CATAAlliance 2012 Federal Budget Responded to Canada's ...

Russ Roberts
Vice President, Tax, Finance and Advocacy
CATAAlliance

The 2012 Federal Budget is very much a work progress.

>> Download the MP3 recording of this webinar from the CATA Research Repository

Commercialization Gap

Recognition of the need to refocus indirect funding to programs targeted at the Commercialization Gap is positive. The commitment to more announcements about this is encouraging. We are particularly pleased that commercialization has now become the issue and it is recognized that a long-term agenda is needed, not just a one-time fix.

The commitment of around $500 million in funds to new or expanded initiatives to address commercialization is consistent with what CATA was encouraging in our White Paper. A copy of the CATA White Paper can be obtained at http://www.cata.ca/Media_and_Events/Press_Releases/cata_pr11241101.html.

CATA's understanding of the policy disconnect associated with historical discussions of the Canadian ?Innovation? Gap and the need to refocus on commercialization has been greatly assisted by the many organizations and individuals who provided input for CATA?s survey and consultations on what would be useful ways to proceed. The Executive Summary, by Dr. Sorin Cohn, CATA Executive in Residence, of this study can be obtained at http://www.cata.ca/files/PDF/2012/Draft-ExecutiveSummary-of-Commercialization-Study-SCohn-24March2012.pdf

Integrated leadership and accountability

The Budget did not address the issue of how to provide the needed integrated leadership and accountability that CATA advocates for Canada?s innovation portfolio.

There have been hugely varying opinions on how to achieve appropriate leadership and accountability for the portfolio and there is no Community consensus for the Government to work with. In our opinion, the status quo needs to change. The Community really needs to focus on the advantages of change and the key parameters for successful improvement. The Budget does provide room for further dialogue and improvements. In our opinion, the issue of leadership and accountability are critical.

SR&ED

The Budget failed to address the inefficiencies and problems associated with retrospective SR&ED claims. In our opinion, this is a real lost opportunity to free up millions of dollars for more productive endeavours. Perhaps the significance of this highly technical issue was lost in all the rhetoric running up to the Budget. And, perhaps, there will be room to explain better this proposal as part of the forthcoming consultation on ?contingency fees?.

In our opinion, the elimination of retrospective claims could be a simple, effective solution that would permit positive aspects of contingency relationships to be maintained.

The Budget has done nothing to change the CRA?s recent policy of auditing firms after they have been issued refund cheques under the Refundable component of the SR&ED Program and then re-assessing some to take back part or all of the refund. The Honourable Elmer MacKay, the Minister of National Revenue at the time of the creation of the SR&ED Program, committed that the Refundable component of the program would work with assurance. That is, once a refund was provided to a claimant ? other than in cases of fraud ? that money was the company?s to keep.

The CRA continues to get more money for the SR&ED Program, but how this will lead to improvements is very unclear, at least to CATA.

The Budget does not make changes that significantly improve the clarity of the SR&ED legislation nor clearly commit the CRA to deal with the fundamental issues identified by the Community on how eligibility is to be addressed and how the scope of associated labour is to be determined. It is now, once again, up to the CRA to address these two perennial issues, as well as the issues of consistency and predictability. The outcome of the CRA?s decisions on the parameters for SR&ED eligibility will materially affect the size of the program and the breadth of firms that can benefit from it. Specifically, the current draft eligibility policies of the CRA, if consistently applied, would result in substantial reductions in support.

The Budget contains a hint that the CRA has been encouraged by the Government to work better with the community. If not, many in the community should be concerned. We have recently had positive discussions with CRA's top management on their approach to eligibility and the implications. Hopefully, once and for all, the CRA works through this perennial challenge to the program's success, i.e., a stable and consistent application of the law.

Some key issues addressed in Budget

Summarized below are some of the key issues for CATA that were addressed in the Budget.

