BCTIA Response to SR&ED Consultation

BC Technology Industry Association 900-1188 West Georgia Street Vancouver, BC, V6E 4A2 604.683.6159 T 604.683.3879 F www.bctia.org

TAX INCENTIVES FOR SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT

CONSULTATION PAPER

INPUT FROM THE BC TECHNOLOGY INDUSTRY

Prepared by: SL Thomson & Associates Consulting

for: BC Technology Industry Association November 30, 2007

BC Technology Industry Association Page 2 November 2007

CONTENTS

Executive Summary ............................................................................................................................................3

The Importance of the SR&ED Tax Incentives .......................................................................................................... 3

The BC Technology Industry ..................................................................................................................................... 3

Recognition of Improvements.................................................................................................................................. 7

Recommendations..............................................................................................................................................8

Analysis ............................................................................................................................................................10

Effectiveness of Current Incentives........................................................................................................................ 10

Limitations of the Existing Program ....................................................................................................................... 11

Role of SR&ED in Increasing Private Sector R&D IN Canada .................................................................................. 13

Role of SR&ED in Increasing Industry‐Academia Collaboration ............................................................................. 16

Role of SR&ED in Increasing Commercialization .................................................................................................... 17

Administrative Improvements................................................................................................................................ 18

BC Technology Industry ....................................................................................................................................21

Fast Facts ................................................................................................................................................................ 22


EXECUTIVE SUMMARY

THE IMPORTANCE OF THE SR&ED TAX INCENTIVES

The Scientific Research and Experimental Development tax incentive programs are very important to many companies within Canada’s innovation economy, particularly early‐stage start‐ups.

While the SR&ED program isn’t necessarily an incentive for high‐tech firms, it does play a valuable role in general cash management and cash conservation. High‐tech companies do a lot of research and development, and often have no offsetting revenues for months or even years. Therefore, any program that generates cash for these companies is beneficial and may even play a critical role in their success.

Technology companies must be innovative to be competitive, and to be innovative they need to engage in extensive research and development efforts. Thus, the true incentive for R&D in the high‐tech sector is competitive market forces, not tax credits. In our consultations, no technology company stated that it conducts research and development because of the SR&ED tax credit; rather, companies receive SR&ED credits because they engage in R&D.

However, nearly all BC technology companies consulted emphasized that the SR&ED tax credits allow them to fund further research and development. More importantly, the SR&ED credits are often used by our companies to fund additional go‐to‐market activities – those activities that position them for wealth creation.

In our global era, the SR&ED tax credits help to keep research and development activities in Canada by rewarding our companies for maintaining their development efforts here, rather than outsourcing them to emerging markets such as Eastern Europe and Asia.

Internationally, SR&ED tax credits have also illustrated the importance that research and development plays within the Canadian economy. SR&ED tax credits enable Canadian companies to market themselves internationally, and to attract foreign investors who bring much‐needed venture capital, as well as the necessary market knowledge and connections to help our companies achieve wealth‐creating export success.

THE BC TECHNOLOGY INDUSTRY

BC is home to a thriving technology sector that has seen considerable growth and expansion in recent years. The province’s leading technology sectors are characterized by rising employment and concentration, with over 8,000 technology companies employing more than 45,000 technology workers and almost 80,000 workers of all job descriptions in 2006.

The industry is home to six distinct technology clusters: ICT, Wireless, Clean Energy Technology, New Media, Fuel Cells, and Biotechnology. As these clusters mature, BC’s reputation is growing, both as an emerging global player in high technology and a prosperous and dynamic innovation‐based economy.

However, in spite of advances made to date, the BC technology industry faces barriers that must be overcome in order to achieve a global leadership position.


KEY ISSUE: ACCESS TO CAPITAL

While BC has an enviable record for creating new start‐ups over the past ten years, there is a trend for these companies to be acquired at a relatively early stage in their lifecycle by larger players, often from outside the country. As a result, the intellectual property, R&D, and jobs associated with these start‐ups usually leave BC in the months following an acquisition.

The primary reason for this tendency toward early acquisitions is that companies in BC have limited access to patient, connected capital. Compared to other Canadian jurisdictions such as Toronto, Ottawa, and Montreal, British Columbia does not have a strong venture capital community, and BC compares even less favourably with global technology centres such as Boston, Silicon Valley, Singapore, and Israel on this measure.

With just $226 million in venture capital invested in the BC in 2005 (compared to $674 million in Ottawa and $727 million in Seattle), BC companies are at a disadvantage when trying to access the capital they need to grow. This leads many companies to go public at a very early stage in their development, not as an exit strategy for the company founders but rather as a means of raising capital.

Due to the lack of available capital at critical stages in their lifecycle, refundable (cash) tax credits represent a vital source of additional capital for technology start‐ups in BC. Conversely, while nonrefundable credits may increase the value of a company over the long term, they do not assist cash flows for companies in the short term.

