Budget announces 24-month suspension of R&D Super Allowance

The federal and Ontario governments have called an apparent truce in their festering dispute over the handling of the province’s Super Allowance when calculating federal R&D assistance. As announced in the May 9 Budget, the province will suspend its use of the Super Allowance for 24 months and allow corporations to exclude their scientific research and experimental development (SR&ED) tax credit from Ontario taxable income. In return, the federal government has agreed not to consider the exclusion of the federal investment tax credit as government assistance and therefore taxable.

“That was the key. It’s that interpretation by the federal government that makes this change by Ontario a valuable change,” says a senior Ministry of Finance official. “This is a fairly benign but complicated move and it puts companies in Ontario back to where they were before the last federal Budget (February/00).”

The suspension of the Super Allowance will give provincial Ministry of Finance officials additional time to lobby their federal counterparts and to conduct a review of all tax incentives including those pertaining to R&D expenditures. The review was announced in Section ‘C’ of the Budget papers “to determine if they are still necessary and effective in an environment of significantly reduced tax rates and lower tax burdens.”

In the coming months, finance staff from both levels of government will hold further meetings that the provincial official says are intended to convince the federal government to change its policy with regard to the Super Allowance. “We want the feds to revisit their policy and redesign it so it won’t target just the Super Allowance,” he says. “We feel it should only be a deduction in excess of gross expenditures.”

The impasse over the federal treatment of the Super Allowance was triggered in 1999 when the Quebec government introduced an R&D deduction of their own, except that it was much more generous and inflamed federal officials, triggering a policy change in how Ottawa treated provincial deductions tied to SR&ED. While the Quebec government quietly withdrew its deduction several months later, the punitive treatment of the Ontario Super Allowance continued, resulting in intense lobbying by the Information Technology Association of Canada (ITAC), its Ontario branch and the CATA Alliance.

Karen Wensley, a tax partner with Ernst & Young and co-chair of the ITAC tax and finance committee, says the Super Allowance was originally introduced in 1988 to offset the provincial taxation of the federal tax credit. The federal government took no action against the Super Allowance until Quebec introduced its measure, which represented a much more significant draw on the federal treasury.

“Quebec got too greedy and there was no way the feds were was going to back down,” she says. “Industry said to the Ontario government, ‘Don’t tax the federal credit’, and that’s what they did with this Budget. But they’re not happy about it.”

Most provincial R&D performers will likely benefit from the suspension of the Super Allowance, but many are waiting to see the draft legislation of the change and work through the technicalities. Had the federal claw back of the Super Allowance been allowed to proceed, the value of the deduction would have been reduced by 50%, costing performers many millions of dollars.

“The Ontario government is showing some statesmanship with this,” says Bob Crow, ITAC’s VP policy, adding that his association is generally pleased with the Budget. One notable exception is the government’s decision to retain the high-income surtax, although industry has vigorously lobbied for its removal.

“We’re very disappointed. It’s almost beyond belief,” says Crow. “These high-income earners are our most valuable and mobile asset.”

R$