Scitax Advisory Partners LP

Scitax Advisory Partners LP

November 08, 2011 07:30 ET

Federal Government Expert Panel Calls for Changes to Canadian R&D Tax Credits

Potential adverse impact on small-and medium-size technology businesses

TORONTO, ONTARIO--(Marketwire - Nov. 8, 2011) -

(Detailed analysis and expert commentary available – see below for details)

On October 17th, a six-member panel appointed by the Canadian Federal Government released a report recommending significant changes in the methods by which it distributes the $6.5 billion spent annually on tax credits and other incentives for private sector R&D.

Scitax, an independent consulting firm specializing in the taxation of technology business, has produced a detailed analysis of this report and how the Panel's recommendations would impact Canadian business if they are implemented by government. This analysis is summarized here; the full version is available free of charge through a URL link at the end of this release.

The panel is headed by Thomas Jenkins, Executive Chairman and Chief Strategy Officer of OpenText Corporation and, because of this, has come to be known as "the Jenkins Panel" rather than its official title which is The Independent Panel on Federal Support to Research and Development.

The 150-page report entitled "Innovation Canada: a Call to Action" makes six "core" recommendations, amongst which are reductions in the SR&ED R&D tax credit program and re-direction of the resulting savings towards so-called "direct funding" incentive programs. In this context, direct funding generally means either grants or contingent-repayable loans. One example of such a direct funding program was Technology Partnerships Canada (TPC) which had disbursed about $2.5 billion of public money before it was cancelled by the newly elected Conservative Government in 2006.

After a detailed analysis of this report, our firm has flagged four broad concerns pertaining to the panel's recommendations vis-á-vis changes to the SR&ED tax credit:

  1. Any money that is shifted out of tax credits and into direct funding programs is money that becomes less subject to democratic scrutiny and the rule of law. Distributing incentive money through the tax system guarantees universal access under legislated rules. The tax system has well established informal- and formal-mechanisms for dispute resolution – up to and including the Supreme Court of Canada. This means that anyone who is denied funding can apply for an impartial review of that denial. It also means that government can recover funding that is paid out to anyone not entitled to receive it. The processes of direct funding are more opaque and do not have the similar redress channels or established legal protocols.

  2. The proposed changes would have a disproportionate impact on various sectors of industry. Small- and medium-sized private corporations ("CCPCs") would see significant cutbacks in their SR&ED benefits whereas public- and foreign-owned corporations would see no change. Furthermore, the recommended changes would impact different sectors of industry in different ways: The big losers are likely to be secondary manufacturing industries such as plastics, metal forming, printing, packaging and food processing. The beneficiaries would be pharmaceuticals, biotech, aerospace and defence, electronics, semiconductors, optics, forest products, and environmental and alternative energy technology companies. In the computer industry, companies involved in the development of business-application software would likely suffer, while those involved in development of "core" technologies such as operating systems, embedded firmware, graphics technologies, encryption and biometrics could fare somewhat better.

  3. Globally, there is increased (and increasing) use of R&D tax credits as a public policy instrument for economic-stimulus of businesses in the science and technology sector. Historically, Canada has had one of the world's best R&D tax credit systems. Over the last few years other countries (notably France, Ireland, Australia and the U.K.) have implemented equal or better systems. While in the U.S., tax credits at the federal level have been somewhat dysfunctional, an increasing number of individual states have implemented their own cash refundable R&D tax credit schemes that equal or exceed Canada's.

  4. Various international trade agreements – specifically the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures – constrain direct subsidies to businesses. Article 3 (Prohibited Subsidies) has already been applied against Canada's Bombardier by Embraer of Brazil in a 1998 WTO action over funding Bombardier received from the former Technology Partnerships Canada (TPC) program. This is a significant issue in Canada, which does not have a large enough domestic market to support the commercialization of technology. Any Canadian Government assistance program that does not require the applicant to be export-capable would be folly.

Scitax has produced a seven page bulletin on the Jenkins Panel's report. Our bulletin includes detailed analysis of the specific changes to Canada's R&D tax credits as proposed in the report and endnote citations for various supplementary "Learn More" resources.

The bulletin is authored by the following persons, all of whom are also available for comment on this issue:

A. Christina Tari LLB LLM
is a tax litigation lawyer. In her role as legal counsel to Scitax clients, she obtains settlement of SR&ED claims that have been wholly or partially denied by CRA through Notice of Objection and/or Tax Court of Canada processes. Before entering private practice in 1989, Christina served for nine years as a tax litigation counsel for the Canadian Department of Justice. She is a past chair of the Canadian Bar Association, Ontario Tax Section and the author of Federal Income Tax Litigation in Canada.
David R. Hearn CET
is an engineering technologist and Managing Director of Scitax Advisory Partners LP. He entered the SR&ED field at a "big four" multinational accounting firm in 1993, prior to which he held engineering and R&D positions in the electronics industry.
Michael C. Cadesky BSc MBA FCA
has practiced full-time and exclusively in the field of taxation since he became a Chartered Accountant in 1980. The FCA designation, which he was awarded in 1994, distinguishes Michael as a Fellow of the Ontario Institute of Chartered Accountants. Michael is a director of Scitax and the managing partner of Scitax's affiliated firm of chartered accountants, Cadesky and Associates LLP.

Download the full text of the bulletin free of charge here: http://www.scitax.com/pdf/bul-048.pdf.

About Scitax....

Scitax is an independent, privately owned Canadian professional services partnership with specialist expertise in SR&ED tax credits. Our firm is comprised of chartered accountants and engineers with an affiliated organization of tax lawyers. We prepare new claims, deliver compliance training programs and help taxpayers resolve SR&ED related matters with the CRA.

To learn more about Scitax, please visit: www.Scitax.com.

Contact Information

  • For further information or to arrange commentary
    from any of the above authors contact:
    David Hearn
    (416) 558-7866
    www.Scitax.com