At SREDucation, we’re taking the time to document all of the changes that have occurred to the SR&ED program over the years. In our “From the Archives” series, you’ll be able to see how the program has evolved since its inception in 1986. For a timeline of these events, check out the SR&ED Tax Credit page on Facebook. Stay current with the program by understanding the historical context.
In March 2012, the University of Calgary School of Public Policy (with assistance from the Manning Foundation for Democratic Education) released a policy paper examining the Jenkins Report.
The Jenkins Report is more formally known as the Review of Federal Support to Research and Development, and was formed by the federal government to examine the issue of innovation in Canada. The team, led by Tom Jenkins, released its report in 2011.
“The two most promising [recommendations] are: (1) the consolidation of research and development spending programs at the federal level and (2) the adoption of smart procurement as a means of spurring innovation in the non-government sector,” the University of Calgary paper stated.
“The message for government and business is clear: the former can and should facilitate Canadian business innovation by removing tax and regulatory burdens, and facilitating better public-private cooperation, while the latter must make innovation a major part of corporate culture.”
Below, this article summarizes the report, particularly focusing on those aspects that have to do with the Scientific Research and Experimental Development (SR&ED) tax credit.
Summarizing the Jenkins Report
The University of Calgary report agrees with Jenkins’ assessment of Canada’s “particular laggard” spending in research and development, pointing out that Canada spent $12 billion or 0.8% of the GDP in 2010 (the latest statistics available.) However, it also said Canadian companies are happy innovators, particularly in the fields of mining and petroleum.
The university then narrowed down Jenkins’ eight principles for reform into three, saying that these would be more streamlined:
- Efficiency (transformative programs that are well-designed, broad, and flexible);
- Effectiveness (positive net benefits and commercial success);
- Transparency (regular reporting of performance and published evaluation).
The university report said it’s necessary to avoid breaking out research by sector in order to glean perceived trends. It pointed out it is difficult to predict the winners and losers in each decade, and to pick the hot sectors ahead of time.
“In principle, the greatest public support should be given to those sectors characterized by large spillovers in research benefiting other parts of the economy. To the extent that it is difficult to measure the size of sectoral spillovers,
uniform support for research is provided as exemplified by the current tax support system.”
The report also pointed out where we could do better in supporting business.
“To assist private sector success, we should identify those barriers to innovation and public policies that undermine innovative activity,” it said.
“One aspect is to provide appropriate regulations (such as patents and copyright laws) to help businesses reap the value of innovation … Further, taxation and regulatory policies should be reformed when they impede innovative activity.”
SR&ED, the report pointed out, is one of the most generous support systems in the world. However, innovation remains low. “Obviously, something is not working well,” the report stated.
“Perhaps one approach to focusing research support is to place more emphasis on direct support programs such as the Industrial Research Assistance Program (IRAP) that benefit small and medium-sized businesses. For large companies, no significant direct program operates as a substitute for tax support. Thus, it is not surprising that [Jenkins] focuses on small and medium-sized businesses as a way to reduce the value of the tax credit.”
The university report agreed with Jenkins in one of its assessments of SR&ED, saying that shifting to direct support is a better strategy for supporting businesses, although there is risk involved due to the costs of bureaucracy associated with the proper implementation of direct support.
“The argument in favour of refundable tax credits is that support is given to risky endeavours since it is not known whether the innovation shall be successful or not. On the other hand, targeting the credit to successful companies encourages those profitable innovations, which are eventually commercialized,” it added.
“Direct spending programs might be a better means to implement risk-sharing since governments are more involved with monitoring the program compared to the SR&ED tax credit program.”
Limitations of Jenkins’ Recommendations
While agreeing with Jenkins on many fronts, the university report said that several “critical” matters were not included in the section relating to tax support. Among them:
- Looking only at labour costs as a part of the research credit “discriminates against capital-intensive research”, the report stated, saying it’s not clear that efficiency gets better in the face of reduced compliance expenses.
- It’s not certain if the tax credits provided by the Federal government and provinces are “at an appropriate level of support.”
- Only companies of less than $15 million in revenues qualify for the small business credit rate of 35%, relating to research and development. “If capital costs were to be excluded from costs to determine the credit for both small- and medium-size businesses, a new size category of corporations would need to be identified as ‘medium,’ ” the report pointed out.
- It argued that the small business R&D credit is possibly “too generous and inefficient” because of several reasons, among them that it encourages research to flow to small companies, that then turn around and sell the research to larger ones. It also is a disincentive against a small company to grow.
“While [Jenkins] nudges the system away from indirect tax support for small and medium-sized businesses, it fails to provide a braver and more comprehensive approach for reforming the direct and indirect support system for research and development,” the report added.
“For example, taking into account reported compliance costs with the tax credit program for small businesses,
it does not seem that a credit more than 25 percent is needed to put it on par with larger companies. The panel’s recommendations will create some incentive for small and medium-sized businesses to use IRAP rather than the tax credit program, especially companies with more capital-intensive projects.”
This article is based upon a University of Calgary School of Public Policy research paper called: Implications of the Recommendations of the Expert Panel on Federal Support to Research and Development. The report was written by Preston Manning of the Manning Foundation for Democratic Education, and Jack Mintz of the School of Public Policy, University of Calgary.