R&D tax credit changes under fire

BARRIE MCKENNA

OTTAWA — THE GLOBE AND MAIL

Last updated Wednesday, Nov. 07 2012, 4:42 PM EST

Research In Motion Ltd., Canada’s top corporate R&D spender, warned a Parliamentary committee recently that changes to the flagship R&D tax credit program will cost the company $50-million a year, or a third of the $150-million it gets now. (Dave Chidley /THE CANADIAN PRESS)

Some of Canada’s biggest research spenders say Ottawa made a huge mistake by revamping its flagship R&D tax credit program – changes that risk sucking hundreds of millions of dollars a year from innovation.

Executives of Research In Motion Ltd., Canada’s top corporate R&D spender, warned a Parliamentary committee recently that the changes will cost the company $50-million a year, or a third of the $150-million it gets now.

“The [tax credit program] for sure has been relatively large for us,” RIM director of government relations Morgan Elliott told the House of Commons finance committee.

Mr. Elliott pointed out that the BlackBerry maker spends roughly $1.5-billion a year on R&D and pays more than $1-billion in Canadian taxes, making the credits a “really good investment” for the government.

Stricter rules announced in this year’s budget mean Canadian companies will either spend less on R&D or shift investments to other countries offering better incentives, said Jayson Myers, president and chief executive officer of the Canadian Manufacturers and Exporters .

“I’m concerned we’re moving in the wrong direction by increasing taxes on the companies that are investing the most in R&D,” Mr. Myers said in an interview.

“That’s going to weaken the ability of companies in Canada to compete for investment and every R&D dollar they spend.”

Canadian businesses will take a $750-million a year hit due to changes in the Scientific Research and Experimental Development program, the CME says in a report presented to the finance committee this week. The estimate is based on the combined federal and provincial impact of the changes to SR&ED, which costs roughly $5-billion a year and goes to more than 2,500 companies.

The impact on R&D spending could be even higher, Mr. Myers suggested.

This year’s federal budget cut the general SR&ED tax credit rate to 15 per cent from 20 per cent and made capital expenditures ineligible. The changes, set to take effect in 2014, are contained in a budget implementation bill now before Parliament, Bill C-45.

Although wildly popular, the SR&ED program has been plagued by abuse, steep compliance costs and criticism that it wasn’t effective in changing the behaviour of companies. Business spending on R&D in Canada has been steadily falling as a percentage of gross domestic product for more than decade.

And that’s part of the policy conundrum for Corporate Canada and the Conservative government: business spending on R&D was declining even with richer tax incentives. So it’s hard to make a compelling case that lower incentives will trigger less spending.

The government made the changes following a federal task force report headed by Open Text Corp. chairman Tom Jenkins. He that concluded that Ottawa spends far too much on tax credits and not enough on direct investments in R&D projects. The budget committed to shifting the savings from the SR&ED overhaul to “direct support programs that will reinforce business innovation in Canada.”

The CME report pointed out that while Ottawa has so far committed $537-million a year in new “direct” innovation spending, much of that is unavailable to larger companies. That means a “significant reduction” in support, especially for the largest of manufacturers, who do the most R&D in Canada.

Mr. Myers said his association, which speaks for 100,000 companies, is now working with federal Finance officials to find new ways to get companies to invest more in R&D and commercialization. The CME, for example, wants to simplify the SR&ED program, accelerate allowable tax write-offs for capital equipment used in R&D projects. and put money into major “strategic manufacturing and technology investments.”

But he acknowledged it’s probably too late to unwind the changes to the SR&ED.

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