Study: Canada’s R&D subsidies are too rich, require review

University of Calgary report argues that R&D tax incentives for small Canadian firms are too generous by international standards.

2 November 27, 2014
by The Canadian Press

13-april-NRC-research-360CALGARY — Researchers at the University of Calgary’s School of Public Policy say Canada needs to rethink its research and development incentives.

In a new paper (An international comparison of assistance for research and development), authors John Lester and Jacek Warda say Canada’s R&D subsidies for small firms are high by international standards and their costs likely outweigh their benefits. They argue R&D assistance must benefit society as a whole, not just the companies receiving it.

Through the tax system, federal and provincial governments together pick up nearly 41 per cent of the R&D tab for small firms — well above the maximum 25 per cent rate the study recommends.

The paper says there ought to be a uniform R&D rate for all businesses regardless of age or size, but concede the case for targeted subsidies is stronger for young firms that tend to be more innovative and are more likely to grow.

It says in theory R&D subsidies should be refundable, but on a practical level there are concerns about lost revenue from larger firms.

© 2014 The Canadian Press



2 Comments » for Study: Canada’s R&D subsidies are too rich, require review
  1. George Thorpe, P.Eng. says:

    Many would disagree with the paper by Lester and Warda.

    Enabling innovation … requires a lot of the ‘right’ pieces to be in place. Supporting Innovation is not a simple or single-dimensional challenge.
    The Micro-Economic Policy Analysis Branch of Industry Canada report of 2001 states:
    “In conclusion, both the international and the Canada and US evidence strongly suggest that innovation is a key driver of productivity, and that of the innovative activities examined, M&E investment has the strongest impact on productivity independent of the interactions of investment and productivity. In addition, for Canada, the results also suggest that a one-time boost to innovative activity could positively and permanently raise the productivity growth rate.
    The Global Competitiveness Report (GCR) assesses the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity. The Report series remains the most comprehensive assessment of national competitiveness worldwide. http://reports.weforum.org/global-competitiveness-report-2014-2015/economies/#economy=CAN
    Canada’s Global Competitiveness rating was 9th in 2009/10, 10th in 2010/11
    Jump ahead to 2014 and Canada is substantially worse off with respect to Competitiveness and Innovation. The Canadian GCR rating has fallen to 14th in 2013/14 and 15th in 2014/15. This places Canada behind countries like United Arab Emirates, Denmark and Taiwan.
    The most problematic factors for doing business in Canada are:
    Inefficient government bureaucracy ……………………………..16.4
    Insufficient capacity to innovate …………………………………..15.1
    Access to financing …………………………………………………..14.0
    Inadequately educated workforce …………………………………9.9
    Tax rates …………………………………………………………………..9.4
    Tax regulations …………………………………………………………..9.1
    Restrictive labor regulations ………………………………………….8.7
    Inadequate supply of infrastructure ………………………………..5.0
    Poor work ethic in national labor force …………………………..4.2
    Policy instability ………………………………………………………….3.5
    Inflation ……………………………………………………………………..2.3
    Foreign currency regulations ……………………………………….1.4
    Poor public health ………………………………………………………0.4
    Corruption …………………………………………………………………0.3
    Government instability/coups ……………………………………….0.2
    Crime and theft ………………………………………………………….0.0

    Innovation is the poorest item in Canada’s basket of competitive assets.
    Canada has fallen to 22nd in the world in terms of overall Innovation. http://reports.weforum.org/global-competitiveness-report-2012-2013/#section=countryeconomy-profiles-canada
    Canada has fallen to 27th in money spent on research and development. http://reports.weforum.org/global-competitiveness-report-2014-2015/rankings/#indicatorId=EOSQ118
    And for a final read on the poor Canadian innovation performance – http://www.thecanadianencyclopedia.ca/en/article/inventors-and-innovations/
    What will stop this downward spiral?
    Reducing government support isn’t the answer.

  2. I completely agree with Mr Thorpe’s comments. Based on my thirty years of experience I would advocate that rather than cut the R&D credits, government(s) should tackle the top six factors Mr. Thorpe listed.
    We are a high tech, manufacturing company selling globally, that invests heavily in R&D as well as IP protection. Without the R&D tax credits our R&D spending level would have to drop by about 30%, effectively slowing down our progress. 30% may sound like a lot however when the listed negative factors are taken into account it is hardly sufficient to offset the disadvantages of operating against global competition.

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