CATA calls for simplification of R&D tax credit system

The Canadian Advanced Technology Alliance (CATA) is calling for a major restructuring of the federal government’s tax credit system for scientific and research experimental development (SR&ED), in attempts to make the credits more accessible and making the legislation surrounding them more in “synch with current business realities.”

In a paper released Thursday, CATA, a conglomerate of Canadian high-tech companies, implored the government to make changes to the SR&ED program stating that many companies who need financial aid are not qualifying for these tax breaks.

“We just haven’t made these as accessible as we should, and there’s a whole variety of things that have to be changed so that they truly deliver an easily-accessed and understandable incentive,” explained John Reid, the president of CATAA, based in Ottawa.

Another reason companies aren’t receiving these tax credits, Reid said, is that SR&ED program is not conducive to poor economic climate plaguing Canadian IT.

“So we’ve hit a downturn in the IT sector, companies are not making profits, but they’re still conducting R&D,” he explained. “If you don’t have profitability, you can’t access the tax credits.”

Even if companies did, surveys conducted on behalf of CATA by Ipsos-NPD Canada based in Toronto showed that about half of the companies interviewed don’t use the system. They say it’s too complex, Reid said.

While the tax credits can be carried forward for up to ten years, he explained companies accumulating these “pools of tax credits” become an attractive target for takeovers because the buyer can use the credits to their advantage.

“So we’re setting up a situation where we’re actually catalyzing the flight of intellectual property outside of Canada, and I don’t think that’s the intention of the program,” he said. “So the perspective we want to be taken [from] is for them to be seen is in the context of economic development, because you want to preserve the intellectual property – the capacity to innovate in Canada.”

Reid said new companies in the early stages of development should be the prime targets for the SR&ED tax credit, and right now, they are suffering the most. “They don’t have directors of taxation. They’re mainly concentrating on developing their technology probably with a fairly small team,” he said.

However, it is not just these small and unprofitable companies that don’t qualify. Reid said publicly-controlled corporations, foreign-owned, and even some privately-owned companies aren’t eligible to receive these credits.

CATA believes that simplifying and improving accessibility of the refundable tax credits is critical in achieving the goal of what is driving the lobby towards reforms – a federal government initiative called Canada’s Innovation Strategy. The government’s goal of this program launched in February 2002 is to boost Canada from 14th to a top five position in the world in R&D.

“This is sort of part of a larger rethink CATA thinks is necessary on public policy as it affects the technology industry,” Reid said. “This is the first critique which basically aims to make these innovation dollars under the SR&ED program more accessible to the companies that utilize them. And we’re seeing that legislation is out of synch with current business realities.”

On a positive note for CATA, Reid said he expects to see small changes made in the next federal budget, and said CATA is looking to see more significant developments in 12 to 18 months.

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