October 20, 2011
The Honourable James Flaherty
Minister of Finance
Department of Finance Canada
140 O’Connor Street
Ottawa, Ontario K1A 0G5
Dear Minister Flaherty,
Canada has weathered a difficult global economic cycle more successfully than most countries. As a result of strong fiscal leadership, Canada is better positioned than most nations to meet current challenges such as slowing global growth and sovereign-debt issues in Europe and the United States. Yet, other challenges to prosperity exist, including productivity — we believe that sustained economic growth in Canada is impeded by our nation’s lagging productivity. Several factors cause this low productivity: risk aversion among business leaders, chronic under-investment in machinery and equipment, lack of risk capital for start-ups, sheltering of certain industry sectors, increased competition for global talent, and insufficient support for innovation. As discussed in our recent report, The future of productivity: An eight-step game plan for Canada, we believe that Canada has a window of opportunity to address these issues and, thereby, significantly improve productivity.
We encourage the Government of Canada to use all available tools to mitigate the effect of these and other phenomena on our national prosperity. Budget 2012 is an opportunity to continue the Government’s commitment to economic prosperity.
Tax policy is a passion of ours — Deloitte is both Canada’s largest tax practice and a global tax firm with a unique perspective on competitive tax policy and the key drivers of national prosperity. With the right tax policy, Canada can be more productive and globally competitive. The key lies in creating a tax ecosystem capable of fostering innovation and investment while supporting the objective of a balanced budget. A nation’s available mix of taxes — corporate, personal, and indirect — permit it to share the tax burden across elements of the economy while ensuring that areas most important to economic growth bear the least tax burden.
Our policy recommendations for Budget 2012 can be summarized in four broad categories:
- Foster innovation through improvements to the SR&ED program
- Support a “start-up economy” with improved financing support
- Attract and retain the world’s most talented people
- Enhance certainty through tax administration
Deloitte’s Budget 2012 Recommendations
1. Foster business innovation through improvements to the SR&ED program
While innovation drives both productivity and ultimately employment, Canada’s historic leadership in encouraging innovation is under threat. With the competition for attracting global research and development (R&D) investments intensifying, it is critical for Canada to improve its scientific research and experimental development (SR&ED) incentive regime to remain competitive. In 1996, only 12 Organisation of Economic Co-operation and Development (OECD) countries offered R&D tax incentives; today, 22 OECD countries offer such incentives, with Germany, Sweden and several others considering the same. In addition, France and other countries have dramatically improved their programs.
We commend the Government for appointing an independent panel to review federal support for R&D. We have reviewed the panel’s recently released report (Jenkins report) with great interest. In particular, we applaud the panel’s recommendation to increase the availability of funds to start-up and later stage companies, and increase the government’s procurement. We also believe that simplifying the SR&ED program is an important objective but the panel’s specific recommendation to only use labour expenditures will create a bias in the program towards labour-intensive sectors at the expense of non-labour intensive industries. Furthermore, capital investments, both tangible and intangible, have been shown to be essential for greater productivity and should not be ignored for the sake of simplicity.
The panel addressed the issue of broad-based funding through the SR&ED program relative to direct support through targeted grants. Deloitte believes that Canada must have broad-based tax incentives for all industries and these should be complemented by grants aimed at supporting specific priorities. Numerous international trade agreements restrict direct subsidies to business. We urge the Government to carefully consider this issue in striking the right balance between tax credits and direct grants.
The panel did not explicitly deal with approaches to making Canada more attractive to foreign investment. Despite weathering the difficult economic downturn more successfully than other countries, Canada still needs solutions that will help businesses deal with a high Canadian dollar and the strong global competition for jobs. This should be an area of future analysis.
Further aspects of the SR&ED program are also currently under review by the Canada Revenue Agency (CRA) and the Taxpayers’ Ombudsman. Amid all this scrutiny, one issue receiving a lot of attention publicly is the cost of compliance to taxpayers under the SR&ED program — specifically the high cost of advisory work. However, the Canadian efficiency ratio of advisory fees to R&D tax credits is low compared to other countries — as confirmed by the CICA Tax Committee through a survey of the six largest accounting firms, it is much lower than hypothesized by the media.
