March 6, 2018

Federal Budget 2018 Missed another opportunity to Maximize the ROI on Canada’s Innovation Investments

Federal Budget 2018 

Missed another opportunity to Maximize the ROI on Our Innovation Investments   

The 2018 Budget heavily bets the welfare of Canadians through investments in science and technological innovation, ignoring the core issue with such investments: the return on investment (ROI) and when.  The return on much of these investments being pre-commercial raises serious issues as to what extent the benefits will accrue to Canadians or whether they will simply slip away to other countries as startups are acquired offshore and our graduates and technologists moved on.  Even if this were not to happen, and history says it will, the heavy orientation of this Budget to academia, while ignoring the retarded commercialization environment that businesses are currently working in is a missed opportunity.  Some might consider this an imprudent investment of taxpayer dollars.

The following are doable improvements recognized by the business community as important to improving the investment climate:

  • remove skews in the tax system to growth of small and medium-sized businesses (SMEs) in Canada;
  • fix the close to $3 Billion Scientific Research and Experimental Development (SR&ED) Tax Incentive Program so that it is stable, predictable from the perspective of its users, and better oriented to supporting what businesses do in the real world, i.e., rapid development of technological innovation – not research; and  
  • build rewards into the system for firms that grow their Canadian innovations through exports.

All are being done by our competitors who seem better focused on obtaining the best possible return on their investments.  The business community has highlighted these opportunities to the Government.  A commitment to reforming the business tax environment by the Government, done right, could greatly help improve the ROI on what this Budget is committing Canadians to spend on science and innovation efforts. And, it would have been well received in the business community.  As it stands, with the Budget’s strong orientation to science and academia, much of the return may only occur well into the future and be limited for Canadians due to significant leakage of IP (Intellectual Property) and skilled knowledge workers to other countries.   

The Standing Senate Committee on National Finance found that the business community was losing faith in the tax system and its fairness and tax lawyers and accountants are saying the CRA is broken. The Standing Senate Committee is calling for an independent, comprehensive review of the tax system. (1)  The community is calling for a similar review.  The Minister of Finance has said that he wants to see what happens with NAFTA.  A legitimate point, but a concern is that a tax review of this nature inherently takes time to do well and there are lots of reasons being raised that justify a review besides what is occurring south of the border.  

Last year’s budget announced that the SR&ED program would be reviewed.  It has taken months to find out who is in charge and it now appears to be a relatively internalized review led by Department of Finance officials who say that they will NOT consult.  Hence, Finance’s review of the program will not have the advantage of transparent, public consultation with the program’s users to understand why there is currently concern about the SR&ED program.  

Is it not time that the Government take a step back and set aside the struggle that occurred with their small business tax reform effort?  Given the economic challenges coming up, is it not better for all of us to get on with an expeditious review and achieve a more effective, internationally competitive environment for our business to grow here in Canada?

Can we not improve the tax environment to get an improved  return on our investments by providing business with better incentives to exploit their successes here in Canada?

(1) Report of the Standing Senate Committee on National Finance, “Fair Simple and Competitive Taxation: The Way Forward for Canada”, December 2017.  

(first published in the Canadian Science Policy Centre)

Dr. Russ Roberts serves as CATA’s Sr. VP, Advocacy, Tax & Finance, drawing on more than 30 years of public policy expertise as he advances thought leadership for innovation and competitive success in Canada.

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