More detailed analyses of the Budget, particularly the changes to SR&ED, have been developed by Ernst & Young and PricewaterhouseCoopers. They can be obtained at:

Link to E&Y:
http://www.ey.com/Publication/vwLUAssets/Tax_Alert_2012_No_14/$FILE/TaxAlert2012No14.pdf

Link to PwC:
http://www.pwc.com/ca/en/tax/budgets/2012/federal.jhtml

For the 2012 Federal Budget please go to: http://www.budget.gc.ca/2012/home-accueil-eng.html

Some Key Issues	Budget 2012
Portfolio Leadership - as recommended in the Jenkins' Expert Panel Report, create a council as "the common service platform for all appropriate federal business innovation support programs."	The Budget indicated that there would be further announcements by Minister Goodyear, but so far no solutions have been offered for the leadership/accountability vacuum. Positive result is doubtful, unless the community can pull together - the window is still open.
Better balance between Canada's direct and indirect support for innovation	Something over $200 to $500 million per year of some $500 to $600 plus million savings in tax expenditures transferred to direct funding. Therefore, it would appear that there might still be room for some funding for future initiatives.
Scientific Research and Experimental Development (SR&ED) (indirect) Eliminate retrospective claims Address CRA administration issues	Did not address CRA's disconnect from the realities of how engineering projects are effectively conducted. If this continues, it is a huge dollar impact on what can be successfully claimed and the predictability of the credits. Current CRA practices very much favour the isolated/dedicated SR&ED project. In our opinion, the Budget fails to clearly address the role of the CRA in delivering a broad based incentive. This is a serious mis-step, unless the CRA itself takes the initiative to effectively deliver the broad based incentive intended by Parliament. Retained basic incentive structures of both the Refundable and Non-refundable tax credits with some significant changes to quantum, and maintained CRA's role as the administrator. Changes phased in over 2 years, Refundable tax credits are effectively reduced by about 5% for those using the proxy. Non-refundable credits are reduced 25% in 2014. The failure to bring the Non-refundable credits above the line is regrettable. Government will argue that large corporations and SMEs are still much better off due to overall reductions in tax rates which actually make the credits more valuable. However, given the high Canadian dollar and competitive tax rates elsewhere, stress should still be expected on Canadian investment. Capital expenses and leased equipment are no longer eligible expenses. Only 80% of previously eligible contracted SR&ED is eligible. Simplification, consistency, predictability, and cost-effectiveness - in our opinion, not really achieved and, at best, debatable. For the future actions of the CRA. Contingency fees by tax preparers - Government will study this in the coming year, including consultations with taxpayers. Additional funding for administration of SR&ED Program Economic Action Plan 2012 announces actions by the CRA to improve the predictability of the SR&ED incentives. Government to invest $4 million in 2012/2013 and $2 million in 2013/2014 to implement changes in the administration of the program. CRA has been committed to improving the Notice of Objection process "to allow for" a second review of scientific eligibility determinations. Useful, but what about the objectivity of the CRA's redress process at the review/audit stage? CRA has been committed to working collaboratively with industry representatives to address emerging issues. Understanding what this means is critical and unknown. CRA has been committed to conducting a pilot project to determine the feasibility of a formal pre-approval process. No details provided, but if it can be made to work predictably, a positive change.
Other tax initiatives, i.e., "commercialization box" (indirect)	Provides no additional indirect support for commercialization and no alternative support to replace credits previously available on capital (including payments re the right to use capital property).
Venture funding and financing (direct)	Provides funding to increase private sector investments in early-stage risk capital, and to support private sector led large scale venture capital funds ($400 million). Presumably, this funding will be made available over a period of years. Our understanding is that details are to be worked out and announced. Very positive. Provides additional funds to BDC ($100 million). Very positive
Procurement (direct)	Provides funding, making the Canadian Innovation Commercialization Program permanent and expanding it to include military procurements. (Economic Action Plan 2012 proposes $95 million over 3 years, starting in 2013/2014; and $40 million per year thereafter.) Very positive.
Programs - integration and consolidation (direct)	Further to the report of the Jenkins Expert Panel, Government to "explore options to consolidate the suite of programs that supports business innovation to make it easier for businesses to access government support and improve efficiency." The NRC is to create a "concierge service" that will provide information and assistance to SMEs to help them make effective use of federal innovation programs. Minister Goodyear seems to be planning to address, in the future, how direct programs will be better coordinated and managed. In our opinion, this is a work-in-progress that the community should encourage and support.
IRAP (direct) - as recommended in the Jenkins Expert Panel report, enhance IRAP.	Economic Action Plan 2012 proposes an additional $110 million per year, starting in 2012/2013. Very positive. Economic Action Plan 2012 proposes $67 million in 2012/2013 to support the NRC in refocusing on "the development of commercial innovations", which was one of the reasons the NRC was created in 1916.
Other	Increased support for promotion of academic/business entrepreneurialism, including, permanent funding for Business-Led Networks of Centres of Excellence program. (Economic Action Plan 2012 proposes $24 million over 2 years, and $12 million per year thereafter.) Positive.

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