BY LYNDA LEONARD
Getting the Tax Regime Right
If you work in an ICT company, chances are pretty good that you measure the impact of your work quarterly. The whole climate in your company may change with the prevailing forces that deliver your quarterly reports.
In an advocacy organization, however, our report card comes primarily when the Finance Minister rises in the House to deliver a Budget. Public policy may take many forms – the creation of new programs, elimination of old ones, new tax measures or adjustments to existing ones. But the Budget is where the allocations are made to do the work or incent the behaviour that Government deems important. So at ITAC, we tend to set our clock by Federal and Provincial Government Budget cycles. The content of a budget, the measures it introduces and sometimes even the language it uses gives a light of clarity regarding government intentions. It also tells us how well the messages that we communicate to government officials throughout the year are understood and accepted.
We are expecting that Finance Minister Jim Flaherty will present a Budget in the House of Commons sometime next month. We thought it would be timely then to focus on some of the behind the scenes work that goes on at ITAC, primarily through its Tax and Finance Committee, to define the issues that we wish to address and build our case for change. This year we are told that the Budget will likely reflect the conclusions of the process the Government undertook to review the policy framework and administration of the Scientific Research and Experimental Development program, which is the largest and most important program for the encouragement of R&D investment. So we’ll be watching with particular interest, and as usual, issue a special edition of this newsletter to give our members a quick report.
Meanwhile our work goes on at the provincial level on issues such as the sales tax problem that Audrey Diamant has outlined, which affects a number of Ontario-based software developers.Why Tax Policy Matters
By Karen Wensley
Most people who are not tax nerds rank a discussion of tax policy somewhere below a conversation about the value of eating green vegetables. But tax policy can have a very significant impact on how businesses make decisions, which in turn can impact the success of that company and the prosperity of the Canadian economy. An example of bad tax policy is the capital tax which imposes higher taxes on companies that make capital investments in technology and equipment. An example of good tax policy is the R&D tax credit, which provides tax relief to companies that invest in R&D in Canada. Tax policy must be kept up-to-date; for example, the speed with which companies can depreciate software and ICT equipment for tax purposes has had to keep pace as the rate of change has meant that companies upgrade more frequently. ITAC’s Tax and Finance Committee has lobbied successfully for the elimination of capital taxes, for changes to the depreciation rates of ICT equipment, and many other more technical changes. We are now working on making the R&D tax credit more widely available to more companies and we’re keen to see changes in the personal income tax structure. You don’t have to be a tax nerd to join us. Some of us are actually quite interesting and you’ll soon discover that the work we do pays off in the bottom lines of ICT companies. If you’re interested in participating, please contact Donna White email@example.com.
Intuit Canada is a leading developer of a variety of electronic solutions for finance management for the home and small business market. Intuit has a special interest in taxation. Its product, QuickTax, is a best selling personal tax filing software. Intuit also employs hundreds of Canadians, including a large group of software developers in Edmonton. Tax issues matter to Intuit which is why Jeremy Depow, Intuit’s Manager of Government Relations, participates in the Tax and Finance Committee.
You’ve been a member of ITAC’s Tax and Finance Forum for the past two years, what are some of the issues the group is currently working through?
We prepare pre-budget submissions and presentations for staff at Finance Canada.
We just completed the feedback to the Federal Government on the consultations around the scientific research and development tax credit (SR&ED).
Not too long ago we met with Finance Canada about SR&ED and personal income tax which is an important issue for the industry and its challenge to attract and retain highly skilled workers. We face a very tough labour market in Alberta with a booming energy sector drawing so much talent. Personal income tax reform would help companies like ours ensure that the employee that we do attract keep more of what they earn.
What has the Government response been like?
There were a number of tax cuts that the Federal Government announced before the Christmas break — a bit of a gift for Canadians but still not quite what we need.
We continue to encourage the Federal Government to look at the top tier income tax level as a way to encourage folks to get into our sector or to stay here (Canada.)
We as an industry need to be competitive so if someone has a choice between Texas and Quebec, where in Texas there isn’t any income tax, you can see that it’s a strong influencer on someone making a decision.
What is the mandate for this year, where do you see opportunities?
We’ve agreed at the board level to focus on important items such as SR&ED and income tax. In terms of next steps, it is important to reflect on what priorities have been set in the past and how we have moved the bar along.
In April 2006 the Ontario Government released the revamped PST guide “Computer Programs and Related Services” (No. 650) triggering industry concern that the rules’ complexity had increased yet again. Two areas of special concern were IT service exemptions and custom software definitions. (See Canadian Tax Highlights, July 2006.) Nearly two years of audit experience under the new guide appears to indicate that industry concerns were well-founded. In the past, the Ministry of Finance has worked with taxpayers to acknowledge and accommodate unique characteristics of different industries and products to arrive at a reasonable solution for Provincial Sales Tax application.
The guide’s new conditions for exemption eligibility focus less on the service’s nature and more on whether it is provided in conjunction with taxable services. For example, the legislation expressly exempts project planning, defined to include “the analysis of specifications, determination and verification of hardware and software prerequisites, scheduling, the preparation of reports, reviewing documentation and discussions of any kind.” The guide suggests such services are taxable if they must be performed to supply a taxable service, and if planning services are provided throughout the project, only those provided at the initial stages can be exempt.
The guide is not clear, but it seems to say that the project planning phases that are typical of a contract for the configuration and installation of taxable software are no longer exempt, or are exempt only at the project’s outset. This seems to run counter to the legislation and the Ministry of Finance’s previous interpretations and also ignores the fact that planning for a larger implementation project may be ongoing, as initial plans are fine-tuned to conform to evolving customer requirements or unanticipated setbacks.
The codification of areas of exemption was presumably intended to introduce some certainty and simplicity in an otherwise complex tax regime. Many IT service providers had painstakingly developed tax matrices based on the legislated areas of exemption and taxability; they are now left wondering whether they may be liable for taxes that the new interpretation indicates should have been collected. Their customers, already overburdened with high taxes on their IT spending, may not have paid or self-assessed enough tax according to the ministry.
Whether software is truly custom is also developing into a troublesome audit issue. A custom computer program is designed and developed solely to meet the specific requirements of one person and is intended for their exclusive use. The Ministry of Finance says that software is custom only if all rights to it are transferred to the purchaser; otherwise the software is a taxable computer program. In practice, software can be created for one user and incorporate the latest innovations, but may still include some subroutines and strands of code to which the programmer either cannot or will not cede control. Reusable elements may include a code for standard security routines that do not reflect or compromise the true and unique nature of the program, but for convenience are reusable. A programmer should be allowed to reuse such a code without jeopardizing the custom nature of the software: the fact that marble is commonly used in building construction does not compromise the uniqueness of the Taj Mahal.
ITAC Submission on Consultation Paper – “Sharpening Canada’s Competitive Edge"
Canadian Reception @ The Healthcare Information and Management Systems Society 2008
2008 CWC Annual Awards Gala
SMC Best Practice Forum - SR&ED Tax Credits: Maximize Their Value
How Effective is Corporate Governance in Canada?
2008 Crystal Ball Conference
To submit articles/news items/comments or to subscribe/unsubscribe please send an email to Jason Grosse at firstname.lastname@example.org.