CANADIAN‐CONTROLLED PRIVATE COMPANY (CCPC) STATUS

By looking to alternative strategies to raise capital, many early‐stage companies also risk penalizing themselves because of the disparity that exists between Canadian‐controlled private companies (CCPC) and non‐Canadian‐controlled private companies (NCCPC), as well as between Canadian‐controlled private and public companies, with respect to rates and refundability of the SR&ED tax credits.

If a BC company attracts significant investment – 51% or greater of its total investment – from foreign VCs or other sources, its ownership status ceases to be CCPC. Only CCPCs are entitled to refundable tax credits; if a company is no longer in Canadian ownership, it is only eligible for the non‐refundable credits.

Therefore, the current system frequently forces cash‐starved start‐ups to choose between investment from foreign and public enterprises and access to refundable SR&ED credits through the federal and provincial programs. This foreign or public investment can come from direct investors or from strategic partners who are positioned to help the company grow through access to complementary technologies, markets, or channels.

Regardless of a company’s ownership status, if it is conducting significant R&D activities in Canada, it is bringing benefits to the Canadian economy. Extensive R&D activities not only drive diversification and economic growth, but also contribute to the development of intellectual property and create well‐paid jobs for highly skilled workers in Canada.


While numbers are not readily available for BC, the U.S. Bureau of Economic Analysis estimates that for every research job created in the United States, 3 to 5 additional jobs are created in the broader economy – depending on the field of research being conducted.

Furthermore, the inability to access refundable credits serves as a deterrent to large foreign companies that might otherwise consider establishing a presence in BC. As a result, BC has very few of the large anchor companies that not only generate increased employment and R&D activity but also bring stability, international visibility, recruitment appeal, and training capabilities to a technology region.

Non‐refundable SR&ED credits also do not provide an incentive for foreign entities that acquire CCPCs to retain their development efforts in Canada, because many of the benefits of the previously refundable credits are lost.

STILL UNNESSARILY COMPLICATED AND ONEROUS

While substantial improvements have been made in recent years, the SR&ED application process is still unnecessarily complicated and onerous. Inequities and discrepancies in assessing which activities are eligible for SR&ED credits generate too much uncertainty in the application process, thereby minimizing the incentive value of the credits.

Companies report that their claims are often wholly or partially rejected at the initial assessment stage. In many cases, appealing the decision results in the claim being approved in full, but only after a substantial delay. Because of these uncertainties in approval and timelines, companies are reluctant to treat SR&ED credits as part of their business planning and instead regard them as “found” money after the fact, reducing their effectiveness as an innovation incentive.

After several years of improvement following the 1998 SR&ED consultations, the predictability of outcomes has again worsened. Without any obvious externalities to which this degradation of performance can be attributed, it appears that this lack of predictability is due to inequitable application of policies and practices within the Canada Revenue Agency.

The onerous process also means that many companies must employ SR&ED consultants to process their claims, effectively bleeding off a substantial percentage of the money they will receive. A more streamlined and efficient process would not only reduce uncertainties, but also enable companies to process applications internally without needing to hire external SR&ED experts

TOO FOCUSED ON SCIENCE, NOT ENOUGH ON COMMERCIALIZATION

A common criticism of the SR&ED program is that it is too focused on the science of the innovations, and not enough on the wealth‐generating exports that can be created from their successful commercialization.

The current SR&ED rules are such that the opportunity to fully stimulate the Canadian economy from private sector R&D spending cannot be fully realized. An investment in R&D is essentially meaningless unless the intellectual property can be effectively commercialized.

Because the credit is limited to the development of the science, it does not recognize many of the necessary business expenditures typically associated with the successful commercialization of new


technologies, such as market research and intellectual property registration – corners that are often cut in the commercialization process due to their intensive cash and resource requirements.

By promoting the investment in key steps such as market research prior to commencement of R&D, the federal government would encourage properly focused science – science that leads to meaningful market‐ready innovations – rather than science for the sake of science.

IMPROVING INDUSTRY‐ACADEMIA ENGAGEMENT

The government is to be commended in this consultation process for exploring the ways in which the SR&ED program can be improved to encourage more private‐public collaboration, as indicated in the current Science and Technology Strategy.

Although the BCTIA appreciates this effort, our industry membership does not feel that the program can be effectively modified to encourage additional investment in R&D within the existing academic environments.

The key rationale on the part of our companies is the larger issue of intellectual property ownership and the burdensome rules that many academic institutions place on development efforts, thereby negating many of the advantages that additional credits would generate.

While the BCTIA is actively encouraging our local academic institutions to rationalize and streamline their IP rules and processes, we feel that no changes need to be made to the SR&ED program for this purpose at this time.

GLOBALLY COMPETITIVE ENVIRONMENT

Canada’s SR&ED program remains one of the most generous available, particularly when combined with provincial tax credits. However, with more than 30 countries now offering similar incentives, its advantage as a unique program is fading.

