Ted Hsu
It is widely expected that the coming federal budget will include major changes for the Scientific Research and Experimental Development (SR&ED) tax credit. In the wake of the Jenkins Panel report on innovation and the soon to be released Taxpayers’ Ombudsman report on illegitimate SR&ED claims, many companies involved in research and development have become concerned about its future.
Most people would agree that there are too many illegitimate SR&ED claims. Too often the decision to make a claim is done after the fact, often at the suggestion of a claims processor, trolling for possible claims and working on a contingency fee. In instances like this, even if the tax credit is ploughed back into the business, it does not work as an incentive to invest in innovation and commercialization.
While it is true that many of the Jenkins Panel’s 228 industry submissions criticized the administration of the SR&ED program, very few of those submissions recommended fixing the problem by limiting claims to labour costs as the Jenkins panel itself concluded.
That’s because many companies which legitimately benefit from SR&ED tax credits are in capital intensive businesses with large upfront investments in equipment. Limiting SR&ED to labour costs would dramatically increase the costs of research for them, which is why the Liberal Party cannot support it.
This raises the question: How do we make SR&ED more efficient and reduce the number of illegitimate claims without significantly narrowing the scope for eligibility?
The following are two recommendations based on suggestions I have heard from people who have used the SR&ED program.
The first is to require companies to notify the Canada Revenue Agency within three months of the start of a project that will eventually lead to a SR&ED application. This statement of intention and brief description of expectations would limit the amount of retrospective SR&ED trolling by consultants.
The CRA would immediately acknowledge receipt of the notification, not as a pre-approval but as an agreed start date for which a future SR&ED claim could be made. Companies could quickly file amended statements should their research lead them in an entirely different direction.
Second, the time it takes to process SR&ED claims must be reduced. Currently a firm has up to 18 months to apply and the CRA may take up to a year to audit their claim. Amid growing, research-intensive companies tend to move around and knowledge of a research endeavour, as well as documentation, can be lost. Sorting all this out leads to extra costs for the company and extra man-hours, which means tax dollars, for CRA employees. Allowing a maximum of six months to file a claim would help reduce this problem.
These two suggestions would improve the efficiency of SR&ED without limiting the scope of the program, while saving money by reducing illegitimate claims.
What do you think? Share your views in the comments below.
- Ted Hsu
Liberal critic for science and technology
Ted,
I am a professional accountant (CMA), owner of a small (but highly reputable and respected) consulting firm that assists companies, in a variety of industries, prepare and defend SR&ED tax credit claims, and have been involved in the SR&ED program for over 17 years (5 years with CRA for 5 years and over 12 years in public practice). I know the program well and have extensive experience with it from “both sides of the fence”.
First of all, I find your blanket characterization of the services provided by SR&ED claim preparers (many of whom are public accounting firms) as “trolling” to be insulting and demonstrative of a significant lack of any real understanding of the nature of the SR&ED program, the roles of the various stakeholders and the issues facing small businesses involved in R&D. Most of the consultants assisting companies making SR&ED claims hire engineers, scientists, tax professionals and accountants who provide professional, valuable services to their clients and ensure that the claims submitted meet all eligibility criteria.
The article in the Globe and Mail was initially considered an example of hack journalism by many of the members of our industry. Unfortunately it seems that many politicians have seized upon it and decided that it somehow represents an entire industry. While there may be a VERY small number of consulting firms and companies making abusive claims, the vast majority of claims being prepared and approved are legitimate and well founded. The Income Tax Act has penalties that CRA can (and should) use to punish those who seek to abuse the SR&ED program. I am sure that there are many funding programs that could just as easily be painted in a similarly bad light based upon a limited number of examples and sensationalism.
Your suggestion that firms submit notices to CRA within three months of the start of any SR&ED project is unrealistic. Most small businesses today are very “lean” from an administrative standpoint and are faced with significant time constraints just to manage day-to-day operations and meet delivery targets. It is often difficult for management to get their staff to consistently complete timesheets and other reports so I expect that the filing of these types of notices would easily get overlooked and forgotten until after the three month deadline was past. In addition, especially with experimental development projects, the specific advancement(s) or uncertainties may not be known within the first three months – all that is known is that there is a need to develop certain advanced capabilities, functionality and/or technical knowledge that the company does not have access to. Another example of where such a requirement would cause a company to be excluded could happen in a situation where a project was started in an effort to develop a new or enhanced product, material, device, application, etc. with the initial belief that the “solution” can be achieved in a certain way, only to discover unforeseen problems and complexities as the project progresses. At this point the staff may well spend months seeking (successfully or not) to develop a viable solution, which if successful would create a technological advancement within their industry. It is highly doubtful that, in the middle of all their efforts, when they are already behind schedule and under pressure from management/customers to resolve the issues, they are going to stop and think “Hey, we’ve got to prepare and send CRA a notice about this.”
