Who Should Advocate for Early Stage Technology Companies in Canada?
Over the years Canada has had a tax incentive program that was the envy of our American and European competitors. This was not the invention of some wild-eyed tax and spend socialists. Instead it was a brilliantly-designed program introduced in 1985 by a progressive conservative government under then Finance Minister, the Honourable Michael Wilson.
In recent years the Scientific Research & Experimental Development Program (“SR&ED”) has been under attack by right wing idealogues who believe in the gospel of free enterprise, and whose vision is firmly planted in the Canada of the 1950s. Presumably they are looking to “make Canada great again”.
In 2011, as a result of the Jenkins Report, the conservative government of the day began to make changes to the Scientific Research & Experimental Development (“SR&ED”) Tax Credit Program. However they not only reduced the amount of available benefits, they changed the messaging to the Canada Revenue Agency (the “CRA”) who administer the program on behalf of the government.
We believe that the CRA changed their focus from administering an incentive program, to enforcing compliance with tax legislation.
The Canadian Advanced Technology Alliance (“CATA”) is an advocacy group for the technology industry, located in Ottawa. Their members include a who’s who of Canada’s most prestigious technology companies and our largest tax practitioners.
CATA — in response to these changes to the SR&ED Program — began to advocate on behalf of its members after the new liberal government indicated they were re-evaluating the government’s support for innovation and technology.
While many of their proposals are welcome, we believe that they are too closely geared towards Canada’s most prestigious technology companies and our largest tax practitioners — who represent their “most important” members. Their proposals with respect to the SR&ED program, will make the SR&ED program much less attractive to startups and early stage technology companies.
Specifically 3 of the 5 recommendations relating to SR&ED, will or could be disastrous for early stage companies:
1. Eliminate Retrospective claims for SR&ED tax incentives
2. Require Initial Submission of Technology Benchmarking and Plans for all claims for SR&ED
3. Consider phasing out the refundable SR&ED tax credits for the ICT sector
While we understand their rationale for these proposals, they are clearly advocating for their members and not for the community as a whole.
Why We Should Not Eliminate Retrospective Claims
Companies that file claims retrospectively cannot be said to have made an expenditure in response to the incentive. However even the CRA recognizes the need for outreach in communicating the existence of the SR&ED Program. First-time claimants do benefit from retrospective claims, and will be likely to continue with experimental development activities after successfully receiving benefits. However first-time claimants are not typically CATA members.
Why We Should Not Require Initial Submissions Of Plans For All SR&ED Claims
Startups and early stage companies do not have the same administrative resources as most CATA members. They are often challenged to carry out effective bookkeeping and record-keeping after-the-fact, let alone pre-emptively plan and report on proposed eligible activities under the SR&ED program. In fact they are typically focused on business objectives and only engage in qualifying SR&ED as a consequence of trying to meet business objectives.
It is unusual for them to know in advance what technological uncertainties they will face. Instead they rely on their agility to overcome technological challenges as they arise.
Why We Should Not Phase Out Refundable SR&ED Tax Credits For The ICT Sector
While CATA does advocate for “a new Digital Innovation tax credit refundable tax credit for smaller businesses” we are concerned that if refundable SR&ED credits for ICT are phased out, existing startup ecosystems in Montreal, Toronto, Vancouver and Waterloo could be gutted.
Clearly there has been a problem with ICT claims. The CRA routinely views some software development as “business process development” which is considered ineligible work in the sphere of social sciences.
While very few of CATA’s members likely qualify for refundable tax credits since they tend to be larger, many companies in the ICT still successfully claim refundable tax credits for experimental development in software and information technology.
In short, we believe that CATA’s proposals with respect to the SR&ED Program will be devastating to many early stage companies. It is important that we do not simply allow CATA to advocate on behalf of the technology industries as a whole. It is clear to us that while their advocacy suits Canada’s most prestigious technology companies and our largest tax practitioners, it does not suit startups and most early stage companies.
We therefore urge you to connect with your Members of Parliament and let these Federal Cabinet Ministers know your concerns:
Minister of Innovation, Science and Economic Development
Minister of Science
Minister of Small Business and Tourism