Encourage foreign investment through full refundability of SR&ED tax credits
In our view, the current framework has served Canada and Canadian taxpayers well and we recommend that the current SR&ED framework be retained. However, to encourage foreign investment, we would like to see the refundability of the investment tax credit made available to all businesses, not just certain private companies; this is already the policy of several provinces and a number of countries with which Canada competes for corporate R&D spending. For many U.S.-based multinational corporations, for example, refundability means the difference between the incentive being a permanent tax savings or a tax deferral, which can be a powerful distinction in perceived value.
Currently, only Canadian-controlled private corporations (whose income does not exceed the specified limit) may claim a refundable credit — all other companies only receive the benefit of the credits in years with taxes payable. Long-term planning is made difficult for these organizations as many operate in cyclical industries and cannot predict the years in which they will have sufficient corporate tax liability to make the SR&ED tax credits of any value. Expanding the refundable credit to all corporations would appropriately reward the risks inherent in carrying out R&D in Canada, sending a strong message to foreign companies seeking new investment opportunities.
Introducing refundability of SR&ED tax credits for all businesses will not only increase investment in R&D but also increase overall economic spending. According to a recent study, full refundability is estimated to be capable of generating at least $520 million in additional R&D spending just from companies that currently claim SR&ED incentives but do not include SR&ED in making their R&D investment decisions. Total spending across the Canadian economy is estimated to increase by $1.1 billion. These increases will result in a positive GDP impact of almost $650 million and an increase in total employment of almost 9,400 full-time jobs.
Enhancing the federal government’s support for innovation through the SR&ED incentive program is an important step that will allow Canada to be a leader in innovation, both in the knowledge economy and in new technologies designed to exploit energy and resources.
2. Spur a “start-up economy” with improved financing support
Knowledge-based industries will contribute significantly to Canada’s productivity and economic growth. This sector will develop exponentially in the near future as well as in the long term and Canada has an opportunity to claim global leadership in industries such as life sciences, alternate energy, clean technology, digital media, and other areas of technology and innovation.
Foster early stage investments with an angel tax credit
In addition to tax incentives for business activities (including the SR&ED incentives noted above), support for financing is essential, as highlighted by the Jenkins report. The financing ecosystem in Canada is fundamentally broken — from early seed financing through to initial public offerings, Canada does not do enough to support home-grown enterprises with world-class potential. In addition to the allocation of new funds for start-up and later stage companies suggested in the Jenkins report, consideration should also be given to targeted credits to further encourage investment, specifically for early stage investors: we support the creation of an angel tax credit to support early stages of innovation-industry development. We recommend that priority be given to an angel tax credit as it is the logical starting point for the renewal of Canada’s innovation initiative and it is the incentive that can have the greatest impact on growing our economy.
Small and medium enterprises (SMEs) are important generators of jobs and also key innovators in the Canadian economy. We believe these businesses need to grow faster. As fiscal conditions permit, we support gradually raising the small business deduction to promote growth in these companies.
3. Attract and retain the world’s most talented people
A key focus must be attracting and retaining the individuals most likely to drive innovation in the economy and improve Canada’s productivity. Accordingly, we encourage the Government to focus on enhancing the competitiveness of the personal tax regime.
Reduce personal tax rates
Attracting and retaining globally mobile and highly productive individuals depends upon many factors —not only economic drivers. Canada is a wonderful place to live and a stable environment in which to raise a family. These factors are already a powerful source of attraction to Canada. We believe, however, that more individuals would stay in Canada or move to Canada if the government were to lower personal tax rates, starting with an increase to the threshold at which the top rate of tax begins and also reducing the top rate of tax.
The suggested enhancements to the personal tax regime can be scheduled over the next five to ten years, in much the same manner as the reductions to corporate tax rates were phased in over a number of years. The benefit of the lower rate drove corporate behaviour before those reductions were complete and we believe that this same effect will apply to individual behaviour, attracting and retaining the most productive, innovative, and mobile individuals to Canada.
