News & Media

R&D Tax Scheme Too Rich: Federal Panel

Ottawa needs to overhaul its flagship research and development program because it spends too much money and fails to show any increase in innovation among Canadian companies, says a federally appointed panel of experts.

The federal government is spending nearly $7-billion on research and development without knowing if that money is making Canadian companies any more innovative, the panel found in a report released Monday.

The report is broadly critical of the dizzying array of federal tax breaks and grants that have failed to boost business spending on R&D for the past decade. There are at least 60 programs, run by 17 different departments and agencies – and businesses don’t even know many of them exist.

Open Text Corp. chairman Tom Jenkins, who spent the past year investigating Canada’s R&D spending, said he was stunned at how little effort is spent figuring out what works, and what doesn’t.

“I was really surprised by the lack of analysis on linking inputs to outcomes,” Mr. Jenkins said in an interview. “In business, our outcome is profits. We have to have that or the competitors in our markets will out-innovate us.”

What’s needed is a much simpler and more focused R&D strategy, the panel said.

Ottawa should rationalize all those programs and then put them under the control of a newly created innovation council, the panel said in its report. It also said the research and development tax scheme should be scaled back because it is befuddling to businesses, overly generous and too much money winds up in the hands of consultants.

Canada’s tax breaks are among the most generous in the world. But numerous studies have shown that in spite of the rich tax breaks, business spending on R&D is stagnant and Canada is falling behind rival countries.

A recent Globe and Mail investigation also found widespread abuse, bogus claims and a proliferation of high-priced consultants.

The savings from the overhauled Scientific Research and Experimental Development, or SRED, program should be pumped back into other programs, including direct grants to businesses and “late-stage” venture capital funding from the Business Development Bank of Canada, the panel said. Ottawa should also make much better use of government purchases to spur innovation in Canada – a model widely used by other countries.

Federal Science Minister Gary Goodyear said he will examine the balance between direct and indirect R&D spending. But he wouldn’t commit to implementing the report’s main findings or provide a timetable for making changes.

“We’ll take a very serious and considerate look at all the recommendations,” Mr. Goodyear told reporters.

Mr. Jenkins said he’s giving the government one to three years to embrace the main recommendations. “This was a problem 30 years in the making, so to expect to resolve big chunks of 30 years in three months might be a tad aggressive,” he said.

Missing from the report is any suggestion at how to make Canada a more attractive place to do R&D, worried Natan Aronshtam, global managing director, R&D and government incentives, at Deloitte & Touche LLP.

The most significant proposed changes involve SR&ED, a program that doles out $5-billion in federal and provincial credits to more than 24,000 Canadian businesses. Among the changes, the panel said the refundable credits should be reduced and eligible R&D work should be restricted to labour costs.

David Hearn of Scitax Advisory Partners in Toronto said the proposed changes would likely make the program less attractive to plastics, chemicals, paper, aerospace, biotech and drug manufacturers. There would be relatively little impact on software companies, who already spend most of their R&D dollars on labour, rather than equipment or materials, he said.

The SR&ED program currently offers smaller Canadian companies up to a third in cash back on eligible R&D projects of up to $3-million, including labour, materials and equipment. Smaller credits are available to all businesses.

The panel did not say what kinds of savings could be extracted from SR&ED. That decision will be up to the Harper government, officials said.



Five keys to getting innovation right:

1. Put innovation spending under the control of one federal minister and one agency.

2. Make programs simpler, transparent and accountable.

3. Shift balance from tax breaks to direct grants.

4. Put more money into “late-stage” venture capital.

5. Use big government purchases to spur home-grown innovation.