Reflections on the Jenkins Report (2)

These reflections focus on the Executive Summary section of the report.

One of the phrases we have heard frequently from RTA’s is “root cause”. Some of the RTA’s have even held that SR&ED can’t begin until a root cause has been identified. The Jenkins group was established to provide “advice to the government on how federal programs that support business and commercially oriented R&D can make an even stronger contribution to a more innovative and prosperous Canada.”

Following the approach of a CRA SR&ED RTA one observes that the report fails to analyze why Canadian innovation lags behind that of its main competitors and why the current panoply of direct and indirect innovation support programs has not resulted in a better result. Without identification of the “root causes”, I would respectfully submit that the recommendations of the Jenkins Panel not only constitutes poor science but would also not receive a passing grade if it were a B-school paper.

In section 3, the report suggests the low level of Canadian Business Expenditure on Research and Development (BERD) as one of the main causes of Canada’s low competitive ranking in terms of productivity. So far, so good.

Then we remember that we have heard this story for decades. Our friend the RTA would class this as “existing knowledge”. The “root cause” in this situation is the answer to the question: Why is Canada’s BERD so low? This question was not within the mandate of the Jenkins Panel, and therefore they offered no answers to the question.

Without addressing this key question, I respectfully suggest that nothing positive has been achieved by the Panel and that its recommendations are of little or no use to the solution of the real problem that Canada needs to address.

Specific comments on each recommendation follow:

Recommendation 1: Create an Industrial Research and Innovation Council:
Comment: The last thing we need is another government bureaucracy to help achieve a higher intensity of business investment in R&D. The problem is the low rate of BERD, not the lack of government programs and councils.

Recommendation 2: Simplify the SR&ED Program by basing the tax credit for SME’s. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SME’s grow into larger, competitive firms.
Comment:The Report fails to provide any support that limiting the allowable expenditures to labour related costs would reduce the compliance and administrative costs. What does this mean for the costs of SR&ED work conducted by contractors and universities and the like?
In addition, the Panel recommends that “Over time, the government should also consider extending this new labour-based approach to approach to all firms”. In one paragraph (2.1) the Panel suggests that limiting the cost basis for SME’s reduces costs of compliance and administration but that still permitting larger firms to use a broader range of costs would not help reduce these costs. Where’s the logic”.
What would really help SME’s would be templates for recording and tracking activities to assist the SME’s in properly documenting their SR&ED activities. This make the job of the RTA’s easier, as the proper use of these templates could be prima-facie evidence that the work was performed and make it easier for the RTA to determine if it meets the SR&ED requirements. Right now each RTA has his own format for obtaining information, which often duplicates the documentation prepared by the Claimant.

Recommendation 3: Make business innovation one of the core objectives of procurement, with the supporting initiatives to achieve this objective.
Comments: By the time the bureaucracy gets through the effort of figuring how to make this work, the cost will likely exceed the monies saved by cutting back SR&ED.

Recommendation 4: Transform the NRC into “a constellation of large-scale collaborative sectoral R&D centres.
Comment: Now how, exactly, will this help to increase business innovation and BERD?

Recommendation 5: Help high-growth innovative firms access the risk capital they need through the establishment of new funds where gaps exist.
Comment: This boils down to providing additional funding for BDC, which is not renowned for its support of innovation and taking risks.

Recommendation 6: Establish a clear voice for innovation and engage in a dialogue with the provinces to improve coordination and impact.
Comment: The constitutional problem with this is that, excepting airlines, telecommunications, banking and railroads the primary jurisdiction for most business activities lies with the provinces. The role of the Federal government in business lies primarily with its taxing power and spending power. As demonstrated by the recent failure of the Government to create a single securities regulator in Canada, something that most financial commentators consider to the development of a more efficient capital market, recommendation 6 is a non-starter from the outset.

 

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Interesting Article on Innovation In Canada

The following article recently appeared in the Globe and Mail.  I think you will find it interesting.

http://www.theglobeandmail.com/news/opinions/jeffrey-simpson/can-ottawa-spark-innovation-it-hasnt-yet/article2321249/

 

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The Future of SR&ED-Reflections on the Jenkins Report

Innovation Canada: A Call to Action
This report aka the Jenkins Report includes a series of recommendations, including recommendations to the SR&ED. The panel of “experts consisted of e six members; 3 are academics, 2 are CEO’s of large public companies and the sixth is employed in a NGO dedicated to advocating for research intensive publicly/funded colleges and institutes and technology?