As a result, companies could spend hundreds of thousands of dollars attempting to resolve legitimate technological uncertainties and produce new or enhanced products, materials, devices, programs, only to be denied access to funding support they are legally entitled to because they forgot to send in a notice. The current guidelines contain definitions and there are many CRA policy documents that explain what is eligible and what is not. There is no need for an additional administrative procedure that does nothing to assist companies in obtaining the financial support under the legislation. Remember that the SR&ED program is intended to be an incentive program.
Your suggestion that the filing deadline should be reduced to 6 months after the end of the fiscal year in which the R&D activities take place would potentially serve to shut out many smaller sized companies who might otherwise be entitled to the tax credits. The 18 month filing limit provides a reasonable amount of time to organize the supporting documentation and provide management with a window to balance all of the competing demands upon their time. I know from experience that it can take months to schedule all the meetings necessary to identify and evaluate projects and expenses for eligibility and to organize all the necessary documentation and forms. The concerns about the length of time of it takes to obtain approval has little to do with when the claims are filed and everything to do with how CRA handles the claims once they go in. The onus is always on the claimant to show that the projects and expenditures claimed are reasonable and supportable. Having the extra time period does not mean that all of the companies will take the 18 months to file – it just give them some flexibility. I can assure you that most claimants are very keen to file their claims as soon as possible. Imposing tighter timeframes for filing would just penalize companies who can’t get their claims organized in such a short timeframe.
I am rather surprised and disappointed that you would have put forth such suggestions and comments which appear to be based on little detailed consultation or study of such an important business support program.
If you would like to discuss the SR&ED program further I would be pleased to do so.
Hello pfarmer,
Thank you very much for your remarks, and thank you for taking the time to write these detailed remarks about my specific suggestions for SR&ED.
I assure you that it was not my intent to paint any more than a minority of companies that prepare SR&ED claims as firms that “troll” for claims. However, we have heard from many, not just the Globe article, that there is abuse of SR&ED. There is just too much anecdotal evidence to ignore it. I think it would be politically very hard to defend the present scope of SR&ED, which is what I am trying to do, without addressing in some way, abuse or SR&ED dollars that did not act as an incentive.
The suggestions I have made were not arrived at without consultation with some people with credentials and experience similar to yours.
As for your reaction to my suggestion of giving notice to the CRA within 3 months of the start of a project (and if there is any major change in research direction), I would find it hard to believe that SR&ED was acting as a real incentive to a business if its manager did not take SR&ED, and a particular project’s chance of satisfying SR&ED’s scientific eligibility, into account when deciding to undertake that project.
My view is that if a manager is thinking about SR&ED, he/she should be able to write those thoughts down. Aren’t researchers supposed to be privately writing down their thoughts and recording their actions for the purposes of protecting Intellectual Property down the road anyways?
Considering that the government might replace part of SR&ED with a system of grants, and facing the prospect of having to write grant proposals, maybe having to deal with politicians, and to wait for funding before starting their research, wouldn’t businesses prefer SR&ED and sending in a notice to the CRA to let them know that they’ve got SR&ED in mind as they start a particular research project?
Finally, concerning the reduction of the 18 month filing period to a 6 month period, it’s the opinion of a person in a reputable firm as your own, that time lags between the actual work and claims filing or dispute resolution are a major head ache, and often results in a lot of extra work. Maybe it takes time to assemble documentation, but I think the CRA should be encouraging, and preferably aiding companies in collecting and storing the documentation as they are doing their work.
Every time I have done laboratory work I’ve never regretted taking the time to take good notes and document what I’ve done. That’s why this suggestion of a colleague of yours to reduce 18 months to 6 months resonates with me.
For a longer version of this blog post, please have a look at this:
http://blog.tedhsu.ca/2012/02/11/reform-the-sred-tax-credit-dont-narrow-eligibility/
Thanks for taking the time to read and comment on this blog post
“pfarmer” & Ted,
You both make good points … methinks you should get together for a serious chat.
In addition, well thought out input and comments have been made here by ‘peter,’ ‘spiritway,’ Bruno, ‘them,’ and Jennifer. Perhaps a teleconference (or two) including any / all of this group would be beneficial.
