The federal government is planning several structural changes to the popular SR&ED tax credit program while sending a warning to consultants who help companies prepare claims.
HIGHLIGHTS: SR&ED consulants on notice; expansion of IRAP; $400 million to boost venture capital funding.
SR&ED, which is intended to support research and development by Canadian companies, consists of an income tax deduction and an investment tax credit. The changes to the program will come in four parts:
- Capital expenditures incurred in 2014 and subsequent years will no longer be eligible for SR&ED credits, affecting companies that spend a large part of their eligible expenses on land, buildings or machinery.
- The investment tax credit portion of the program will decrease by five percentage points to 15 per cent, starting Jan. 1, 2014. But an "enhanced rate" of 35 per cent will remain for small and medium-sized Canadian-controlled private corporations on their first $3 million of eligible expenditures.
- In cases where more tax credits are provided under the rules than the actual costs incurred, the government plans to reduce a "prescribed proxy amount" used to calculate overhead expenditures to 55 per cent from 65 per cent of direct labour costs. This will also take effect Jan. 1, 2014.
- In an attempt to strip the mark-up on third-party contracts from eligible expenses, only 80 per cent of contract payments can be used to calculate SR&ED tax credits, as of Jan. 1, 2013.
The intention is to shift financial support from indirect programs - specifically, SR&ED - to more direct forms of support such as the Industrial Research Assistance Program, the budget stated.
The federal government said its existing programs are promoting an "over-reliance on tax incentives" compared to other jurisdictions and hampering innovation, a large concern recently raised in a report by OpenText Corp. chairman Tom Jenkins.
"The government seems to be focusing on the fact that the (SR&ED) program hasn't delivered in terms of the amount of research and development in Canada, and that they are tweaking the program as Jenkins suggested," said Doug McLarty, managing director at financial services firm McLarty & Co, in an interview inside the budget lockup.
One recommendation of the Jenkins Report not adopted by the Conservative government is a call to decrease the refundable parts of the credit that allows unprofitable companies to recoup a portion of eligible costs.
The government said SR&ED provided more than $3.6 billion in tax assistance in 2011.
Meanwhile, consultants received a warning about contingency fees that they charge to prepare SR&ED claims for businesses. The government said it is "concerned that high contingency fees charged by tax preparers are diminishing the benefits of the SR&ED tax incentive program."
But with the proposed changes removing much of the complexity from SR&ED claims, it's possible that the contingency fee problem could correct itself before the government needs to take action, Mr. McLarty - whose firm offers SR&ED services - said.
The government also plans to make it easier to predict if a company will be approved, through changing a self-assessment tool already available online, working with industry to determine any problems as they arise, sending out more tax alerts and improving the objection process to review eligibility requirements.
While putting the squeeze on SR&ED, the government also proposed doubling support to the National Research Council's Industrial Research Assistance Program, increasing its contribution by an additional $110 million each year.
"This will allow the National Research Council to support additional small- and medium-sized businesses that create high-value jobs, and to expand the services provided to businesses through the program's industrial technology advisors," the budget stated.
In addition, the NRC would start a "concierge" service intended to help these businesses determine how best to make use of these programs.
Seperately, the federal government is taking a stab at addressing the widely regarded shortage of venture capital funds in Canada.
The budget allocates an additional $100 million to the Business Development Bank of Canada for its venture capital activities and allocates an additional $400 million to help create large-scale venture capital funds and increase private-sector investments in early-stage risk capital.
"The issue is, how do we take this $400 million and get it to the startups?" said Mr. McLarty.
The government will release plans on how it will structure its financial support for making risk capital more accessible to businesses in the coming months