SR&ED Report: “R&D Tax Treatment in Canada: A Provincial Comparison” (1997)

October 15, 2013 Elizabeth Lance

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In September, 1997, a report was prepared for The Science and Technology Redesign Project at Statistics Canada by The Conference Board of Canada entitled “R&D Tax treatment in Canada: A Provincial Comparison.” The author states that provinces that provide direct tax credits—such as the Scientific Research and Experimental Development (SR&ED) tax credit—perform slightly better in international research and development (R&D) rankings than provinces that apply R&D allowances because their tax credits, even though reducing the amount of federal tax credit available, are deducted directly from the provincial tax due rather than from taxable income.

SR&ED Report Background

The report was performed to determine the effect different types of R&D tax credits have on provincial innovation as part of the Information System for Science and Technology Project at Statistics Canada. The results were meant to “contribute to the analysis of regional differences in science and technology activity in Canada.”

“The objective of the Project is to develop useful indicators of activity and a framework to tie them together into a coherent picture of science and technology in Canada,” said the author. “The indicators can provide the picture at the national level or at provincial or sub-provincial levels to reflect regional differences.”

Results and Impact on SR&ED

The report found that provinces with their own R&D stimulus programs—Ontario, Quebec, Nova Scotia, Manitoba, New Brunswick, and Newfoundland—offered more attractive incentives for businesses to perform R&D than in provinces that relied on a federal program. Regardless of these factors, all Canadian provinces performed well in international R&D rankings.

“All things being equal the theoretical implication of this result is that companies located in [provinces with R&D incentive programs] would be spending more on R&D for the very reason that they require (thanks to increased government assistance) a lower rate of return to make a profit,” the author said. “Still, the four provinces who rely only on the federal R&D tax incentives are very competitive internationally.”

With regards to SR&ED, the report concluded that tax credit systems are more effective for spurring R&D than general incentive programs. The author explained this in the following way:

“[T]ax credits, even though reducing the amount of federal tax credit available, are deducted directly from the provincial tax due rather than from taxable income (on which a provincial corporate income tax rate applies). Therefore, the marginal effect of the tax credit on the B-index is greater than the marginal effect of an R&D allowance.”

This article is based on a study issued at the time: “R&D Tax Treatment in Canada: A Provincial Comparison”