The conversation has gone far beyond the point where I could make any effective contribution, however, I DO understand the concerns and think a ‘recorded group discussion’ is warranted.
Given I really can’t add anything to the conversation, I would not want to participate – except to act as teleconference chair, if you wish.
This is an interesting conversation.
It occurs to me we may actually elucidate Ted on the same problems from a different perspective. In his position as Liberal Science Critic, he could use this valuable information to foment a reasoned and incalculably superior response to the knee jerk “toss the game” approach offered by almost everyone in a position to change things. This in stark STARK contrast to the rising chorus of honest players who now feel they have almost nothing to lose. We could learn from them too.
First of all; The “Consultant Trolls” at the center of the controversy have never been given standing at the table. Save that which we are permitted to offer in the name of our clients, during the course of regular business with CRA. Typically, we cannot comment, complain, offer suggestions, or make any other communication directed to CRA without connecting that communication directly to the taxpayers business with the SR&ED division.
This is not a small issue. In effect the CRA denies the client the right to representation, by hobbling the ability of the consultant to employ the only tool of his trade, which is his continuum of experience. The second insult is when the CRA muzzles us by complaining to the taxpayer we are “making things difficult”.
It’s safe to speculate; the major strategy used to reduce hundreds of submissions to the ombudsman to a handful of complaints was to discard consultants’ submissions on the grounds they had no legal standing. It’s clever, but dishonest.
You see; the one thing we want to say, and we cannot, is the concept of fairness and equality and consistency has been re-defined by the CRA in the administration of the SR&ED program.
Fairness, equality, and consistency are only being measured in terms of current policy. I would argue that treating every diner to the same food poisoning is not a measure of fairness, equality, and consistency in the eyes of the diners.
I the same way, our concern is not whether CRA treats everyone the same, and strives to meet a consistent message, and deliver the same “product” to everyone. The problem is, the program has suddenly and deliberately moved the line dividing right from wrong, good from bad, compliant from cheat, and program advocate from troll, leaving the vast majority of previously honest and diligent performers of SR&ED, and their consultants (doing precisely what they have previously been told was legitimate) on the wrong side of their arbitrary line.
Then they used the power of their office to vilify us for being re-defined.
Yeah, we should have that conference call.
I just want to address the comment “Trolling for possible claims, and working on a contingency fee”
This is a pretty salty comment, and highly editorializes the description a completely legal business model.
Working on contingency is completely legal. Large retail stores place huge amounts on unpaid stock on their floor, and get paid only if it sells. Lawyers, Salespeople, anyone working on a commission get paid a contingency fee.
In effect, anyone offering a money back guarantee is getting paid a contingency fee.
As for “trolling”. Is it wrong to seek out companies who are unaware of their tax rights, and fail to apply for their legal reimbursements?
Is it wrong to help a struggling business identify refund ENTITLEMENTS?
And finally, is it wrong to allow a businessman to spend his legally obtained entitlement refunds on whatever services and consultations he wants to?
Maybe what is wrong is the Harper Government who campaigned on a platform of smaller government and less interference in business, is using strong language and fierce rhetoric to sway uninformed minds to a self-serving opinion.
As a matter of fact, who pays your salary? Is it paid in advance?, or do you get it after you work for two weeks?
Do they pay you even if you don’t show up? Do they pay you if you fail to do your work?
I think YOU work on contingency Ted, you troll you.
;)
It will never be effective until the mistrust subsides, and all the interested parties sit down and agree to a full partnership.
The mistrust will never subside until the politicians stop fanning the flames.
I have many valued colleagues in Revenue Canada and I can tell you they are even bewildered as to why the government is promoting a contentious agenda.
It was 98% working and only 2% broken.
If things go the way it seems they might, they will substitute a roulette wheel and gamble 4.6 Billion a year on “picking winners”
Egad, even seasoned investors can’t do that.
Also appreciate LavaBit’s suggestions, too.
Thanks for your links, Peter and Bruno. Yes, absolutely we need facts and reality to guide our decisions on these matters. I am very tired of guilt by fiction. Stories get circulated because they play well in the media or suit an ideological agenda.
I feel the same way about how supply-management is being bandied about.
Yes, these systems have flaws, but they were also instituted and developed in ways to meet particular needs.
I’m all for the following: fine-tuning existing systems while at the same time looking out for the emerging global picture that might identify new needs/concerns that the present model can’t address.
