Reference Article (>5 Years Old)
Please note that the information herein may be outdated, links could be inactive, and policies discussed may have evolved. For the most current data, consult our latest publications. If you would like us to refresh this article as it is of interest to you, please contact us.
At SR&ED Education and Resources, we’re taking the time to document all the changes that have occurred to the Scientific Research & Experimental Development (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. Stay current with the program by understanding the historical context.
In 2007, the Department of Finance released a document entitled An Evaluation of the Federal Tax Credit for Scientific Research and Experimental Development.1 Using recent literature on the subject, the study examined the SR&ED tax credit “taking into consideration the responsiveness of the private sector to changes in the price of R&D, the spillovers on the rest of the economy from the additional R&D, the economic cost of raising taxes to fund the credit and the administration and compliance costs associated with the credit.”
The Department of Finance’s Position on the SR&ED Tax Credit
The authors begin the report by giving a clear picture of how the Department of Finance views the success of its R&D spending—particularly the SR&ED tax credit program.
“R&D tax incentives help correct the failure of the market to provide a socially desirable amount of R&D capital by compensating firms for the spillover benefit their research provides to others,” they say. “These incentives may also help alleviate financing constraints on R&D investment, particularly those faced by smaller firms.”
The authors reference the statistics of a 1997 study performed by the Department of Finance that found the SR&ED tax credit “generates $1.38 in incremental R&D spending per dollar of foregone tax revenue.” They go on to explain that this report will act as an update on that 1997 study.
In analyzing the SR&ED program, the authors found that the tax credit was not generating the same incremental R&D spending it was in 1997; however, this does not appear to be a point of concern.
“The point estimate is a positive welfare effect of about 11 cents per dollar of revenue forgone,” they say. “While this may appear to be a modest return, it is roughly equivalent to the government investing funds raised by distortionary taxes.”
In spite of findings suggesting “using direct and indirect assistance jointly may undermine their effectiveness,” the authors ascertain that all forms of R&D funding should be able to work harmoniously.
“We conclude that there is presently no evidence-based reason to choose between tax credits, grants and publicly performed R&D as alternative ways to deliver support for R&D,” they say.