Ottawa is launching consultations on a 'cost-neutral modernization' of the Scientific Research and Experimental Development program, seeking input on several key questions, including how to better support research and development-intensive Canadian businesses.BLAIR GABLE/Reuters
The federal government will explore whether to give innovative companies that develop and keep intellectual property here a tax break on sales of their inventions globally as part of a sweeping review of its biggest research and development spending initiative.
On Wednesday, the government is launching consultations on a “cost-neutral modernization” of the Scientific Research and Experimental Development (SR&ED) program, which provides more than $3.5-billion a year in tax credits to companies that employ knowledge workers.
Industry players have long called for an overhaul of the 76-year-old program. The Liberal government first promised the review two budgets ago, then pledged in December it would launch consultations this month after a series of disappointing efforts to translate its innovation agenda into meaningful economic growth.
“Canadians and stakeholders will be invited to provide feedback on how to better target SR&ED to the broader goals of ensuring that support effectively benefits Canada and positions the country as a research and development leader,” said Katherine Cuplinskas, press secretary for Finance Minister Chrystia Freeland, in an e-mail.
The Finance Department is seeking input on several key questions, including: how to better support research and development-intensive Canadian businesses; how to improve the program’s eligibility criteria and overall architecture; how the program can better complement other R&D support programs; and whether there are more effective ways to provide assistance through SR&ED.
Under SR&ED, Canadian-controlled private companies can earn tax credits for 35 per cent of up to $3-million in eligible R&D expenses, and 15 per cent above that. Public and foreign companies earn 15-per-cent tax credits for qualified expenditures conducted in Canada.
The government will explore whether it should shift some of the supports now offered through SR&ED to an approach that focuses less on the inputs of R&D spending and more on the outputs of generating revenues from those efforts.
Under the “patent-box” incentive regime, the government would offer companies a lower tax rate on gains from intellectual property (IP) based on work conducted in Canada and that is domiciled here. Several countries use similar regimes including Britain, Ireland, Switzerland, France and Spain.
Through its consultations, the government will examine what would make for a competitive tax rate under a patent box and how such a system would measure up against SR&ED in making Canada more competitive as a destination to develop IP.
One ideal outcome would be to maintain the 35-per-cent SR&ED rate for smaller, financially stretched companies but lower the incentive for other businesses and use the savings to fund the patent box approach, Laurent Carbonneau, director of policy and research with the Council of Canadian Innovators, which represents Canadian-based technology companies, said in a blog Tuesday.
That would deliver “probably the most bang for buck that Canada could get with a cost-neutral approach,” Mr. Carbonneau wrote. “As innovation policy continues to evolve in a more cost-constrained fiscal environment, we have to think hard about the kinds of trade-offs we will have to make in making sure Canadians see real value for their investments in future growth and productivity.”
By contrast, Robert Asselin, senior vice-president of policy with the Business Council of Canada, which represents a cross-section of domestic and foreign corporations, has argued that large companies should get a richer SR&ED incentive that is more in line with smaller companies as the former generate “spillovers that are much greater than those generated by small firms” and would have a larger benefit overall to the Canadian economy. A patent box “would be a better way to incentivize commercialization of R&D than SR&ED,” he said in a 2022 memo to Ms. Freeland.
Meanwhile, Technation, a lobby group for both domestic and foreign technology companies, will ask the government to improve the efficiency of the cumbersome administration of SR&ED and for large companies to access unused SR&ED credits to fund risk capital for smaller, promising domestic companies, among other requests.
The government promised the consultations last month on the same day it announced a delay in the implementation of Canada Innovation Corp, a flagship innovation funding agency that was also announced in the 2022 budget, to “no later than 2026-27.” The CIC was supposed to be running in 2023. The delay potentially moves the launch of the CIC to after the next federal election slated for October, 2025. That means it may not materialize at all if there is a change in government.
CIC was set to be the latest in a long line of big programs from the Trudeau government to spur innovation and boost productivity, including the superclusters program and a plan to spur more government procurement from startups, that have fallen short of their promises and failed to make a meaningful impact on Canada’s chronically lacking productivity performance.