Who is shredding SR&ED?

The fattest course on the menu of Canada’s federal support for R&D is SR&ED, the $4-billion “Scientific Research and Experimental Development” tax credit program. So many people have been beating on SR&ED lately, which make you wonder whether it still have any political allies. The Liberal and NDP mantra against corporate tax cuts would be consistent with taking apart SR&ED. But could the Conservatives also be turning against this business-friendly program? Eviscerating SR&ED might be just the antidote for a government under electioneering attack for planned Corporate tax reduction.

Seed, pre-seed, post-seed, pre-angel, post-angel, programs for first contact between company and university, programs for ongoing contacts between company and university, short term programs, long term programs, programs that pay too much for too short a time, programs where the money is not worth the paperwork… Engage, Interact, Create, Proof of principle, you name it.

Welcome to Canada’s many boutiques for funding “innovation”: NRC, IRAP, AIF (Atlantic Innovation Fund) and another AIF (Automobile Innovation Fund), as well as many, many more in each province.

But the biggest elephant in the room is the aforementioned $4 billion SR&ED tax credit program, which is essentially a federal tax incentive program administered by the Canada Revenue Agency that encourages Canadian businesses of all sizes, and in all sectors, to conduct research and development in Canada.

As reported before, a Government R&D review expert panel is currently working on figuring out why Canada lags behind many of its peers in capitalizing on research advances despite Ottawa’s $7-billion spending on promoting “innovation”, including SR&ED. The panel asked for input, and they got it!

The submission papers were made public last week and boy, what a treasure trove of special pleading. They include more than 250 submissions from industry, academia and government.  As I said in a previous post, you don’t need to be a fortune-teller to imagine the line-up of CEOs waiting to testify as to how important these tax incentives are to the country. “Paris vaut bien une messe” and a billion or four are surely worth testifying for.

Surely enough, my friend Rob Annan did read some of the submissions and his reaction was: “I sympathize with Tom Jenkins and his fellow panelists who will have to sift through these not-even-thinly-veiled self-interested calls for support.”

He also reports: “Major industry players have made submissions, including JD Irving, Pratt & Whitney, and Bombardier. These international industry leaders will no doubt be able to provide a global sense of how to nurture innovation and strengthen our economy. What are their suggestions? Well, Irving would like rules to be changed so it can get IRAP funding and access collaborative R&D grants without university collaboration. Pratt & Whitney would like foreign-controlled companies to qualify for greater SRED credits, including for R&D performed outside Canada (not clear how that boosts Canadian innovation…). And Bombardier reminds the panel that its industry has “unique characteristics” that require governments to make exceptional investments to address their R&D needs. Of course it does.”

Less expected however is the frontal attack waged on SR&ED by the Globe & Mail and others. In particular, the article “Flawed R&D scheme costs taxpayers billions”, by Barrie MacKenna, which follows, “How Canada’s R&D incentive gets abused” that appeared a couple of weeks ago.

His hard-hitting analysis seems to be sound, even if some of his numbers look a bit shaky. “This year, Ottawa and the provinces will dispense $4.7-billion to more than 20,000 Canadian companies under one of the richest R&D tax regimes in the world. But a third or more of that cash is being wasted and paid to consultants as a result of hazy rules on what’s legitimate R&D and limited government auditing resources, according to dozens of interviews with consultants, claimants and government officials”.

For us academics, the amusing part of all this is that the program can be considered to be “peer-reviewed”… by consultants and tax auditors.

As fellow French mathematicians like to say: “De deux choses l’une”. Either the Globe is trying to influence the R&D panel, or it is simply paving the way and preparing the audience for a Flaherty surprise in a couple of weeks: the obliteration of SR&ED.

Why? Because the program doesn’t really make any sense, especially political sense. Think about how much more efficient it would be if this money is available to distribute on demand and not after the fact, allowing companies to make serious (business) proposals to government, which will then conduct appropriate reviews and funding decisions.

And from the political side, think about how many announcements this would make! But the real kicker in the current political context might be to use the cancellation of SR&ED to counter the criticism for the planned corporate tax cuts. How many birds in one stone?

In any case, don’t forget to give credit to “Piece of Mind” if this actually happens. Otherwise, you may forget I ever said that.

This entry was posted in Op-eds, R&D Policy. Bookmark the permalink.

6 Responses to Who is shredding SR&ED?

  1. Peter Bell says:

    Great links. Thanks!

  2. Nilima says:

    As I commented on Rob’s blog, the submissions from the academe to this review panel are somewhat disappointing. I fully expected companies to hold out a begging bowl, which they did. I also hoped for cogent, creative arguments from our research establishment, defending programs which work and precisely skewering programs which don’t.

    Compare and contrast with the Royal Society in the UK, whose spirited defense helped protect research in their universities amidst deep budget cuts: http://royalsociety.org/policy/reports/spending-review-submission/

    If we have to wait for an article in the Globe and Mail to articulate what we believe, that’s a problem.

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  6. SR&ED says:

    SR&ED is directly used by startups and small businesses to finance their growth because it provides a direct source of cash (refundable tax credits) for expenses incurred. For example, without SR&ED, early-stage high-tech startups would constantly be suspending operations, in order to apply for direct funding (in the hopes that can get it to commercialize their idea). Remember, it usually takes 2-3 years before a startup can be cashflow positive. Until then, their only forms of financing are friends+family, and SR&ED.

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