I encourage everyone to follow Peter’s suggestion and read the Ombudsman’s “Observation Paper”.
This is an important program to Canadian businesses.
Can it be improved? Absolutely, like anything else, but let’s deal with the facts as much as possible.
I witnessed first hand certain judgment calls on items within a claim that can be considered on either side of the eligibility issue and found the experience quite fairly evaluated even though not everything went in our favor.
I strongly believe that the majority of the claims would easily pass any smell test. I’d proudly make mine public. Those who would not want to make their public may have a legitimate reason or something to hide but let’s not kill a good program on “speculative” abuse. Most so called “trollers” are reputable accounting people who have their hard earned reputations and valuable designations. I could be wrong, but I doubt the majority would risk either for a few dollars on a bogus claim. Let’s not paint everyone with the same negative brush of the few…..
Mr. Hsu
I emailed you and hoped you would endeavor to correct the fundamental error in your analysis. But alas no.
Despite it being a popular hypothesis, and much bandied about in the news and the house, there has never been a study into Illegitimate Claims. The ombudsman’s report was NOT mandated to look into abuses, but to consider the flaws in administration of the program.
You can read it here. http://www.oto-boc.gc.ca/obsppr/menu-eng.html
and note it is called:
“Issues of service and fairness within the Scientific Research and Experimental Development Tax Incentive Program”
I think it might serve the needs of informed discussion if you yourself were to become informed before proffering misleading opinions on such important issues of the day.
The fact is the Minister of Revenue himself said illegitimate claims are not a major problem, but a growing concern.
I am all for positive changes to the system, but I prefer rational measured discussion to ones rife with mis-truths and hyperbole.
Hello Peter,
Thanks for your remarks.
What I’m trying to do is to propose that SR&ED _not_ be narrowed in scope or that funding be reduced. This is what I am hearing from businesses, especially those in my home riding whose companies have benefited from it. I think you’ll agree that our position contrasts with the recommendation of the Jenkin’s panel.
The biggest political push-back I am getting when I advocate for keeping SR&ED is stories of abuse. For example, these lines from an article in the Globe and Mail:
“Nearly 25,000 companies across Canada use the tax break, which for small companies means instant cash rebates for R&D they’ve already conducted. A recent Globe and Mail investigation found widespread abuse, including bogus claims and large consultant fees paid from credits.
Companies that use the program have long complained that the program is too bureaucratic, unpredictable and bears no relation to how company’s actually conduct R&D. The result is often no money for legitimate work, and quite often credits for companies doing routine product development.
Many of those complaints are likely to be included in a long delayed report on the SR&ED program by the federal Taxpayers’ Ombudsman, Paul Dube, which is expected to be made public as early as next week.”
I think this needs to be addressed — with proposals that do not cut the program or limit its scope.
Yes, it was not accurate to characterize the ombudsman’s report as about illegitimate claims. However, if the CRA is forced to respond and explains why claims and claimants are treated in a certain way, I believe Mr. Dube is going to hear about false SR&ED claims, and he is going to have to address the balance between onerous burdens on claimants, and the level of fraud or waste we are willing to tolerate.
For a longer version of my blog post, please consider reading this:
http://blog.tedhsu.ca/2012/02/11/reform-the-sred-tax-credit-dont-narrow-eligibility/
Thanks again for your comments. I think we are actually on the same side of this issue, more or less.
Ted
Ted,
We are SOMEWHAT on the same side of the issue.
But I think an age old problem emerges from an overly narrow view of “the problem”
As you pointed out the Globe article claimed an investigation uncovered widespread abuse. And I understand CRA is now prosecuting a number of false claimants under the normal provisions of the law.
The Globe article also suggests fees are being diverted by apparently unscrupulous consultants.
The real problem is a sort of loophole in the law, that allows for taxpayers to assess work done up to two fiscal years previous, and claim that work conditionally meets the description of SR&ED, as described in previous CRA publications and Tax Court decisions.
In fact until about 2007 CRA reviewers were encouraged to grant the tax credits to these claimants, even if the documentation was lacking. The reasoning used was: The taxpayer may not have been aware of the program or did not realize they qualified, and therefore could not meet the documentation requirements, even though they did carry out qualified work.
This was done in the spirit of the incentive nature of the program.
In recent years, although the law itself has not changed at all. The combination of policy changes, tax and supreme court decisions, and massaging of definitions has resulted in some push-back from an industry that is struggling to keep up. This precipitated the Ombudsman’s systemic investigation. The report is flawed in only one sense, it fails to deal with CRA’s policy being a moving target that changes retroactively.
