A Future Friendly Innovation Strategy

Submission to the Expert Panel Review of Federal Support to Research and Development

February 18, 2011

i

Executive Summary

TELUS Corporation (“TELUS”), a leading national telecommunications company in Canada with 12.3 million customer connections, provides a wide range of communications products and services including data, Internet protocol, voice, entertainment and video. TELUS pursues an active research and development program in order to meet the market demand for faster and more comprehensive telecommunications services. These efforts propelled us to fourth place among Canada’s top R&D spenders, as reported by Research Infosource Inc. in October 2010.1

TELUS applauds the Government for launching this study and the company is pleased to make the following recommendations to the expert Panel:

• recognizing the multiplier effect of the broadband investments that enhance the Canadian digital network infrastructure on which other innovators and Canadian businesses depend, we urge the Panel to propose policies that continue to encourage that investment;

• government policies and industrial strategies increasingly need to focus attention and research dollars on uncovering and supporting the drivers of ICT adoption;

• because adoption of health IT solutions represents a material opportunity for Canada to lead in an area that would have material benefits for improving the efficiency and quality of health care outcomes, adoption of health IT solutions should be a major focus area;

• because the path from R&D to productivity requires commercialization to bring it out of the lab, strategic innovation to drive change that adds value and an adoption focus on how fast and wide the innovation is deployed, a national R&D strategy must take full account of all factors;

• because substantial opportunities for innovation exist in relation to processes, a national R&D strategy must recognize the importance of process innovation to productivity.

The nature of the R&D and broader capital investment ($1.7B in 2010, $2.1B in 2009) that TELUS undertakes in Canada provides a foundation for innovation with a great multiplier effect as the investment pertains to enhancing the Canadian digital network infrastructure on which other innovators and Canadian businesses depend. The benefits of broadband investment are multifold, so we urge the Panel to propose policies that continue to encourage these forms of investment. More broadly, TELUS considers that government policies and industrial strategies increasingly need to focus attention and research dollars on uncovering and supporting the drivers of ICT adoption. This is a step beyond supporting the commercialization of invention, and goes directly to supporting the adoption of existing beneficial technologies. The path from R&D to productivity requires commercialization to bring it out of the lab; strategic innovation to drive change that adds value; and an adoption focus on how fast and wide the innovation is deployed. It is insufficient for government to invest in R&D unless that investment is pursued within the context of an industrial strategy of promoting strategic innovation through commercialization and adoption of new products, services and processes. Finally, the Government of Canada should continue to promote innovation in ICT by removing regulatory barriers, avoiding asymmetric treatment of Canadian and foreign nationals, and introducing positive incentives to the use of these technologies.

1 http://www.researchinfosource.com/2010-top100-sup.pdf

iii

Contents

REVIEW OF FEDERAL SUPPORT TO RESEARCH AND DEVELOPMENT .................... 1

A National Strategy for Innovation and Productivity ..................................................................................... 3

Recommendations: .............................................................................................................................................. 5

APPENDIX A – ANSWERS TO SELECTED CONSULTATION QUESTIONS ................... 7

APPENDIX B – TELUS SUBMISSION TO 2007 SR&ED STUDY .................................... 12

APPENDIX C – TELUS INNOVATIONS ........................................................................... 20

1

Review of Federal Support to Research and Development

1200-270 Albert Street Ottawa, Ontario K1A 5G8

Dear Members of the Panel:

TELUS commends the Federal government on undertaking this review and it appreciates the opportunity to present our thoughts on how Canada can derive the greatest value from federal investments in R&D and innovation.

Of all the questions asked in the Consultation document, TELUS considers the ones on commercialization and innovation as the most important since these are the industrial activities that give rise to increased productivity. TELUS has therefore structured the majority of its submission as a response to those questions. In Appendix A we provide brief commentary on some of the other Consultation questions.

TELUS Corporation (“TELUS”) is a leading national telecommunications company in Canada, with $9.8 billion of annual revenue, 12.3 million customer connections, 7 million wireless subscribers, 3.7 million wireline network access lines, 1.2 million Internet subscribers and more than 300,000 TELUS TV customers. TELUS provides a wide range of communications products and services including data, Internet protocol, voice, entertainment and video.

TELUS pursues an active research and development program in order to meet the market demand for faster and more comprehensive telecommunications services. These efforts propelled us to fourth place among Canada’s top R&D spenders, as reported by Research Infosource Inc. in October 2010.2

The nature of the R&D and broader capital investment ($1.7B in 2010, $2.1B in 2009) that TELUS undertakes in Canada provides a foundation for innovation with a great multiplier effect as the investment pertains to enhancing the Canadian digital network infrastructure on which other innovators and Canadian businesses depend. While pure research and early stage development efforts are important, we urge the Panel to recognize and reinforce in its final report that a far greater potential for widespread innovation and a far greater potential for economy-enhancing productivity benefits comes from the act of business and public sector enterprises adopting and exploiting the benefits of digital and other technologies to enhance the efficiency and effectiveness of their own operations and processes.

This report dispels the myths that Canadian telecommunications companies are not innovation leaders and that changes to telecommunications foreign ownership rules for the sole benefit of smaller players and new entrants are needed to spur innovation in Canadian telecommunications. In fact, the report demonstrates that the combined R&D spending of the top 2 Canadian telecom services R&D spenders (TELUS and BCE) nearly exceeds the combined R&D spending of the bottom 60 of the Canadian top 100, and that the telecommunications services and equipment providers, as a group, take the top 4 and comprise 6 of the top 10 spots on the R&D leader list.

2 http://www.researchinfosource.com/2010-top100-sup.pdf

2

To use a simple but increasingly commonplace example, consider the virtuous circle enabled by telecom investments in broadband to the home. Among many, one key benefit of the network availability, when combined with other innovations like virtual networking, is the platform available to support remote network access and telecommuting. Telecommuting delivers such productivity and economy enhancing benefits as: same or greater individual output for lower capital and other inputs, reduced demand on roads, lower carbon emissions, work-life balance improvements, and so on. Serendipitously, the growth in demand for anywhere anytime connectivity provides incentives for ongoing wired and wireless network investments, thus enhancing the network platforms used in new innovative and productive processes.

The benefits of broadband investment are multifold, so we urge the Panel to propose policies that continue to encourage that investment as well as policies that support shared funding of broadband network development in markets where an economic opportunity for private sector network development does not exist. As a related theme, government policies and industrial strategies increasingly need to focus attention and research dollars on uncovering and supporting the drivers of ICT adoption. This is a step beyond supporting the commercialization of invention, and goes directly to supporting the adoption of existing beneficial technologies. A simple example may be found in the observation that even where affordable broadband service is available, broadband penetration in Canada tracks very closely to the presence of a computer in the home. Perhaps more government attention, and support, needs to be paid to the socio-economic and digital literacy issues at the core of non-adoption in order to bring more Canadians within the fold of the digital economy.