The continued strength of the Canadian dollar against that of the U.S. and the rise of off‐shoring have also restricted Canada’s ability to continue investing in R&D, especially in the manufacturing industry.

Because Canada is very resource‐based, and now one of the largest oil producers in the world, the economic realities of the Canadian dollar as a petro‐currency suggest that the Canadian dollar will remain strong for some time to come. Where SR&ED was a necessity when the Canadian dollar was in the $0.65‐to‐$0.80USD range, it is more even important today as we hover around parity.

Additionally, the global emergence of Asian countries, particularly China and India, as offshore manufacturing and now offshore R&D centres means that jurisdictions around the world are following Canada’s lead by implementing incentive programs to keep their R&D domestic. The result is that where the SR&ED tax incentives previously represented global R&D leadership by the Government of Canada, this leadership is now being matched and surpassed.

As such, it is imperative that the federal government act quickly to reinvigorate innovation in Canada to:


• encourage companies in Canada to undertake more market‐oriented R&D that leads to wealth‐creating exports, and

• retain and attract high‐value research and development, particularly those advanced activities which cannot be easily outsourced to developing nations.

With respect to the SR&ED program, it is critical that the federal government maximize the incentive value of the credits by removing unnecessary limitations, particularly where they provide no discernible benefits.

RECOGNITION OF IMPROVEMENTS

The feedback we have received from our members indicates that the federal government should be recognized for the considerable improvements it has made to the processing of SR&ED claims in recent years. Our members, of all shapes and sizes, have commented on noticeable improvements with respect to:

Education and Assistance – Better assistance in understanding the SR&ED program with respect to how it can be applied to their development situations

Timeliness of Returns – A reduction in claim processing times, allowing for better cash budgeting, particularly among smaller start‐up organizations that are typically development‐heavy and have little or no offsetting revenues

However, a troubling recent trend toward increasing unpredictability of claim outcomes has diminished the incentive value of the SR&ED credits, as well as resulting in unnecessary appeals that utilize far too many resources of our member companies, their consultants, and the Canadian Revenue Agency. This suggests that much work still needs to be done to further simplify and streamline the process in order to make it easier for smaller companies to qualify and claim the credits.


RECOMMENDATIONS

Based upon input received from our membership over the past several years, and particularly during this consultation process, our recommendations are articulated below.

Recognizing the detailed analysis that is being provided by many organizations as part of this consultation process, particularly the Big 4 accounting firms and other SR&ED consultants who have an intimate knowledge of the program’s operational complexities, our recommendations focus mainly on the high‐level issues.

1. Reward all companies equally for conducting R&D in Canada regardless of their ownership structure. Specifically, eliminate the disparity between Canadian‐controlled and non‐Canadian‐controlled private and public companies with respect to rates and refundability.

2. End the penalization of companies located in provinces that have provincial SR&ED programs by removing the discounting of the provincial SR&ED credit from the calculation of the federal SR&ED credit. For example, where CCPCs in BC are eligible for a 35% credit federally and a 10% credit provincially, the total credit for the company should equal 45% rather than a net credit of 41.5%.

3. Broaden the eligibility criteria for R&D expenses to include certain pre‐ and post‐R&D expenditures such as market research and go‐to‐market costs associated with the commercialization of technologies to ensure that the program supports commercialization of innovation.

4. Continue to streamline, standardize, and ideally rationalize the eligibility criteria and assessment

processes to provide more certainty‐of‐outcome in the application process. These efforts will reduce the need for external consultants (thereby minimizing leakage) and better position SR&ED credits to incent research and development activities within Canada.

5. Continue to work, as the broad Government of Canada, to build a strong Canadian venture

capital industry and reduce the systemic access‐to‐capital issues that make programs like SR&ED a necessity for improving cash flow within the innovation economy.

6. Encourage provincial governments to make similar changes and enhancements to their provincial

SR&ED programs to ensure that the program is leveraged to the maximum benefit for Canadian companies.


BCTIA CONSULTATION PROCESS

On October 5, 2007, the federal government launched a Canada‐wide initiative to consult with industry on how the Scientific Research and Experimental Development (SR&ED) tax incentive program can be improved.

In response, the British Columbia Technology Industry Association (BCTIA) has developed the following submission on behalf of its members.

The input that makes up this report has been provided by BCTIA members through a number of forums over the past several years, and many of the comments and recommendations have been brought forward in other reports and venues. In response to the federal government’s request for consultation, the BCTIA initiated a special project to review and expand on the views of its members and stakeholders.

Feedback was received from more than 30 organizations comprising large and small companies across BC’s broad and diverse technology community, including traditional information and communications technology companies (hardware, software, wireless, and new media), clean energy companies, and life science companies. Input was also provided by a number of service companies that assist technology companies in the commercialization of R&D, as well as several key stakeholders in the commercialization process including the BC Innovation Council (BCIC), the BC Institute of Technology (BCIT), and The University Presidents’ Council of BC (TUPC), which is the coordinating body for BC’s leading academic institutions.