So what really happened is a whole lot of consultants and claimants couldn’t keep up with the description of what was legitimate, because it was legitimate when they filed the claim and policy changes made it bogus before it reached the review stage.
If you look at the history of changes, and reviews, and reports, and panels struck since 1999, you will find the truth about why the program has failed, and why there are suddenly so many “bogus” claims.
The real story would match your article title more closely, and make for an exciting bit of intrigue. But if you are simply interested in political expediency, keep up the good work.
TLDR; It’s simply a case of blaming the victim.
Actually I apologize for the political expediency comment.
It would be hard given the noise generated around the “boogeyman” of the unscrupulous tax cheat victimizing the hapless small businessman.
I would just rather we try to apply reason to the process.
Start with the very correct assumption that MOST Canadians, and businesses are honest, law abiding, and hard working just like you and me and that goes for consultants and the taxman too.
What we need is a mechanism that catches the small number of cheats, and doesn’t victimize or overburden the vast number of honest people.
We can’t get that if we incorrectly convey that the criminals have overwhelmed the system.
Sorry, Ted. Your analysis is superficial, and a 6-month time limit simply won’t fly with most industries, given how long it takes to put a complex claim together.
If you read the various reports, you’ll see that largest corporations suck out 80% of the money allocated to SR&ED, yet those are the corporations that decide to do or not do SR&ED based on their own business needs, and not based on an incentive programme. This is the biggest reason why the correlation is broken between the tax credit and actual SR&ED, and why it is failing as an incentive.
By contrast, if you recognize that it is small and medium-sized businesses that are the biggest source of jobs, including knowledge-based technical jobs, and recognize that the tax credit really does have leverage as an incentive for SR&ED in medium and small businesses, the picture becomes more clear.
In order for the government to get the biggest bang for its buck, and really foster a knowledge-based economy, it needs to change the emphasis of its SR&ED budgeting from giant corporations to medium and small businesses. That’s where the real SR&ED action is, and that’s where the levers are to incentivize doing SR&ED.
Sure, there are scammy claim submissions out there, but CRA already has processes to filter those out. The filter we DON’T have yet is the one that can focus resources on where SR&ED will actually increase as a result of the tax credit, and that means shifting away from this useless 80% giveaway of corporate welfare to large corporations and aim the money where it will generate more technology, more knowledge-based jobs and a broader knowledge-based infrastructure for the country.
Hello “them”,
Thanks for your suggestion that SR&ED should be more weighted towards smaller companies in order to maximize the program’s benefit.
I think that companies should be keeping track of how they are qualifying for the SR&ED credit, as they are doing the work. I am told that the passage of time is often a big head-ache when sorting out SR&ED claims with the CRA — the end of the fiscal year could be up to 12 months before fiscal year end, then you get 18 months to file a claim, and then the CRA has up to 12 months to audit. That’s 3 1/2 years total. I think we want companies to keep track of how they are going to file their SR&ED claim as they are doing their work (because SR&ED is supposed to function as an incentive), and the initial notification plus shortening the 18 months to 6 months would encourage that.
To respond to another point, I’m also told that the CRA, in fact, can only audit some small claims. Politically I’m feeling resistance to advocating for not reducing the scope of SR&ED because of things like this quote from the Globe and Mail:
“Nearly 25,000 companies across Canada use the tax break, which for small companies means instant cash rebates for R&D they’ve already conducted. A recent Globe and Mail investigation found widespread abuse, including bogus claims and large consultant fees paid from credits.”
Thanks again for your comments
Ted
I wouldn’t put too much stock in what the Globe calls their “investigation”. Real investigative reporting died years ago when the media industry consolidated into a few large entities, and turned their news departments into generators of “news-tainment”.
Most news organisations have no budget for proper investigative journalism (with very rare exceptions). Instead, most “investigations” are quick, superficial, have minimal fact-checking or vetting of information, little contact with parties representing opposing points of view, vested interests, or sources of information.
The gaps are filled with careless assumptions, overreaching statements, hyperbole, and general rabble-rousing to make stink — and the reality be damned. News-tainment. Stir the pot, get people riled up.
Basing one’s views of complex issues on reporting like this is no way to make policy.
Mark Twain once said: “There are Lies, Damn Lies, and Statistics.”
Political movers of certain stripes deliberately misinterpret the fact that the majority of bogus claims come from small businesses, in order to vilify small and medium-sized companies.
