It is clear from the 2022 federal budget that the innovation economy remains a priority and needs to be supported. The government’s request in the recent budget for a review of the Scientific Research and Experimental Development (SR&ED) tax incentive program is welcome, but the scope of the review requires careful consideration.
The Liberal government’s election platform last year indicates which parts of the program would be subject to review. The platform suggested it would seek to reduce “bureaucracy and the need for consultants” and make the program more generous for companies that take the biggest risks. Presumably, this is where a future review of the program would begin.
Reducing paperwork is a universally embraced goal in any business, and one that certainly makes sense when looking at the SR&ED program. In the case of SR&ED Form T661, a new claim today for a complex project often takes a team of consultants weeks or even months. That’s right. For a company to guarantee a successful and timely application, it needs a team of experienced consultants, because no one has this kind of expertise in-house. Realistically, claiming a tax credit shouldn’t be more difficult than filing your tax return.
However, even in a streamlined process, consultants still have a role to play. Today, the consultant does more than simply fill out and file an SR&ED claim. The best consultants provide strategic advice, guidance and a pathway to optimize the complex but necessary set of grants and fiscal incentives provided by various levels of government and agencies. It is a fact that the fear of most government programs is fraud. When it comes to the SR&ED program, reputable consultants can play a bigger role in preventing fraud by ensuring that any claim is ethical and successful. In any event, a top consulting firm has more to lose than a startup in the event of fraud, not to mention the fiduciary duty to provide sound, legal advice. Targeting the cost of consultants may sound good on paper, but it masks the real opportunities for program improvement.
Beyond cutting red tape and reconfirming the role that consultants play, the biggest problem that needs to be addressed is that there’s too much subjectivity in the SR&ED process as it is, and that’s the enemy of any tax code. The government has said the scheme should be made more generous for companies that take the biggest risks. Yet how will the Canada Revenue Agency (CRA) determine how much you are moving the needle in science? If the goal of the program is to support jobs and innovation, why does the CRA have the responsibility to decide how much science is enough? Or how much risk is enough risk? Specifically, if a startup can meet SR&ED criteria by employing R&D personnel, gain investor confidence to raise capital, and attract skilled talent, the business community judged the company to have potential. . At this point, there is no added value for the CRA to decide how vigorously the scientific method was applied and the level of risk taken by the company.
Canada has been well served by looking abroad for best practices, such as Australia’s influence on the recently introduced Bill C-18, the Online News Act. Australians recently reformed their research and development tax credit, which includes, among many items, wages, contractors’ charges, non-capital material costs, travel expenses or overhead apportioned such as rent or utilities. It is also jointly administered by the Australian Tax Office and the Department of Industry Innovation and Science Australia. This joint approach takes some of the scientific and qualitative analysis out of the hands of the tax office. Perhaps most encouragingly, Australian registrants are self-assessing for R&D eligibility.
Everyone can support the exploration of possibilities for modernizing and simplifying an effective SR&ED program that adequately supports the innovation economy. Let’s just make sure it ultimately results in the most productive ways to do it.