TELUS has been an industry leader in the development of new services and technologies including quantum leaps in wireless communications, data transmission, high speed internet and TELUS TV. The Company has been recognized by its peers in industry with numerous awards for technological advances related to SR&ED and other projects undertaken by TELUS. Appendix C to this submission has a partial list of technological achievements and of circumstances where our achievement was lauded by industry peers and others. Although some TELUS initiatives do benefit from SR&ED and other tax credits administered by the Canada Revenue Agency (CRA), opaque processes and a “denial-orientation” at the CRA creates sufficient uncertainty that TELUS does not take into account potential credits in developing the business case to support its planned R&D and innovation. Part of the challenge arises from complicated tests requiring demonstration of the invention or unique research nugget from efforts TELUS has undertaken with an ab initio intent to rapidly commercialize the R&D effort. A corresponding challenge arises from a shortage of sufficient technical expertise on the part of CRA to properly assess some of the more complex TELUS proposals notwithstanding the presentation by TELUS of rigorously prepared supporting materials developed to meet detailed CRA requirements by the same scarce people resource that conduct the SR&ED ,along with the support of external experts in the SR&ED process.

TELUS has made submissions in the past as to the workings of the present SR&ED system. A copy of those comments is attached as Appendix B to this submission. To those comments we would add the following. Concerns about the use of middle-men in the SR&ED credit application process are better understood as a sign of deficient standards than of a deficient process. It is the narrowness of the SR&ED objective that necessitates the use of experts to identify and explain to CRA the pure R&D nugget within beneficial, productivity-enhancing and innovative commercially-oriented activities. Broader objectives, including either or both of pure research or success-based funding of commercialization efforts, would engender simpler processes and allow for a greater proportion of Government support to go to its intended use.

3

TELUS is not only innovative on a world class basis in telecommunications, but it is also a key source of innovative products, services and practices for Canadian businesses and the public sector in the critically important field of health care. In this regard we draw the Panel’s attention to the work of the Ivey Centre for Health Innovation and Leadership3

Telecommunications, and especially wireless communications, is widely regarded as being integral to innovation and productivity. This was recognized by the OECD in its report “Innovation to Strengthen Growth and Address Global and Social Challenges”:

and the road map for adoption of health information technologies such as those provided by TELUS Health Solutions. TELUS considers that adoption of health IT solutions represents a significant opportunity for Canada to lead in an area that would have material benefits for lowering the cost and for improving the efficiency and quality of health care outcomes.

Broadband networks provide a platform for the development and diffusion of smart infrastructures (energy, health, transport, education). Governments should promote this symbiotic relationship and ensure that broadband is available throughout their territory. This will allow other sectors to leverage the infrastructure to develop other platforms, such as distance education and telemedicine, and enable the development of digital content, including local content. Such investments must be accompanied by regulatory frameworks that support open access to networks and competition in the market. Governments should foster the integration of information and communication technology (“ICT”) investments in physical infrastructure, such as buildings, roads, transport systems, health facilities and electricity grids, allowing them to be smart and thus save energy and improve safety and adaptability.

TELUS therefore submits that in addition to its innovative development and deployments of technology enhancements as a telecom service provider it also plays an important role as a facilitator of innovation and productivity for other industries. This facilitation aspect should not be overlooked in identifying who the relevant players are in Canada’s future.

A National Strategy for Innovation and Productivity There is a misconception that the Canadian ICT industry is not innovative due to a lack of competition and that Canadian ICT businesses are followers rather than leaders. This fallacy arises from relying on global statistics related to investment in R&D and comparisons to the U.S. as the sole basis for discussion without recognizing the significant impact of structural differences between the two countries, in particular the investment by the U.S. in space and defence programs.

TELUS notes that your panel uses the Oslo Manual (2005) definition for innovation. TELUS believes that “innovation” in and by itself is not the sole answer. Rather, innovation needs to be married with “strategy” to create value. Many articles have been written on strategy, but a succinct review of the strategy analysis in real life contexts is described in the article “What is Strategy” by Michael E. Porter in the November-December 1996 issue of the Harvard Business Review. (Another key reference discussing strategy is the book “Blue Ocean Strategy” authored by W. Chan Kim and Renée Mauborgne.) According to Porter, innovation occurs where a strategy is created by a set of “unique activities” that result in “sustainable competitive advantage”.

3 http://blogs.ivey.ca/ichil/

4

Strategy and innovation then are inseparable and in many circumstances need not be driven by or a result of technology advancement. For example, innovation, and specifically strategic innovation, is often about successful commercialization of existing technologies or more productive uses for existing assets, but, importantly, substantial opportunities for innovation exist in relation to processes. Dating back to the industrial age, successful businesses have looked to innovative process improvement opportunities as a key means to driving productivity benefits. TELUS submits a national R&D strategy must adopt the same logic and recognize the importance of process innovation to productivity.

Research and development for its own sake does not directly result in strategic innovation, nor does it automatically equal productivity. TELUS submits that a successful innovation and productivity strategy needs to recognize that R&D is a factor in enhancing productivity, but ultimately as a less important one than the rate of adoption of innovation. In TELUS’ formulation, the path from R&D to productivity requires commercialization to bring it out of the lab; strategic innovation to drive change that adds value; and an adoption focus on how fast and wide the innovation is deployed. As the greatest productivity multipliers down the path from R&D are value-added innovation and broad, accelerated adoption, that is where a government seeking to wring the benefits of R&D investments must focus. Put another way, it is insufficient for government to invest in R&D unless that investment is pursued within the context of an industrial strategy of promoting strategic innovation through commercialization and adoption of new products, services and processes. Such a strategy must apply as great or greater focus on creating the incentives for adoption as it does for invention and experimentation.

The Council of Canadian Academies was appointed by Industry Canada in 2007 to study the factors that influence business innovation and the Canadian business performance in respect of innovation. In 2009, the CCA delivered its report which stated as follows:

“Innovation is new or better ways of doing valued things. Innovation is not limited to products but includes improved processes like the assembly line, and new business models like web-based commerce. An “invention” is not an innovation until it has been implemented to a meaningful extent.”4

Finally, TELUS is extremely pleased the government’s Digital Economy Strategy consultation placed significant emphasis on adoption of ICTs (information and communication technologies), but disappointed that the same sponsoring department, Industry Canada, did not direct this Panel in its work to place the same emphasis on adoption. Indeed, while the Panel’s consultation document contemplates commercialization, its sole references (2 in total) to adoption are encouragements that business should adopt innovation as a competitive strategy. TELUS submits that the Canadian economy and Canadian productivity levels would be better served by strategies incenting the adoption by businesses of existing and new innovations than still more and varied encouragements to innovate.

Of the myriad programs, 44 of which were listed in Appendix 2 of this Panel’s consultation paper, adoption of strategic innovation and commercialized R&D is either ignored, presumed or an afterthought. Few, if any, incorporate adoption as a priority and none establish incentives to accelerate the rate of adoption or otherwise measure rate of adoption as a success metric. Furthermore, the sheer number of programs cannot help but result in duplication, inefficiencies and wasteful spending on programs that are not priorities in enhancing Canada’s productivity.

4 “Innovation and Business Strategy: Why Canada Falls Short” at page 3. Available at: http://www.scienceadvice.ca/en/assessments/completed/innovation.aspx

5

Recommendations: 1. As noted above, TELUS considers that innovations in the ICT industry including innovative uses of

telecommunication services should be among key initiatives recommended to government by this Panel. Other priority areas should include environmental sciences and technologies, natural resources and energy, and health and related life sciences.

