by G. Bruce Doern, School of Public Administration, Carleton University, under contract to Industry Canada, April 1995
Summary
This paper assesses the institutional evolution of the federal Scientific Research and Experimental Development (SR&ED) tax credit. The analysis is based on published reports and literature as well as on several interviews conducted by the author with officials and experts involved in government and business in the forging and implementation of the SR&ED. The interviews were carried out with the understanding that the persons interviewed would not be quoted. The co-operation of these individuals is greatly appreciated as are the constructive comments of several officials and an anonymous reviewer. It also develops an institutional frame for examining alternative governmental portfolios for the location and operation of research and development tax incentives.
Established in 1986, the SR&ED scheme currently delivers about $1 billion annually in tax credits. The SR&ED arose in part out of difficulties experienced with the earlier Scientific Research Tax Credit (SRTC) which had been based on a flow-through mechanism for research and development expenditures (Lalonde, 1992; Doern, 1987). As Appendix I shows, the SR&ED is also the product of a long history of investment tax incentives and direct research and development grant programs (McQuillan and Goldsmith, 1976; Bernstein, 1986).
In the May 1985 Budget, the federal government extended the refundable system of investment tax credits begun in 1983. The SR&ED program also clarified in the definition of eligible scientific research and experimental development expenditures. Under the SR&ED scheme, full refundability was provided to Canadian-controlled private corporations with taxable income of less than $200 000 on the credits earned on the first $2 million of qualifying current expenses. Credits earned by other categories of firms were only partially refundable. Further changes were made to the program and to its administration as examined below, including the loss of the partial refundability component.
This paper seeks to provide a clear understanding of how institutional variables affect the design of the original policy, its overall implementation and the level of compliance. An explicitly academic or theoretical focus has been de-emphasized in the sense that the study does not review the extensive literature that exists in political science and public administration on the nature of political-institutional analysis. See J.G. March and J.P. Olsen, Rediscovering Institutions (New York: Free Press, 1989) and G. Bruce Doern, "The Evolution of Policy Studies as Art, Craft and Science" in L. Dobuzinskis, M. Howlett and D. Laycock, eds. Policy Studies in Canada: The State of the Art (Toronto: University of Toronto Press). Instead, it focuses (for an audience of research and development, and industrial policy specialists) on issues of potential organizational and institutional restructuring within which more cost-effective delivery and compliance might occur, including alternative dispute resolution (ADR) measures.
Institutional restructuring refers to an examination of the advantages and disadvantages of having the primary organizational location of the program changed from a tax collecting portfolio where it is now located, to other portfolios. These other portfolios could include fiscal or micro-economic, and research and development ministries or, as in Australia, an independent board. Alternative dispute resolution measures refer to other ombudsman-like, mediation or related measures which might be added to the administrative process either in addition to, or in lieu of, existing appeal and redress rights.
The institutional focus of the paper is intended to complement existing literature on the economic and legal aspects of tax policy and implementation. It is only through such a focus that a more complete picture of the political economy and institutional aspects of tax incentives can be obtained. Thus, the paper examines the policy mandates of, organizational cultures in and relationships among: Revenue Canada, the Department of Finance, Industry Canada and other relevant institutions and players such as the courts, research and development interest groups, key companies and the accounting and legal professions.
The interplay among these institutions is examined through:
- the policy process that created the SR&ED incentive in 1986 and amended it in 1992;
- the ongoing or normal decision process for handling applications for the incentive; and
- the processes and dynamics for handling redress, appeals and actual or potential non-compliance (Law Reform Commission, 1986).
The first section presents a basic institutional framework for analyzing research and development tax incentives. The second section profiles the key federal institutional players focusing on the policies inherent in their mandate areas, and on the general values and incentive systems each brings to the policy and decision process. The third section examines the policy processes that resulted in the development of the SR&ED incentive in 1986, its amendment in 1992 and its ongoing quasi-policy-making processes established through the development of guidelines and circulars. The key substantive issues in the incentive program emerge from these political dynamics.
The fourth part of the paper zeroes in on the normal administrative process, focusing on processes for reviewing applications by both the scientific staff and financial auditors at Revenue Canada. It also deals with the role of other departments in influencing the design of these processes. This is followed, in the fifth section, by an examination of the appeals and redress process, both formal and informal.
Comparative issues and criteria for possible institutional change and the use of the Alternative Dispute Resolution mechanisms are then examined in the final section. Comparative analysis is related to:
- the Australian model of an independent board and the related potential for different organizational locales in Canada such as having the program based in a fiscal ministerial portfolio or a micro-economic research and development ministerial portfolio;
- other realms of Canadian micro-economic or business policy implementation; and
- other taxpayers in Canada.
The actual or potential types of Alternative Dispute Resolution mechanisms are also profiled briefly. The final conclusions of the paper focus on how the overall interplay of institutions affects the SR&ED program and sets limits on future reform options.