But when you see that there are many many more small and medium-sized businesses than large ones, it becomes clear this is just a natural result of the larger population.
If, say, 5% of the claims from any range of business size are bogus, then the business size class with the large quantity of businesses will have the largest absolute number of bogus claims.
Knwoing and understanding the fallacy that is being relied on here, is it sensible to tar the entire small-medium business segment with the same brush?
After all, the majority of the employment base of the country itself comes from small and medium-sized businesses. And small-medium businesses generate most of the knowledged-based jobs and most of the serious R&D that improves Canadian competitiveness.
Attacking small-to-medium businesses, as a group. is attacking the people doing the best research. Pulling funding from the small-to-medium businesses will swiftly put an end to much of the best R&D
being done in the country. And small-to-medium business are mobile. The ones whose choice to do their R&D here is most directly driven by a yearly tax credit — they are the ones who will shut down and move their operation to Mexico, if that tax credit is taken away.
As the Globe and Mail continues their sloppy and ill-informed crusade against the SR&ED programmes, more and more Canadian companies have, on the basis of their articles, put real time and effort into scouting out locations in foreign countriesto move to, for when the tax credit is taken away.
Ontario’s manufacturing industry is on its last legs, due to lack of foresight by our treaty negotiators over the past 25 years.
Intensive R&D is the key to keeping what’s left of our knowledge-based economy, and hopefully building it up even further. I’ve seen it happen. If we’re serious about creating an R&D ecosystem where lots of companies, large and small, are engaging in it regularly and seriously, to render the need for cheap labour obsolete, then there must be clear-headed and deliberate policies to incentivise doing R&D. Sitting back and letting the market take care of it will not lead to a knowledge-based economy in Canada.; rather it will lead to Companies pulling up their roots and setting up shop in Mexico or China, or now even Cambodia. There’s a never-ending source of cheap labour somewhere.
So: do we want to create an R&D ecosystem in which Canadian companies have the incentives and tools to create the ‘killer apps’ for their sector that will make cheap labour obsolete? Or do we want to let market forces decide for us what will happen?
It’s time to choose a clear and intelligent direction for fostering intensive R&D and creating an unassailable knowledge-based economy in this country.
And that will take a lot more work than drawing conclusions from rushed reports riddled with sloppy assumptions — by newspapers, ombudsmen, special panels and committees, and the like. To hazard a guess, a careful meta-analyses of the lot of these will likely show nothing but a cacophony of dissonant voices coming to mutually-exclusive conclusions — as expected, given the minimal involvement of other parties (eg. the people who are ACTUALLY DOING R&D).
The rhetoric and hyperbole and bad reporting surrounding all of this is creating far more confusion than the SR&ED tax credit ever did.
It’s time for some clear thinking about what the ITC does well and not just re-hash the obvious attacks, which are are based on limited or inapplicable “evidence”.
Thanks Them.
I was recalcitrant to point out the Ted seems to have based his entire position on fawning acceptance of the “facts” in one Globe article.
Myself? I am watching a very interesting and growing revolt, gathering numbers of complainants to overturn claims in the ombudsman’s report that nobody complained. So far we have establish that to be a lie, now we are just trying to figure out how big a lie it is.
Lets call for real reform and real change, and throw the tax wasting ombudsman’s office who has wasted millions in the taxpayer’s money solving less than 80 problems in 3 years, and producing patently false reports to mislead Canadians. (and who ACTUALLY made ABSOLUTELY no mention of fraud or consultants in his report Ted, notice you haven’t retracted or apologized despite the obvious salacious “error” in your editorial.)
Gregg, allow me to support your suggestion with an example…
The following idea can easily be denied or accepted to move on to next steps….from a SR&D perspective
-STATEMENT OF INTENTION-
As the economy becomes more and more global, there is a need for a global currency facilitating simply and only the exchange of food items, without exchange rate fluctuations.
Countries can apply to participate and food items produced by the member country will not be subject to exchange fluctuations.
Benefits:
I can list many….one of which it will help reduce world hunger in many countries…another is that it will help producers, particularly farmers, compete on a fair global scale.
Obstacles:
I can list many as well.
The reader can simply now put themselves in the position of accepting and or denying the above INTENT based on the rules and objectives laid out in the program.
Before anyone critiques my simplicity, I fully understand and appreciate that the request for pubic money would require more details that I have presented above…..
We in Canada have the creative minds, the skilled people and the resources to be a global leader in this so called knowledge economy. Do we have the will and the courage to overcome the fear of failure?
By the way…it is not the SR&D program that my company has been granted…YET!
