October 17, 2011 No. 2011-30
	Expert Panel Recommends Changes to Federal R&D Funding Programs Savings from changes to R&D tax credit program to be invested in direct subsidies for small and medium-sized businesses Today an expert panel established to review the federal government’s support of research and development (R&D) in Canada released its report. The 148-page report recommends changing the balance of R&D spending to provide more direct funding through targeted grants and incentives and less in the form of indirect spending through tax incentives. Specifically, the panel recommends simplifying the Scientific Research and Experimental Development (SR&ED) tax credit program by restricting the base for the tax credit for small and medium sized businesses to labour-related costs and raising the tax credit rate. Background The federal government launched a comprehensive review in late 2010 of federal programs that support business innovation. As part of the review, the government established an independent expert panel, lead by Tom Jenkins of Open Text, to provide recommendations on how it can maximize the benefit of almost $7 billion dollars spent annually to support business R&D in Canada. Despite this significant investment, Canadian businesses still lag in investing in R&D when compared to other industrialized countries. As part of its mandate, the panel was asked to review three types of federal R&D initiatives: · Tax incentive programs, such as the SR&ED program · Programs that support business R&D through general support (i.e., Industrial Research Assistance Program) and sector-specific support (i.e., Strategic Aerospace and Defence Initiative) · Programs that support business-focused R&D through federal granting councils and other departments and agencies, including research at universities and colleges (i.e., Centres of Excellence for Commercialization and Research). The federal government has asked that the panel’s recommendations not increase or decrease the $7 billion in funding already provided each year. The panel’s recommendations In its report, the panel makes the following recommendations: · Create an Industrial Research and Innovation Council (IRIC), with a clear business innovation mandate and enhance the impact of programs through consolidation and improved whole-of-government evaluation. · Simplify the Scientific Research and Experimental Development (SR&ED) program by basing the tax credit for small and medium-sized enterprises (SMEs) on labour-related costs. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms. · Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective. · Transform the institutes of the National Research Council (NRC) into a constellation of large-scale, sectoral collaborative R&D centres involving business, the university sector and the provinces, while transferring NRC public policy related research activity to the appropriate federal agencies. · Help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist. · Establish a clear federal voice for innovation, and engage in a dialogue with the provinces to improve coordination and impact. SR&ED tax credit recommendation The panel’s recommendation on the SR&ED program addresses the government’s question, “Is the current mix and design of tax incentives and direct support for business research and development (R&D) business-focused and R&D appropriate?” The panel recommends reducing compliance and administration costs by basing the tax credit benefiting small and medium-sized Canadian controlled private corporations on labour-related costs, including the labour component of contracts and payments to third parties such as universities. As a result of this recommendation, SMEs’ costs such as capital expenditures, materials and overhead would no longer be eligible for SR&ED tax credits. Because the credit would be based on a smaller cost base, its rate would be increased. The report says the government should consider eventually extending this new labour-based approach to all firms. The report also includes the following recommendations for the SR&ED program: More predictable qualifications Improve the CRA’s pre-claim project review service to provide companies with pre-approval of their eligibility for SR&ED credits. More cost effective Reduce the amount of SR&ED tax credit assistance by introducing incentives that encourage the growth and profitability of SMEs while decreasing the refundable portion of the credit over time. Redeploy the savings to fund new and/or enhanced support for innovation by SMEs, as proposed in the panel's other recommendations. More accountable Provide data on the performance of the SR&ED tax credit regularly to permit evaluation of its cost-effectiveness in stimulating R&D, innovation and productivity growth. Phased implementation and consultation Adopt the proposed changes through a phased-in approach to give the business sector time to plan and adjust smoothly. There should be early consultations with the provinces on the proposed changes, given that they may want to consider adopting the same base as the federal government. Next steps The government’s response to the panel’s report remains to be seen. It will be interesting to see what measures the government chooses to adopt in light of the report and how quickly it decides to proceed. We can help Your KPMG adviser can help you assess the effect of any changes the government may introduce in response to the panel’s report and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of any forthcoming proposals as they make their way into law and help you bring any concerns you may have to the government’s attention.
	Information is current to October 17, 2011. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500. KPMG LLP, the audit, tax and advisory firm (kpmg.ca), a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such. KPMG's Canadian Web site is located at http://www.kpmg.ca/ © 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.