How does the Canadian R&D tax regime compare?
R&D Tax Update, October 11, 2011 (11-5)
Canada’s Scientific Research & Experimental Development (SR&ED) program has long been considered one of the world’s most generous, currently ranking third among Organisation for Economic Co-operation & Development (OECD) countries — after France and Ireland. However, the global competition for research & development (R&D) investments is intensifying. In fact, in 1996, only 12 OECD countries had R&D tax incentives; today, more than 30 countries offer them. In addition, several countries are contemplating the introduction of an R&D tax regime and others are currently reviewing and upgrading the incentives that they offer. At home, the Review of Federal Support to Research and Development (commonly called the Jenkins committee) will release its final report on October 17, 2011. Deloitte will provide analysis and commentary of the report soon after.
With this rapidly changing environment, Deloitte’s recent Global Survey of R&D Tax Incentives offers a summary and comparison of the R&D tax incentives provided in 27 countries conducive to business R&D. The survey highlights that R&D incentives vary by country with regard to computational mechanics, the levels of benefits available, and the certainty of realizing an economic benefit from the tax incentive.
Although the basic definition of R&D is similar across many countries, many distinctions in the details of each program exist. Some countries offer very generous incentives, subject to some limitations on the location of the qualified research activity, funding of R&D, ownership of intellectual property (IP), etc. But other countries offer basic incentives with important restrictions, including eligible industries, qualified costs, and application procedures. Most research incentives are incremental in nature, designed to encourage companies to maintain a certain level of R&D, with additional incentives for increased research spending. Many regimes offer incentives for operational costs such as wages, supplies, and contractor fees, while only a few offer tax benefits for capital investments in R&D. Furthermore, start-up companies are offered enhanced tax incentives in many countries.
Thus, how does Canada’s regime compare? Some of the key differences between Canada’s SR&ED tax regime and programs in other countries are highlighted below (the survey contains more detail).
In Canada, along with Australia and the UK, tax credits for qualifying small or medium companies are completely refundable. France, Ireland, and Austria offer some degree of refundability regardless of the size of the company — allowing unused tax credits to be converted to cash, sometimes after a delay, or subject to a cap. In Belgium, unused deductions are refundable after five years. Singapore offers an option to convert a limited amount of tax deductions into a non-taxable cash grant.
Although not required in Canada, many countries have specific rules on whether the IP must be retained in the country. For Australia, Belgium, China, Germany, Japan, and Turkey, any associated IP must generally be retained within the country to qualify for tax benefits. The UK has a similar restriction, but only for small-medium enterprises. Although a factor in the governmental pre-approval process, the location of the IP is not legally required in Israel, Malaysia, Mexico, and Russia. In South Africa, the IP must be created in South Africa but it can be held elsewhere.
Location of R&D
Claimed work must usually be performed within the funding country. Canada, along with Australia and New Zealand, allows up to 10% of related work performed outside the country to be claimed. China has a limit of 40%. A number of countries place no restriction on location: Belgium, Italy, Korea, Spain, Japan, Portugal, and the UK. For European Union (EU) countries, work performed anywhere within the EU is typically claimable.
Canada offers pre-claim advice on eligibility. In other countries, some form of pre-approval is required, especially in China, India, Malaysia, and the Czech Republic. In France, claimants may seek an advance ruling from the ministry.
Taking advantage of opportunities
Because of these and other differences, projects or parts of projects that do not qualify for support in Canada may qualify in another country, enabling companies doing R&D in several jurisdictions to optimize their use of incentives. Learn more about the distinctions between Canada’s regime and those of other countries in our Global Survey of R&D Tax Incentives. Deloitte’s global R&D and Government Incentives group is available to discuss the related opportunities and to define options available to ensure your incentives are maximized.
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.