Shortly after federal Finance Minister and Deputy Prime Minister Chrystia Freeland announced a review of the Canadian government’s SR&ED program, the first subtweet blared out.
“We’re going to review SR&ED again…again again. Again,” tweeted Daniel Munro, senior fellow in the Innovation Policy Lab at the Munk School of Global Affairs and Public Policy at the University of Toronto.
Speaking over the phone with BetaKit, Munro noted the Scientific Research and Experimental Development program–better known as SR&ED–isn’t working, in his opinion. But he wasn’t convinced another review of the $4 billion annual program would fix things. After all, the SR&ED program has been tinkered with and reviewed almost constantly since it was first established in 1944.
Some of the more recent reviews and amendments include 1987, when the federal government launched a major reform of the program to redefine the meaning of “scientific research and experimental development” as set out in the Income Tax Act. More changes came in 1994,1995, and 1998, when the Minister of National Revenue announced measures to improve the administration of tax incentives for SR&ED.
“Although it is highly popular, well appreciated, and utilized, there are some that stay away from SR&ED because of the work involved, or a misapprehension about qualifying or eligibility. Some believe that it may not be worth the hassle.”
– Alex Popa,
Munro noted that two of the reviews over the last decade arrived more or less at the same conclusion: that the Canadian mix of direct and indirect support for R&D and innovation in Canada ought to be rebalanced towards direct support and away from indirect support. The largest contributor to the latter, of course, is the SR&ED program.
As Canada’s largest research and development incentive, the SR&ED program has its detractors and its fans. BetaKit spoke to both to find out what a SR&ED program review might look like, and what they hope to see out of it.
What Munro would like to see out of a federal government review is a down-sized SR&ED program, with $1 billion of the program’s budget moved to back the proposed, new Innovation and Investment Agency.
In contrast to Munro, Alex Popa, founder and former CEO of Boast.ai, doesn’t believe a SR&ED review would be a bad thing. He claims the SR&ED program has a “massively positive impact on thousands of Canadian businesses.”
Popa noted that the Canadian Revenue Agency, which administers the SR&ED claims, sees between 15,000 to 20,000 businesses access the incentive annually, providing those businesses with a reliable way to invest in staff, processes, invention, discovery, and innovation.
But it comes as no surprise to find Boast.ai bullish about the tax credit as it has some skin in the game. The company’s software platform automates the process for claiming R&D tax credits in the United States and SR&ED tax credits in Canada.
Although the Canadian government calls the SR&ED “the cornerstone of Canada’s innovation strategy,” it’s apparent it has concerns over the program’s impact as well. In Budget 2022, the government asserted that Canadians and Canadian companies need to take their new ideas and new technologies and turn them into new products, services, and growing businesses. “However,” the budget stated, “Canada currently ranks last in the G7 in R&D spending by businesses. This trend has to change.”
Canada’s spending lags to the point where comparatively it places in the lower third of the Organisation for Economic Co-operation and Development (OECD) countries, between Estonia and Portugal.
As of December 2021, the OECD reported that Canada’s GDP per capita was 12 percent lower than OECD pest performers, and productivity 18 percent lower. Yet, according to Munro, other OECD countries view Canada’s incentive program as a success, and are looking at potentially instituting a similar kind of program.
In Budget 2022, the federal government said that through a review of SR&ED it wants to ensure that the program is effective in encouraging R&D that benefits Canada. The government also wishes to explore opportunities to modernize and simplify the program, as well as examine changes to the incentive’s eligibility criteria to ensure both adequate support and overall program efficiency.
The government also announced that it would consider and seek views on creating a patent box to examine whether the tax system can play a role in encouraging the development and retention of intellectual property coming from R&D in Canada.
Following the publication of this story, the Department of Finance responded to BetaKit’s various questions and prior requests for comment by stating that “more information about the review will be made available in due course.”
As much as Popa supports SR&ED, he still sees room for improvement, calling for a simplification of the program. He noted the criteria for work that qualifies for the incentive and expenses are complex, vary from industry to industry, and can be daunting.
“Although it is highly popular, well appreciated, and utilized, there are some that stay away from SR&ED because of the work involved, or a misapprehension about qualifying or eligibility,” Popa said. ”Some believe that it may not be worth the hassle.”
“There’s constant tweaking of this program, but I think it’s just that: tweaking.”
Council of Canadian Innovators president Benjamin Bergen echoed the need to make the SR&ED program simpler. He said the CCI’s members want to see the program become more efficient in order to reduce the bureaucracy that currently makes the program “cumbersome and unreliable.”
Some of the concerns raised over the SR&ED program include that extensive documentation and justification are necessary to access the credits.
“At CCI we’ve been talking about this issue for years, and now the federal government has assured the innovation sector that they will consult with us and then move swiftly to revamp SR&ED,” Bergen said. “If done right, a modernized SR&ED will help direct R&D spending in Canada to produce more productive innovation outcomes.”
Bergen noted that CCI approved of the government signalling that IP generation should be a key consideration for SR&ED going forward, opining that by establishing the right policy frameworks for patents and other intellectual property related to innovation under the tax credit, Canada could create the next generation of intangible assets to drive prosperity.
About that IP review: Viet Vu, a senior economist with Brookfield Institute for Innovation and Entrepreneurship, sees IP policy as almost an entirely separate suite of policies to be reviewed. Vu suggested that even if the government did develop a patent box, the key question in understanding and reforming SR&ED should directly focus on whether providing tax incentives for innovative activity encourages innovation.
“And if so, to which kinds of firms do they actually encourage innovation?” Vu rhetorically asked. “That’s really the key question in understanding the policy.”
Byran Watson, a partner in the SR&ED consulting firm Flow Ventures, isn’t even certain the program needs a review. He noted that some refinements in language to the wording of the program have been made in the past few years to try and help companies better understand what the criteria were for the incentive program.
“I hesitate to say, ‘yes, it needs a review,’ only in that I don’t know there’s been time to digest all those changes yet,” Watson said.
Watson believes that it is important that the companies articulate the value of the program, and the disruption it might cause if major changes were put in place. “It’s a good program,” he said. “The compliance is globally stellar in terms of the voluntary complaints. You don’t see a lot of companies filing things they shouldn’t be and there’s a good compliance system, the audit system, to ensure that.”
Back at the University of Toronto, Munro said that he didn’t think “our experiment” with an indirectly weighted R&D system has worked out very well for Canada. He noted that countries like Israel, which tops the OECD for gross domestic expenditure on R&D as a percentage of GDP, and Finland, which is in the top quarter of countries, both rely on direct support for business R&D.
“There’s constant tweaking of this program, but I think it’s just that: tweaking,” Munro said. He added while he had tweeted of the program being reviewed again and again, he emphatically added: “I think it’s time for a good, proper, rigorous review of this thing to see whether or not it is producing the outcomes it’s supposed to produce.”
UPDATE 26/05/2022: This story has been updated with comment from the Department of Finance.
Images courtesy Wikimedia Commons.