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Tax rules tightening on R&D?

Published by Steve Coleman on August 05, 2011

Canadian manufacturers fear a more restrictive policy in Scientific Research and Experimental Tax Credit
 
Canada Revenue Agency is currently proposing changes in the SR&ED Tax Credit that will negatively affect private sector R&D in Canada - according to the Canadian Manufacturers and Exporters (CME).

In a letter sent to the Canada Revenue Agency on Aug. 4,  CME raised that while industry, government, academia, and politicians across the country are working collectively to find ways to improve productivity, innovation and the private sector's investments in R&D, CRA is putting together a policy review process that actually confirms the trends that manufacturers have witnessed over recent years, based on an extremely narrow view of the nature and importance of R&D conducted by business.

"One particular issue in this regard is CRA's definition of technological advancement.  The definition appears to have changed to focus exclusively on the development of new, core technologies and to exclude incremental improvements in engineering know-how needed for the applications of key technologies, which are essential for continued process and product innovation and productivity growth", explained CME President and CEO, Jayson Myers. "The exclusion of virtual prototyping or evaluation exercises and other similar analyses from the CRA's definition of project scope is a good example on how restrictive CRA's view of R&D has become".
 
CME believe that CRA should use this current review as an opportunity to support Canadian research, innovation and productivity and return the program to its original stated and supported intention.  Without this, current accumulated tax credits will become of limited use, off-shoring of R&D activities by Canadian firms will be accelerated, and it will send a negative signal to multinational companies that are looking at the best business environment in which create jobs, wealth and high value added products through their R&D activities.
 
In 2010, the Government of Canada launched a comprehensive review of federal support to R&D, led by an expert panel (The Jenkins Panel) and a consultation paper is being currently reviewed by industry.  CME is strongly concerned that the CRA is moving on this fundamental issue on its own, prior to the comprehensive review of R&D by the expert panel being completed.  Coordination between CRA reviews and the panel's consultation is certainly an important factor that will determine the success or the failure of Canada's R&D incentive policies for the next decades.
 
The Canadian SR&ED tax credit program was originally intended to provide broad-based tax support for private sector innovation. Established in the 1980's, the program invests about $3.5 billion annually to about 18,000 businesses. Small- and medium-sized enterprises represent about three-quarters of the claimant. About half of the Investment tax credits are earned by the manufacturing sector.

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