2. Recognize and reward the adoption of innovative practices by Canadian businesses rather than just the research and development of new technologies. Early adopters of new technologies bear risks and costs including capital expenditures, new processes and training. Canada should incent businesses to adopt new technologies, such as internet based businesses, e-commerce, e-health, e-education and utilization of cloud technologies, through tax incentives for both operating and capital expenditures. Purpose-based incentive programs have been pursued in the past.5

3. Programs should focus on outputs rather than solely on inputs. Many of the current R&D programs set the criteria for qualification based on the nature of costs incurred, whether the costs were incurred in Canada, or whether the costs were for qualified activities, etc. The programs should concentrate on the adoption of innovative business practices and base the funding on some measure of productivity improvements. By emphasizing results over costs, businesses are rewarded for, and incented by, the nature of their achievements rather than the nature of their spending.

In the context of a digital economy promoting innovation, similar incentives might focus on purchases of Internet Protocol network-connected equipment made for the purposes of replacing non-networked equipment or similarly dated technologies and to reward income derived from the sale of products and services derived through innovative approaches. As businesses have a natural inclination to utilize inputs in a profitable and productive manner in order to maximize the benefits received, there is a very high probability of substantial economic return on government investment in such a program.

4. Broad-based, economy-wide measures such as the planned reductions to the corporate tax rate are essential drivers of the overall investment climate in which Canadian businesses operate. At minimum, the planned reductions must not be halted or rolled back. As other jurisdictions, many of which already have other advantages such as larger domestic markets, move to close or erase the gap of Canada's corporate tax advantage, Government should consider pursuing additional reductions in order to foster ongoing growth and investment in the Canadian economy.

5. An innovation agenda for a digital economy should take a close look at all levers and impediments; not simply as it pertains to the organizations developing ICTs, but also from the perspective of all potential business and consumer adopters of such technologies. Societal benefits are lost or delayed when the additional cost of federal consumption taxes pose a barrier to ICT adoption among consumers, MUSH(municipalities, universities, schools and hospitals) and financial institution users. TELUS recommends consideration of GST/HST exemptions to these user groups for purchases of computer technologies and productivity enhancing software. As a related point, the Federal government must not allow municipalities to undermine digital economy objectives through direct taxation, as some municipalities have proposed, of telecommunications services as a means of funding areas of municipal or provincial responsibility.

5 For instance, favourable tax rates, investment tax credit and accelerated capital cost allowance incentives have been provided for other "output" focused activities such as the business of “manufacturing or processing in Canada of goods for sale and lease”.

6

6. The SR&ED system does not go far enough in supporting the ultimate commercialization of new products and services. Such costs can exceed SR&ED expenses and can impede market introduction. Government should strongly consider extending the ITC’s (investment tax credits) to ancillary activities and to enable 100% write-off of any capital expenditures required to support such activities. Further, all ITCs should be refundable and not be contingent on the tax-paying status of the organization giving rise to the eligible activities.

7. In a submission made to the Industry Canada Digital Economy Strategy consultation, the Canadian Wireless Telecommunications Association advanced proposals for accelerated Capital Cost Allowance rates for specified classes of broadband networking equipment. (see link6

8. The Government of Canada should avoid asymmetric treatment of Canadian and foreign nationals; notably, access to foreign capital should be equally available to all businesses.

at page 20) TELUS supports and commends to this Panel and the Government those recommendations.

9. All levels of government can show leadership by adopting smart technologies for roads, buildings, utilities and other public infrastructure and by enhancing use of internet based technologies for delivering government services, particularly education and health care. Governments can employ the emerging cloud technologies to provide access to government data and services.

10. Canada should also foster an environment of innovation by breaking down regulatory and tax impediments and promoting all-encompassing policies to support innovation including immigration policies that attract skilled labour in key industries and educational programs to develop skills in those industries in a collaborative manner with business partners.

TELUS would be pleased to meet with you at any time to discuss any of TELUS’ ideas or those put forward by of other parties. In that regard please contact:

Michael Sangster, Vice-President Federal Government Affairs michael.sangster@TELUS.com (613) 597-8420

Yours truly,

TELUS Corporation

Robert G. McFarlane

Executive Vice-President and Chief Financial Officer

6 http://de-en.gc.ca/category/organizations/canadian-wireless-telecommunications-association/

7

Appendix A – answers to selected Consultation questions 1. In addition to the R&D activity defined by the OECD, should government be funding other business activities related to the commercialization of R&D? If so, what and why?

See recommendations and answer to 15.

2. Does Figure 2, the model of business innovation presented above, capture the key structural factors and inputs to innovation? If not, what is missing?

Figure 2 takes an unsubstantiated leap from the R&D investment of firms to increased productivity without regard for whether the result of the research or business innovation is desirable, relevant or accepted by market actors through adoption. Unless the research addresses a market need, improves a process or creates an opportunity, increased productivity will not follow. As TELUS explains throughout its submission, research and development for its own sake does not directly result in strategic innovation, nor does it automatically equal productivity. In TELUS’ formulation, the path from R&D to productivity requires commercialization to bring it out of the lab; strategic innovation to drive change that adds value; and an adoption focus on how fast and wide the innovation is deployed. It is insufficient for government to invest in R&D unless that investment is pursued within the context of an industrial strategy of promoting strategic innovation through commercialization and adoption of new products, services and processes.

3. Regarding capital, is there an adequate supply of risk capital for Canadian firms at each stage of their growth (start-up, small, medium, large)? If not, why not? Where returns on investments are low, what are the reasons and potential solutions?

TELUS Ventures7

makes strategic investments in high–growth market opportunities related to the telecommunications sector with a focus on exploiting the convergence of voice, enhanced data, digital media and wireless. Consistent with TELUS' view regarding the importance of commercialization and adoption to extracting the true benefits of innovation, these opportunities include products that can be purchased by TELUS as well as solutions that can be sold by our business units.

As a strategic investor, TELUS Ventures co-invests with leading venture capital groups to create a balanced and powerful support team for a start-up company. The combination of growth capital, relationships, and technical and management expertise provides for the powerful backing of any venture-backed firm. To have a vibrant venture capital industry, there has to be a pool of patient capital that understands the risk-return profile of the asset class, has the expertise to deploy the capital into promising opportunities and the patience to support the asset class through several business and investment cycles. In Canada, the major institutional sources of funding (pension funds, insurance companies etc.) have had a lower relative allocation to alternative asset classes like LBOs and Venture Capital than their US counterparties. This may be the legacy of a more conservative business culture and a higher aversion to risk in unproven asset classes like Canadian Venture Capital. Where institutional investors have engaged with Canadian Venture Capital funds over the last decade, the results on a risk adjusted basis have been sub-par. 7 http://about.telus.com/ventures/en/approach.html

