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A Budget with Promise

March 29, 2016
By: 
Russ Roberts, PhD
Senior Vice President, Tax, Finance & Advocacy
CATA Alliance

The federal government's decision not to change the stock option regime, because of its importance to Canadian start-ups, is important beyond simply the result.  It demonstrates that this is a Government that can listen to business and wants to do it right

The Government has used the 2016 Budget to set out a new vision for Canada's economy: "to build Canada as a centre of global innovation", and to ask for assistance in achieving it.  The Budget throws out a huge challenge to all of us to step outside the box and our comfort zones to work "in partnership" with the Government to create an "Innovation Agenda" plan to realize this vision.  The Innovation Agenda will redesign and redefine the way Government supports business innovation and economic growth. 

It's clear that the commitment is not simply to improve the status quo in some nebulous way.  Rather, the Agenda will "define clear outcomes - objectives and metrics to measure progress...."   The idea is to demonstrate what is moving the country towards the vision and what is not.  A very welcome commitment.

The Government really had little choice, nor, in my opinion, do we.  In addition, the Government has announced a complementary review of tax expenditure programs.  What has been achieved in the past with current programs is clearly not good enough.  

One of the key concerns of CATA has been the failure of repeated governments to address why there continues to be an innovation Gap when we are so good at research and engineering.  Recently, it has been pointed out that we are gaining momentum in the creation of successful start-ups.  Now, it appears that the Government has recognized the elephant in the room: the need to create "a business environment that supports commercialization and growth." 

What remains to figure out is how to actually create the environment that promotes the retention and growth of our businesses as world competitors – not just an environment that promotes R&D, but one that maximizes returns to Canadians on our investments in R&D.  It's key that we participate effectively in helping the Government in defining its Innovation Agenda, which will mean looking at new paradigms.  

The $ 3 billion plus Scientific Research and Experimental Development (SR&ED) Tax Incentive program is going to be a critical challenge, particularly for the ICT sector.  Many of us would argue that the SR&ED program really does not work well for the sector (not to mention other sectors) or at least that it could be fundamentally improved.

This is in spite of the focused best efforts of the CRA's administrators in recent years to improve the administration, and the program's in-depth review by the Jenkins Expert Panel.  There are many reasons to look closely at what the SR&ED tax credits are delivering, how they are focused, and their influence on companies' investment decisions to innovate and grow.  Practitioners tell us that other tax credit regimes using similar concepts for what is supported are more reliable and more effective.  What is it about our regime and the way we approach it that makes this so?  

In the case of the ICT sector – after 30 years of reviews, rewritten policy, jurisprudence and attempts to improve SR&ED, the current approaches to eligibility often result in the parsing of development projects into micro-SR&ED projects not focused on the innovations.  This includes five attempts alone to develop an effective explanation of how the policies apply in the sector.  Is there not a better way?  Is it not time to look outside the box and see if there is a better way, at least for this sector?