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February 24, 2012

No. 2012-09

 

 

R&D Tax Incentives — Big Changes Afoot?

Many companies that do research and development (R&D) in Canada benefit from government programs that provide funding and tax incentives to encourage and support their work. Over the last few years, the federal government has been examining the effectiveness of these programs in fostering innovation.

This initiative has included a review by an expert panel, efforts to improve the CRA’s administration of the Scientific Research and Experimental Development (SR&ED) tax credit program and an investigation by the Taxpayers’ Ombudsman into complaints about the SR&ED program’s administration.

Recently we’ve seen indications that the government may be planning changes to its programs that support R&D. Companies doing R&D in Canada should follow developments in this area closely because they may significantly affect the cost of their R&D work in the future.

Jenkins report — Changes to SR&ED tax credits coming soon?

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.

The panel released its 148-page report in October 2011. The 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 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. For details, see KPMG’s TaxNewsFlash-Canada 2011-30, “Expert Panel Recommends Changes to Federal R&D Funding Programs”.

In a speech given at the end of January 2012 in Davos, Switzerland, Prime Minister Stephen Harper said Canada will continue to invest in science and technology but he believes Canada has obtained less than optimal results for the investments it has made. He said, “we have recently received a report on this — the Jenkins report — and we will soon act on the problems the report identifies”.

It’s possible that this year’s federal budget, currently expected in March, could include some of these recommendations or other changes to the SR&ED tax credit program.

CRA working to clarify SR&ED tax policies

As part of an effort to improve the administration of the SR&ED program, the CRA began reviewing its SR&ED policy documents in December 2010 with the objective of consolidating, clarifying and updating these documents and related guidance. The CRA wants to ultimately present this information in a user-friendly way on the SR&ED pages of its website.

The CRA’s project is not intended to alter the principles explained in its current policy documents and related guidance, but only to make wording changes for clarity and readability of existing administrative policies.

To achieve its goal, the CRA has consulted its key stakeholders, including associations and accounting firms such as KPMG, to gather their opinions on the information presented in more than 20 policy documents. The topics of these documents include the CRA’s policies on filing requirements, capital expenditures, salary and wages, eligibility of work, the traditional and proxy methods, and total qualified expenditures.

KPMG’s submissions on the CRA’s policy documents focus on ensuring their clarity and usefulness for companies claiming SR&ED tax credits. KPMG’s submissions, including the CRA policy documents they pertain to, are available at www.kpmg.ca.

Ombudsman finds taxpayers misunderstand SR&ED program

While this tax policy review has been underway, the Taxpayers' Ombudsman has been investigating dissatisfaction with the SR&ED program among tax credit claimants and their representatives. The Ombudsman recently released his long-awaited report on this investigation. The 24-page report finds that many claimants do not understand the CRA's policies for administering the $3 billion SR&ED tax incentive program and the CRA needs to enhance its communication with them.

Background

The Taxpayers' Ombudsman is an independent and impartial officer appointed to review service-related complaints about the CRA and uphold the Taxpayer Bill of Rights. The Ombudsman's mandate is also to identify and investigate systemic and emerging service-related issues that could have a negative impact on taxpayers.  

Few taxpayers willing to file formal complaints
The Ombudsman says that, while he heard numerous accounts of discontent with the SR&ED program among claimants and other stakeholders, including tax advisers and industry associations, he was unable to validate many of the criticisms due to a lack of specific complaints to investigate. The report notes that the Ombudsman encouraged taxpayers to file formal complaints so that he could fully investigate them, but few people were prepared to come forward and detail their issues on a file.

Despite being limited in his role because so few formal complaints were lodged, the Ombudsman's office did undertake an informal review of the SR&ED program and provides "observations" in the report rather than formal recommendations. For details, see KPMG’s Canadian Tax Adviser, “Ombudsman Finds Taxpayers Misunderstand SR&ED Program”, dated February 14, 2012.

KPMG observation

For the most part, the Ombudsman validates the CRA’s administration of the SR&ED program and suggests that taxpayers misunderstand the program's administration. The report does not suggest changing any CRA processes. As such, it seems that nothing is likely to change in the program, as far as taxpayers are concerned, as a result of this review. 

In his conclusions, the Ombudsman states that his observations “speak to the need for the CRA to continue, and even enhance, its proactive communication with SR&ED claimants and their representatives…Overall, stakeholders would benefit from greater clarity with regard to the CRA’s policies and procedures for this program.”

Looking ahead for R&D in Canada

The government appears to gearing up for a change in the SR&ED tax credit program and the way grants and other direct incentives are delivered. If your company does R&D in Canada, it’s important for you to be aware of these developments and how they might affect both your short-term and long-term plans for financing your R&D activities in Canada.

We can help
Your KPMG adviser can help you assess the effect of any changes the government may introduce to the SR&ED program 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 February 23, 2012. 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.

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