8

Changes in policy in recent years permitting Canadian institutional investor to increase their exposure to foreign assets, has resulted in competition for Canadian VC opportunities, with funds flowing to the venture with the best track records, regardless of geography. The challenge for Canadian venture is compounded as there is not necessarily a corresponding in-flow of foreign capital to Canada as sub-optimal tax treatment of capital gains for foreign funds has limited the number of US based players willing to allocate time, treasury and talent to Canadian investment opportunities. Government policies and actions, such as attempts to created clusters of excellence backed by government funding, subsidy programs like Labor-sponsored VCs and programs like SRED+IRAP, although well intentioned, can have unintended consequences. For example, the availability of non-dilutive subsidies and payments (IRAP, SR&ED) can encourage creation of companies that may not have otherwise come into being - which carries positive and negative implications. On the negative side, companies with a dependency on public funding source to an extent that would not be acceptable in a free VC market, can create a situation where the benefiting company can “not die and not scale” to the level where they can be robustly and independently profitable. Cheaper government money has an impact on many Canadian first-time entrepreneurs, who might be troubled by financing terms proposed by financial VCs, by creating a disequilibrium of expectations between entrepreneurs and investors. Consequently, and irrespective of whether the underlying technology/solution has real promise, some of those that opt to live with subsidized government funding may never be able to raise an optimal or large enough amount of capital required to make them world-class companies. TELUS’ conclusions are therefore as follows:

1. There is inadequate of amounts of the “appropriate” type of venture capital (i.e. smart, capital that has survived multiple cycles) in Canada.

2. Deals that meet most of the requirements of seasoned Venture Capitalists are few and far between 3. Government programs, historically, have had unintended consequences of skewing the market

and not permitting weak companies to die, and allowing the marketplace to reallocate capital to the best opportunities and pragmatic entrepreneurs.

4. The last decade of Canadian VC investing has had delivered poor returns, making it difficult for conservative institutional funds to justify committing more capital

5. The venture capital ecosystem in Canada has limited depth, and players who had developed expertise have not been able to raise new capital due to the poor returns they delivered during the last decade of venture capital. This hard gained expertise is being lost or migrating to more giving environs

6. At this point it is unclear what new policies will help re-invigorate the sector. Time will tell whether recent attempts by the government entities to change the status quo by becoming Limited Partners in seasoned VC funds (e.g. Renaissance Capital, Tandem) will be successful

4. Regarding ideas and knowledge, do you believe it is important for Canadian firms to perform their own R&D and, if so, what do you believe are the key factors that have been limiting business R&D activity in Canada?

See main submission and answer to 15.

9

6. Regarding the creation of demand for business innovation, what role, if any, do you believe that government should play in being a “first customer” for R&D investments in Canada?

TELUS considers that adoption of health IT solutions represents a significant opportunity for Canada to lead in an area that would have material benefits for improving the efficiency and quality of health care outcomes. Accordingly, TELUS considers health care IT as perhaps the most significant area for Governments of all levels to play the “first customer” role in respect of adopting innovation. In this regard, TELUS endorses the recommendations made by the Ivey Centre for Health Innovation and Leadership in their recent white paper on improving health care outcomes through adopting innovative IT services.8

7. Regarding talent, is Canada producing sufficient numbers of graduates with the right skills to drive business innovation and productivity growth? If not, what changes are needed? Where demand for advanced skills is low, what are the reasons and what changes, if any, are needed?

As a technology leader, TELUS is one of Canada’s largest employers of skilled workers. For the second year in a row, TELUS has been named one of Canada’s Top 100 Employers (the only telecommunications company able to make such a claim). Yet in recent years, TELUS has nonetheless found certain strategic and technical roles increasingly difficult to fill. Challenges arise for a variety of reasons, including rapid advances in technology, the fact that certain roles are in demand across a variety of industries (e.g., “business intelligence” experts who can parse vast quantities of data to uncover knowledge and translate that to strategic differentiators), and the preference of top talent in certain specialized fields to pursue short-term placements over permanent roles. Skills gaps are not necessarily a function of the number or quality of graduates as gaps can occur at all levels of an organization. For its part, TELUS invests heavily in the development of its team members, and it places significant emphasis on co-operative placements and leadership development programs for students and new grads. For example, TELUS develops new grads through initiatives for engineers, computer science students, and business grads that accelerate their learning and rapidly enhance their skills and ability to contribute. Additionally, TELUS takes on co-op students (typically in 4 to 8 month rotations) and interns (placements of up to 16 month), with the difference between the two being a function of the post-secondary institutions overall program.

8. Can you describe whether and how your firm employs students currently enrolled in community colleges, polytechnics and universities, and what government measures could make it easier to work with students during their academic programs and to recruit them after their graduation?

See answer to question 7.

8 http://blogs.ivey.ca/ichil/files/2010/09/White-Paper.pdf

10

10. If you have direct experience and knowledge of the SR&ED tax credit, what are your views in relation to the following:

a. Does the current structure of the SR&ED tax credit encourage incremental investment in R&D? Does it free up capital to invest in other aspects of innovation activities in the firm? Does this vary by size, ownership, sector or nationality of firm? b. What are the strengths and weaknesses of the refundable portion of the SR&ED tax credit for Canadian-controlled private corporations and to what extent does it encourage the growth and commercial success of SMEs? c. Bearing in mind the improvements being made by the Canada Revenue Agency, are there additional opportunities for change to simplify the administration of the SR&ED tax credit and facilitate the applications process?

A: TELUS does not factor these credits into the business case for project approvals as there is too much uncertainty as to whether the credits will be received. As such, it is TELUS’ view that the current structure of the SR&ED tax credit program does not encourage incremental investment in R&D and the tax credits do not positively impact investment decisions in R&D initiatives. B: The refundable aspect of SR&ED tax credits is positive in that it can result in more immediate funding of expenditures, similar to grant based incentives. However, limiting refundable tax credits to CCPC’s is too restrictive in that it ignores the substantial investment in SR&ED by public companies who conduct the vast majority of SR&ED in Canada and often cannot utilize the tax credits until several years after the expenditures are incurred. Deferred recognition negatively affects the net present value of the benefit in any investment decision. C: TELUS believes that changes to the SR&ED program over the past three years have been largely limited to minor modifications, such as redesign of forms, while more pressing and substantive opportunities for change have not been pursued. TELUS refers to its submission of November 2007, attached here as Appendix B, for examples of recommendations for action, consistent with ideas promoted by independent bodies such as the OECD and Council of Canadian Academies, that have gone unheeded. Additional comments on SR&ED: In its report “Innovation and Business Strategy: Why Canada Falls Short” the CCA noted that Canada’s support for business R&D is larger relative to GDP than both the U.S and U.K. and that Canada was unusual in its almost exclusive reliance on tax based incentives compared to other OECD member countries. We submit that the fact Canada invests more in their R&D program and has lower productivity indicates that the SR&ED tax credit program is misguided policy arising from an emphasis on R&D rather than innovation. The current SR&ED tax credit program is predicated on criteria that run contrary to the idea of strategic innovation that actually fuels productivity and prosperity. For example:

• It only provides tax credits based on an extremely narrow and technical definition of SR&ED rather than in respect of the broader concept of innovation and the critical element of adoption.

• It directs incentives to pure research and development and does not recognize the need to incent

early adoption of new innovation.

11

• It has stringent requirements regarding technical advancement, a “new to the world” concept, rather than rewarding incremental innovation, described by CCA as driving productivity growth.

