Rethinking the Research and Development Tax Credit

The following is an excerpt from the final “Full Report” by Paul Daniel Muller, a consultant to the Minister of National Revenue Jean-Pierre Blackburn, dated 30 November 2009, of his review of the SR&ED Research and Development Tax Credit Program and the CRA’s action plan, “CRA Action Plan on Consultant’s Recommendations for the SR&ED program”. It was obtained through an Access to Information request to the Department of Finance by the CATA Alliance. Portions of the report are reproduced here as a service to the SR&ED stakeholder community.

1 – Introduction
1.1 Scope
In-scope – All aspects of program delivery, with a specific focus on timeliness, consistency, cost of compliance, tools and services. Industry-wise, focus on the agri-food sector. Focus on SMEs.

Out of scope – Anything for which Finance is responsible; namely fiscal policy issues such as refundability of all claims, and project or expenditure eligibility issues that are rooted in the Income Tax Act.

1.2 Approach
Each issue is treated is two parts. In a first part, I summarize the main complaints addressed to the program, as well as what CRA has done, is doing, or intends to do in response to them. I then go on to analyse the issue and report on my findings.

In the second part of each issue, I take a double-barrelled approach, focusing both on managing claimant expectations and improving CRA performance. In some cases, I suggest some messages that CRA or the MNR or both might put to the constituency, either in response to some of the most oft heard critiques or to elicit cooperation in the pursuit of our common goal of encouraging R&D through a cost-effective program.

In other cases I suggest options for actions CRA could take to respond in deed to those critiques. As in many walks of life, SR&ED stakeholders can be satisfied or dissatisfied with a program depending not only on actual performance, but also on their expectations. Managing expectations AND improving program delivery are BOTH necessary to close the gap between the two and raise overall stakeholder satisfaction.

1.3 Inputs
Inputs for this report were obtained from seven types of sources:

• From stakeholder submissions to the Finance-CRA Joint Consultations in 2007;
• From correspondence received by the MNR¹
• From meetings and meeting and telephone conversations with external stakeholders, including claimants, lobby groups tax preparers and Department of Finance ministerial staff;
• From CRA official documents and SR&ED internal policies, action plans and reports;
• From the CRA SR&ED database;
• From internal CRA sources, through meetings and conversations with SR&ED officials;
• From third party (AG, OECD, etc.) reports on SR&ED or on R&D support at large.

 ^I Correspondence received by the MNR includes letters, facsimiles and emails. Correspondence can be received either directly from the taxpayer or his tax professional, or via a Member of Parliament. Volume of correspondence pertaining to SR&ED appears stable at around 20-25 per year up till 2007, with a spike of 32 in 2004. In 2008, volume reached a record 36, and in 2009, we are at 22 at the half-year mark. The bump in 2008 and 2009 appears to be due to cash-strapped companies asking for quicker refunds of ITCs. Most frequent topics in ministerial correspondence are: l) disagreement with disallowance of claims; and 2) timeliness.

1.4 Postulates

• CRA is to remain administrator of SR&ED. Moving the program’s administration to another department such as Industry Canada is not an option.
• TSOs and CTS0s are to remain responsible for the regular processing of claims, consistent with CRA’s functional model. Recentralization of treatment is not an option.
• MNR and CRA have committed to maintaining historical practice with respect to the
  interpretation of controversial concepts, such as experimental production.

To see the full report as a PDF, visit the CATA Alliance page here.

This report was completed in November 2009.  When it was released to the then Minister of Revenue Jean-Pierre Blackburn his assistant assured us that the Minister found the report significant, that actions were merited, and that he would release it to promote discussion.  Many of you met with Mr. Muller and provided input to this report.  We find it to be a very interesting, third party review, highlighting many issues that we are still discussing.

Subsequent Ministers chose not release the report.  Why?  Its release could have encouraged a more productive dialogue. ” – CATA Alliance 

Photo Credit: Ryan McGuire