July 14, 2020

The Canadian Advanced Technology Alliance calls on feds to protect Canadian $36B annual innovation investment and endowment

The Canadian Innovation Promise

Canadian innovation investment of $36B year over year via universities, commercialization programs and direct investment was a major shift toward a knowledge economy. The strategy has been delivering competitive talent, jobs, immigration drivers, and economic returns to Canadians.

This investment can not be converted to national returns without our small and medium science and tech centric companies transforming research and science into market ready products and services for the world. These companies remain economic engines for Canada’s future growth post Covid.   

Leaving Canadian innovators behind is a broken promise to Canadians

Without protection these companies who are the glue for Canadian sought after talent, intellectual property and strategic capabilities are at risk of leaving CANADA for good. Canadian’s expectations for a return on their investment will  leave with them. 

As Canada focuses on smashing COVID-19 – an offensive for Canada’s future is equally needed

Our way of life, our social, health and education programs will need healthy national revenues to survive. Our politicians and government  leaders are doing a commendable job navigating through chaos, looking after our health and delivering emergency programs.

Small and medium tech businesses being left behind under current programs are at risk of being purchased by large international firms. We know that once Canadian tech companies fall,  shattering their teams, they can not be put back together again.

Historically, with each economic downturn, Canada’s unsupported tech sector resulted in a 10 year recovery for new technology platform development. Canada can not afford to make the same mistake.

“APPLE & MICROSOFT FOCUS ON ACQUISITIONS Apple, Google, and Microsoft have not invested in any companies … since the advent of the pandemic. However, both Apple and Microsoft have been acquisitive, purchasing 5 companies total since the start of the pandemic …taking advantage of compressed valuations due to the pandemic to buy companies cheaply.” – CB Insights

Small and medium tech companies are one of the great hopes to lead us out of the stalled economy faster, but only if protected. These potential economic catalysts will be leading the future of jobs and the economy either for Canada or others.  Pre-COVID19 advanced technologies and ICT outpaced job and economic growth rates by almost twice our national average.

COVID emergency programs – some are working – others  inaccessible

Emergency support started with the Canada Wage Subsidy, IAP/ IRAP was originally created for 1000 companies who didn’t qualify. The $40,000 loan (CEBA) has been well subscribed and of great help for smaller companies . 

All were welcome programs and policy makers recognized scale limitations and added programs like the EDC and BDC liquidity/capital matching packages. Unfortunately these additional packages are not accessible or practical for most small, medium and growth science and technology centric businesses.

Only 18% of tech owners who responded to the CATA COVID19 Business Pulse Survey in May 2020 were confident that existing and proposed funding would help them survive the next 12 months.

Leveraging Canada’s largest innovation program – Science Research and Economic Development Tax Credits provides a key opportunity to address the gap.

13,000 small and medium Canadian owned tech businesses participate in Canada’s Science and research tax credit program.  They invest their own money in research and science, employ 760K people across Canada paying $34B in payroll*.

Even with annual revenues of $188B in 2019, they are vulnerable. If 40-60% of these companies fall, and their technologies are absorbed off-shore it will be years before our tech sector rebuilds and recovers. 

 

The DATA Solution

One fast simple solution can help protect some of the 13,000 tech companies in need and the 760K people they employ. In a letter to Prime Minister Trudeau, 3 April, The Canadian Advanced Technology Alliance (CATA)  proposed a Resilience Rebound Emergency (RRE) Data Solution – Fund. This can also be used as an eligibility fix expanding undersubscribed programs.

Protecting some of the 13,000 Tech SMEs,  and keep Canadian tax payer annual $36B/year investments in intellectual property, talent, education and commercialization IN CANADA. We acknowledge that the RRE is not the only solution, but we believe that it or a derivative will work.  

Complex eligibility is an obstacle to right-sized assistance for innovator SMEs under existing programs. CATAAlliance proposes alternative eligibility criteria scaled to company operational size for existing programs or via a new fund. 

The Canadian Resilience and Rebound Emergency (RRE) Fund and DATA Solution – A short term protective measure to shore up and restart the innovation and science eco-system. Right sized assistance will encourage the retention of sovereign IP and bring talent back to work as a foundation for bridging to the future

The program uses Canadian Revenue Agency data and relationships within Canada’s largest innovation program, the Science, Research and Experimental Development tax credits. Track record and claim amounts are used  to simply pre-qualify and right size loans. The assistance would be partially forgivable based upon IP and talent staying in Canada. 

Under-subscribed program budgets could be reallocated to get people back to work and boost subscription rates. Funds would finance growth expansion and development of new opportunities, help bridge stressed COVID19 induced issues for these firms and help those that need quick cash to respond to opportunities created by COVID.

The Canadian Revenue Agency (CRA) experience and data with the established firms with good SR&ED records provides the basis for a pre-approved loan mechanism for companies.

A baseline loan cap could be based on historic company investment in R&D. The financing could be administered by CRA, like the successful digital-first CERB and Child Tax Credit top up programs or via another mechanism including existing programs. 

More specifically, we suggest a zero interest loan, with a forgivable component  based upon qualified, capped expenditures in R&D, plus IP, finance, marketing and sales. We suggest that the amount would be based on historic claim size; up to 5X annual SRED claim (averaged over the last 2 years of SR&ED)  

Obviously, there could be other derivatives, but the core issue is how to protect Canada’s huge investment in these technologies and development teams for the recovery and the benefit of its citizens.    

Canadian employer businesses are 97.9% small and medium size employing 89.6% of the private sector