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Re-architecting Canadian innovation: Budget 2012 cuts into SRED, Canada's largest tax program

By Julie King |

Small and medium sized businesses should pay attention to recent changes made to the SRED program in the 2012 budget, which could signal a shift that will see the goverment play an active role in determining which innovations get financed in Canada.

(Click here for an overview of all announcements that will impact small businesses in budget 2012.)

For small businesses, the Economic Action Plan 2012 is tightly aligned with recommendations from the Jenkins report on innovation and the Science Research and Experimental Development program in Canada.

Citing the Jenkins report in its Economic Action Plan 2012, the government is introducing substantial changes to the Scientific Research and Experimental Development tax incentive program, which was valued at over $3.6 billion in 2011 and with the provincial portions provides roughly $5 billion in annual support.

The initial changes to the SRED program will result in:

  • The general SRED tax credit rate will be reduced by 5 per cent, dropping to 15 per cent as of January 1, 2014 from the current 20 per cent rate.
  • The removal of capital from the SRED expenditure base starting in 2014 and subsequent years. Salary and wages, materials, overhead expenses and contract payments will remain eligible.
  • The formula used to calculate overhead rates will be reduced from the current 65 per cent to 55 per cent of direct labour costs, with the 55 per cent rate being fully phased in by January 1, 2014.
  • Stating that arm’s length contractors include a “profit” component, the Economic Action Plan 2012 will only allow 80 per cent of contract payments to be used for the purpose of calculating SRED tax credits. This change will be effective on January 1, 2013.
  • While not related to the financial aspect of the SRED program, the government also announced that it will study contingency fees charged by tax preparers who can charge 30 per cent or more of the total claim amount. The goal is to understand why firms choose to hire consultants on a contingency basis and to determine if further action is needed.

At the same time, the government has announced $1.1 billion in new funding for direct investment initiatives.

This includes doubling funding for the National Research Council's (NRC) Industrial Research Assistance Program (IRAP) and makes the Canadian Innovation Commercialization Program permanent.

It is also clear that the Jenkins report has had a great influence over cuts to the SRED program, despite alternative viewpoints that have been presented by others include the Canadian Advance Technology Alliance (CATA) [Canada Faces Commercialization Gap, Not Innovation Gap] and Professor Jeffrey G. MacIntosh, TSE Professor of Capital Markets, Faculty of Law, U of T [Tantalus Unbound:Government Policy And Innovation In Canada].

This should be of particular concern to smaller companies in Canada, as there was no representation for SMEs on the panel that created the final report.

The language in the 2012 budget brief, which referred to "shifting from indirect tax incentives to more direct support for innovative private sector businesses" is telling.

The budget changes announced this year may be the beginning of a transitional period that will see the government take an increasingly active role in directing funding to specific projects, rather than using the open funding system that is currently available to any business in Canada that chooses to undertake a qualifying, innovation project.

When it comes to politics, it helps to share your views so that politicians can hear from those affected by policy decisions.

So if that concerns you - or if you support these changes - we would encourage you to use our free tool, Have Your Say, to share your thoughts with federal politicians.

If you enjoyed this article, be sure to visit CanadaOne's article knowledge base for more informative articles.

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