Report: A Primer on Tax Expenditures, Such as SR&ED (2011)

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On June 21, 2011, the Library of Parliament released a report entitled A Primer on Tax Expenditures. Two officials from the International Affairs Trade and Finance Division of the Parliamentary Information and Research Service outlined how tax is used as a policy tool in Canada. The report mentioned the Scientific Research & Experimental Development (SR&ED) tax credit, with the main focus being on how tax expenditures as a whole affect taxpayer behaviour as well as public policy in Canada.

How Tax Expenses Affect Taxpayers

According to the report, taxes are not only a source of revenue for the government but also a vehicle by which the government can implement public policy. Exemptions, deductions, rebates, and the like generally have a cost to the government because they reduce the amount of revenue coming into Federal coffers. These tax credits have led to criticisms that such exemptions are not an effective way to administer benefits to taxpayers, the report said. The report explained that there are two criticisms that are often levied as a response to tax expenses:

  • Taxpayers may change their behaviour because of a tax credit. Giving to charity, for example, would likely be reduced if taxpayers did not get a tax credit for doing so.
  • Figuring out which taxpayers are eligible for tax credits is a potential “value judgement”. One example is the salary amount that falls under the lowest eligible tax bracket. Some countries may see this as fundamental tax policy, while others would consider this as an expense.

How this Policymaking Relates to SR&ED

The SR&ED tax credit falls under the category of corporate taxes. The administration of corporate taxes, the report said, can support mandates such as helping small businesses get established, giving incentives for businesses to make investments, and encouraging companies to contribute to charity. SR&ED specifically, though, is supposed to encourage companies to do research and development in Canada, the report stated. It’s the largest tax benefit that the government provides, which is likely evidence of its importance in Federal eyes, according to the report. “The economic benefits of SR&ED activities are not limited to the private interests of the firms undertaking the research, since the economy also benefits from technological advances, resulting in productivity growth,” the report stated. SR&ED, the report added, is “available to all Canadian corporations, proprietorships, partnerships, and trusts.” This article is based upon a Library of Parliament report: A Primer on Tax Expenditures.

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