The main beneficiaries of SR&ED are the SME’s, for whom the SR&ED program can be “transformational”. Yet there is no member of the Panel who has expertise in this sector. It would appear that the panel has a prima facie apprehension of bias against SME’s and in favour universities and government agencies.

In the Reports “About the Cover”, the story is told of Canadians Woodward and Evans, who patented a light bulb in 1874 and contrasted their story with that of Thomas Edison whose patent was issued in 1879. While they mentioned that Edison realized the commercial viability of the light bulb and was able to secure major financing to continue his experiments, they failed to explain why Woodward and Evans failed to obtain financing.

Edison succeeded because he learned early on in his career as an inventor to “never waste time inventing things that people would not want to buy.”

By the way, neither Woodward and Evans nor Edison ever received a penny of government support for their work. By the time Edison “invented” the light bulb, he was already a successful entrepreneur who had started and sold several businesses.

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Contemporaneous Documentation

CRA is putting a greater emphasis on the availability of documentation to support an SR&ED claim.  Even if the Reviewer believes that SR&ED has taken place, they may disallow the claim for “lack of documentation”.

In addition, the documentation must be contemporaneous with the SR&ED.  Contemporaneous is a fancy term meaning “created at the same time as”.  Therefore it is critical to pay attention to the creation of supporting documentation during the course of the activity.

Documentation that appears to have been created after the request for a review or after it is requested by the reviewer, is suspect and may expose the claimant and their consultant to gross negligence penalties.  So be sure to document your work as it is performed and date and initial or sign it.  Poor contemporaneous documentation is much better than documentation prepared much later on.

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Changes in the SR&ED Rules? No. Stricter application of the existing rules? Yes.

Because the Federal Government spends between $3-4 billion on the SR&ED program there has been speculation that, because of the size of the deficit, the government was planning to abolish the SR&ED program or change the rules to make it harder to qualify.  According to the folks at CRA, this is not the case.

For a number of years have been complaints, particularly from smaller companies, that the forms were too difficult to complete and that the language used on the forms was confusing, especially with the use of the term “technical uncertainty”.  Beginning with the 2008 fiscal years CRA has introduced changes that clarify the terms and simplify the forms.  They have also begun consultations with the various SR&ED stakeholders which has resulted in ongoing improvements to their publications and are working on achieving more consistency in their review procedures.

In addition, over the past few years CRA has noted a growing problem with the submission of claims that have no merit whatsoever.  Some SR&ED consultants have been submitting numerous such claims, especially software claims and when CRA requests a review, they withdraw the claims.  This wastes CRA’s time, increases their costs and penalizes legitimate claimants.  To counter this CRA has changed its approach to such claims.  They will no longer permit applicants to withdraw their claims when a review is requested.  CRA has announce that it will review these claims and, if found to be totally without merit, may apply gross negligence penalties against the claimant and their consultant

What we have noticed in the past two years is that the technical and scientific reviews have become more thorough.

However we have also found that clients with well-documented claims are still successful and that the degree of success is often proportional to the quality of the supporting documentation.  The rules are the same, but are being applied with a greater focus on documentation.

SR&ED is based on the use of the scientific method; this in turn requires documentation of the methods and results so that other investigators can replicate or disprove the results.  This is how scientists acquire knowledge.  Obviously, CRA does not expect you to share with others your methods, results and knowledge gained.  However proper documentation is important if the knowledge is to become part of the company’s knowledge base and does not evaporate when key employees leave.

Is keeping proper documentation a “pain”?  Does it increase your costs?  Yes, to both questions.  On the other hand the additional costs and bother are usually justified by helping your company protect its intellectual property and by the amount of the tax credits earned.  In terms of the revenue vs. costs equation CRA will be one of your most profitable customers.

 

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Welcome to the Scientix SRED Blog

Scientix Inc. is a consulting firm that for 10 years has assisted its clients in submitting SR&ED (Scientific Research and Experimental Development) tax credit claims.  During this period we have secured more than $10 million in SR&ED and related tax credits for our clients.

The purpose of this Blog is to help our clients and others keep up do date in the world of SR&ED.

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