• Tax credits are based on costs incurred, an input approach, rather than incentives based on

measures of outputs such as productivity gains or technological achievements. • The audit process is adversarial, costly, time consuming, uncertain and bureaucratic requiring

taxpayers to maintain and provide voluminous documentation related to costs and processes. • Costs incurred outside of Canada are not eligible, thus discouraging collaboration with

international strategic partners as well as the utilization of resources and skills not available domestically.

• There is a scarcity of information upon which the public can evaluate the effectiveness of the tax

program, recipients of benefits and criteria for funding due to the cloak of secrecy maintained by Canada Revenue Agency.

12. How could the Government of Canada be more innovative and responsive to meet new needs or opportunities, and try alternative service delivery-approaches in its programs?

See main submission and answer to 15.

15. Is there a difference between R&D and innovation? If yes, how are they different? Should government focus on R&D or Innovation? What should the balance be?

Research and development for its own sake does not directly result in strategic innovation, nor does it automatically equal productivity. TELUS submits that a successful innovation and productivity strategy needs to recognize that R&D is a factor in enhancing productivity, but ultimately as less important than the rate of adoption of innovation. In TELUS’ formulation, the path from R&D to productivity requires commercialization to bring it out of the lab; strategic innovation to drive change that adds value; and an adoption focus on how fast and wide the innovation is deployed. As the greatest productivity multipliers down the path from R&D are value-added innovation and broad, accelerated adoption, that is where a government seeking to wring the benefits of R&D investments must focus. Put another way, it is insufficient for government to invest in R&D unless that investment is pursued within the context of an industrial strategy of promoting strategic innovation through commercialization and adoption of new products, services and processes. Such a strategy must apply as great or greater focus creating the incentives for adoption as it does for invention and experimentation. TELUS notes that your Panel uses the Oslo Manual (2005) definition for innovation. TELUS believes that “innovation” in and by itself is not the sole answer. Rather, innovation needs to be married with “strategy” to create value. Strategy and innovation then are inseparable and in many circumstances need not be driven by or a result of technology advancement. For example, innovation, and specifically strategic innovation, is often about successful commercialization of existing technologies or more productive uses for existing assets, but, importantly, substantial opportunities for innovation exist in relation to processes.

12

Appendix B – TELUS submission to 2007 SR&ED study

TELUS Corporation 8 - 555 Robson Street Vancouver, British Columbia Canada V6B 3K9 www.telus.com

Robert McFarlane 604 697-8010 Telephone A Member of the TELUS Team 604 435-5579 Facsimile

robert.mcfarlane@telus.com November 30, 2007 Nancy Horsman and Peter C. Armstrong Joint Finance Canada - Canada Revenue Agency SR&ED Consultations 140 O'Connor Street L'Esplanade Laurier Ottawa, Ontario K1A 0G5 Dear Madam and Sir: Thank you for allowing us the opportunity of presenting our thoughts as to what is the current state of Canada’s SR&ED tax incentive program and our recommendations on possible courses of action to improve Canada’s incentive program. TELUS Corporation (referred herein as to “TELUS” or “the Corporation”) is the largest telecommunications Corporation in Western Canada and the second largest in the country. We provide a wide range of wireline and wireless telecommunications products and services including data, Internet Protocol (IP), voice, video and entertainment services. Our strategy is to unleash the power of the Internet to deliver the best solutions to Canadians at home, in the workplace and on the move. TELUS’ 2006 annual revenue was $8.8 billion with 10.8 million customer connections including 5.1 million wireless subscribers, 4.5 million wireline network access lines and 1.1 million Internet subscribers. The evolution of the telecommunications industry over the past two decades has been dramatic. On its website, TOTEL PTY LTD, a global telecommunications research organization, describes the Canadian telecommunications industry as follows:

Canada has one of the best-developed national broadband infrastructures in the world, using a range of network architectures and technologies. It has achieved the highest overall broadband

13

penetration of the Group of Seven industrialized countries. In April 2006, Canada was placed eighth in the world for broadband penetration. Broadband deployment continues to progress under active government encouragement, with 95% of Canadians now living in communities served by high-speed Internet access. The introduction of affordable pricing, tiered services and capped charges have all helped to drive the penetration of broadband services. The high penetration rate of PCs has also been a major contributing factor as is the previous high penetration of narrowband Internet access services. In 2006, 77% of Canadian households with Internet access used broadband connections.

Canadian TV and video markets are experiencing significant changes, characterized by convergence with digital media, broadband and telecommunications services. Media convergence gained pace in 2005 and 2006 with increasing merging of video, data and voice applications, in particular digital TV, broadband and VoIP services. Cable TV operators and telcos, and to a lesser extent satellite companies, are increasingly competing for the triple play consumer. The slow but steady transition from analogue to digital TV is increasing the use of new products and services such as Video-on-Demand and High Definition services. Increasing broadband penetration continues to drive the triple play market, with well over half of all Canadian households subscribing to broadband in 2007. Broadband penetration is also seeing the emergence of IPTV and is driving the migration from traditional circuit-switched telephone lines to VoIP telephony, with VoIP subscriber numbers growing rapidly during 2006.

TELUS depends upon an active research and development program in order to meet the market demand for faster and more comprehensive telecommunications services. TELUS has invested heavily in scientific research and experimental development (SR&ED) over the past two decades and, recently, was listed as one of Canada’s top corporate R&D spenders for 2006. Over the past 5 years TELUS submitted SR&ED claims in the following amounts (in millions of $):

2001 33.6 2002 46.4 2003 23.7 2004 45.0 2005 141.9 2006 130.8 (estimated-claim will be filed June/08)

TELUS has been an industry leader in the development of new services and technologies including quantum leaps in wireless communications, data transmission, high speed internet and TELUS TV. The Corporation has been recognized by its peers in industry for a number of awards for technological advances related to SR&ED projects undertaken by TELUS:

• In October, 2006 the TELUS Geomatics team was the recipient of three 2006 Channel Elite Awards presented by the Computer Dealer News recognizing the achievements of IT channel professionals who build technology solutions for the public and private sector. The awards were presented for Geoexplorer, an SR&ED project to build a world class hosted spatial information and data integration application. The seven services developed by TELUS that use GeoExplorer as the base application are:

1. Automated Vehicle Location (AVL) Services – integrates GeoExplorer with cellular and

satellite networks to dynamically track and monitor client vehicles in real-time to address issues of fleet and personnel safety, maintenance, optimization and control;

2. Emergency Notification Services – integrates GeoExplorer with interactive voice response systems and incident management software to track and manage incidents and emergencies, and keep emergency personnel, the general public and key stakeholders informed during emergencies;

14

3. Asset Management Services – integrates GeoExplorer with asset management tools and client asset databases to enable clients to manage corporate assets;

4. Business Demographics – clients can quickly summarize numerical demographic information for a given geographical area and view the information on GeoExplorer;

5. Public Web Mapping – open public Internet access to municipal, provincial and federal government information using interactive maps;

6. Satellite Data Resale – SPOT satellite imagery is integrated with GeoExplorer and viewed on-line (TELUS has exclusive rights to SPOT satellite imagery in Canada); and

7. GPS Phone Location Services – similar to AVL Services but tracks GPS enabled cellular phones instead of vehicles.

• In April, 2005 TELUS received the Global Innovation Partner award from Cisco Systems

recognizing the development of Angel, highly customized managed security software that provides network access control for enterprise accounts.