For now, we’re simply trying to create Canadian jobs by building a Global Credit Bureau and being quite successful, I may add, thanks in part to SR&D support but mostly to the brilliant people I work with.
Well written Ted. Also, I found the comments by Bruno and ‘spiritway’ to be enlightening.
Ted, your first recommendation is “to require companies to notify the Canada Revenue Agency within three months of the start of a project …”
Perhaps a more restrictive approach would be even more effective with regards limiting (eliminating?) SR&ED trolling by consultants.
Having worked for four decades as a consultant in the IT sector, I was involved in many programs that were at least partly funded by one or more level(s) of government. In practically all cases, projects were eligible for support ONLY if ‘approved prior to any expenditures being made.’
Perhaps I am being too simplistic, but it seems to me that any organization, regardless of size, could easily submit a “statement of intention and brief description of expectations” in ADVANCE of any expenditures (investments) being made. Once submitted, the process would move forward as you have suggested. Would this approach tighten up the process and reduce (eliminate) the illegitimate claims?
Hi Gregg,
I considered having to file a simple statement with no grace period. That is, you could only count expenditures after the “time-stamp” when Canada Revenue Agency receives your statement. However, I found out that there is a lot of in-the-field/hard-hat research that is done in locations and situations where it would be very hard to not allow a grace period. So, I’m suggesting 3 months after the start of the project whereas right now you get until 18 months after the end of the fiscal year.
Thanks very much.
Ted
As an owner of a small business which has benefited from the program, I will offer my perspective…
1) If it was not for the SR&D reporting companies I would have never heard of the program. A a matter of fact, the first one that approached us declined to work with us because our “program was too small and not worth their while”. No question they make money on our backs but then again, we small business owners are busy building the business and keeping the banks happy to have time to check out the details of government initiatives. The second company has worked with us for over 4 years and yes, has benefited more than any other stakeholder. The business and community has benefited as well.
2) SR&D has assisted in paying for the equivalent of 1 employee out of 12, but was instrumental in giving me the courage to hire 2 additional spin off professional. Without SR&D, my company of 12 employees would have had 3 less for the past 4 years, not to mention the spin off employment of the people prepping the claim. In other words, the community got back what it invested in my business through payroll taxes etc…
3)The R&D we were able to finance through the SR&D claim has permitted us to compete against US multinationals and actually carve out a presence in the Canadian credit information industry. While the multinational have actually shrunk Canadian operations and jobs and repatriated those jobs to their US operations, we have been able to grow Canadian jobs. Is that all attributed the SR&D? No, but it has had a very positive influence on getting us to where we are a a little sooner.
4) Is there abuse with SR&D? I don’t have time to prove it, but I imagine like many government programs, there are those benefiting for the wrong reasons, giving the rest of us a bad reputation.
5)I believe SR&D money should also be granted for marketing the innovation that a company has developed. The claim only permits IT or technological innovation and limits any other expenditures.
What is the point of spending a ton on money on developing a new mouse trap if you don’t help the company tell the world what it has developed? Additional marketing assistance helps the companies promote their discoveries which creates new customers which creates new Canadian jobs. Is that not the goal of the program in the first place?
I agree with Ted’s idea that having to notify the government within 90 days will reduce the “trolling” by reporting companies, but then again if that rule was in place, we would not have been a success story of the program. Pros and cons I guess…
I also agree with reducing the time to process the claim. While we are waiting for the refund, the companies have to finance the payroll for the R&D people involved and that puts a heave burden on small business who are already challenged to raise capital.
I can’t speak for the big players in the program of whether the community benefits from the investment we collectively make in SR&D, but I fully support it for firms in the 5 to 50 employee range. There is no question of being able to tangibly prove the benefits to the business as well as the ROI back to the community.
The low number of comments or interest in this topic and posting maybe speaks for the program itself????
Hi Bruno,
Thanks for your comments. Our goal is to preserve a program that many people are telling us has benefited their companies and allowed them to grow and hire. People like you running businesses are busy and so only a few have time to comment like this. There may not be a lot of posts here, but I know a lot of business people share your viewpoint.
By the way, for a longer more detailed version of this blog post, please have a look at
http://blog.tedhsu.ca/2012/02/11/reform-the-sred-tax-credit-dont-narrow-eligibility/
I agree with your comment that we should also try to help Canadian companies commercialize and market what comes out of their research and development. Many people say that this is the bottleneck now.
