July 2012

1. Budget 2012’s impact on innovation investment ITAC(based on survey conducted between June 13, 2012 – July 3, 2012) July 2012

2. Introduction • The Canadian government proposed in its 2012 federal budget to shift some of the support from the Scientific Research & Experimental Development (SR&ED) tax credit program to direct support mainly through targeted grant programs, such as the Industrial Research Assistance Program (IRAP). • To capture the private sector’s perspective related to the budget changes, Deloitte, in cooperation with several industry associations, conducted an online survey in of companies from across Canada, with a particular focus on innovation investment. • The following slides are the results of the survey with comments from ITAC members. Budget 2012’s impact on innovation investment ITAC

3. 1. Do you believe that the federal 2012 budget will impact your annual SR&ED tax credit amounts going forward? n=25 Budget 2012’s impact on innovation investment ITAC

4. Comments from ITAC respondents • It will negatively impact the amount of money available from this source. • The new Budget is really penalizing large multinational R&D subsidiaries, it makes those less competitive compared to their internal competitors around the world...It also does not promote capital investment which is, most of the time, a main driver of employment in Canada. • Program is of little or no use to start-ups. • This budget greatly affects the multinationals at the R&D level where as the SMEs that already benefit of more rates that are advantageous, don’t incur any impact. It would not be a surprise to see some of the affected multinationals put transfer their R&D activities to countries where the rates are more advantageous. The multinationals are present in many countries and have many options. If we lose the R&D, it then becomes impossible to obtain the first steps of fabrication. • We have already started the migration of some R&D activity outside of Canada as a result. Budget 2012’s impact on innovation investment ITAC

5. 2. If your answer in question 1 was Yes; what do you estimate your reduction in SR&ED incentives will be for your company once measures are fully implemented? • Of the 80.0% who indicated a ‘yes”, the majority of companies (87.0%) are estimating that there will be a reduction in SR&ED incentives up to 50%. • Some of the impact is a result of cessation of Canadian based activity. n=23 Budget 2012’s impact on innovation investment ITAC

6. 3. In general, do you consider that the direct funding (i.e. grants) announced in the budget will compensate the reduction in tax credit amounts when fully implemented? n=24 Budget 2012’s impact on innovation investment ITAC

7. Comments from ITAC respondents • No certainty that direct funding will be available or targeted at a particular industry, making longer term planning difficult. • Access to IRAP has been constricted at the point of application. We believe the IRAP program is over-subscribed or accessible only via consultants. • Direct funding method places the decision for what technology to invest in the hands of the federal government and not the private sector. • It is fully expected that the new direct funding program will be directed to small and medium business only. • It is clear that the Jenkins mandate was to make a difference with the same budget. The choice was to cut the large companies without cutting the small ones... it is clear that the large companies will come out of this the losers. • Grants are expected to be more difficult to access and the uncertainty in their receipt make them difficult to 'count on' in a budget cycle. Budget 2012’s impact on innovation investment ITAC

8. 4. If your answer to question 3 is Yes, do you consider direct funding as effective as indirect tax-based funding in stimulating R&D investment in Canada? n=8 Budget 2012’s impact on innovation investment ITAC

9. Comments from ITAC respondents • Direct funding is what it says, directed to certain industries. Not all. So it is not a level playing field. • SR&ED makes jobs for accountants and bureaucrats - adds no value. • The federal research institutions are not close enough to the industries. The program will not be able to be administered effectively. • If administered with clear rules and multi-year certainty required to make mid to long-term investments. This is not currently the case. Budget 2012’s impact on innovation investment ITAC

10. 5. Overall, what is your perspective on Canada’s global attractiveness (global position) in respect of R&D incentives after the proposed changes in Budget 2012? n=24 Budget 2012’s impact on innovation investment ITAC

11. Comments from ITAC respondents • Hard to say without more information and experience on the replacement money. • What we need is consistency from the Feds and the provinces - Quebec figured it out. Budget 2012’s impact on innovation investment ITAC

12. Comments from ITAC respondents to: You indicated that Canada will be less globally attractive, please explain why? • Companies will factor in known incentives, not bank on potential grants. • Tougher to do business. • Less acquisitions and a reduced incentive to do R&D in Canada going forward. • Higher cost of resources will lead to enterprises moving innovation activities into lower cost regions. Also the direct funding method increases the level of infrastructure needed at the company level to apply for the funding programs. • Cost of compliance is currently rising against a smaller credit...CRA's administration of this credit was already making it unattractive before the reductions. • The program in general is providing less incentives than before for our industry. • Decrease in SR&ED increases marginal tax rates of companies. Canada’s advantage via lower corporate taxes is being offset by the reduction in SR&ED. • Due to reduction in direct funding for SR&ED, Canada will be less globally attractive for companies to invest in. • Less focus on SME R&D. • The changes to the SR&ED program are detrimental to our ability to continue to do R&D in Canada. • Outside companies that have a company in Canada use it for the RD incentive because it is more favourable than their country - this gap now gets closer so there is less incentive. If this happens then some of the R&D jobs could disappear in Canada and go elsewhere. So less employment and less taxes being paid in Canada. Budget 2012’s impact on innovation investment ITAC

13. Comments from ITAC respondents to: You indicated that Canada will be less globally attractive, please explain why? • Less R&D incentives offered to multinationals. • Less money will be spent if less is available for SRED refund. • No R&D ITCs. • Other countries are offering more attractive incentives while Canada's are become more difficult to access reliably and less on total value. • The R&D tax credit system here is more onerous and less valuable than other countries. Budget 2012’s impact on innovation investment ITAC

14. 6. Are you aware of other measures in the budget which will impact positively or negatively your tax/economic position in Canada? n=23 Budget 2012’s impact on innovation investment ITAC

15. 7. What is your company's R&D expenditure ($) over the last year (2011)? • 44% of the companies are in excess of $10 Million. In fact one company indicating it was $1.3 Billion. n=18 Budget 2012’s impact on innovation investment ITAC