ANALYSIS

The following analyses reflect on the major questions posed by the government in its request for submissions. These questions were posed directly to the BCTIA membership, including companies of all shapes and sizes, as well as leading academic institutions and SR&ED specialists.

EFFECTIVENESS OF CURRENT INCENTIVES

Q. How do the SR&ED tax incentives affect the performance of R&D in Canada, and how can they contribute to increasing private sector investment R&D?

SR&ED credits are a valuable tool for driving R&D performance in Canada. By providing additional funds for companies to plough back into further research, they increase the amount of R&D taking place in the country and enable successful development of a greater range of technological innovations. Many companies use the credits to employ additional development staff, increasing employment and job opportunities in Canada.

The SR&ED program provides a significant incentive for companies to keep their R&D operations in Canada, rather than pursuing off‐shoring options that might offer cost savings in the short term.

Companies that have leveraged the credits successfully unanimously laud the benefits they have provided to their organizations, with several commenting specifically that without refundable SR&ED credits, they would have significantly less money to invest in R&D. The credits are also used to fund additional development staff, creating new highly‐skilled jobs in Canada. A number of companies also use the credits as part of their general cash flow, funneling them into their day‐to‐day operations.

Companies that are only able to access the non‐refundable credits were not as positive about the program, with several saying that they no longer used it because the non‐refundable credits are not valuable enough to invest the time required to apply. Furthermore, these non‐refundable credits provide no benefit to companies that have not yet achieved profitability. Thus, making refundable tax credits available to companies that are currently only eligible for non‐refundable credits would generate a considerable increase in overall R&D.

The application process itself presents another barrier, particularly for smaller companies. More education and assistance with understanding eligibility criteria and completing the paperwork would increase access to the credits for smaller companies and first‐time applicants, enabling them to increase their R&D efforts.

All of the larger companies that responded apply for the credits on an annual basis. Smaller companies tend to apply more intermittently.

“If it was not for these credits we would be forced to consider offshore development, i.e., taking employment away from Canada.”

BC Technology Company


LIMITATIONS OF THE EXISTING PROGRAM

Q. Are there features of the SR&ED tax incentives that impede the growth of small and medium‐sized innovative Canadian companies? If so, how do they impede the growth of these companies?

While the SR&ED program has a number of limitations that are particularly problematic for small and medium‐sized companies, none of these limitations are insurmountable and all could be addressed with targeted changes to the program.

Specific limitations include general lack of awareness and understanding of the program, as well as insufficient knowledge regarding the extent of eligible activities; administrative complexity; processing time; and the restriction of the program to innovation activities, with no provision to support commercialization efforts.

Currently, these limitations present a significant impediment to the growth of smaller companies, which struggle to raise the funds they need to successfully develop and commercialize products in the limited Canadian capital market. By addressing these issues, the government could remove the barriers that prevent these companies from accessing funds that would enhance their ability to develop technologies and take them to market. This would not only increase the growth and success rates of these companies, but also enable them to compete more effectively in the global marketplace, especially against competitors that have access to the better‐funded U.S. capital market.

Key limitations of the program that should be addressed are as follows.

AWARENESS AND EDUCATION

Based on interview responses, uptake of the SR&ED program could be increased significantly if targeted efforts were made to raise awareness of both the existence of the program and what activities are eligible for the credits. Many smaller companies, particularly start‐ups in their first year or two, are simply unaware of the program, or do not know that some of their activities might qualify for refundable tax credits. Another common issue for small companies is that they do not understand the boundaries between eligible and ineligible activities; for example, the difference between development and production. Again, targeted promotion, marketing, and education could assist companies in understanding which of their activities qualify for credits, increasing the likelihood of successful applications and a positive overall experience with the program.

“A lot of our clients don’t know SR&ED exists – we have to tell them.”

BC Outsource Engineering Company


ELIGIBILITY

Many SMEs have not reached the profitability stage and so can only access the non‐refundable credits, which are of little use to them as they are not yet paying the taxes against which the credits could be claimed. They are also at the stage of the corporate lifecycle where additional cash revenue is most needed. Because they cannot access the credits, they are forced to seek other sources of capital such as foreign investment, which may cost them their Canadian‐controlled private company (CCPC) status. Once this status is lost, they are no longer eligible for refundable credits. Many of these companies are missing out entirely on the benefits of the SR&ED program, regardless of how much R&D they are conducting or the contribution they are making to the Canadian economy.

There is a further discrepancy between public and private companies; public companies are also only eligible for non‐refundable credits.

Extending the credits to non‐CCPCs, public companies, and companies that have not yet reached the profitability stage would encourage them to increase their R&D efforts in Canada.

