Thank you.
I apologize for not having a document handy, but I was invited yesterday to attend. There is a submission from Deloitte, which was filed on September 13.
My opening remarks relate to the R and D incentives program. I am the Canadian leader of the global incentives and investment attraction for Deloitte. I also preside over the board of the Quebec Industrial Research Association, l'ADRIQ. It's in this capacity that we're in contact with industry right across the country. I wish to reflect industry's view on the changes proposed in relation to SR and ED.
We think we need to position the incentives discussion in the wider discussion of innovation investment attraction or preservation. R and D incentives certainly serve to help increase productivity. We would agree with that, but R and D should also serve to increase economic wealth by creating the next generation of technologies.
Canada is attracting natural resource investments. Unfortunately, the related innovation investment is not being made, or at least not entirely. Canada, therefore, is not as attractive compared with the rest of the world in its strategy of attracting, preserving, or creating the next large technology company.
Canada's SR and ED regime has been widely viewed as an important positive factor in encouraging innovation investment in Canada. We believe that the proposals to reduce government support make Canada’s incentive regime less attractive than those of competing countries that are improving their incentive programs. In fact, Canada’s ranking in tax incentive generosity has already declined from third to fifth for small companies, and from ninth to thirteenth for larger ones, from 2008 to 2012.
With the changes announced in the budget, we anticipate that these rankings, especially for large companies, will drop even further. Our recent post-budget survey of Canadian companies confirms that reactions to the reduction in government support through the SR and ED program have generally not been positive and suggest that Canada’s R and D tax regime will be less attractive after the changes.
In our view, the elimination of incentives for capital expenditures does not recognize that capital investments are needed to perform R and D and that certain industries will be put at a disadvantage as a result of this measure. The software industry, for example, requires computers and related equipment in order to undertake R and D. Rather than completely eliminating all capital costs, we recommend that the government distinguish between short-term capital expenditures, such as computers and related equipment, and longer term ones, and treat the short-term capital expenditures in the same manner as material costs would be treated, as eligible for SR and ED credits.
In addition, rather than introducing a broad elimination of eligibility of capital expenditures for SR and ED, we recommend the introduction of a limitation process. For example, an approach similar to that for shared use equipment could be considered. Alternatively, the proposals could introduce a cap on the amount that would qualify.
Should the proposals relating to capital expenditures be retained, we would recommend that the draft legislation be refined to introduce greater certainty. I won't go through the series of notes in respect of the drafting itself, but there are a number of them that create some uncertainty as they relate to the legislation as currently drafted.
As we noted in our pre-budget 2012 submission of October 2011, we believe that Canada’s R and D tax regime should be improved by allowing the tax credits to be at least partially refundable for all businesses, as is the case in many countries and in Canadian provinces. The U.K., for example, has decided not to eliminate the program, but to make the tax credit entirely refundable for all companies. France is doing the same.