Ottawa is preparing to shake up the way it funds Canadian research and development, expressing concern that too much federal science cash is flowing to accountants.
Intense lobbying is underway in the run-up to the 2012 budget given that billions of dollars in tax credits for Canadian businesses are riding on the outcome of Ottawa’s new approach. The stakes are high for firms that receive the credits, but also for the large industry of consultants who have carved out a lucrative business helping other firms land the government help.
Gary Goodyear, the federal minister of state for science and technology, is hinting that upcoming changes will aim to limit these added costs, which are being expensed to Ottawa’s $3.5-billion Scientific Research and Experimental Development (SR&ED) program.
“I’m not concerned about what accountants charge for their everyday business. My concern is simply that that money then moves out of the science, research and development sector and moves over into another area of our economy,” said Mr. Goodyear in an interview.
Part of Ottawa’s concern is that businesses are spending less on R&D than they did before the recession, in spite of one of the most generous tax-incentive regimes in the world. Ottawa wants to help grow Canada’s tech sector, but is disappointed with the results of existing programs.
Also, the government isn’t sold on the merits of tying federal cash more directly to the labour costs of research – a central recommendation of a recent expert panel report on the topic.
The report from the panel – led by Tom Jenkins, chairman and chief strategy officer of software maker Open Text – identified several ways Ottawa could get better results from the $7-billion a year it spends on research and development.
The Jenkins report recommended that the federal R&D program should be simplified so that only labour expenses qualify for the tax credit. The report argued that by no longer allowing the credit to cover capital costs such as equipment, it would reduce the need for firms to use outside accounting advice.
But Mr. Goodyear has his doubts.
“I'm not convinced moving to a labour-based [system]will actually achieve the outcome,” he said Tuesday following a speech to the Economic Club of Canada in Ottawa. “We want to make sure the program is doing what it’s supposed to do, and that’s encourage more business research and development. And we’re going to hopefully make some changes to do that without impacting people too negatively.”
Andrew Dunn, a managing partner at Deloitte, the biggest Canadian player in SR&ED consulting, worries Ottawa will slash the credit scheme on a potentially “faulty” premise.
“Moving from credits to grants puts the decision in the hands of government,” he said. “Canada has a bad history of grant-type programs. The global trend is from grants to credits.”
Mr. Dunn also disputed the notion that consultants are pocketing too much of the R&D credits. While some consultants charge contingency fees of 30 or 40 per cent, Mr. Dunn said the overall numbers are much lower. He pointed to a survey by the Canadian Institute of Chartered Accountants which found that the top six accounting firms in Canada earned $117-million in 2010 from SR&ED.
Mr. Dunn said the government could root out overly aggressive practices by banning contingency fees and requiring registration of all consultants.
SR&ED is Ottawa’s single largest contribution to business research and development in Canada. About 24,000 companies across Canada, in almost every industry, tap the credits to defray their R&D expenses. Combined with provincial programs that piggy-back on the federal program, the credits cost Canadian taxpayers $5-billion a year.
One of the SR&ED program’s major attractions is that it is broad and generous. Almost any company, in any industry, can qualify as long as it can demonstrate and document it does R&D.
But generosity and complexity are among its key defects. Companies can file claims for R&D that may have occurred more than two years earlier. For smaller Canadian-owned companies, the credit is 35 per cent on the first $3-million spent, refundable in cash.
And those features have helped spawn an industry of aggressive consultants who sometimes push the envelope by enticing companies that do little or no R&D, from bakeries to boat makers, to file claims, according to an investigation last year by The Globe and Mail. The company pays nothing and the consultant pockets a sizeable success fee, paid for by the taxpayer.