COMMERCIALIZATION

Currently, the SR&ED program is targeted toward innovation and the development of new technologies. It does not provide support for the next crucial stage of the product lifecycle: commercialization. To successfully identify a market for technologies and products, companies need to make substantial investments into market research and business planning. For small companies, this represents a significant financial burden. Extending the SR&ED program to include go‐to‐market activities would support the commercialization of new technologies and the growth of Canadian companies.

(See Section 5: Marketing for additional information.)

ADMINISTRATIVE COMPLEXITY

The application process is a barrier for smaller companies. For first‐time applicants it is a very daunting, time‐consuming process, and outside of the SR&ED seminars there is little help allocated to those who are new to the program. Employees of smaller companies are also more likely to engage in extensive multitasking, which makes the time‐logging requirements of the SR&ED program considerably harder to quantify and more onerous to track.

“We would like to use the SR&ED program; however we are a public company with substantial tax losses . . . rather than spend $20, 000 to $40,000 to process a claim that does provide any immediate benefit for our company, we have chosen not to make any claims.”



The complexity of the process means that many companies must employ an SR&ED consultant or other specialist to process their claims. For a larger company with funds to spare, this is not a significant barrier to accessing the credits (although it can bleed off a significant amount of the money they receive – up to 30% if the specialist is employed on a contingency basis), but smaller companies often struggle to find the funds to pay an SR&ED consultant, and they may be left with so little cash at the end of the process that it is simply not worth their while to apply.

PROCESSING TIME

An additional limitation of the current process is the length and unpredictability of the time it takes to approve applications. Although there are some signs that the new fast‐track program (introduced last year) is improving the situation, refunds often take up to six months to arrive. For larger companies with other sources of income this is not a significant issue, but for smaller companies that are in a considerably more precarious position, this is an unacceptable delay. Not being able to predict the arrival of funds with certainty limits the SR&ED’s effectiveness as an incentive because companies cannot factor it accurately into budgets or financial planning.

ROLE OF SR&ED IN INCREASING PRIVATE SECTOR R&D IN CANADA

Q. How could more private sector R&D be leveraged?

The key to leveraging more private sector R&D is to address the limitations and exclusions of the current SR&ED program, as discussed in the previous section.

ADMINISTRATIVE IMPROVEMENTS

Making the application process more straightforward and less administratively complex would encourage companies to participate in the process, claiming funds that they would then be able to channel into further R&D (see Section 4: Administrative Improvements for specific details). The need for administrative improvements was unanimously emphasized by respondent organizations; even those who had no difficulty with the application process themselves felt that there would be merit in streamlining the process, particularly for smaller companies and first‐time users.

INCREASE AVAILABLE FUNDS

A simple but effective measure would be increasing the amount available for refund. Several companies suggested that this would be the single greatest incentive for increasing private sector R&D through the SR&ED program.

“For a small company, it’s very expensive to get the appropriate accounting and tax resources to submit an application and ensure a defensible submission.”



EXTENDING THE REFUNDABLE CREDITS

One of the most significant limitations of the program’s ability to leverage private sector R&D is evident in the number of private companies that conduct significant R&D in Canada but are not eligible for the refundable credits: non‐Canadian controlled private companies and companies that are not yet profitable. Extending the refundable tax credits to these companies, with the proviso that they must conduct a specified minimum of their R&D in Canada, would increase the number of private sector companies eligible for the refundable credits. With additional funds to plough back into further research, these companies would increase their R&D activity.

BCTIA members generally supported extending the program to private companies in these categories, assuming the companies provided work for Canadian talent, and that the benefits of that work remain in Canada. There was some concern that extending the credit to non‐CCPCs could expose the program to the risk of abuse; to mitigate this risk, it was suggested that if the credits are extended to non‐CCPCs, a claw back clause requiring repayment of credits if the benefits of Canadian R&D were moved outside the country within a specified timeframe should be included.

Outside the private sector, R&D in Canada could be further incented by extending the refundable credits to public companies. Private companies expressed concerns that this could limit their own access to the credits, and stressed that they would want to see a clear mandate that providing public companies with access to the credits would increase their contribution to R&D and its associated economic benefits before they would be willing to support such a change.

ELIGIBLE ACTIVITIES

Promotion and marketing of the SR&ED program should include a comprehensive education package explaining eligible activities to companies. Currently, many eligible activities are not being claimed, in part because companies – particularly small companies and first‐time claimants – are unaware that certain activities qualify for the program, or do not know how to

“Research in Canada is research in Canada, regardless of who owns the business.”


“Many early‐stage companies depend on U.S. financing, but lose their CCPC status if they take advantage of it – yet they are still providing the same benefits, such as employment for highly skilled labour in Canada.”


“A company such as ours is just as important to the country’s development and growth as a private company. The fact that we are public and have tax losses from being a start‐up should have no bearing on our need for assistance.”



report them in the form required by the application process.

