What Is the Purpose of the SR&ED Program?
Why was the Scientific Research and Experimental Development (SR&ED) program introduced,
and what is the purpose of the SR&ED Investment Tax Credit Program?
Although you may have previously claimed SR&ED, you may be uncertain as to why the program was created and its ultimate purpose in regards to government policy. Drawing from government documents, including the 2017 Report on Federal Tax Expenditures and previous budget documents, this article will examine the government’s reasons for introducing the SR&ED program, and ultimately, what the government wanted the program to achieve.
The SR&ED Program’s Reported Purpose
According to an article published in January 2018, by Brian Cookson, the SR&ED program was conceived in 1985 to keep Canadian business “competitive and growing.” 1 Cookson states that upon examining recent Federal Budget papers, they found that the government stated the SR&ED program was intended to achieve the following objectives:
- Promote competitiveness
- Increase growth
- Create highly skilled R&D jobs 2
The author admits these terms “are very broad and somewhat vague, so that the existing SR&ED program can only hope to indirectly and partially help achieve the above objectives;” 3 however, upon our own review of the Federal Budget papers, we found no evidence of these terms in any of the documents, from any of the years the budgets were published.
The 1992 Federal Budget Paper states that “the benefits of successful research and development activity typically extend beyond the actual firms involved and into the economy more generally,” however, there is no elaboration on this that indicates the SR&ED program’s purpose was to meet the objectives listed above.4
SR&ED’s Purpose in the 2017 Report on Federal Tax Expenditures
The 2017 Report on Federal Tax Expenditures (the most recent report at the time of writing in January 2018) is a document that gives the most explicit definition of the purpose and objectives of the SR&ED program. The report states:
[The SR&ED program] is intended to encourage the performance of scientific research and experimental development in Canada by the private sector and to assist small business to perform scientific research and experimental development (Budget 1996). The rationale for this tax support is that the benefits of SR&ED extend beyond the performers themselves to other firms and sectors of the economy. The existence of these spillovers of externalities means that, in the absence of government support, firms would perform less SR&ED than desirable for the economy.5
The report also notes that the objective of SR&ED is to “encourage or attract investment,” 6 and indicates that the government benefits from offering SR&ED support to small firms and the private sector, as the success of these businesses improves economic conditions in Canada as a whole.
SR&ED’s Purpose in the 1996 Federal Budget
We reviewed the 1996 Federal Budget documentation referred to in the 2017 Report and found no explicit mention of the SR&ED program. The 1996 Budget Plan did mention that the government sought to invest in innovation “to encourage the use of the latest ideas and technologies in the development of new and better products and processes,” 7 however, the Canada Revenue Agency (CRA) states that SR&ED is not “the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,” 8 and so it can be argued that this statement in the 1996 Budget papers does not refer to the SR&ED program.
However, as the 1996 budget sought to:
[…] foster the creation of jobs and growth […] through spending and tax expenditure reallocations, to increase Canada’s investment in three key areas:
- education and employment opportunities for young Canadians;
- technology and innovation; and,
- international trade 9
It can be argued that the purpose of the SR&ED program was to create new jobs and encourage economic growth if the investment in “technology and innovation” mentioned above refers in part to the funding of the SR&ED program.
SR&ED’s Purpose According to the CRA
The CRA is more explicit when stating which businesses it intends the SR&ED program to support, by noting that the objective of the SR&ED program is “to encourage Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada.” 10 This implies that the objective of the SR&ED program is to encourage businesses to conduct R&D, and does not explicitly state how this relates to or benefits the wider Canadian economy.
We asked the CRA if they could provide any more information on the purpose of the SR&ED program and the representative we spoke to provided an explanation almost verbatim to the 2017 Report on Federal Tax Expenditures, stating that:
The rationale for this tax support is that SR&ED creates knowledge benefits which extend beyond individual performers to other firms and sectors of the economy; because firms cannot monetize the full value of these knowledge spillovers, in the absence of government support firms might perform less SR&ED than socially desirable.11
They also added that “although some parameters have been adjusted over time, the purpose and objective of the SR&ED program have remained the same [since its introduction in 1985].” 12
Keeping SR&ED’s Purpose Deliberately Vague
It was suggested in an article in 1988 that “tax levies for a specific purpose have, in principle, been taboo with finance departments since the Napoleonic era.” 13 The introduction of other tax incentives for specific purposes (such as IRAP, (which was introduced specifically to “accelerate the growth of [the claimant’s] business through innovation and technology,”)14 and the 2017 Super Clusters Initiative, which encourages the creation of “superclusters” involving industry and academia) may suggest that the government has kept the purpose of SR&ED deliberately vague.
Summary
The CRA’s explanation suggests that the purpose of the SR&ED program is to encourage R&D in Canada. The 2017 Report on Federal Tax Expenditures reiterates this and then elaborates upon this to suggest that the SR&ED program, through encouraging Canadian R&D, also promotes growth in the Canadian economy. The report suggests that without government support in the form of SR&ED, Canadian businesses would perform less R&D, which would negatively affect the economy.15 The suggestion made by Cookson that SR&ED’s purpose is to promote competitiveness and create R&D jobs can also be associated with Canadian economic growth and the promotion of R&D. The CRA and the articles and reports highlighted above, suggest that SR&ED’s purpose is to promote R&D, and grow the Canadian economy.