When is a tax break not a tax break?

OTTAWA—A Conference Board of Canada survey says that executives at foreign and domestic firms, both big and small, are starting to grow somewhat wary of the country’s R&D tax credit program.

Though considered

by the federal government to be one of the best tax credit systems in the world, the survey shows IT managers are worried that Canada is quickly losing ground to other countries now offering similar or better tax incentives.

The research firm conducted two focus group sessions in Ottawa and Toronto in the spring with senior managers at 13 private sector information and communication technology companies. The think tank wanted to find out what they thought of Canada’s Scientific Research and Experimental Development (SR&ED) tax credit. The tax credit program accounts for 25 per cent of government support to industrial R&D, and more than 11,000 businesses apply for about $1.5 billion each year. The research was presented on Tuesday with the Information Technology Association of Canada.

Gilles Rheaume, vice-president of public policy for the Conference Board, says the 17-year-old tax credit now faces “”strong competition”” from other countries. For instance, the number of nations within the Organisation for Economic Co-operation and Development (OECD) offering credits has increased from 10 to 16 since 1996, and now includes the U.K. and Norway.

“”Many countries — such as Australia, Austria and Spain — have also sweetened their already-generous existing tax incentives by increasing the rates of their credits, or by introducing new tax incentives,”” says Rheaume.

In response, the Board came up with five solutions to revamp the SR&ED program. One was to introduce the concept of refundability to all companies, regardless of their size. Right now, only small domestic companies get a government refund on their taxes, irrespective if they post a profit or not. Larger, more-established Canadian companies receive money back only during the years they earn money.

This concern echoes one the Canadian Advanced Technology Alliance (CATA) voiced earlier this year. The high-tech lobby group says that corporations who didn’t receive a tax credit were at a disadvantage during industry-wide downturns like this one.

The Board also recommended ways to reduce tax credit dilution for foreign-owned multinational companies. For example, a U.S.-owned company with an R&D firm in Canada might get a tax break here through the SR&ED credit. However, the credit also reduces the number of tax incentives available to them back in the States, usually making any Canadian tax advantages completely meaningless.

Shirley-Ann George, government programs manager of IBM Canada, says this point in particular lessens Canada’s appeal as an R&D incubator to multinationals.

“”If your credit gets washed away upon (tax) consolidation (with the U.S.), then you don’t have a credit,”” she says. “”So it’s not the most generous tax credit in the world—it’s no tax credit. The world, by its nature, has changed so. . .we need to move quickly on making sure this program is valuable and competitive. That’s code for ‘this coming (federal) budget’.””

George pointed at IBM’s semi-conductor testing and packaging plant in Bromont, Que., as an example.

“”They do critical R&D there (in Quebec) that ensures the competitiveness of that manufacturing facility,”” she says. “”It’s a brutal business, and they’re competing against manufacturers in places like Taiwan and Singapore. So these credits are important, but they don’t do us any good.””

“”Most of our member corporations are innovators,”” says Barry Gander, CATA director of public policy. “”The very R&D programs they’re creating may be making them unprofitable and preventing them from benefiting from the SR&ED tax credit program, since R&D tends to be expensive. It doesn’t make sense to punish innovation leaders.””

The Board made three other recommendations in its report, which will be submitted to the Department of Finance Canada and possibly other departments like Industry Canada for review:

  • Clarify the SR&ED program’s goals and objectives to better reflect the challenges now facing Canadian R&D firms who do business globally.
  • Reduce the amount of money companies spend on tax credit compliance by simplifying administration and auditing practices.
  • Find ways to market the program better, as many companies weren’t aware the tax credit existed or found it wasn’t worth the hassle to claim.

— with files from Monika Rola

Comment: [email protected]

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