Canada will not be able to realize its dreams of developing the technology sector without revamping its high-tech tax-credit system, an industry group says.
In a consultation paper released Thursday, the Canadian Advanced Technology Alliance, Canada's largest high-tech association, calls for fundamental changes to the way the federal government delivers the Scientific Research and Experimental Development tax-credit system.
The system is Ottawa's major tool for supporting high-tech development and the knowledge economy.
Specifically, CATA urged the government to improve accessibility to refundable investment tax credits. When tax credits are not fully refundable, CATA said, they do not provide the assistance that firms need to help them weather a sustained high-tech downturn.
Entitled Improving Access to SR&ED Investment Tax Credits, the 12-page consultation paper was developed Russ Roberts, a senior director of CATA and Deloitte and Touche.
The findings of the paper were based on surveys conducted by market analysts at Ipsos-NPD Surveys, combined with input from CATA's members and consultants from Deloitte and Touche and KPMG.
"We believe that improving accessibility of the refundable [credits]will be critical to achieving the technology leadership that the government is anticipating to result in Canadian jobs under the goals of Canada's Innovation Agenda," CATA president John Reid said in a statement.
"The companies that are the leaders of, and breeders of, Canada's economic progress should not lose out on tax credits merely due to the complex, capricious nature of the rules for obtaining the credits," he added.
Mr. Reid said the alliance's research shows that almost half of companies interviewed report that they don't use the credits, because the system is too cumbersome and complex to be useful.
"Simplification of the system will not only help claimants, but it will save time and eliminate unnecessary costs," Mr. Roberts said. "Confusion can be eliminated and extremely costly disputes can be avoided for all parties."
Disparities exist in the current system, in which credits are available to early stage, mid-evolution and mature corporations, CATA charged.
Specifically, CATA's recommendations include:
- Making the tax credits universally accessible to all Canadian entities, regardless of corporate status. Currently, CATA said, many kinds of corporations do not qualify, among them publicly controlled corporations, non-resident controlled corporations and certain Canadian-controlled private corporations.
- Although tax credits can be carried forward as much as 10 years, they are available to companies only if they are taxable, often resulting in a pool of credits with no practical or immediate value. Ironically, CATA said, these pools become useful to prospective take-over corporations who operate in a similar line of business, thus accelerating a fire-sale of Canadian high-tech companies. Non-refundable tax credits make up around 70 per cent of all credits claimed each year, CATA said.
- The tax credit system must be structured simply, so that companies should not lose out because they are unable to understand the rules for obtaining credits.
"By permitting universal access to refundable SR&ED credits, funding that is earned by those participating firms will flow immediately into the Canadian economy," Mr. Reid said. "The result will be increased and sustainable employment levels of knowledge workers in Canada. This in turn will lead to an increase in tax revenue from both the salaries earned by the additional knowledge workers that are employed and from the profits that will result from new Canadian developed SR&ED based products."