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Combined with provincial programs that piggy-back on the federal program, the Scientific Research and Experimental Development tax credit costs taxpayers about $5-billion a year. (Ryan Remiorz/The Canadian Press/Ryan Remiorz/The Canadian Press)
Combined with provincial programs that piggy-back on the federal program, the Scientific Research and Experimental Development tax credit costs taxpayers about $5-billion a year. (Ryan Remiorz/The Canadian Press/Ryan Remiorz/The Canadian Press)

A glaring need to determine what's legitimate R&D Add to ...

Federal Taxpayers’ Ombudsman Paul Dubé did 58 media interviews and delivered 15 speeches last year, according to his 2010-2011 annual report.

Got a problem with the Canada Revenue Agency? The former New Brunswick defence lawyer is your man.

Since his appointment in 2008, Mr. Dubé has spent considerable time reaching out to taxpayers. In the past three years alone, he has conducted 900 investigations and communicated with 15,000 taxpayers.

More from Barrie McKenna

But he is keeping a much lower profile of late. Earlier this month, he quietly released the results of one of the most sweeping investigations since becoming Canada’s first taxpayers’ ombudsman – a probe of the $3.5-billion annual Scientific Research and Experimental Development tax credit.

Instead of identifying what is wrong with the program, he closed the file and posted a truncated “observation paper” on the tax agency’s website, explaining that there were too few complaints and insufficient evidence to reach any conclusions.

No interviews. No speeches.

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 taxpayers $5-billion a year.

Mr. Dubé has acknowledged that he began hearing complaints about the administration of the program soon after he took the job. There were gripes about inconsistent and arbitrary decisions, overly complex rules, and steep compliance costs.

He launched a full-scale investigation a year later. Dozens of companies, consultants and industry groups weighed in – a response one official characterized as “tremendous.” A team of four investigators collected evidence, talked to companies and dealt with the CRA over nearly three years. Mr. Dubé’s office now says there were just 24 submissions and 14 formal complaints, most of them unfounded.

But an early partial draft of the investigation report, obtained by The Globe and Mail, suggests Mr. Dubé’s investigators had identified problems as far back as 2010 – problems that never made it into his “observation paper.”

By last year, the mood about SR&ED had changed. The feeling in policy circles was that the government’s signature R&D program was too rich, prone to abuse and wasn’t making Canadian companies any more innovative.

One of the program’s major attractions is that it’s broad and generous. Almost any company, in any industry, can qualify as long as it can demonstrate and document the R&D it does.

That generosity is also one its key defects. Companies can file claims for R&D that may have occurred more than two years earlier. Smaller Canadian-owned companies can claim 35-per-cent credits, instantly refundable in cash.

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. The company pays nothing, the consultant pockets a success fee of up to 30 per cent, and all taxpayers lose.

Last fall, a federal task force headed by Tom Jenkins, chairman of Waterloo, Ont.-based Open Text Corp., issued a report urging the federal government to limit SR&ED’s refundable credits, tighten the rules, and then use the savings to support more strategic financing of R&D.

Prime Minister Stephen Harper has embraced the Jenkins report, signalling that the next federal budget would likely bring major changes. Against that backdrop, Mr. Dubé’s report about disgruntled SR&ED users became irrelevant, and politically awkward.

And now the investigation is closed.

That conveniently clears the way for the Harper government to make the changes it wants to SR&ED, without having to deal with any glaring deficiencies sitting awkwardly on the table for all to see.

The worst-case scenario is that Ottawa retains a diminished SR&ED, does not redeploy the savings to other R&D efforts, and then fails to address the tax agency’s apparent inability to determine what’s legitimate R&D.

Canada is unlikely to get out of the R&D tax-credit business entirely. Most other advanced economies offer similar incentives. Not being in the game at all would put the country at a competitive disadvantage.

Whatever happens, Ottawa must ensure it’s effectively delivering the right incentives to the right companies.

Follow on Twitter: @barriemckenna

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