Here’s how Canada can fix its research-and-development tax credit

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JP Chauvet is CEO of Lightspeed Commerce. Lori Weir is CEO of Four Eyes Financial. Benjamin Alarie is CEO of Blue J Legal. Nicole Janssen is co-CEO of AltaML. They are all members of the Council of Canadian Innovators.

Fretting over Canada’s dismal productivity rate is a national pastime for pundits and politicians alike, so it was a bit surprising that there hasn’t been more chatter about the federal government’s plans to overhaul Canada’s most important innovation program.

But for those of us who are immersed in the innovation economy, making investment decisions and doing the hard work of entrepreneurship, the launch of consultations Wednesday on a key tax credit made us perk up.

Ottawa will begin consultations on reviewing the Scientific Research and Experimental Development tax credit with an eye to “better target SR&ED to the broader goals of ensuring that support effectively benefits Canada and positions the country as an R&D leader,” although the Department of Finance has said proposed changes should not significantly increase the cost of the tax credit.

This is a really big deal, because SR&ED is a tax credit which creates an incentive for companies to spend money on research and development. In total, this tax credit is worth about $4-billion to Canadian businesses annually, including a portion that is refundable, meaning the government actually pays out money to companies.

At $4-billion, SR&ED does more than twice as much to fund innovation in a single year than the entire lifetime of the government’s ill-fated superclusters. But the criteria for what exactly qualifies as a SR&ED eligible expense has long been complicated, unclear and out of step with the realities of the modern innovation economy.

Reshaping the SR&ED program has the potential to reshape the innovation economy, and the early signals from government are generally encouraging. Here’s how it should be done.

Government is tightening its belt and we understand that now is not the time to be expanding the criteria in a way that would massively increase claims. But there is significant room to reform the existing program for the maximum benefit of Canadian companies.

As CEOs we can feel how SR&ED shapes the innovation landscape – sometimes negatively. A lot of this is based on hunches and anecdotal experience, because the program is opaque and convoluted. But most Canadian tech CEOs are familiar with the cottage industry of consulting firms that will shepherd your SR&ED claim through the system – for a percentage of the payout.

It might make good business sense to use these services, but from a public policy perspective, it would be vastly better if the program was redesigned to be straightforward and clear, such that companies would be able to make the application themselves – with all the funding going directly to R&D, instead of paying for tax consultants.

There are other issues that we can feel playing out with SR&ED, including foreign multinationals using Canada as a cheap outpost for government subsidized R&D work, and concerns over the concentration of funding.

Last year, researchers at the University of Sherbrooke published some landmark research on the Quebec government’s $350-million digital media tax credit for video game production. What we learned is that about 200 businesses claim the tax credit, but of those, an astonishing 75 per cent of that $350-million went to just 15 companies.

Is this same kind of dynamic at play with SR&ED? We don’t know definitively because of the program’s opacity, but we can certainly feel the impact of foreign tech giants who set up R&D branch plants and scoop up Canadian talent. What’s worse, when Canadian tax dollars subsidize multinationals’ R&D work, it doesn’t actually benefit the Canadian economy.

The government should closely examine how foreign companies receive the SR&ED tax credit. Allocating funds to foreign companies in regions with low unemployment and a skilled-talent shortage is counterproductive. And when Canadian government funding is building wealth for foreign multinationals, what we’re effectively doing is paying Silicon Valley tech giants to develop new intellectual property that they’ll sell back to us later.

As the federal government reviews SR&ED, transparency should be the guiding principle. We should know what kind of R&D is being done, and by which companies. And ultimately, it is entirely possible that the government can make changes which benefit the Canadian economy without increasing the cost of the tax credit.

We are in a moment where Canada’s GDP growth is languishing, and labour force productivity today is lower than what it was in 2017. We need bold, cost-effective actions to meet the economic crisis we are facing.

Now is the best possible time to reform the country’s marquee innovation funding mechanism to unapologetically focus on the engine of economic growth – homegrown Canadian companies at the forefront of technological development and research commercialization. This is how you generate real wealth, and turn around our economy.