It’s now certain that Canada’s flagship research and development program is headed for a major revamp in the next federal budget.
Prime Minister Stephen Harper ended any lingering uncertainty this week, vowing to act “soon” on a recent task force report that urged major changes to the troubled $3.5-billion-a-year Scientific Research and Experimental Development tax credit.
Speaking to world leaders in Davos, Switzerland, Mr. Harper acknowledged the country isn’t getting good value from the money it spends pushing Canadian companies to be more innovative.
“We believe that Canada’s less than optimal results for those investments is a significant problem for our country,” Mr. Harper Thursday at the World Economic Forum.
And Mr. Harper vowed to act on the findings of an October task force report headed by Tom Jenkins, chairman of software maker Open Text Corp.
The report’s bottom line is that Canadian companies are investing less in R&D than they did five years ago and falling further behind foreign rivals in spite of one of the most generous tax and incentive regimes in the world.
The report’s key proposal is that Ottawa should make the SR&ED tax credit simpler and smaller, diverting the savings to more focused funding of business innovation.
Among suggested changes to the program, the report said the credit should be limited to labour costs and that the generous refundable portion of the credit for smaller Canadian-owned companies should be reduced.
Nearly 25,000 companies across Canada use the tax break, which for small companies means instant cash rebates for R&D they’ve already conducted. A recent Globe and Mail investigation found widespread abuse, including bogus claims and large consultant fees paid from credits.
Companies that use the program have long complained that the program is too bureaucratic, unpredictable and bears no relation to how company’s actually conduct R&D. The result is often no money for legitimate work, and quite often credits for companies doing routine product development.
Many of those complaints are likely to be included in a long delayed report on the SR&ED program by the federal Taxpayers’ Ombudsman, Paul Dube, which is expected to be made public as early as next week.
This flagship tax break amounts to a $5-billion transfer from Canadian taxpayers to businesses, including $3.5-billion from the feds, plus another $1.5-billion from several provinces that piggyback their own tax breaks on Ottawa’s plan.
In all, the federal government spends nearly $7-billion a year on R&D through a dizzying array of federal tax breaks and grants that have failed to boost business spending on R&D for the past decade.
The Jenkins report identified at least 60 programs, run by 17 different departments and agencies – and businesses don’t even know many of them exist.
Among other key recommendations in the Jenkins report:
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 funding.
4. Put more money into “late-stage” venture capital.