Push for changes in business tax credits

The Toronto-based Investment Industry Association of Canada (IIAC) is pushing to keep the SR&ED program focused on small businesses, in the belief that allowing the use of flow-through shares helps to defray R&D costs for technology startups.

However, both groups agree that job creation should be a major goal of Canada’s tax policy. Says Barb Amsden, director of strategy and research with the IIAC: “I think most people would agree that the job creators [in Canada] are generally small businesses.”

It appears as if the federal government is trying to achieve balance, Amsden says, by encouraging small-business development without actually spending money. Instead, the government is leaving it to companies to put their own money into R&D.

The IIAC submission points out that against a backdrop of ongoing domestic and global economic recovery, the high Canadian dollar and volatile capital markets, corporations continue to hold on to capital rather than invest in their businesses. The IIAC estimates that cash reserves now amount to 30% of gross domestic product, about three times the historical average.

And although SR&ED credits have benefited small businesses in the past, Amsden says, they don’t always work as well for small startups. As a result, she says, the IIAC will continue to look for innovative ways to foster investment for startups.

“There is no silver bullet,” Amsden says. “But we want to keep focusing on the areas in which there is the most need. And that still seems to be in getting the small businesses off the ground and funding them, especially when there is a long lead time before they can be profitable.”

Meanwhile, the CICA’s submission calls for the federal government to broaden the SR&ED program to make it more widely available to large corporations as well as small businesses. Change to the SR&ED program is needed, the CICA paper says, in order for Canada to stay competitive and create employment opportunities for an educated workforce.

The federal government’s 2012 budget revealed amendments to the SR&ED program, including the removal of claims for capital expenditures, and decreased the tax-credit portion of the program to 15% from 20%, beginning in 2014.

The CICA disagrees with this strategy, says Gabe Hayos, the CICA’s vice president of taxation: “We felt that instead of reducing the refundable tax credits, [the government] should be increasing the number and availability, in terms of rate and who they apply to.”

As a result, Hayos says, the current structure is putting big business at a disadvantage because tax credits don’t carry the same overall benefit [for large businesses] as they do for startups and small businesses.

“We are more about the growth in R&D rather than the size of the company,” Hayos says. “Whether it is small or large, you want to encourage all companies to invest more.”

The Canada Revenue Agency says that the SR&ED program provides more than $4 billion in tax credits each year to more than 18,000 claimants, of which about 75% are small businesses.

Instead of funding innovation for direct investments, the CICA prebudget submission says, amendments should be made to the SR&ED program to include capital expenditures, which were eliminated in last year’s budget.

“I don’t think the government has dramatically simplified the SR&ED credits,” Hayos says. “All business contributes to job growth, and you want to encourage those companies that create greater investment in scientific research and experimental development – not just small businesses.”

Hayos says he recognizes the difficulties that small, entrepreneurial startups face in getting the funding and support they need in Canada. That’s why the CICA, he says, is lobbying the federal government for a tax credit for “angels” to help stimulate growth. This would be in addition to the $400 million the federal government earmarked for venture capital in last year’s budget.

One proposal the IIAC has put forward to help small startups is the use of flow-through shares as an alternative to the SR&ED tax credit. Flow-through shares allow the high expenses of the early development stage to be passed along to investors, who can use the deductions.

This kind of approach, Amsden says, is particularly useful for companies in the high-tech and biotech sectors that are exploring new areas of R&D.

The economic benefit of flow-through shares, says Amsden, would be more long-term, high-paying jobs – and could even trickle down to help stimulate the flat-lining Canadian manufacturing sector.

“Canada’s system, at one point, was considered to be the most generous in the world,” says Amsden. “This gets to the issue that Canada has not been spending as much on R&D as other countries.”

The CICA is also calling for a simplification of the tax system. Its submission recommends setting up an expert panel, modelled after Britain’s Office of Tax Simplification, to explore structural changes to the system. IE

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