• In April, 2005 TELUS received the Partner of the Year award from Cisco Systems as a result of

the development of new managed VoIP solutions including IP-One. In addition, the publishers of Communication Solutions magazine recognized TELUS’ VoIP leadership in the development of the IP-One platform, by giving TELUS its “Product of the Year” award.

• In November, 2004, and for the fourth year in a row, TELUS won an Award of Excellence at the

Canadian Information Productivity Awards (CIPA), the largest Canadian business awards program in the field of information management. The 2004 award was in recognition of outstanding innovation in the category of efficiency and operational improvements for the successful implementation of Channel Self-Service, a web-based toolkit that allows dealers to provide faster and more comprehensive in-store service to wireless customers.

• In April, 2004 the Association of Professional Engineers, Geologists and Geophysicists of

Alberta (APEGGA) awarded TELUS the APEGGA Project Achievement Award for the TELUS Next Generation Network. This prestigious award is given to a project demonstrating engineering, geological or geophysical skills and representing a substantial contribution to technical progress and the betterment of society. The TELUS Next Generation Network Project was an industry leading achievement by TELUS to conceive, research, develop and implement a carrier-class single IP-based network to carry all forms of communications traffic including voice, data and video.

• In 2002 TELUS won the Award of Excellence at CIPA for its Web Activations solution allowing

customers to self-activate their newly purchased wireless phones in real time using the web. TELUS was identified as a visionary organization making the most innovative and effective use of technology to address critical business needs.

• In 2002, the “Next 21” profile in the National Post distinguished TELUS as an e.Business

Innovator in Canada, highlighting the work done through the Web Enable e.Demand initiative, aimed at streamlining processes through the deployment of technology solutions for procurement, inventory and warehousing, collaborative forecasting and fulfillment.

Although TELUS has invested significantly in SR&ED in the past, regrettably the Corporation’s experience has been generally negative with the program itself, incurring substantial costs to prepare and defend the claims with less than satisfactory results. Between 1992 and 1998 the Corporation filed SR&ED claims which were substantially denied by Canada Revenue Agency (“CRA”). CRA took a similar approach with other Canadian telecommunications providers and, in 2000, the Auditor General of

15

Canada prepared a report critical of the Canadian SR&ED tax incentive program. In response, CRA initiated settlement discussions with the telecommunications providers and, in the spring of 2002, settled the claims from 1992-1998 by allowing, in TELUS’ case, 85% of the amounts claimed. In the meantime, frustrated by its experience to date with the SR&ED audit process, TELUS had substantially reduced its claims for the period from 1999-2000. However, encouraged by the 2002 settlement, TELUS resumed its efforts to participate in the process beginning with the 2001 taxation year. Unfortunately, TELUS has continued to experience great difficulty with CRA’s adversarial audit approach, resulting in onerous costs to resolve claims. TELUS was required to undergo two separate audits of its 2001/02 wireless claims before reaching a still less than acceptable resolution and has only recently resolved its wireline claims for the period from 2001-2004. In order to arrive at these resolutions, the Corporation has been forced to engage external consultants at a cost in excess of $ 3 million in addition to a similarly expensive investment of internal resources including key technology managers whose time is better spent developing the new services and technologies to address customer needs. With this as a background, TELUS respectfully submits its recommendations for improvement to the existing SR&ED tax incentive program.

1. Reassign Responsibility for Administration of Program, Provide Certainty and Remove the Program from the Income Tax Act

CRA’s administration of the SR&ED program is consistent with their background in enforcing compliance with the Income Tax Act in that they similarly employ an adversarial approach in dealing with taxpayer SR&ED claims. Although Canada touts that its program is one of the most generous in the world, CRA’s approach effectively neuters the program’s goal to of incenting private sector SR&ED. Because claims are consistently challenged and denied and the cost to defend such claims is exorbitant, claimants can be discouraged from participating in the program. This occurred in 1999 and 2000 when TELUS sharply reduced its participation in reaction to negative audit enforcement conducted by CRA. The adversarial approach adopted by CRA leads to considerable uncertainty with respect to a taxpayer’s ability to realize the SR&ED benefits claimed. This uncertainty means that related Investment Tax Credits (“ITC’s”) cannot be recognized in the Corporation’s financial statements until there is likelihood of eligibility of a claim and ultimate receipt of the incentive. This results in a long time lag (several years) between the conduct of the SR&ED and the accounting recognition of the related ITC’s. Since the TELUS business units that perform SR&ED cannot immediately recognize the benefits of their SR&ED activities in their departmental financial results at the time such activities are conducted, they are not motivated to undertake the projects which inherently have higher risk and lower payback. If there was more certainty as to the eligibility of claims to enable ITC’s to be recognized on a current basis, these benefits would help make more projects justifiable. The net result of the lack of certainty in the administration of the SR&ED program is that any ITC’s received are more of an after the fact bonus rather than an incentive that is considered at the time an expenditure is made. We also note that TELUS files its wireless SR&ED claims with Industry Canada to support its commitment to research and development under the terms of its wireless Spectrum licenses. These claims are audited by external auditors to provide independent assurance for Industry Canada that the SRED claims meet the criteria under the license agreements, the identical criteria

16

as for the income tax program. While these audited claims are accepted in full by Industry Canada, CRA has historically accepted only 30-40% of the claims for income tax purposes. TELUS also has concerns in the use of the Income Tax Act as the delivery mechanism for the SR&ED program. Because this program is located in the Income Tax Act, the implication is that the chief administrators from the Corporation’s perspective are its income tax personnel who have no understanding or background in science-related matters. This results in considerable frustration in dealing with CRA since such tax personnel cannot assess whether the Corporation’s application for such incentives are too broad or if CRA is being overly conservative. Certainly, such personnel are not trained to provide project descriptions in the language that CRA seems intent on receiving. TELUS notes that because of its relative size that CRA audits every taxation year of the Corporation and its subsidiaries. Indeed CRA is virtually located at TELUS premises on a permanent basis. Such audits have their own timelines and requirements for responses to queries which are usually negotiated between TELUS and CRA in order to be reasonable for both sides. CRA’s separate audits of SR&ED are not coordinated with the regular income tax audits and the demands placed on the Corporation by such reviewers are considerably more severe in terms of demand times for responses which must be quite detailed and well-considered by science experts. This lack of coordination with the regular audit cycle of CRA together with rather inconsiderate and unreasonable demands for information within short timeframes puts considerable strain on the Corporations administration of its income tax affairs. While TELUS wishes to be as cooperative as possible in meeting the requirements of the Government for the information that it needs, CRA should attempt to coordinate their activities to make the process as smooth as possible for both sides. TELUS recommends that the Government’s policy as to how it wishes the SR&ED program to be administered should be revised to enable certainty in the determination of eligibility of SR&ED activities. The different treatment by CRA and Industry Canada is a case in point. Responsibility for the SRED program should be reassigned to a Federal department that is more aligned with an incentive based approach, such as the Industrial Research Assistance Program. This could also reduce duplication of the costs of having two different departments administer research programs. Moreover, consideration should be given to removing the SR&ED program from the Income Tax Act to avoid the implication that SR&ED has something to do with administering income taxes. If on the other hand, the Government of Canada continues to believe that CRA is the best agency to administer this program, there should be more coordination with the regular income tax related audit and the audit of SR&ED claims.

