Toronto Region Research Alliance: Review of Federal Support to Research & Development Expert Panel Consultation Submitted: February 18, 2011
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Introduction The Toronto Region Research Alliance (Appendix 1 describes TRRA) chose to address four questions posed by the Expert Panel’s Consultation Paper. To shape our response, we conducted a survey which was distributed to companies across our region from our own contact lists and those of economic development organizations across the region. A complete report on the survey’s results appears in Appendix 2. In addition, we distributed an early draft of this submission to a number of business leaders across the region for comment and suggestions. The insights gained from both the survey and our smaller group of business leaders are incorporated in this submission.
Question 10: If you have direct experience and knowledge of the SR&ED tax credit, what are your views in relation to the following: a) Does the current structure of the SR&ED tax credit encourage incremental investment in R&D? Does it free up capital to invest in other aspects of innovation activities in the firm? Does this vary by size, ownership, sector or nationality of firm? b) What are the strengths and weaknesses of the refundable portion of the SR&ED tax credit for Canadian-controlled private corporations and to what extent does it encourage the growth and commercial success of SMEs? c) Bearing in mind the improvements being made by the Canada Revenue Agency, are there additional opportunities for change to simplify the administration of the SR&ED tax credit and facilitate the applications process? SR&ED works extremely well for SMEs eligible for refunds and plays a critical role in the development of start-ups in research-intensive industries. Preserving the benefits SR&ED brings to this sector will be critical to foster sustained innovation. This message came through extremely clearly in the survey conducted by TRRA (Table 1).
Table 1: How important was the SR&ED program to your company's research and development activities?
SR&ED program
Very Important
Important
Neutral
Unimportant
Response Total
65% (13)
30% (6)
5% (1)
0% (0)
20
For the companies for whom SR&ED was important satisfaction levels were also high as seen in Table 2
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Table 2: How would you describe your experience with the SR&ED process?
Very Satisfied
Satisfied
Dissatisfied
Very Dissatisfied
15% (3)
75% (15)
10% (2)
0% (0)
0% (0)
20
Timely decision-making
20% (4)
65% (13)
10% (2)
5% (1)
0% (0)
20
Timely receipt of funds
20% (4)
50% (10)
25% (5)
5% (1)
0% (0)
20
Appropriate oversight by SR&ED officials
20% (4)
65% (13)
10% (2)
0% (0)
5% (1)
20
Appropriate reporting requirements to SR&ED
15% (3)
70% (14)
5% (1)
5% (1)
5% (1)
20
Ease of application
Not Response Relevant Total
Total Respondents
20
It is important to note, however, that many fewer than half of those who completed the survey reported strong value from SR&ED, which illustrates that SR&ED works well and should continue to do so for some elements within the Canadian business community but it does not meet all needs. SR&ED is less effective for corporations eligible for tax credits only, especially foreign-owned companies. The Canadian tax credits are managed at a multinational corporate headquarter level for consolidated tax filings so the true benefit and incentive is hidden. The level of R&D conducted in Canada by foreignowned companies is significant at $2.7 billion and, increasingly, these companies are competing with their subsidiaries in other countries for new R&D mandates. Recent trends point to a significant increase in the mobility of R&D investments across borders. Government incentive support for R&D by foreign multinationals in Canada will generate incremental activity given the comparatively low share those Canadian companies have of the global R&D investments controlled by their parent. For example, among the top ten spenders of R&D in Canada by foreign-controlled companies, most have a 1-2% share and only one has more than a 6% share of the global R&D budget. Therefore, the upside potential is significant if Canada can compete more effectively versus other jurisdictions. Although some difficulties occur for American controlled multinationals with any SR&ED benefits being taxed back from the parent company by the IRS, a large American-owned multinational active in Canada made the following comment in response to a draft of this submission:
For multinational corporations that perform R&D in Canada, the SR&ED tax credit is one of the most important government incentives as it enables corporations to maintain existing research activities. However, making the SR&ED tax credit refundable for large corporations would allow for cash flow in tough economic times and encourage continued R&D investments. The current interpretation of what constitutes eligible R&D project focuses more on traditional R&D and falls short in including essential broader aspects of innovation that drive R&D into the market to solve customer needs.