Extending the range of eligible activities would also encourage additional R&D. BCTIA members strongly support the inclusion of go‐to‐market activities such as market research and intellectual property management, as this would reduce the financial burden that companies currently face in accurately identifying a target market. Marketing a product appropriately is as essential to its success as developing its technological components, and successful products generate revenue for companies, enabling them to continue expanding and refining their R&D efforts.

(See Role of SR&ED in Commercialization for further detail.)

BCTIA members flagged software development activities as particularly hard to claim under current eligibility criteria.

ALTERNATIVE REFUND OPTIONS

An additional possibility would be to expand the range of refund options and benefits available under the program. For example, the current credits are subject to penalties under U.S. tax legislation, which discourages companies with a U.S. ownership component from using the program. If a grant were offered as an alternative, the tax penalties could be avoided. This would act as an incentive for U.S. companies to conduct R&D in Canada, or base their R&D operations here.

Another option would be flow‐through shares in which development expense write‐offs are charged to the investor rather than the company. This option has been leveraged with significant success in the petroleum, mining, and alternative energy industries, and there is a strong case for extending it to other areas.

“As a software developer, I could find that a product I’m currently working on isn’t eligible because it has the same code base as an older product that we worked on three years ago, and yet to all intents and purposes it’s a new product.

Software development isn’t a straightforward process; sometimes it’s new, and sometimes it’s developing an old product into a new form.”

Bob McKeever, McKeever’s Software Wizardry Ltd.

“The extension of flow‐through shares would be particularly important in areas where costs are high, risks are higher, and payback can only happen in the longer term . . . in such circumstances flow‐through shares could be a critical tool to ensure the ongoing availability of capital to fuel the development process.”

BC Innovation Council


REFUND DELIVERY

Making the refunds available on a quarterly rather than annual basis would increase both the ability to incorporate them into business planning and their usefulness to smaller companies. The proponents who offered this suggestion noted that it would increase the amount of work required by companies to obtain the credits, but that for smaller companies the benefit of having this additional flexibility in terms of accessing their refunds would outweigh the additional workload.

ROLE OF SR&ED IN INCREASING INDUSTRY‐ACADEMIA COLLABORATION

Increasing collaboration between academia and industry would encourage further R&D, enhancing opportunities for the commercialization of technologies and innovations produced by academic institutions. Partnerships provide benefits for both parties, with industry accessing a new R&D pipeline and academia gaining the benefit of business expertise. These benefits increase the likelihood of successful commercialization of technologies, generating funds that both businesses and academia can use to support further R&D.

One straightforward method of encouraging additional academia‐industry collaboration would be to increase the eligible percentage recoverable for researchers and consultants in academic institutions to a higher level than is currently permitted for private sector contractors. Additionally, eligible expenses could be expanded to include go‐to‐market and business planning activities, provided they were conducted under the guidance of an academic liaison office. Academic institution respondents endorsed both of these changes.

A second method for encouraging additional collaboration would be to revise the definition of eligible activity so that research activity undertaken at a university would qualify automatically for the program, subject to the standard audits. This would simplify participation in the program for companies undertaking collaborative product development, an improvement that would be of particular benefit to smaller companies and first‐time applicants.

However, it should be noted that industry respondents were less receptive to the proposal of using the SR&ED credit to encourage collaboration with academia. Respondents were unanimous in stressing that the SR&ED tax credit program is not a limiting factor in their collaborative research efforts today, nor would any changes to the SR&ED program be likely to alter the amount of collaborative research they

“Making payments quarterly instead of annually would be huge. If you’re cash‐starved it would be well worth the extra work to have that option.”


“The program is well‐supported by universities, and it is actively promoted as a means of fostering academia‐industry collaboration.”

University Presidents’ Council of British Columbia


undertake in future. Rather, the barrier to greater collaboration between academia and industry is the approach that the academic institutions take to intellectual property (IP) registration.

Because academic institutions usually seek to retain all IP rights, venture capital investors are very unlikely to provide funding for organizations looking to develop new technologies and innovations through collaboration with universities. Additionally, companies seeking research collaborations often find themselves in a licensing morass when it comes to IP because academic institutions deal with IP rights on a case‐by‐case basis rather than having a consistent, up‐front policy.

If the IP issue were resolved, companies would consider increasing academic collaboration. If this were the case, suggested improvements to the credit that would encourage joint ventures include an increase in the percentage of money that could be claimed back for collaborative projects, and more flexible eligibility criteria with regard to IP licensing and where the IP must lie in order to qualify.

ROLE OF SR&ED IN INCREASING COMMERCIALIZATION

Q. Should the tax credit program be expanded to include expenditures for go‐to‐market activities?

Targeting a market is expensive and poses a particular burden for small companies, which may not have the funds or expertise to carry out the market research required to ensure that their technology is right for a particular marketplace. Extending the SR&ED credits to cover go‐to‐market activities would significantly increase the likelihood of successful commercialization.

