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