NorthBridge Consulting Services

Winter 2011

Issue 32

This Issue: Productivity is Innovation, Not InventionTestimonialForbes names Canada as #1 Country to do BusinessMaking Sense of Changes to the SR&ED ProgramHow SR&ED Helps the High-Tech SectorDates to Remember

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Productivity is Innovation, Not Invention

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.

This article was written by James Ro, VP Northbridge Consultants.

Refer a Friend


"On behalf of Cambridge Elevating, I have to thank the Northbridge team for all your help and efforts on making this SR&ED claim so successful. We've definitely enjoyed working with you and look forward to our continuing business relationship for the foreseeable future."

Brian Winnett, Accounting Manager, Cambridge Elevating

Cambridge Elevating specializes in the manufacturing, installation, and servicing of residential/commercial elevators and lifting devices.

Forbes names Canada as #1 Country to do Business

In October, Forbes’ released their annual findings for the Best Countries for Business. Looking at 11 different factors, Forbes compares how countries rank in areas such as innovation, technology, investor protection, property rights, and freedom of trade. For the year of 2011, Canada rose from last year’s #4 to #1 in their findings – an achievement that we should all be proud to recognize. In fact, Canada was the only country to rank in the top 20 in 10 out of the 11 metrics, and rank in the top five for investor protection and lack of red tape.

A good portion of the rise in the rankings is attributed to how Canada handled and recovered from the recent economic recession. Some countries were crippled, and while we did face our own struggles, our economy came out better equipped to face the recession – thanks, in part to the conservative lending practices of our banking and financial institutes. Avoiding bailouts and the profitablity of our banks helped in the face of the economic recession.

Our unemployment rate also had a significant impact on the increase of Canada’s ranking – Canada has a lower unemployment rate than both the U.S. (8.5%) and the Eurozone (10%). According to StatsCan’s most recent labour survey, released in early November, our unemployment rate is currently 7.3%

On the whole, the results of this report could have a positive effect on Canadian businesses. The fact that we were ranked in the top five for both investor protection and lack of red tape show that, compared to other countries in the world, it can be quite easy to start a new business in Canada. This may encourage companies that are looking to start new divisions, or are in the process of relocating their headquarters to consider Canada as a viable option to locate their businesses.

Whether or not we see immediate results from this report, we now have a baseline to continue to strive for. Here’s to working towards keeping Canada the #1 Best Country for Business for years to come!

Making Sense of Changes to the SR&ED Program

Still one of the largest subsidy programs provided by the federal government, the Scientific Research & Experimental Development (SR&ED) program provides over $3 billion annually to Canadian companies that are conducting innovative work. The past few years have seen a lot of changes for the SR&ED program, including new releases of the T661 form, a new auditor review manual, and an evolution in the approach of the CRA as to how claims are reviewed.   To many, it may seem as if suddenly the guidelines for the SR&ED program have gotten stricter with uncertainty as to adequate levels of documentation retention in the event of an audit.

In a constant effort to continue making improvements to the program, the changes as developed in the recently released Jenkin’s report recommends a number of changes can be made to the SR&ED program to make it more effective. This report has been garnering a lot of press; however it is doubtful we will see any dramatic changes to the SR&ED program in the very near future.    Currently, the federal government is spending $7 billion annually on various research and development initiatives (outside government labs). Overall, the committee who put together the Jenkins report had six main recommendations: making the application processes for some funding programs more streamlined; simplifying the SR&ED program so that it is based only on labour costs; encouraging innovation to be the core focus of government procurement; creating an easier platform for collaboration between businesses and academic communities; removing some current gaps in funding; and making the federal government accountable for innovation in Canada.

While none of the recommendations from the Jenkins report have yet been implemented, nor do we yet know for certain that they will be, one must expect that the SR&ED program will continue evolving as it always has.   In the recent year, the CRA has definitely evolved towards conducting more reviews of SR&ED claims, at increased levels of detail, with stronger emphasis on contemporaneous documentation (documentation that was created at the time when the SR&ED work was done). Despite these modifications, the goal of the CRA SR&ED review maintains to be an activity to ensure compliancy with program.  The current audit dynamic simply places more emphasis on the need for the development of intelligent SR&ED resource tracking and diligence in the preparation of claims to be filed.

The changes that have been made to the SR&ED program recently are geared at improving the program as a whole, with an increased focus on the integrity of claims. While these changes may seem overwhelming, they can be easily adapted for primarily through improvements to company policies of SR&ED project tracking and documentation retention.

How SR&ED Helps the High-Tech Sector

With current advancements in technology, software developers continue to meet consumer expectations. New hardware and software architectures create new possibilities and software development companies compete to provide an ever increasing range of applications, from maximizing the potential of all new released hardware to integrating various software systems together. Software companies must use their advanced skills, which outrank their competition, for the market share.

The business of creating mobile "apps", for instance, has never been more lucrative, enabling or assisting consumers to perform their day-to-day activities and providing relevant information on demand. As hardware manufacturers release new hardware products or software systems and environments, custom software developers respond through ever increasingly complex software applications enabling consumers to maximize the benefits of their hardware purchases. Further still, Enterprising Resource Planning ("ERP") has become an integral part of almost all business in today’s market, and its effectiveness is proven beyond doubt. Integration of ERP systems executing on server platforms with mobile applications executing on hand-held devices using Wireless Communication may often constitute advancement in technology, and also give a competitive advantage to companies already using ERP. With LTE wireless technology reaching beyond geographic boundaries and a much faster communication and data transfer process, it has enabled the organization to stay "connected" with its members whenever, wherever.

Among the numerous financial assistance programs fostering Research and Development (R&D) in Canada, the flag-ship federal tax incentive program, Scientific Research and Experimental Development (SR&ED,) is meant for just such an undertaking. New and innovative ideas in the high-tech industry, fueled by the need to be first in integrating a new system with existing deployments, are therefore imperative for improving the state of R&D in the Canadian market. Without a proactive approach to software development and seeking advancement in technology, developers of enterprise level systems and software architectures can quickly lose their competitive edge and, furthermore, may even fail to create opportunities for smaller companies to provide software for the niche that customers are seeking. In such a case, developers will often provide new functionality, (literally the purpose that something is designed to fulfill) but advancement in technology may not occur.

Oftentimes, we are asked whether ”tweaking” or deploying software or hardware systems purchased off-the-shelf, or making improvements to Information Technology (IT) infrastructure are eligible SR&ED activities. While such projects may involve significant R&D, they may not require technological advancement by the company undertaking the project. These projects may not qualify for SR&ED because there are typically no technological obstacles overcome through systematic investigation – in that standard software programming, scripting or customization efforts can be utilized to develop the needed functionality.

When looking to see whether a project involving the development of a software application or hardware system is eligible for an assistance program like SR&ED, some questions to ask yourself are: Do I own the intellectual property of this software? Can I sell it as is? Can I modify it and resell it? Has there been a deviation from routine software development due to technological obstacles? Is the person developing the software a qualified computer scientist or software engineer/developer?

Now, more than ever, there is a great need to ascertain that what you are claiming does qualify for the SR&ED program. To get more information about whether your IT project qualifies for SR&ED, talk to us about your project.

Dates to Remember

December 31 June 2010 FYE claims due now
January 31 July 2010 FYE claims due now
February 29 August 2010 FYE claims due now

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