Increase targeted immigration – meeting Canada’s future needs
With Canada’s aging population, our country’s human capital needs should be articulated in a reasoned and practical multi-year plan aimed at increasing immigration to fill gaps in the Canadian workforce and to support a sound knowledge base.
Increased immigration to Canada by individuals who are educated, productive, and innovative will not only improve the ability of Canadian enterprises to compete globally, but will also enhance government revenues from corporate and personal taxation. A larger population of well paid, skilled individuals will contribute significantly to an increase in the overall amount of personal taxes collected, even with our recommended personal tax rate reductions.
We therefore support the development of an immigration vision with a long term perspective. In addition to increasing overall targets, we believe there is room to sharpen existing programs. For example, the federal skilled worker program should be refined to target desired immigrants – appropriate attention must be given to all sectors including the blue collar workers who build Canada’s infrastructure.
Encourage retirement savings – planning for tomorrow
The Government has recently recognized the importance of encouraging retirement savings today to avoid an economic crisis in the future. Statistics indicate that Canadians still do not save enough. Recent data indicate that almost $600 billion in RRSP contribution room remains unused — clearly, other approaches are required, as noted by Andrew W. Dunn and others before the Standing Senate Committee on Banking Trade and Commerce. A specific proposal put forward by Deloitte to the Committee is a flow-through of the tax benefit of certain forms of income (e.g., dividends paid by Canadian corporations) when withdrawn from Canadian retirement vehicles. The Final Report of the Standing Senate Committee on Banking, Trade and Commerce, Canadians Saving for their Future: A Secure Retirement, contained several good recommendations to enhance saving by Canadians. We strongly encourage the Government to introduce creative and appropriate incentives to increase saving.
Enhancing Canada’s incentives for retirement savings will further improve the attractiveness of Canada to new immigrants. Thus, we recommend that new immigrants be allowed to contribute to their RRSPs in the year that they arrive in Canada. Currently, since earned income is measured on a one year lag basis, new immigrants can only contribute to their RRSPs in the year following their arrival into Canada.
4. Enhance certainty through tax administration
Tax administration plays a key role in advancing competitive tax policy.
Sound tax policy requires efficient tax administration. Moreover, certainty in tax law is key to attracting and retaining corporate investment and global talent. The tax community as a whole — revenue authorities, taxpayers and tax advisors — all benefit from a clear understanding of the law at any point in time. In this context, we respectfully offer the following recommendations:
- Administrative red tape and filing complexities should be reduced to create a more competitive business environment
- Legislative amendments addressed in comfort letters should be enacted on a timely basis to increase the certainty of doing business in Canada
- Tax proposals with detailed explanatory notes should be introduced and advanced through the legislative process within a reasonable timeline, while keeping in mind the need for consultation in regard to any significant changes to complex legislation
- While not within the exclusive purview of the Department, we believe that the relationship between the CRA, business, and the broader tax community could be improved. We would welcome forums that allow for greater communication between the CRA, the Department of Finance, taxpayers and tax practitioners. Improving communication should enhance certainty and allow for increased efficiency in both compliance with and administration of the tax legislation.
Deloitte is committed to playing a key role in shaping Canada’s future. We trust that our policy recommendations will provide helpful guidance as you move forward with Budget 2012. We would be happy to meet with you personally or with anyone you suggest from the Ministry of Finance to discuss any of these matters further.
Deloitte & Touche LLP
Andrew W. Dunn, FCA Albert Baker, FCA
Managing Partner, Tax Tax Policy Leader
Copy to: Mr. Brian Ernewein, General Director, Tax Policy Branch, Department of Finance Canada
 Aronshtam, Natan and Joanne Hausch. “Innovation and the SR&ED Program.” 2010 Conference Report. (Canadian Tax Foundation) forthcoming.
 Statistics Canada. CANSIM table 111-0040.
 Some of the recommendations from the report, Canadians Saving for their Future: A Secure Retirement, include: encouraging multi-employer pension plans, ensuring withdrawals from RRSPs, while taxable, have no impact on eligibility for the amount of federal income-tested benefits or tax credits, allowing contributions to RRSP to be made until the age of 75, and educating all Canadians on the importance of saving for retirement.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.
Attachments: Recommendations for the 2012 federal budget
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