2. Increase Transparency, Timeliness and Fairness Through Improved Disclosure and Consistency of Delivery

In today’s financial markets, companies are under increased pressure to accurately measure their financial results and companies within industry segments are under increased scrutiny and comparison to competitors. The integrity of the Canadian markets is dependent upon transparent, fair and timely financial disclosure and the Canadian SR&ED incentive program should have the same characteristics due to the importance of this program on the financial results of claimants. Furthermore, Canadian taxpayers have a right to know how their government is spending tax dollars to invest in incentive programs such as SR&ED. Currently the program is subject to strict confidentiality rules and complexity that prevent the public from analyzing and comparing the value of incentives received by the companies in which they invest. Also, the long time delays in auditing and appealing claims prevent companies from

17

recording the benefits in an accurate and timely manner. While public companies do their best to address these concerns, non-public companies do not have the same disclosure requirements. This is of particular concern to TELUS as its main competitor, Bell Canada, is about to privatize and will not have the same financial disclosure requirements as TELUS. TELUS also has a serious concern with the fairness in and consistency with which the SR&ED program is administered. Over the past three years, the Corporation has engaged a number of different external consultants to assist in preparing and defending SR&ED claims. These consultants have advised TELUS that CRA takes a much more adversarial approach in challenging TELUS claims as compared to claims by its competitors, which we understand are being much more readily accepted by CRA. We further have been given to understand that if this is not a particular taxpayer based discrimination, it could be a result of inconsistent treatment of all taxpayers that file in the Prairie Region SR&ED administration located in Calgary. The additional costs of supporting its claims, and the extent to which CRA denies claims, results in TELUS and its shareholders being subjected to unfair discrimination and financial penalty relative to its competitors and other taxpayers whose files are administered in cities other than Calgary. The Government of Canada should not be interfering with the financial markets by subjecting taxpayers to discriminatory treatment. TELUS would also note that there is inconsistent treatment between large and small claimants. While TELUS appreciates that due to the size of its claims, all such claims must be carefully reviewed, TELUS has received anecdotal evidence from several sources that because small claimants are not regularly audited, claims are generally fully approved without adjustment. The Government should provide full public disclosure of amounts provided to companies as SR&ED incentives, either through the tax system or otherwise, to allow the public to gain a full understanding of how public money is spent and to consider this information in the financial markets. Furthermore, TELUS recommends that the Calgary SR&ED personnel, practices and procedures should be reviewed from the perspective of improving consistency of treatment for all taxpayers in Canada. Moreover, the Government should treat both large and small SR&ED claimants in a consistent manner.

3. Improve Clarity of SR&ED Requirements

The legislation in the Income Tax Act provides a very general definition of SR&ED so the program is administered through a series of Interpretation Bulletins and other government publications. However, there is still considerable uncertainty as to the definition and requirements of SR&ED and auditors use inconsistent methodologies to evaluate claims. Commercial enterprises normally engage in experimental development in developing a product or service from inception, through a series of trials to commercial development. The cutoff between SR&ED and commercial development is not well defined and this causes disputes between CRA and claimants. The grey area between what is clearly experimental development and commercialization needs to be addressed. There are significant development, refinement and enhancements required in moving from the pilot stage to a fully commercial project, especially in large, capital intensive projects. A telecommunication product or service which may function in a test lab situation often encounters significantly different technological uncertainties when it is deployed onto the full network. Issues arise such as geographical disparity, distance and capacity limitations, degradation of transmission due to natural or structural impediments (ex: trees and buildings), interference from other forms of broadcast transmissions, etc. It is overly simplistic to assume that the SRED process is complete when a prototype product or service has been developed in a lab setting.

18

Auditors and technical consultants also use arbitrary and inconsistent means for evaluating SR&ED projects, particularly if those projects are large and complex. CRA has frequently adopted the approach of breaking TELUS projects into smaller components in an effort to deny many of the expenditures, even when those expenditures are integral to the conduct of the SR&ED. This tactic directly contradicts the audit approach described in the CRA literature. More recently, CRA has challenged TELUS to identify and claim only those activities directly associated with “technical nuggets”. TELUS is not aware of any CRA literature that discusses or defines “technical nuggets” and we believe this is a further attempt by CRA to unfairly restrict claims to a very small percentage of the overall SR&ED effort. We have also noted that CRA enforces timelines to accommodate CRA’s financial yearend. Often TELUS has been subject to restrictive timelines so CRA can complete their audit and “sign-off” on the file by March 31. We suspect this is to allow auditors to meet certain annual targets and we’ve been told by auditors that there are other CRA mandated timelines that incent the auditors to close files without proper review. This is unfair to an organization such as TELUS with complex claims that require significant time to support and defend, particularly given the adversarial approach employed by CRA. There must be an additional investment of time and resources in clearly defining the nature of SR&ED and the audit approach to be used for administering claims in a fair and impartial manner. This information must be clearly communicated to claimants and auditors.

4. Improve Dispute Resolution Process

TELUS claims are administered by the Calgary Taxation Services Office. The relationship has been difficult, in part because of the fact that the auditors are in a different city and because there has been a history of adversarial and difficult audits. TELUS has requested that the administration of its claims be relocated to Edmonton, where the TELUS Taxation department resides. These requests have been denied. The consultants engaged by TELUS to assist with SR&ED defense have also advised us that the CRA Research and Technology Advisor and the external technical consultants to not have the background to properly review TELUS claims. TELUS claims include projects related to wireline technology, wireless technology, software development, video, data and voice applications, digital TV, broadband and VoIP services. However, the same technical consultants are employed to audit all of these varied claims. Furthermore, TELUS has been advised that any appeals associated with SR&ED claims will be reviewed by the same personnel in the Calgary TSO who conducted the original audit. This undermines the independence and credibility of the appeals process. Additional qualified technical resources must be employed to audit SR&ED claims and a fair and independent appeals process should be utilized.

5. Revise the Rules Related to Investment Tax Credits (ITC’s)

Consideration should be given to revising the method of providing SR&ED tax incentives. The current program for ITC’s and income inclusion has certain deficiencies. ITC’s are required to be included in income in the year after they are utilized to reduced Federal income tax payable. This results in provincial taxation on the ITC income inclusion, reducing

19

the incentive for the taxpayer who performs the SR&ED and benefiting provinces in which the SR&ED may not occur. The system for providing Federal tax credits and income inclusion effectively results in a hidden transfer payment from the Federal government to the provinces. ITC’s expire within 20 years and TELUS has been in the situation of having to reduce discretionary claims to increase taxable income and utilize ITC’s due to expire. This creates taxable income for provincial purposes which then requires the increasing of discretionary deductions in the provinces, increasing the complexity of TELUS tax filings. Eventually this will lead to the acceleration of provincial tax liabilities due to the ITC income inclusion. Many SR&ED performers are in the “start-up” phase of their business cycle and don’t immediately benefit from ITC’s other than those companies which may qualify for refundable tax credits. The benefit of ITC’s may only be realized once the Corporation is taxable so the incentive is not received when it’s needed most. Non-residents receive no net benefit from the ITC system because any reduction in Canadian taxes is offset by the reduction in their foreign tax credit, thereby increasing their local taxes. This restricts the benefit to non-residents and may limit foreign investment in Canadian SR&ED. An SR&ED incentive program based on non-taxable grants would alleviate many of these deficiencies.