Possible go‐to‐market activities that could be covered by such an extension include:

• Market research

• New product introduction

• Engineering

• Pilot and demonstration projects

• Business planning

• Intellectual property registration and management

• Market planning

“There’s more to designing a widget and getting it to market than working out bugs.”


“By encouraging commercially relevant innovation, the government can gain a much greater economic return on investment compared with products and technologies that are developed without the end‐consumer in mind.”

BC Academic Institution

“Increasing collaboration with academia would increase the amount of private sector R&D in Canada.

There is very little research taking place in Computer Science departments that does not have practical applicability to industry.”

Nick Arden, ED‐BC


• Competitive intelligence

• Business consulting

• Coaching and mentoring

An additional benefit of making these activities eligible for the credit is that it would improve Canada’s competitiveness in the global marketplace by mitigating the difficulty that companies currently have in accessing the kind of capital available to U.S. companies.

Most organizations were strongly supportive of this proposal. However, some companies supported the idea in principle, but felt that the rate of return in this area should be lower than for pure R&D because the costs are “fuzzier” and harder to quantify.

Those BCTIA members who were opposed to an extension of this kind felt that it was simply not within the mandate of the SR&ED program, which is about research and development. One respondent felt that there was an assumption in the current SR&ED mandate that some go‐to‐market costs are included.

Generally, the issue seemed to be whether the SR&ED program is designed simply to support research and development, or whether it is genuinely intended to encourage the growth of Canadian companies. If it is the latter, the credit should be extended to include go‐to‐market activities.

ADMINISTRATIVE IMPROVEMENTS

Q. How could administration of the SR&ED tax incentives be further improved and its complexity reduced?

The application process places a significant administrative burden on companies, putting first‐time applicants and smaller companies at a particular disadvantage. Streamlining the process and providing practical, targeted support to help newer applicants through the reporting process would not only result in more applicants and more successful claims, but also reduce the need for SR&ED specialists, whose fees often cost companies a substantial proportion of their final claims.

SUPPORT AND EDUCATION

More support is required for first‐time applicants to assist them with their claim processing. New to the SR&ED program, and often only considering the credits after the development effort has occurred, many of these claims are denied due to improper documentation. More lenience needs to be afforded to first‐time applicants surrounding documentation and support to ensure claimants first experiences are positive and that they continue to utilize the program in subsequent years, thereby increasing the amount of R&D that they ultimately do.

The level of support for first‐time applicants should also be increased beyond the current SR&ED seminars. Organizations that had attended the seminars reported a lack of consistency in the advice given, and found the sessions

“Sample case studies would be really useful – examples of truly workable claims that make it clear how the process differs from industry to industry.”

Paul Bowler, Braithewaite Technology Consultants Inc.


to be of limited use when it came to completing applications. BCTIA members emphasized the need for a more practical program of education and support for small companies and first‐time applicants.

A support and education program could offer some or all of the following kinds of practical assistance:

• A set of very specific case studies, targeted at specific industries and organization sizes, would provide the kind of practical, useful assistance that is currently missing – such case studies could show a company exactly how the program would work for them depending on their particular circumstances, including how to determine eligible activities, working their way through the application process, and the potential benefit the credits could bring to their future R&D efforts; these case studies could be offered as part of an education package for companies new to the SR&ED program

• A helpline for first‐time applicants

• Auditors mandated to guide new companies through their first applications

• An online application process, similar to the federal immigration process, where claims could not be submitted until complete

• Forums where companies could share their experiences and ask for advice

• An extensive marketing campaign to raise awareness of both the program itself and eligible activities

BCTIA member companies were strongly supportive of any practical measures that would assist new applicants in processing their claims. It was widely recognized that the companies missing out because of current limitations are the small and start‐up businesses that need the refundable credits the most.

CLARITY AND CONSISTENCY

The eligibility rules need to be stated more clearly and applied more consistently. Lack of consistency in claims processing means that companies do not rely on the credit funds until they arrive, which limits their effectiveness as an R&D incentive because they are treated as found money rather than funds that can be worked into the business planning process. Lack of clarity in terms of what activities are eligible has the same effect, or worse, resulting in companies failing to claim eligible activities or being denied claims for activities they believed would be eligible. The element of uncertainty this introduces into the process limits the program’s value as an incentive.

“The biggest challenge for SMEs is simply understanding the rules and applying them to the activities they undertake. Provide a simple way of looking at it for small companies: here are the tests we use, and here’s how they are applied. It is essential that they can make use of these credits to fund further R&D.”



A number of members cited inconsistency in processing as a major concern. Several companies felt that lack of appropriate technical expertise on the auditor’s part had resulted in problems with their claims, which in some cases had quite serious consequences when claims were unexpectedly turned down. While most companies acknowledged that this was something that had only happened to them once, the risk of having an application turned down – or delayed for the unspecified duration of an appeal process – made them unwilling to include the credits in their forward planning. This limits the effectiveness of the credits as an incentive to conduct R&D.

