In its federal budget for the 2008-09 fiscal year announced this week, the Canadian government is offering more tax credits to companies doing research and development, but two major IT industry groups say the changes don't go far enough.
The federal government plans to spend more on the Scientific Research and Experimental Development Program which gives tax breaks to certain companies developing new technologies or conducting research or work supporting engineering, mathematical analysis and other technical activities.
The current expenditure limit for companies controlled by Canadians is CAN$2 million, and the government says it will increase that to $3 million.
But the presidents of the Information Technology Association of Canada, which has been lobbying for an overhaul of SR&ED, and the Canadian Advanced Technology Alliance, say many tech firms still don't qualify for the tax breaks.
"When you're trying to encourage large companies that have R&D mandates in Canada and you have these credits but you don't provide them access to those credits, then that affects the decisions as to where you locate your R&D," said CATA president John Reid.
"What was not addressed was the accessibility of these credits for those companies that are not part of the CPC definition."
ITAC has had a similar complaint. SR&ED offers incentives to firms of all sizes, but to qualify for an investment tax credit of up to 35 per cent, a firm must be a small Canadian-controlled private corporation (CPCC). But since it's a tax credit, it benefits mainly companies which are profitable, and companies could lose their CPCC status if they attract enough investment from outside Canada.
"When companies are making investment decisions, in many cases, the companies that are operated multi-nationally, or companies that are not making profits, the SR&ED are of no value to affect investment decisions," said Bernard Courtois, ITAC's president and CEO. "So here we are spending a lot of money on a program that's there to get more labs created here and for many investment decisions, it accounts for zero."
He added the federal government will only increase spending on SR&ED credits by a little more than one per cent.
"It's a program that looks a lot more generous than it is and in many cases has absolutely zero impact on investment decisions," he said. "Really we're hoping that at least the door's not closed (to further changes), and they'll address the real problems some other time."
Both Courtois and Reid praised the government for promising improvements in the administration of SR&ED. The government plans to publish a new claim form, guide and eligibility tool for companies.
It will also give the Canada Revenue Agency an additional $10 million per year to administer the program, which will be used to hire more technical reviewers to decide whether companies' expenditures qualify for SR&ED credits, and give technical reviewers more time to work with claimants to explain the review process.
Although there's a wide range of expenditures that qualify for SR&ED credits, not all research expenditures can be used. For example, companies cannot claim for humanities research, commercial production of new products, market research, routine testing of materials or products or drilling for minerals or natural gas. As part of its administrative improvements, the federal government also plans to review dispute resolution procedures of SR&ED decisions.
"They have an action plan for the administrative aspects of the program, which is something we've been asking and we're thankful to get that," Courtois said. "But we're worried because everyone's concerned about manufacturing and forestry and all that but the most valuable jobs we have in this country are R&D jobs and they're being affected by the high dollar just like everything else."
Courtois does praise the government for proposing changes to the immigration system, in which the feds promise to spend $22 million over the next two years to establish a "just-in-time" immigration system, which aims to process skilled immigrants more quickly.
"They seem to have all the right intentions there so we're hopeful," he said. "We have a very big problem of shortage of skilled resources in many technology areas in Canada and it's going to get bigger rather than smaller. What we really need to do is make the immigration system more effective in channelling skilled people to where they're needed in the Canadian labour market."
Reid agrees.
"There is a talent crunch, so we have to give every lever possible to attract and retain talent in Canada."
Reid added the $250 million Automotive Innovation Fund, which was announced in the budget and is geared towards companies developing more environmentally friendly vehicles, will help the IT industry because cars use a wide variety of technologies.
"Everything is an integration," he said. "Canada has a nascent sector on the green economy or clean tech and we're going to have to look more and more to these new sectors as the next source of critical mass for the economy."
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