Thank you for considering our submission. You have asked if we would give permission to post our submission on the Department of Finance website. We hereby provide permission to post our submission. TELUS would be pleased to meet with you at any time to discuss any of TELUS ideas or those put forward in submissions of other parties. In that regard and for purposes of the permission noted above please contact: Mr. Timothy McGillicuddy Vice-President, Taxation 10020-100 Street Edmonton, Alberta T5J 0N5 780-493-3604 tim.mcgillicuddy@telus.com Yours truly, TELUS Corporation Robert G. McFarlane Executive Vice-President and Chief Financial Officer

20

Appendix C – TELUS Innovations TELUS and our business partners have been at the leading edge in introducing new technologies and services. Examples over the past three years include:

• September 2010- TELUS, in partnership with Black’s Photo Corporation, unveiled the next generation of digital imaging with the world’s first-ever fully integrated photo management site and an innovative smart phone application allowing customers to use a secure TELUS-powered storage cloud to learn, share, shop, organize and create memorable photo projects and to send photos directly from their smart phones to a printer at any Black’s location across Canada.

• August 2010- TELUS announced Remote Recording, an enhancement to TELUS’ Optik TV service that allows customers to record, delete and manage content on their PVR as well as view and search the interactive programming guide using any Web connection from any location or via an application for the iPhone.

• August 2010- TELUS and Microsoft announced a North American premiere to Canadian homes, enabling customers of Optik TV to use an Xbox 360 as a digital set top box to deliver the ultimate integration of gaming and entertainment on one platform.

• August 2010- TELUS became the first carrier in North America to test and begin deployment to support speeds of up to 42 Mb/s using HSPA+ Dual Cell Technology.

• June 2010- TELUS unleashed Optik TV, a revolutionary TV and high speed internet service using the latest fibre optic and IP technologies

• May 2010- TELUS announced the launch of TELUS health space, a secure and confidential online consumer platform to allow Canadians to create, store and manage their family’s health care information in a safe environment utilizing the latest in encryption and protection technology, a first of its kind in Canada.

• February 2010- TELUS, in partnership with Rogers and Bell, announced the successful completion of two-way mobile video calling trials between carriers, creating the largest vide calling audience in North America.

• February 2010- TELUS Health Solutions announced that it was selected by the Great-West Life Assurance Company for the development and implementation of an e-Claims exchange service for extended healthcare providers such as physiotherapists, chiropractors and visioncare providers to electronically submit claims directly to the insurance company on behalf of their clients, the first of its kind in Canada

• January 2010- TELUS implemented Phase II enhanced 911 service to help Canada’s emergency service providers better identify the location of wireless 911 calls with advanced Global Position System and triangulation technologies.

21

• December 2009- TELUS launched Canada’s first Intercompany Cisco TelePresence Service allowing any user at any organization to meet face to face with other users on other enterprise networks.

• December 2009- TELUS Health Solutions was named the 2009 Health Transformation Company of the Year by the Information Technology Association of Canada for being the healthcare information and communication technology company that has most fundamentally transformed healthcare in 2009 through the use of health informatics.

• September 2009- The Speech and Stuttering Institute, with funding support from the TELUS Toronto Community Board, announced a first of its kind web-based speech therapy program to help youth with stuttering problems practice and improve their speech skills outside the clinic while being accessible to in-clinic speech-language pathologists who can view progress and provide online, real-time feedback.

• June 2009- TELUS announced TELUS Alert and Assist, GPS based technology using a small electronic key to signal emergency contacts of an employee’s whereabouts in a situation of distress or uncertainty.

• May 2009- TELUS partnered with the Montreal Region Health Authority, one of the first regions in Canada to deliver an electronic clinical information system combined with a documentation imaging solution that will convert paper records and integrate them into a unified electronic patient record

• January 2009- TELUS partnered with ATB Financial, giving financial institutions a competitive edge by allowing their customers to use their mobile devices to view account balances, see recent transactions and transfer funds using virtually any mobile phone’s existing messaging software and mobile web capabilities

• November 2008- TELUS named 2008 Health Company of the year by the Information Technology Association of Canada for the successful implementation of a 24-hour-a-day emergency referral service for physicians across the province of Ontario

• October 2008- TELUS announced TELUS Voice Control, a service that enables wireless business clients to use their voice to access Web content, dictate email or text messages and manage calendar and contact entries

• October 2008- TELUS joined BC Hydro in first-of-its-kind program in Canada to introduce virtual servers, which can co-exist on a single physical server, provide organizations with increased IT flexibility and scalability, diminish the need to continually acquire and maintain server hardware and significantly reduce energy consumption

• October 2008- TELUS began construction of a fourth generation wireless network based on the latest version of High Speed Packet Access technology, the most advanced broadband network technology

• October 2008- TELUS invested more than $33 million in a state-of-the-art internet data centre designed according to the Leadership in Energy and Environmental Design standards

22

• June 2008- TELUS launched a suite of GPS solutions: TELUS Asset Tracker enabling businesses to track assets large and small, TELUS Resource Tracker allowing businesses to increase safety and productivity through real-time location monitoring of workers and TELUS Track and Dispatch giving head-office the ability to determine the closest mobile worker to a new job assignment or to immediately dispatch help if a worker needs assistance.

• June 2008- TELUS partnered with CritiCall Ontario to deliver a first in Canada web-based platform using audio and video features to enable health providers to schedule appointments, book equipment and rooms, and share and view electronic health information to reduce patient wait times by making optimal use of their staff equipment and facilities

• May 2008- TELUS completed deployment in P.E.I. of its next-generation pharmacy management software, a high performance, fully integrated system that allows pharmacies to efficiently manage their patient files, dispensing of medications, inventory and professional information on a system compliant with the HL7v3 standard allowing pharmacists to interface seamlessly and securely with the PEI Drug Information System

• December 2007- TELUS and the Kids’ Health Links Foundation announced the launch of Upopolis, the first secure online social network for children in specialized and hospital care allowing youth struggling with mental health issues to keep in touch with people important to them, play games and research health information without the dangers open access to the Internet creates for young patients.

• July 2007- CATAAlliance awarded TELUS the Outstanding Product Development-ICT award for the TELUS Emergency Management Operating System, a secure, managed, web-based system supporting the key functions of emergency management by allowing officials to access geographic information with GeoExplorer (a web-based geographic information system developed by TELUS several years ago), share updates through incident logging capabilities, and quickly notify large stakeholder groups including fire, police, emergency workers and citizens.