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
SR&ED has rigid scientific criteria that preclude companies that fall below the high threshold with developing new products or creating innovative improvements to their existing products. Canada has a broad-based economy with strengths in industries beyond life sciences and information technology. If a national goal is to increase business investment in R&D, the eligibility criteria should be tested against the research and innovation processes of companies in a wide range of product and service sectors – not just those for which scientific discoveries can make a difference. The current SR&ED model does not provide for easy prequalification. Thus, companies are assuming the risk with no guarantees that they will be successful in securing SR&ED support. One respondent to the TRRA survey made the following comment:
The SR&ED program is from the fifties when things moved a lot slower and big companies did research as opposed to the 12 month development cycles and start-up environment of today. And it is a crapshoot on which companies cannot depend. I start a program in January of one year and I MAY get funds for it 18 months later. This does not help me fund the program or the company. It’s just a way for large companies with a lot of cash to maybe get paid what they would have done anyway. As a software start-up the program is of little use to me or to potential investors. A respondent to a draft of this submission from the same American-owned multinational quoted earlier said:
Despite CRA’s recent attempts for improvement of the administration of SR&ED, businesses are not confident about what R&D is eligible. Other issues such as inconsistent technical interpretations, increasingly complex requirements for compliance and delays in claim processing diminish the value and efficiency of the SR&ED tax credit system. Another major European major multinational active in Canada stated:
Canadian government needs to establish a greater line of communication with private firms in order to facilitate the application process. One suggestion is the establishment of a hotline for questions from private firms to help improve the quality of these applications. Also, the Canadian government needs to create more open dialogue with private firms to gain their feedback on these programs and the application process. A different European multinational said:
Pre-qualification process should be transparent and easy to handle. Timelines should be provided and be trackable by the user. A dedicated case manager should be assigned for the applying company. In conversations leading to the drafting of this submission TRRA heard that companies active across the country have very different results and interpretations of guidelines with SR&ED depending upon which office adjudicates. SR&ED may be providing support to companies who will do the research regardless of the incentive. Consideration should be given to a simplified and effective prequalification process that would provide greater certainty for companies and provide government with improved information for budget planning and tracking.
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Question 11: How could the Government of Canada lighten the administration requirements of its programs on recipients and improve outreach to business? Maintaining records of research activities and the related qualifying expenses is a time consuming process for companies large and small. In many instances, companies hire SR&ED tax consultants to manage this process or assign the administrative task to highly paid researchers who should be focused on their scientific activities. Technology tools could greatly improve this efficiency of this process if the government developed SR&ED applications that synchronize and/or integrate with standard accounting programs like QuickBooks, project management software and Office programs like Outlook. Communication with business is a large undertaking for any individual government program. Many firms are unaware of the breadth of government support programs available from both federal and provincial governments. Incentive programs overlap, information is only available through multiple government ministry sites and funding agencies with application details and timelines buried deep in the guideline files. Borrowing from the experience of Service Canada that provides seamless service to citizens, the government could consider a Business R&D web portal that would contain all federal and provincial incentive programs, standardized applications, user accounts to store common data points and easy search applications to quickly find incentive programs that match the industry and project of the business user.
Question 13: Are there any gaps in the Government of Canada’s support to business and commercially-oriented R&D? Do firms performing R&D in other countries have an advantage over Canadian firms because of access to programs that are not available in Canada? What would be the principal features of new programming to fill these gaps? Australia provides 45% refundable tax credits to companies with income of less than $20 million and 40% non-refundable tax credit to other companies. France has a special entry-level program for first-time users that can see the credit rise to 50% of expenditures up to €100 million and, for high-tech SMEs, features immediate refunds. China provides 150% deduction of expenditures if the total R&D expenditure represents a 10% increase over the previous year. New Zealand offers vouchers worth between $100,000 and $200,000 that small companies can use for contract research with universities while the United Kingdom provides 130% deduction for expenditures in excess of £10,000 with no upper limit. The U.S. Small Business Administration Office of Technology administers the Small Business Innovation Research (SBIR) Program and the Small Business Technology Transfer (STTR) Program. Through these two competitive programs, SBA ensures that the nation's small, high-tech, innovative businesses are a significant part of American research, development, and innovation activity. A multinational company asked to review the draft of this submission made the following comment:
The program needs to evolve – Canada’s program is no longer attractive enough to compete against other countries such as China, UK and Australia. Global companies compete against their own sister companies around the world and a non-refundable credit system is no longer providing that competitive edge. If a refundable R&D credit is not feasible for large corporations, another possible option is to continue to provide existing non-refundable credits of 20% for existing projects with an expansion to include innovation and then provide additional refundable credits of 40% to 50% on top of the base credits for any new projects. This will enable Canadian corporations to compete with other regions within their corporate group or with external partners, particularly in the US, India and China. Another company indicated that the government should look at providing research facilities for company use closely aligned with research centres and support co-op work between companies and academic institutions including awarding companies with vouchers to purchase contract research from universities and colleges similar to the scheme in the United Kingdom. Page 4
TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Australia was cited by a number of respondents as a country that is out-competing Canada for global R&D mandates. Given the similarities between Canada and Australia, benchmarking Canadian federal government support against Australian government support would be a useful exercise. Government could consider introducing incremental incentives for small first-time users of SR&ED and encourage partnerships between those companies and researchers in academia through voucher schemes. Canada should continually monitor the competitive position of its R&D support due to the increasing global mobility of investments. The top 100 companies in Canada invest $10.2 billion in R&D annually, representing 35% of all R&D spent in the country. Given the importance of large corporations to the overall investment in R&D, government should consider a unique category of internationally-competitive incentives for these large firms based on revenue and R&D investment thresholds. The result would be more Global R&D mandates being conducted in Canada versus other countries by both domesticallyowned and foreign-owned firms. 41 of the respondents to TRRA’s survey (those who were active in R&D) responded as follows when asked about other forms of government support that could make a difference
Table 3: What other forms of Federal Government support would increase the likelihood of your company to engage in research and development activities?
