By Paul Boucher.
The government funding landscape to support manufacturing companies in Canada is changing.
A yearlong review of spending initiatives and tax provisions to support the industry has been completed. The government has sought public and expert input from across the country to assist with defining a new approach to sector support. Although the specifics are not yet known, it is clear that change is coming. In addition, funding initiatives will have a higher level of accountability with respect to the return on investment and value of the funding program to achieve stated objectives.
Canada has developed a myriad of funding initiatives from a number of federal departments, resulting in a complex path for companies to access government funding. Sourcing out these programs is often difficult for manufacturers, let alone successfully submitting an application.
But initiatives to improve this process have already been implemented. For instance, a ‘concierge’ program has been established to access government services, while the 2016 federal budget introduced a framework for a future ‘innovation agenda.’ And, it is anticipated that the upcoming 2017 budget will announce revisions, streamlining and consolidating funding programs, as well as rolling out new initiatives.
A competition for dollars
The Scientific Research and Experimental Development (SR&ED) Investment Tax Credit is the largest single source of government support for industrial R&D. The program provides incentives in the form of cash refunds and/or tax credits to Canadian businesses of all sizes, and in all sectors who conduct R&D in Canada. The SR&ED claim consists of a technical report and project financials that are filed as part of the corporate tax return.
The benefits from the SR&ED program have been clawed back over the last number of years and this trend is expected to continue. The savings from a reduced SR&ED program have been channeled to new or expanded direct funding initiatives for various industries; however, these programs are a competition for funds rather than eligibility based on the Income Tax Act for all companies to access.
Direct funding programs have a subjective eligibility threshold typically judged by an administrative panel. Each program is tied to achieving specific outcomes — job creation, skills upgrading, export market development, or greenhouse gas reductions, as examples. Participants must be proactive in their applications, as only expenditures incurred after receipt of application approval is eligible in most cases. This will force manufacturers to advance their planning processes and improve the development of comprehensive business cases to support funding applications. Although all submissions may meet the stated program eligibility requirements, only the best business cases will win!
SR&ED program trends
The experiences on the Prairies mirror the trend from across Canada with respect to increased CRA review and program compliance. Specifically, emphasis has been placed on the existence of documentation to support each phase of SR&ED eligibility: Technological uncertainty, hypothesis, scientific method, technological advancement, and portability for future technical applications.
CRA has taken the administrative position, based on jurisprudence, that project eligibility is established when all five questions can be answered and proven through evidence-based internal systems and controls. Contemporaneous documentation created at the time the work is performed, rather than end-of-year work summaries, are required. The burden is on the taxpayer to comply with all administrative review requirements of the program.
Most companies struggle in this last aspect, as manufacturing operations are typically not geared to generate the level of detail required to support all aspects of the development process. Manufacturers have a tendency to document the conclusion of the experimental process well, but fail to document the details of the iterative developmental process taken to achieve that final outcome. The SR&ED program is geared towards rewarding the developmental journey taken rather than the final outcome, whether positive or negative.
This is a fact that is difficult for manufacturers to understand, and creates the major gap between CRA reviewers and companies in assessing project eligibility.
In addition to performing eligible SR&ED activities, manufacturers must also ensure their internal systems and controls generate information in support of the project. This includes financial general ledger accounts, activity time tracking, test results, analysis, and actions taken related to product or process development.
There are four ‘must-dos’ for every manufacturer: Plan in advance for funding support on a proactive basis; enhance internal systems and controls; fully understand funding program objectives and ensure submissions meet those objectives; and, seek professional assistance from an experienced service provider.
Inevitably, with any change comes both confusion and opportunity. Practices that may have been acceptable in the past are now no longer adequate. Companies must raise their game for SR&ED submissions to meet the current increased level of review.
New or enhanced funding programs and details of Canada’s ‘innovation agenda’ will provide companies with new support opportunities. Successful companies will be those that have a solid business plan, and robust internal systems and controls that can provide the data required to participate in any government-supported funding program.
Paul Boucher is a partner with BDO Canada LLP, and leads the organization’s Special Advisory Services Manufacturing Industry Team, focused primarily on maximizing opportunity under the SR&ED Investment Tax Credit program.