The federal government is clarifying what kinds of projects qualify for its lucrative R&D tax credits – a response to years of complaints about erratic rulings and bogus claims.
The Conservative government is part of an effort to make the $3.6-billion-a-year program more user-friendly for the roughly 24,000 Canadian companies that get the credits every year.
The changes announced Thursday by the Canada Revenue Agency include testing a “pre-approval” process to reduce uncertainty for claimants, consolidating years of rulings into a coherent policy, deploying a web-based tool to assess claims and improving the appeals process for companies whose claims are rejected.
The agency said it is committed to making R&D tax credits “easily accessible,” while managing the program with “fiscal integrity.”
The policy may be clearer, but tax experts said CRA officials are taking a much narrower view of what constitutes legitimate research and development, resulting in fewer credits being paid out. That will likely mean a smaller program, which now costs taxpayers $5-billion a year, including provincial credits.
“If enforceable, I have no doubt that CRA’s new policies have the potential to reduce abuse,” said David Hearn, managing director of Toronto-based Scitax Advisory Services.
But he said the Income Tax Act remains “rather vague” and the changes won’t stop many companies from going to court to defend their claims.
“Many of the teeth in these new policies will need to be vindicated through jurisprudence,” Mr. Hearn said.
Companies have long complained about wildly erratic decisions by CRA. Virtually identical R&D projects are approved by one CRA office, and rejected by another, or treated differently from year to year.
The Conservative government announced key changes to the Scientific Research and Experimental Development (SR&ED) program in last year’s budget. Among the changes, the general tax credit rate will be cut to 15 per cent from 20 per cent for larger companies in 2014, and capital expenditures, such as new machinery, will no longer be eligible.
Some of Canada’s biggest research spenders, including Research In Motion Ltd., warned last fall that the tighter rules introduced in the budget would suck hundreds of millions of dollars a year from innovation. RIM, which spends about $1.5-billion a year on R&D, has warned the changes will cost it $50-million.
All told, Canadian companies will take a $750-billion hit, potentially affecting billions of dollars worth of R&D projects, according to a recent estimate by the Canadian Manufacturers and Exporters.
Ottawa, meanwhile, has expressed concern that it isn’t getting enough bang for the billions it spends on R&D as it works to boost Canadian productivity. R&D spending by companies has stagnated in Canada in recent years, leaving Canada behind many other developed countries.