Posts Tagged ‘sred’

On October 17, 2011, the federally appointed panel, chaired by Open Text chief strategy officer Tom Jenkins, released an assessment of the government’s $7-billion in annual investment in “business R&D”. The report recommended significant changes to the incentive programs and singled out the Scientific Research & Experimental Development (SR&ED) tax credit, the largest program, which accounts for nearly half of the government’s $7-billion in annual R&D investment.

The Jenkins report focused solely on small and medium enterprises (SMEs) and considering the vital role the SMEs play in the Canadian economy, I sincerely hope that the conservative government does its homework before deciding what changes to make (and when) to the SR&ED program. The SME market (businesses with less than 500 employees) represents the vast majority of firms in Canada, collectively employing almost 50% of the workers in the private sector (or 40% if the public sector is included) and contributes significantly to GDP growth and job creation. Aside from the benefits of productivity, it is growth that has more significant effects on the economy. Studies have shown that a large portion of job creation comes from a small subset of businesses, which experience a long period of sustained exponential growth. The irony is that the vast majority of these firms have started out as SMEs.

The word, “innovation” shows up in almost every page of the Jenkins report. When you look up the definition of “innovation” it refers to the “creation of better or more effective products, processes, technologies, or ideas”. The unfortunate reality is that the government and CRA seem to be focusing on “invention” rather than “innovation” – they’re not the same. Invention is the creation or discovery of something new to the world, whereas Innovation is about creating value through enhanced products, new processes or reducing costs of existing products or services.

In my opinion, the SR&ED program should mainly be about growth (productivity and innovation) – not the number of patents or scientists in a lab (i.e., inventions). That being said, I don’t want to discount the importance of science and research to our economic success but how many top companies rely solely on inventions to achieve global leadership? Canadian firms have achieved success through innovation, not invention.

It is interesting to note that Canada has had one of the most stable economies since the global recession, yet it continues to fall behind other countries when it comes to innovation. It is somewhat puzzling as to why Canada has slipped out of the World Economic Forum’s ranking of the 10 most competitive national economies. It is easy to blame the inefficiencies of the SR&ED program (I think there are many), however, I can think of at least one game changer (in addition to the China factor) that probably played a bigger role in Canada’s declining global competitiveness – the rise of the Canadian dollar. Ten years ago, Canada’s dollar hovered in the 60-cent range that provided a cost advantage (or incentive) to invest in Canada and trigger further productivity. With the Canadian dollar trading around par to the US dollar, that advantage is far less prevalent today. As such, Canadian businesses must continually innovate and increase their productivity to remain globally competitive. If every business in Canada did something incrementally better than they did before, whether it was expanding into a new market or changing a process, it would be those types of innovations that would increase the standard of living and reinforce growth in the Canadian economy.

There was a recent Angus Reid Public Opinion survey released by Intuit Inc. that stated, 97% of Canadian small business owners said innovation was less about disrupting the status quo and more about making changes to existing products and services, upgrading technology, or improving customer relations and internal processes. The SR&ED program is a means to incentivize companies (large and small) to take risks so any cuts to the program or obstacles to receive funds will be a sure way for Canadian entrepreneurs to avoid such experimentation.

- James Ro, Vice President of Northbridge Consulting Services

Along with the other changes that the CRA has been implementing over the past couple years, the Claim Review Manual has been updated. This is the manual that tells the CRA reviewers what processes they need to follow when reviewing an SR&ED claim. This review manual is meant to make the review process more consistent from review to review, and from reviewer to reviewer. It sets out clear guidelines as to what is to happen in a review, and what kind of timeline the reviewer should be following when working on a claim. The manual is also supposed to increase the co-ordination between the technical and financial reviewers, and to increase the communication quality between the reviewer and you (the claimant).

The CRA’s website has laid out the steps to a review, as listed in the CRA Review Manual. A brief overview follows:

1. Preparing and planning:
   • Reviewing your claim
   • Identifying issues with your claim (ie – areas they are unsure can be considered SR&ED)
   • Making first contact with you
2. Conducting a site visit:
   • Preparing for the review (the reviewer will contact you by phone or letter to discuss when the review will happen)
   • Preliminary review work (interviewing any possible staff involved with the SR&ED work, explaining the SR&ED program, etc)
   • On-site review (tour of the facilities, interviewing staff involved in the SR&ED work, reviewing supporting documentation)
   • Request for more information to be sent to the CRA reviewer
   • Communication of preliminary decisions (if possible, the reviewer will let you know what kind of results to expect from your claim submission)
3. Finalizing results:
   • SR&ED review report (prepared by the CRA for you, to allow you to review it and provide any new information if you disagree with their assessment)
   • Finalization of technical and financial reports (these reports will be sent to you by mail, be delivered in a meeting, or discussed over the phone)
   • Dispute resolution (if you disagree with the CRA’s final report)
   • Appeals process

There is no denying that Canada has one of the best programs as far as funding for companies that perform R&D goes. And while it is promoted frequently for Canadian Controlled Private Corporations, there are many other companies that can take advantage of this program.

Take, for instance, an American-owned company that has a branch in Canada. This Canadian branch manufactures custom products for its customers, and regularly has to work through technological obstacles to create the final product that was required.

Because this American-owned company has a branch that operates in Canada, and pays taxes to the Canadian government, this foreign-owned company would be eligible for the Scientific Research and Experimental Development program. Unlike privately-owned businesses, however, this foreign-owned company would be eligible to receive 20% of their claim in the form of tax credits. These tax credits can be applied retrospectively ten years, or can be applied forward three years.