Very Likely
Likely
Unlikely
Very Unlikely
Not sure
Response Total
Direct grants
73.17% (30)
19.51% (8)
0% (0)
0% (0)
7.32% (3)
41
Loan guarantees
34.15% (14)
29.27% (12)
14.63% (6)
14.63% (6)
7.32% (3)
41
Low-interest loans
36.59% (15)
34.15% (14)
4.88% (2)
14.63% (6)
9.76% (4)
41
Subsidies
46.34% (19)
34.15% (14)
4.88% (2)
4.88% (2)
9.76% (4)
41
Preferential procurement
36.59% (15)
34.15% (14)
7.32% (3)
7.32% (3)
14.63% (6)
41
Total Respondents
41
In addition to issues of government financial support, in discussions leading to the preparation of this submission, TRRA heard that in a global economy clear processes that result in effective protection of intellectual property is critical. We would encourage the government to review Canada’s intellectual property framework relative to key competitor jurisdictions.
Question 15: Is there a difference between R&D and innovation? If yes, how are they different? Should government focus on R&D or Innovation? What should the balance be? TRRA believes that there is a significant difference between R&D and innovation. R&D is a business function with projects that have a start and end. The outcome is generally a tangible new or improved product. Innovation is about people in an ongoing process that encompasses every business function from production to marketing. It includes more people than the scientists and engineers. Innovation outcomes are frequent and can be small, incremental steps or larger market-changing events. R&D by itself will unlikely improve business productivity: however, innovative initiatives will make significant improvements to a firm’s productivity, especially investments in technology solutions.
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Government focus on R-&D is critically important to the economic prosperity of the country. Tax incentive and grant programs should encourage Canadian businesses to invest in R&D to discover new products and enhance existing ones. Innovation is more of a cultural attitude, a management practice or an individual’s pre-disposition. We don’t need everyone to be innovative; however; we need the workforce at large to be open to innovation. Government should consider funding social science and humanities research to learn more about the Canadian approach to innovation and assess the curriculum in primary, secondary, college and university courses beyond math and the sciences for teaching principles relative to innovation. One of our respondents quoted the Conference Board of Canada:
Countries with the highest overall scores (in innovation) not only spend more on science and technology but also have policies that drive innovation supply and demand.” The Conference Board of Canada, 2010 Our survey respondents and those who reviewed a draft of this submission were united that Canada falls down on getting innovations deployed. Our problem is not invention; it is adoption. Government policies that support adoption as well as discovery were deemed to be essential. It is important to recognize that sectors that are science intensive or capable of benefiting from advanced technologies represent only one-quarter of the Canadian economy. While significant increases in Business Expenditure on R&D (BERD) and in M&E expenditure would be welcome, such increases would need to be significant in order to increase total Canadian productivity given the comparatively narrow portion of the Canadian economy in which they occur. Given that some 75% of the Canadian economy is services, innovation in service design and delivery through the adoption of productivity tools – ICT based and otherwise – has the capacity to make a dramatic impact on Canadian productivity vis-à-vis the United States and other competitor countries. It is important to note that very little, if any, of the expense of service innovation would qualify for Scientific Research and Experimental Development program. Even among the respondents to TRRA’s survey who use SR&ED, 44% indicated that all of their activities essential to development of innovative products, services, and process design are not eligible for SR&ED credits. The following comment from one of our reviewers sums up much of what we heard in response to Question 15:
Both R&D and innovation can sustain and create jobs in Canada – both are necessary if Canada’s objective is to grow and be competitive. The R&D tax credit program should continue to remain the government’s focus; however, eligibility should be expanded to include key innovation processes that enable market growth.
Conclusion TRRA has welcomed this opportunity to respond to the questions of the Expert Panel on which we felt we had a contribution to make. We would be happy to use our network across the Toronto Region – Kitchener/Waterloo to Oshawa to elicit feedback from our large number of innovative companies to any further requests for consultation in which the Expert Panel chooses to engage.
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TRRA Submission: Review of Federal Support to Research & Development Expert Panel Consultation
Appendix 1 – About Toronto Region Research Alliance
TRRA Vision, Mission and Goals Vision To transform the Toronto Region into a top 5 global centre for research and researchintensive industry Mission TRRA is a regional economic development organization promoting increased investment in research and innovation to further economic prosperity. Goals Increase awareness of the Toronto Region among global R&D decision-makers and influencers Retain and grow foreign investment into regional organizations, and attract innovative foreign companies to locate here Become the pre-eminent source of intelligence on regional research assets and associated international trends Promote enhanced research intensity among regional businesses Advance initiatives to strengthen research and innovation capacity
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