2019 Federal Budget ignores calls for a more effective Business Tax Regime that supports Canadian business competitiveness
Russ Roberts, PhD
Senior Vice President, Tax, Finance & Advocacy
A review of the Scientific Research and Experimental Development Tax Credit (SR&ED) program was announced in last year’s budget.
While organizations generally supported the tax credits in their pre-2019 budget submissions, there were calls for improving the CRA’s management of the SR&ED program, expanding the program, and developing complementary patent/innovation boxes.
The Standing Senate Committee on National Finance has called for an independent, comprehensive review of Canada’s tax system, noting that: “We need to encourage, rather than inhibit, innovation, entrepreneurship, and economic growth while at the same time enhancing the overall fairness of our tax system.” However, the committee stated that:
The Minister of Finance did not seem interested in undertaking a comprehensive review of our tax system, but we believe it is time.
Fair, Simple and Competitive Taxation: The Way Forward for Canada, Report of the Standing Senate Committee on National Finance, December 2017: https://www.sencanada.ca/content/sen/committee/421/NFFN/Reports/NFFN_Tax_Planning_24th_Report_e.pdf
There does seem to be a reluctance on the part of the Minister, his staff and Finance officials to support work on finding improvements to our business tax regime. Budget 2019 did eliminate the taxable income criteria in calculating SR&ED tax credits for CCPCs. This change was welcome, but beyond that, many would argue that there is a lot more that could be done to simplify and clarify the SR&ED program, let alone the business tax regime.
The 2019 budget did outline its new Innovation Property Strategy which includes a Patent Collective Program. It does not contain fiscal incentives to firms to promote the protection of Canadian IP as suggested by some.
Surprisingly, the 2019 budget did not address a recent analysis by John Lester indicating that the 35% refundable tax credit may not be optimal (i.e., resulting in a social loss of around 12% per dollar of tax revenue foregone) in part due to compliance costs. Business Subsidies in Canada: Comprehensive Estimates for the Government of Canada and the Four Largest Provinces: https://www.policyschool.ca/wp-content/uploads/2018/01/Business-Subsidies-in-Canada-Lester.pdf, section 7.2, “Assistance for R&D.”
Finance has not released any further results of the review of the SR&ED tax credits announced in the 2018 budget. Nor have they released a summary of the concerns and suggestions expressed by the community; how the review was conducted; the issues covered; analytical support done, including comparative cost-benefits analyses of various measures; design options; as well as the options they considered to better support the development of SR&ED based innovations and their commercialization.
The 2019 budget did recognize that the CRA’s overall Agency service model could be improved. In respect to the SR&ED program, the user community has repeatedly identified to both the CRA and Finance the CRA’s decentralized service model as a challenge for applicants. As well, the Auditor General highlighted this as an issue in 2000. The budget is unclear on what the CRA’s focus on improving their overall delivery model means for the program.
Canadian businesses are being asked to take on blind faith that the directions of the federal government’s tax support for innovation and commercialization reflect best in class, reasonable choices. Is it not critical that Finance be able to demonstrate that there is a rationale for the government’s decisions on their support for innovation?
Given Canada’s historically poor performance at capitalizing on its R&D strengths and investments, shouldn’t there be greater accountability for Finance? I make this comment in spite of last year’s announcement of the proposed review of the SR&ED program – apparently completed; the government’s extensive budget consultations this year; and the government’s commitment to a Fair Tax System for all Canadians that was just announced in the 2019 budget.
Where are the supporting analytics that would give confidence? Wouldn’t some transparency really help the business community have confidence in Finance’s leadership of the business tax system? Should we have confidence in this one-sided dialogue on an issue as important as this?
What do others say?
Already this year, over 1,200 petitioners have called on all federal parties to support an independent tax review in parallel with the recommendations of the report of the Standing Senate Committee on National Finance.
Specifically, these petitioners have called on all parties to:
(1) Recognize that while Canada remains strong in terms of the quality and impact of its scientific output, it is lagging further and further behind in its ability to commercialize that output and generate wealth.
(2) Create a 21st Century Tax Commission focused on improving the nation’s support for innovation through fiscal measures, test all recommended measures through robust public consultations, and deliver a final report in twelve months.
(3) Support current work on developing a modern IP (intellectual property) system and include appropriate fiscal measures to encourage the retention of IP and its exploitation in Canada, and also to provide assistance to cover some of the direct costs of the patent process (5) Publish benchmarking metrics comparing Canada to other leading countries building innovative capacity.
As well, they support the completion of the SR&ED review, which, as I have noted, Finance may see as complete.
For full details go to https://goo.gl/forms/BGt4x7PT9BBTUojM2