Navigating Canada’s productivity challenges has become a familiar concern for both analysts and policymakers. However, there’s a notable silence around a pivotal initiative by the federal government to reshape our nation’s critical innovation program.
Ottawa has initiated consultations aimed at refining the Scientific Research and Experimental Development (SR&ED) tax credit. The objective is to strategically align SR&ED with broader goals, ensuring effective support for Canada and positioning the country as a leader in Research and Development (R&D). The Department of Finance emphasizes that proposed changes should not substantially escalate the cost of the tax credit. Why is this significant for us? Well, the SR&ED tax credit serves as a powerful incentive for companies to invest in research and development, amounting to approximately $4 billion annually for Canadian businesses. This figure includes a refundable portion, meaning the government actively contributes funds to companies engaged in innovation.
To put things into perspective, the SR&ED tax credit contributes more than twice the funding for innovation in a single year than the entire lifetime of the government’s superclusters initiative. However, the existing criteria for SR&ED eligibility have long been intricate, unclear, and not aligned with the dynamics of the modern innovation economy. Reshaping the SR&ED program holds the potential to transform our innovation landscape, and initial signals from the government are promising. Here’s our take on how it can be done effectively.
Understanding the government’s need to tighten fiscal policies, expanding criteria that lead to massive claims is not the solution. However, there’s ample room to reform the existing program for the maximum benefit of Canadian companies. A critical area for scrutiny is how foreign companies access the SR&ED tax credit. Allocating funds to foreign entities in regions with low unemployment and a skilled-talent shortage is counterproductive. Supporting Silicon Valley tech giants with Canadian funds to develop intellectual property that they may later sell back to us undermines our national interests.
As the federal government reviews SR&ED, transparency should be the guiding principle. Disclosing the nature of R&D activities and the companies involved is crucial. Importantly, changes can be made to benefit the Canadian economy without necessarily increasing the cost of the tax credit.
In the current economic climate where Canada’s GDP growth is stagnant, and labor force productivity lags behind 2017 levels, bold, cost-effective actions are imperative. We need to provide the necessary support for Canadian entrepreneurs to innovate and propel our nation forward.
Let’s stay tuned for further developments and work collectively towards a more innovative and prosperous future.
