The good news? Ottawa-area tech companies are putting more money into innovation. The bad news? Those same companies are not taking advantage of lucrative research and development tax credits because they feel the process is too “cumbersome,” according to a recent survey.
The survey, conducted by Ipsos-NPD Canada for management consultants KPMG LLP and Ottawa-based CATA Alliance, a technology business lobby group, found that 40 per cent of companies are investing heavily in R&D right now and another 30 per cent have plans to in the next five years.
But what concerns CATA president John Reid is that while many companies are looking to innovate, some surveyed may be stymied by the tax credit process. What’s more, that apprehension can lead to problems sustaining an industry that, by its nature, needs innovation to exist.
“When you see flags or difficulties with R&D, it becomes a number one issue in the tech industry,” he said. “This is just an indicator.”
This survey of Ottawa high-tech companies is part of a national research study supported by CATA for the TechAction Town Hall and is just one in a series of similar studies being conducted across Canada looking at readiness for future growth.
Reid said he finds the lack of change discouraging. “The whole idea here is that it is supposed to be an incentive program and you have an incentive program being managed in an accounting framework, so one of the proposals we have discussed is looking at all of Canada’s innovation dollars and put them into an agency that motivates people to invest, as opposed to having contradictions,” he said. “This is a decade of trying to get it right. The word gets out that it (the tax credit) is cumbersome and complex and that it is not meeting its purpose.”
Reid said tax credits should be an incentive for small business in particular, but those businesses – one’s that do not have staff dedicated to deciphering complex tax credit issues – are the very ones turning away from the process that they perceive as too complex.
Ottawa-based Charles Murphy, a KPMG R&D tax partner, said the benefits in going after tax credits differ from large to small companies.
“For larger corporations, it is simply a credit that can be used to offset taxes payable,” he said. “What that means is that if you are not otherwise paying tax, the credit doesn’t have a lot of benefit to you, especially in these days when profit is hard to come by, it may not be a huge benefit.”
He added that larger companies could carry it for several years in hopes that it would be useful in the future.
“For smaller enterprises, the R&D tax credit is a refundable tax credit which provides needed cash flow to smaller businesses,” he said. “For most businesses, it can mean up to 50 cents on the dollar in refundable cash.”
As for what that means to the industry, Murphy shows that it is a clear matter of economics.
“It’s a matter of cash flow, to the extent that if a business doesn’t have cash flow from these R&D tax credits, it’s going to have to cut its costs or do something to deal with it,” he said. “If it is a matter of these dollars being used for continuing operations, then not having them will have an impact.”
Reid said CATA has adopted a matrix for assessing the performance of the CCRA (Canadian Customs and Revenue Agency) in delivering tax credits. CATA has passed along the information to the agency, but Reid said he hasn’t seen any results yet.
“We have handed them the methodology with the recommendation that they adopt it…but it has basically been buried,” he said. “How do you measure the cost of not getting there? One or two flagship companies that are turned on or turned off by the program? While this is going on, the government is talking about the innovation agenda, but you need to have the underlying mechanism to make it happen.”
The CATA Alliance in Ottawa is at http://www.cata.ca
KPMG, with offices internationally, is at http://www.kpmg.com
The Canadian Customs and Revenue Agency in Ottawa is at http://www.ccra-adrc.gc.ca/