Honda Canada Inc. submission to the. Research and Development Review Expert Panel. Review of Federal Support to Research and Development

Transcription

1 Honda Canada Inc. submission to the Research and Development Review Expert Panel on Review of Federal Support to Research and Development February 17, 2011

2 Executive summary: As one of the largest automotive manufacturer in Canada, Honda Canada Inc. operate 13 facilities and service 232 Honda and 48 Acura dealers coast-to-coast in Canada. Honda employs more than 5,000 Honda Canada Associates and provides employment to more than 21,000 Canadians through manufacturing, sales offices and dealerships across the country. Our success is built on planning for the long term and on our successful investments in the Canadian automotive market. As a large contributor to the Canadian economy and its innovation agenda, Honda Canada Inc. recognize the importance of ensuring that federal programs aimed at promoting R&D create and harbor an innovative community in Canada. While a number of programs exist for that purpose, particularly the Scientific Research and Experimental Development Program, there are certain deterrents and heavy administrative burden that are preventing such programs from generating the level of innovation that is comparable to or exceeding other developed countries. Also, other aspects of business activities related to the commercialization of R&D such as business-university or business-college partnerships as well as linkages with provincial business and commercially-oriented R&D programs should be improved to provide companies with easier access to the full range of interrelated programs and incentives. INTRODUCTION: In 2011, Honda will celebrate its 42nd year of operations in Canada. With 3 manufacturing plants based in Alliston, Ontario, including an engine plant which started operation in 2008, Honda s investment exceeds $2.6 billion in Canadian operations and close to $1.4 billion in goods sourced yearly from Canadian suppliers. Honda recently increased its economic contribution to Canada with the opening of a new Honda Canada head office in Markham, Ontario. In addition, sales, distribution and technical training complexes are located in Dartmouth, Nova Scotia; Boucherville, Quebec; Richmond, British Columbia; Calgary, Alberta; and Markham, Ontario. Also research and development is conducted in Dartmouth, Markham and Thompson, Manitoba. In addition to manufacturing and selling vehicles, Honda Canada also sells and services its own brand of motorcycles and power and marine equipment through a nation-wide dealership network made up of over 275 dealers. As such, Honda Canada employs more than 5,000 Honda Canada Associates and provides employment to more than 21,000 Canadians through manufacturing, sales offices and dealerships across the country, generating $12.5 billion in annual sales.

3 With such a large employment base, Honda Canada is keen in working closely with the Federal and provincial governments in ensuring that programs aimed at furthering Canada s innovation agenda are properly used to ensure that Canada continues to be a leading innovator in industrialized countries. Having a stable financial environment and being able to fully benefit from existing federal tax and program spending measures are important business fundamentals that ensure that companies, like Honda Canada, continue to prosper for the benefit of all Canadians. Issues: 1- SCIENTIFIC RESEARCH & EXPERIMENTAL DEVELOPMENT PROGRAM (SR&ED) Public Communication: The CRA is heading in the right direction with the guidance that it has issued to try to address certain industry specific topics. However, it would be prudent for the CRA to continue this practice or rather expand its practice to other industries and sectors and provide guidance about the typical activities that would qualify in those industries/sectors. The material or documentation should also be current and so, at a minimum, be updated on an annual basis. For example, since the program has been in place for a number of years, the accumulated data and knowledge that auditors obtained from the automotive industry during their audits should be published to outline the typical activities that would qualify from an automotive perspective. Further, the material should also encompass the typical evidential support that is required to substantiate the claim upon an audit. If this guidance is provided, the potential user of the program would be able to integrate the R&D mentality into its business rather than having R&D and the SR&ED program come as a second thought. Additionally, the government should be forthright and proactive when promoting the program. Often times it is an outside service provider who would be bringing this program to the minds of the potential user. Increasing the level of awareness of the program is also essential in order to help achieve a higher level of innovation in Canada. The panel should also think about efficient and effective means of disseminating this information to potential business users. For example, an insert can be attached to a corporation s notice of assessment for ease of distribution. Administration : Lack of Consistency There is a lack of consistency at the administration level of the program. It is often the case that different auditors would have very different views about whether the same or similar activity or cost is eligible for the program. Consistent application of the program across all users will assist the government in achieving a fair result from one user to another and promotes engagement between the user/taxpayer and the auditor. Users of the program often feel that the success rate of an SR&ED claim is like a lottery and is very subjective.

