CRA changes could impact company research tax credit claims

Canada’s biggest telecom players – including BCE Inc., Telus Corp. and Bell Aliant – as well as smaller ICT and digital media companies will face some stringent new reporting rules when applying for research tax credits this year, warns Canada’s largest technology association. Some companies will be more affected than others. The Canadian Advanced Technology Alliance (CATA) is concerned over what appear to be “significant changes” to Canada Revenue Agency’s (CRA) long-standing administrative policies for its Scientific Research and Experimental Development (SR&ED) tax. The new requirements, introduced late last year, are actually designed to make the process simpler, particular for smaller companies. But the information government now requires is more detailed and precise, creating more paperwork for some companies. “Some of the documentation required is not normally collected by firms. And if you don’t have it, you lose the claim,” says Russ Roberts, senior policy director at CATA. “So the questions are: How much documentation is enough, how will this record-keeping skew the way companies do development, and what overhead costs for collecting it should be borne by companies?” CATA president John Reid says thousands of companies will be affected by these tax changes across all industries. “We’re not just talking about little high-tech guys – some of these are huge oil field projects with hundreds of millions invested.” Many established as well as emerging digital media and telecommunications companies rely on tax credits provided under the federal government’s $4-billion SR&ED program to offset the high costs of research and product development. ICT companies are Canada’s biggest R&D spenders, accounting for 51% of Top 100 R&D spending in 2007, according to Research Infosource Inc. BCE, Telus and Aliant accounted for 13% of the Top 100 spending, with BCE continuing to hold the number two spot with $1.26 billion in research expenditures, behind Nortel Networks. For smaller R&D-intensive companies, such as those developing interactive games, the credits have become critical to their ongoing growth and survival. This type of program, CATA maintains, is a fundamental component of the economic stimulus needed to keep innovative Canadian businesses afloat during these hard times. “But start-ups that were counting on support for their research expenditures under the old rules are seeing them changed half-way through their projects. They’re getting notices from the CRA saying, ‘Sorry, this research can no longer be a shared cost.’” Industry needs to have input on changes Reid says there’s a disconnect between the political and administrative elements of the CRA. “The administrative end basically changed the rules without involving participants in the program and without sufficient political oversight.” In recent months, the CRA has met with CATA and other industry groups to understand their concerns, he says. “They’ve assured us there’s no change in policy. What they’re doing is creating a different approach that lets them identify the files they feel they’ll need to review more effectively. Historically, their acceptance of SR&ED claims has been quite good – but when reviews have gone awry, they’ve gone very awry.” Shawn Reain, leader of research and development for Western Canada at PricewaterhouseCoopers, agrees there are some disconnects to address. “The CRA needs a lot of information collected to administer the SR&ED program effectively, but industry doesn’t really function that way. So collaboration is vital.” He notes the way research is conducted has changed over the past 20 years, and both sides have to adapt. “The CRA needs to acknowledge that innovation in today’s economy often doesn’t occur in laboratory environments. They’ve acknowledged that at CRA’s headquarters, but there may be inconsistencies at the field level. And industry has to figure out a way to provide the CRA with the information it needs to assess claims effectively.” Industry reacts to changes New media and telecom associations aren’t sure what the impact of the changes will be yet, as most companies file their business taxes in June. “I haven’t heard any concerns from our members yet, but that may change – they’re not sure what it means now,” says James Lewis, executive director of the Canadian Interactive Alliance (CIAIC), noting that companies involved in the interactive gaming sector rely heavily on the SR&ED program. “No one’s doing their taxes yet, but the wave will probably hit in May,” agrees Michael Bidu, executive director of the Wireless Innovation Network of British Columbia (WINBC), an advocacy group that represents 250 companies. WINBC is watching developments closely, but Bidu’s preliminary view is that there may be a positive impact on smaller companies."There’s a genuine effort on the part of the CRA to make the process easier for smaller companies, and it’s encouraging them to file electronically.” On the other hand, the introduction of 50 different fields to complete the form may pose some challenges. “I can see how researchers in smaller businesses may balk.” Bidu suggests the impact of the changes will likely depend on the size of the company and type of research conducted. “Some companies will be more affected than others – those that invest more money in materials, hardware and so on (will be more affected) versus those that are in pure R&D in application and software development. But our members are mostly SMBs with 3 to 10 developers.” Guidance from accounting firms The use of form 661 is mandatory for taxation years ending after December 31, 2008, according to Ernst and Young’s Tax Alert entitled SR&ED: A simpler, easier claim process? The Alert explains that the revised form is actually intended to simplify the claim process. The new questions and format will allow the CRA to use automated evaluation methods to identify claims that require more detailed on-site reviews, which will speed up processing for companies that don’t require further attention. The Alert notes that filing SR&ED claims will likely be more time-consuming for companies that have more than 20 SR&ED projects, or have multi-year projects, or projects to incrementally improve existing products and processes. Companies that wait until the last minute to file their claims may find it difficult to conform to the new requirements. “Many companies look at this program as an afterthought,” says Raine. “But our greatest successes have been with clients that work with us as they go through their development work as it happens, so they can properly segregate their costs into eligible buckets.” Companies shouldn’t assume the information they’re collecting for their areas of research will suffice to file a claim, he says. “They should go through the self-assessment process to ensure they’re looking at all their activities and are quantifying them properly.”

CRA changes could impact company research tax credit claims

Broadcast | April 2, 2009

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