in tax assistance, while in 2015 it only processed around 23,000 SR&ED claims, providing about $3 billion in tax incentives.

More damningly, given the likely motivation for the government’s belt tightening, the amount of taxes recovered during the period surveyed in Roberts and Bishop’s report declined as well: from $424 million in 2011 to $394 million in 2014.

A broken system

There is plenty of evidence – both financial and anecdotal – to suggest that many in Canada’s tech community are hopping mad over those numbers, CATA CEO John Reid says.

Online polls and social media posts already suggested that revising the CRA’s SR&ED tax incentives was a high priority for the industry, he says – one reason the organization chose the subject as the inaugural cause for its recently-launched crowdfunding efforts.

CATA CEO John Reid
CATA CEO John Reid has long believed Canada’s innovation tax credit system needs work, but even he was surprised by the current program’s ineffectiveness.

“If the government was truly setting out a path for more innovation success, then you’d think the main tax incentive program would have increased usage as opposed to less, and you would see a much more positive view from the community,” Reid tells ITBusiness.ca. “Which is not to say that it doesn’t work at all, but it doesn’t seem to be on the government’s radar as part of its solution to moving Canada forward as an innovation nation.”

Reid says that even he was surprised by the direction of Roberts and Bishop’s numbers, which were included in a video that was circulated among CATA members and shared with the CRA, alongside a draft version of their report, a week before its official release.

“This is not the government picking winners or losers – it’s a tax-based incentive program open to all,” he says. “So the numbers shouldn’t be going down – we should be seeing the opposite. And if it’s a smaller program we should see reduced overhead, not more.”

It’s clear that many CATA members agree the SR&ED tax credit’s current rules are a problem that should be addressed, with at least one respondent to a survey regarding the report confirming that the program’s standards are hindering applicants:

“Having to jump through a bunch of hoops to be ‘qualified’ before they can start undertaking R&D is a disincentive,” the member wrote.

“Over the last 5 years the CRA has tightened its eligibility criteria, which has eliminated otherwise innovative work,” wrote another. “The strength of the SR&ED program lies in the fact that businesses (in a variety of sectors), not government officials, decide where their money and time could best result in a competitive advantage.”

A history of revision

After being contacted by ITBusiness.ca and reading an advance copy of Roberts and Bishop’s report, CRA spokesperson Zoltan Csepregi acknowledged that there had been a drop in the number of SR&ED claims filed by businesses with the CRA over the last 5 years, and that the number of SR&ED investment tax credits provided to Canadian businesses had decreased, but emphasized that the CRA’s approval rate of submitted claims has remained steady at around 90 per cent for the past seven years.

“The 2017 Federal Budget initiated a whole-of-government review of business innovation programs, including the Canada Revenue Agency’s Scientific Research and Experimental Development Tax Incentive Program to ensure its continued effectiveness and efficiency,” he wrote in an email.

The CRA’s SR&ED tax incentive policies were last reviewed by a federal panel in 2011, but their recommendations, such as helping high-growth, innovative firms access the capital they need through the Business Development Bank of Canada, do not apply to the current system, CATA’s Roberts says.

“There is some fundamental work that needs to be done on the system’s structure and whether SR&ED is what they actually want to support, or if certain sectors need some other form of innovation credit,” he says. “Interestingly enough, it’s coming out that for many companies, it isn’t SR&ED that really helps their business, it’s innovation. And innovation isn’t necessarily R&D based. So that’s something we need to have an open, intelligent discussion about.”

As it stands, too many government officials fail to recognize a key difference between R&D and innovation, he says: the former only leads to the latter if applied in an innovative way.

“A tremendous amount of innovation doesn’t require any R&D at all,” says Roberts, who has a 30-year background in R&D. “It simply involves coming up with a different way of using existing tools, or arranging existing practices in a different sequence, that leads to more productivity.”

The start of a true innovation agenda?

If there is a silver lining to Roberts and Bishop’s research, CATA CEO Reid says, it’s that it’s being shared with a government that so far has at least appeared willing to listen.

“During the Harper regime, I think there were a lot of revenue pressures put on the program, and they didn’t have a clear articulation of the role they wanted innovation playing in Canada’s future,” he says. “I think this government has signalled pretty strongly that it wants to create a higher standing for Canada in the global community.”

Thus far, Reid says, Prime Minister Justin Trudeau has paid little more than lip service to innovation, but made it clear he understands the concept. Now he wants to see action.

“It’s not our goal here to be confrontational,” he says. “We just want to say, ‘here’s an exclamation point, let’s team up to turn this around.'”

For his part, Roberts is simply pleased to find the government open to discussion.

“It isn’t a very fast process, but I’ve seen some very positive conversations take place,” Roberts says. “All we’re after is a clear path to discussing the program and how to improve this situation. It’s that simple.”

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