I think the anecdotal evidence for abuse of SR&ED is strong. I certainly felt that push-back as I tried to advocate for the interests of businesses in my riding and argue for not cutting back on eligibility for SR&ED.
Ted
I am not involved with this sector at all on a daily basis, so perhaps my comments will be helpful in terms of seeing where the average citizen is on the issue. I would also appreciate any comments from fellow ‘bloggers’.
I do, however, want Canada to be a place where innovation is burgeoning — in a variety of sectors — and where science can be applied to both bring about economic prosperity and responsible social/ecological action.
I fear (perhaps wrongly, please comment) that we are ‘missing the boat’ on the green-economy revolution (decisions like last week’s cancelling the retro-fitting program don’t help); that our current government is not interested in us being anything other than a country that supplies raw materials to other nations’ value-addeed economies; and that we have stifled innovation in our country through either a) too much bureaucracy, b)lack of education, or c) lack of access to funds once a good idea has been secured through research and experimental development.
People have to be able to get on the ground running. And it will not be enough to just ‘tweak’ the current system — as with all the issues we are facing, we have to look at a paradigm-shift.
a) Bureaucracy: I agree with your suggestions above. I also fully agree that you cannot limit SR&ED credits to labour costs! This would only favour the largest innovators who have already secured venture-capital (yes? no?). That seems to make sense to me.
b) Education: If you really want innovation in this country (and that is a federal issue, yes?), then you need a National Education Plan for it. OUr current education systems, laudable as they may be, do not stress (indeed some would say cannot stress) experimental approaches, observation and free-thinking. I live in Ontario. Mike Harris’ curriculum does not prepare students to be innovators.
c) Fund-Access: Issues like access to venture-capital come up as well as the ones you mentioned about SR&ED. These are broader than SR&ED (no?). This is very ‘political’ territory, especially where large corporations hold sway without government regulation. My brother-in-law (US) came up with wonderful technology for the reward-card system; he waited months for venture-capital, it did not come through, and he had to declare bankruptcy (letting go 25 workers). Then the technology was ‘bought up’ by a large corporation (that shall go unnamed). This is unjust. People should be able to reap the rewards of their efforts.
Deeper questions for the paradigm-shift:
What is research?: I would like to see your understanding of scientific research include things like action-research (in the field). Also our understanding of science needs to shift in order to accommodate the new understandings that are emerging The German concept, Wissenschaft comes to mind — beyond just controlled experiments.
Thank you for reading. I take my responsibility as a citizen seriously, so I offer what I can and what is thought out.
Hello Spiritway,
I agree with many of your points. The federal government I think should be much more committed to preparing for a greener economy where we are much more efficient in our use of energy and other natural resources and get serious about reducing net greenhouse gas emissions.
It is also important to try to produce and export more value added products, and that will require a better educated workforce, improving Canada’s ability to commercialize our innovations, and I’ll stick my neck out and say some cultural shifts.
Ted
I think a large part of the problem is how the reporting is so complicated, those actually doing the research and spending the money can’t fill out the forms!
Oh, SR&ED is providing jobs all right, for the SR&ED reporting companies!
Hi Jennifer,
I understand that a common head-ache is the long time lag between doing the work and sitting down with the CRA. It can be several years. That is why one of my suggestions, is to reduce the time allowed to file claims from 18 months after the fiscal year end to 6 months after fiscal year end (which is the usual deadline for filing income tax returns).
Ted
Hi Ted. I admit to being more on the fringe of any knowledge of SR&ED. I work for a public accountant. And it seems to me that we are always struggling to meet the timeline as it is for filing the T2 with the Sched. 600 on it. I don’t know where the hold-up is, though, whether it is with the company doing the SR&ED itself, or with the SR&ED filing firm.
I certainly think that if we could speed up the timeline AFTER the current filing deadline to when the claim is approved, that would be better. But it would cost us all more, because that means more CRA employees needed to look at the things, right?
Hi Jennifer,
Yes, I think we have to try do better than simply putting in more resources in the CRA to speed up the process after the filing deadline. One reason that I was attracted to the suggestions I made (which by the way are not meant to be comprehensive, and do come from people like yourself who work in the area) is that business should continually keep in mind the tax consequences of the decisions they make, and not wait to see how the dust settles when they file their tax returns. If it’s hard to do that for SR&ED over the course of the tax year, then that’s a problem.
Very few mentions are made in the media these days about new scientific research in Canada and any attempts to speed up the process of getting research funding and making the process of getting it less vague and frustrating would likely help Canadian businesses who need such funding.