Examining Canada’s Science and Technology Strategy: SR&ED and More

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Examining Canada's Science and Technology Strategy: SR&ED and More
Learn about how Canada’s Science and Technology Strategy might impact your Tax

The Canadian government released a science and technology strategy in 2007 that was intended to accelerate the process of innovation in our country. With an eye to putting that in context, the Library of Parliament released a document that same year reviewing science policy strategies over the years, as well as commenting on and summarizing the federal government’s strategy.

The report, called Mobilizing Science and Technology – The New Federal Strategy, only briefly mentions SR&ED. However, the tax credit is a larger part of the innovation debate surrounding Canadians.

Numbers from the OECD and more recent criticisms from the Jenkins report indicate that Canada is lagging in innovation, and there are questions about how to address that problem.

As a result, tax credits such as SR&ED are coming under scrutiny. Some say that the credits are forcing the government to pick winning and losing industries, a task that federal officials are reportedly not qualified for; the practice hurts innovation, the critics say.

On the other side, advocates for tax credits say that money invested in the companies frees up more time and money for the firms to focus on research and hire employees to perform it.

This article will summarize that report.

Attempts to fix the system

The report emphasizes that the federal government has spent years working to improve innovation in Canada.

“Science, research and development underpin Canada’s position in the knowledge economy, where strength depends on capacity to innovate and to stay ahead of the technological curve,” the report states. “Over the past decade, federal government policies have aimed to foster world-class research programs in universities and research institutes and to encourage industrial investment in research and development (R&D).”

Citing a 1999 study from the Association of Universities and Colleges of Canada, the report states that Canada’s science infrastructure was in poor shape in the early- to mid-1990s. As a result, the Canadian government increased science funding and tried to foster more science-friendly policies, such as the establishment of Canada Research Chairs.

Successes and challenges

“With hindsight,” the report stated, “some of the most influential (programs) have been: the increases in research council funding; the Canada Research Chairs program; the creation of foundations, particularly the Canada Foundation for Innovation; and the focus on partnerships – both within research silos through the Networks of Centres of Excellence program and through the leveraging of federal funds to encourage provincial and private-sector matching investments in research activities.”

However, even with these measures in place, Canada is still behind the average of countries within the Organisation for Economic Co-operation and Development regarding research intensity.

The report also expressed concern about the government’s recent practice of creating foundations focused on science; even though they are arm’s-length from government and not as dependent on the federal budget, the Auditor General has drawn attention to “the lack of accountability of the federal government for the funds they disburse through foundations.”

How funding is allocated

According to the report, the Canadian government funds 18% of the research and development done in Canada. Federal government laboratories used to do most of the research funded by the federal government, but since 2003 this has shifted to universities, mainly.  Additionally, the federal government provides $3 billion in tax credits to research and development, most of it in the area of SR&ED.

That sounds impressive when taken on its own, but in comparison to other countries, Canada’s research spending pales when looked at as a percentage of the gross domestic product. It’s remained flat at 2% despite the new initiatives – below the average of 2004 OECD figures cited in the report.

Canada also performs “poorly” in business spending on research and development, as only a few companies do heavy-duty research, the report stated. On a sobering note, the top company cited in this 2007 report was Nortel Networks, a former R&D powerhouse that is now essentially a shell company, wrapping up a few last affairs.

On the bright side, Canada’s higher education spending on R&D is the tops of the G7 and second in the OECD, behind Sweden. But Canada is committed to putting a greater emphasis on industrial spending, the report noted, with expert panels and a business innovation assessment all examining the issue.

Canada’s new strategy for science and technology

Launched in May 2007, the federal science and technology strategy has several aims:

  • Foster more private sector spending in science and technology. This included the establishment of five research networks under the Networks of Centres of Excellence ($11 million in Budget 2007); creating new centres intended to foster commercialization ($350 million over three years); maintaining use of SR&ED; and aiming to have “the lowest tax rate on new business investment in the G7.”
  • Narrow in on several science and technology priority areas: environment, natural resources/energy, health and life sciences, and information and communications technologies.
  • Keep Canada at the top of higher education spending in R&D, as well as giving students new funding opportunities through industrial partnerships;
  • Think about a new way of managing non-regulatory federal R&D labs, such as National Research Council laboratories co-located with universities. A task force was under way at the time;
  • Bring together the advisory councils of the Science, Technology and Innovation Council.

Open questions

The report summed up by giving some feedback on the federal strategy, particularly with regard to things that might be missing. Unanswered questions included:

  • What measuring stick will be used to measure progress in R&D?
  • How will Canada work in large international projects, such as the CERN Large Hadron Collider?
  • How will the government put its spending in context with the priority areas? A $50 million funding announcement for the Perimeter Institute for Theoretical Physics fell outside of the four stated areas, for example.
  • What funding can the universities and major science councils (NSERC, SSHRC, CIHR) expect in the coming years, so they can make adequate plans?
  • What role does the National Science Advisor play in all of this? After the advisor left the Privy Council in 2006 for Industry Canada, he or she no longer directly advises the prime minister. The advisor’s role in science policy is not clear, the report added.

This article is based upon a Library of Parliament report: Mobilizing Science and Technology – The New Federal Strategy. The report was written by Eleanor Fast, who is with the Science and Technology Division of the Parliamentary Information and Research Service.

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