A possible solution to the perceived lack of consistency would be to centralize the administration of the program, making it easier to maintain national standards. This would increase consistency at the highest level, generating a corresponding increase in the predictability of claim outcomes and reducing confusion for applicants. Standardization would also make it considerably easier to create the kind of support and education package described above.

Companies are generally quite accepting of the fact that the application process must be thorough enough to include an appropriate degree of accountability, and that streamlining the process should not compromise this.

“A single, unitary approach to SR&ED will simplify the administration of the program, create clarity within the private sector, and enable organizations . . . to better promote the specifics of the program when working to attract international companies.”

BC Innovation Council


BC TECHNOLOGY INDUSTRY

The following is an outline of the major industry sectors in BC and their relative strengths with respect to number of companies, number of employees, annual revenues.

Data compiled from Profile of the British Columbia High Technology Sector (2007), Wireless in BC (2005), New Media BC, Aerospace Industry Association of BC, and Security Technology Snapshot (2006). Sectors contain overlapping data due to companies being listed in more than one sector.

TECHNOLOGY SECTOR STATISTICS

INFORMATION & COMMUNICATIONS Hardware, Software, Telecommunications, and IP over Everything

6,000 companies 46,000 employees $9 billion in revenue

WIRELESS Hardware, Software, and Broadband Internet

220 companies 5,200 employees $1 billion in revenue

LIFE SCIENCES Pharmaceuticals and Medical Devices

179 companies 2,700 employees $800 million in revenue

NEW MEDIA Interactive Multimedia, Gaming, and E‐Learning

900 companies 14,000 employees $1.2 billion in revenue

SECURITY TECHNOLOGY Enterprise Data and Surveillance; Environmental Monitoring, Asset Tracking, and Loss Prevention; Solutions for Law Enforcement, Military, and Homeland Defence

400 companies 10,000 employees $1.25 Billion in revenue

AEROSPACE Engineering, Manufacturing, and Training

190 companies 1,550 employees $450 million in revenue

CLEAN TECH Hydrogen; Fuel Cells; Power Electronics; Energy Storage; Wind, Ocean, and Solar Power; and Environmental Technologies

1,360 companies 22,000 employees $2.5 billion in revenue


FAST FACTS

• BC’s technology industry has reached a historical high, reporting a total of 22,377 technology companies in 2005 – with 8,748

full‐time employees and 13,629 self‐employed entrepreneurs.

• BC leads Canada in percentage growth of high‐tech employment, reporting 70,490 workers in 2005.

• BC has the lowest personal income tax rate in Canada for incomes up to $108K.

• BC offers a competitive corporate tax rate of 12% and a small business tax rate of 4%.

• Research and development tax incentives totalling 28% of qualified spending make BC an attractive place to do R&D.

• The majority (69%) of BC’s exports go to the U.S., with the Pacific Rim as the second‐largest destination.

• BC is the most connected province in Canada, with 7 out of every 10 households and 8 out of every 10 businesses having a computer and Internet access.

• For a decade the University of British Columbia has led Canada in the number of U.S. patents awarded and the gross income earned from technology licenses.

• Vancouver was ranked first in the world for liveability by the Economist Intelligence Unit ranked first in North America and third out of 215 cities worldwide in the Mercer Group’s 2006 Quality of Living Survey.

• BC has experienced the highest employment growth rate in Canada since 2001 – 10.4%.

• The Port of Vancouver, which is Canada’s busiest trade intersection, facilitates trade with more than 90 nations worldwide and is a recognized gateway to Pacific Rim markets.

• With more than 90 languages spoken, BC is rich in cultural diversity.

• BC’s healthcare system is one of the best in Canada.

• BC promotes a flexible and healthy working environment.

• BC has 28 public post‐secondary institutions comprising university colleges, institutes, colleges, and universities.

• As can be seen from the following table, BC is home to a considerable number of global companies, most of which have an R&D or operational presence in BC due to the acquisition of innovative local companies.

GLOBAL COMPANIES WITH A PRESENCE IN BC 3M Touch Systems Ballard Power Systems Inc.* Boeing Broadcom Corporation Business Objects CDC Software Dolby Canada Eastman Kodak eBay Electronic Arts Harman International Industries Honeywell Video Systems HSBC Group IBM Intel MacDonald, Dettwiler and Associates Ltd. (MDA)*

Microsoft Corporation McKesson Corporation Nokia Open Solutions Plug Power Royal Phillips Electronics Sage Group Schneider Electric Scientific Atlanta – a Cisco Company Seiko Epson Corporation Sophos TELUS* UTStarcom Vivendi Universal Walt Disney

* Headquartered in BC