4 Further, the guidance that is provided in a previous audit of a company should be subsequently followed by auditors of future audits of the same company, thereby providing the company with some assurances that the methodologies and processes which were employed by the company will meet the eligibility criteria. This also reduces the efforts and financial resources which are incurred by the company to meet the eligibility and documentation requirements. Negative Auditor Attitude It often is the case that the attitude of the auditors under this program is quite controversial and confrontational. It should be noted that the program is a voluntary program designed to promote the innovative nature of the company. When auditors display such negative behavior, the company will most likely not submit a future claim due to the experience that the company had in previous claims. This could translate into a loss of innovation since the company may or may not have the financial resources to further its R&D efforts. High Administration Costs In most circumstances, companies use outside service providers to compile their SR&ED claim since the rules surrounding the eligibility of activities is usually not known or well understood by the people involved in the company. This generates the first level of costs associated with an SR&ED claim but is usually the more cost effective level. The second level of costs and the most expensive component is the support of the audit process. The auditors often ask for information in a standardized format or information that the responsible person may not have at its finger tips. Time and substantial amounts of financial resources are usually deployed in order to gather the data and transform that data into a format that is required by the auditor. To help alleviate this concern, the auditors should be specifically assigned to certain companies to promote auditor consistency and therefore, information requirement consistency. This also provides the company with a more consistent understanding of what they need in order to prepare for an audit, thus reducing the amount of time and effort that an auditor will need to spend to audit the claim. Substance over Form Auditors need to recognize that every company may use very different wording and acronyms to explain the same or similar activity. Judging whether an activity is eligible based on wording alone should not be employed and auditors should be open minded to learn about the activities which a company is describing in their claim. This would also help reduce the onerous and expensive fees which companies usually have to pay in order to get an SR&ED claim prepared and filed. Time Delays between Filing and Receipt of Funding There may be significant time delays between the time the company files its claim and the time when the company is in receipt of its R&D funding. This potentially significant time delay could be a deterrent to a company who wishes to participate in the program since the timing of the funding may be critical to the continuation of its R&D projects or the employees of the company

5 who may have been able to answer an auditor s questions may not be employed by the company anymore. Therefore, there is a significant risk that the claim may be rejected by an auditor. The CRA should improve their audit process and remove redundancy so that the auditor is able to finalize his/her audit within 6 months of the company filing its claim. Although the CRA could release the R&D funding to the company ahead of the completion of the audit, this could also put the company into a compromising position since there is still the possibility that the claim would be rejected and the company would have to return all the funding with interest. The interest costs could be significant to the company. Issue Resolution Needs to be Faster When issues are raised on audit, the company representative and the auditor should work diligently to resolve any issues in a timely manner. Often the case, the auditor would sit on an issue for months at a time, thereby, delaying the closure of the audit. Priority should be provided to resolving these manners through open discussion between the responsible person at the company and the auditor in an objective manner. Reasonable Allocation Methodologies should be allowed to allocate certain costs In certain circumstances, the auditor should realize that in order to implement systems to track materials and other costs may be a significant outlay to the company or could pose a significant disruption to the business. Therefore, the CRA should provide consideration in terms of allocation factors that could be reasonable and acceptable to both parties. The CRA should outline and publish acceptable allocation factors that are reasonable in various circumstances in order to help streamline the audit process. 2- BUSINESS ACTIVITIES RELATED TO THE COMMERCIALIZATION OF R&D While the SR&ED program is the major program used by Honda Canada Inc. with respect to its R&D activities, there are a number of other federal and provincial programs that could be better integrated into the existing innovation agenda to help other business activities related to the commercialization of R&D. Specifically, Honda Canada Inc. would like to see a flexible funding program that will assist in enhancing its internal and external competitiveness through programs that would promote productivity increases such as investments in technological equipment and processes. Internally, a number of factors, including programs that would provide Honda with this competitive advantage, are considered in determining where, on a global scale, to expand its operations or to remain in its current jurisdictions. The plants operated by Honda Canada Inc., for example, not only compete against other automotive manufacturers but also internally against other Honda plants in order to continue to manufacture automobiles in Canada and to receive new models. Therefore, a program to assist Honda Canada Inc. in demonstrating its value in Canada is very important.

6 Business-university or business-college partnerships Although Honda Canada Inc. is in its infancy and exploratory phase of possible partnerships with universities or colleges, it has found that the universities/colleges are very aware of two key areas when it comes to these types of partnerships: confidentiality and intellectual property ownerships. Certain universities have gone as far as offering to setup a segregated, secured premise for future research work to be performed in confidence. This provides confidence to Honda that possible future joint partnerships are handled with the utmost care. On the other hand, Honda was surprised to discover that the approval process for these types of partnerships take a substantial amount of time (i.e., from 6 months to 9 months). This may be an impediment to these partnerships. Graduate skills: The diversity of educational institutions and graduates across Canada appear to be sufficient and relevant to the automotive industry. Specifically, educational institutions which provide practical experience, such as co-operative education programs or internship programs, as a complementary addition to the graduate s theoretical experience is very valuable to Honda. This combination of learning provides for more well rounded graduates who are able to tackle the constantly changing automotive environment. Co-op and intern students: Honda employs students from a variety of universities and colleges both through the cooperative education programs and internship programs for various areas including summer relief, engineering, maintenance and ergonomics support and have found these programs to be very valuable in our operations. Honda has also been actively involved with Georgian College in developing curriculum for IT related programs and would welcome the opportunity to work with other educational institutions. It provides a forum for Honda to interact with future or potential talent and provides a constant stream of talent to maintain a high standard in the automotive industry. Alignment between federal and provincial programs: Overall, the R&D and related programs to promote innovation in Canada generally do not reach the average potential user and the government will need to provide more focus in making these programs visible to the potential user. Perhaps, the government should provide a comprehensive and common portal for potential users to find information on these programs rather than having the potential user search in numerous locations through the internet to discover what possible programs are currently in place. Additionally, a change in the mentality of the administrators of the program will go a long way to promoting a healthy and innovative nation. If we all think of these programs as a partnership between the government and the industry, the intentions of these programs will be realized and Canadians will benefit.