Innovation Canada: A Call to Action

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Innovation Canada: A Call to Actionrate for the program increases beyond a certainthreshold. Some level of subsidy is of courseneeded to stimulate the behaviour that aprogram is trying to encourage. But anincreasing subsidy obviously raises the “cost”side of the equation directly and also steadilyincreases the likelihood that projects withpoorer expected returns will be undertaken, orthat businesses with poor prospects will besustained longer than they otherwise would be.Either of these outcomes reduces the addedbenefit contribution of the program. At somepoint, the additional cost of a higher subsidywill exceed the additional social benefit thatmore generously subsidized projects induce.Were this to occur, the subsidy rate should bereduced. When subsidies associated with severaldifferent programs are combined to support agiven project, the risk of excessive subsidizationobviously increases. This is why it is important totake an overall portfolio approach to a suite ofR&D programs and to establish closecooperation between federal and provincialgovernments in this regard.As noted in Chapter 5, the SR&ED program isboth lauded and criticized. In the latter regard,its complexity results in excessive compliancecosts, unpredictability about qualification andfirms having to resort to retaining consultants,the cost of which diminishes the benefit.Compliance costs are currently estimated to beapproximately 14 percent of the value of creditsearned by small firms and 5 percent for largefirms. 3 At the same time, the program’senhanced benefit for small firms may be richerthan necessary, particularly given thecompounded effect of provincial credits andother government support programs. Figure 6.4shows the impact of combining the R&D taxcredits provided by individual provinces withfederal SR&ED credits. Box 6.3 providesaFigure 6.4 Federal and Provincial Tax Credit Rates (%)Provinces Provincial Tax Credit Federal Plus Provincial aCCPCsOther FirmsAlberta andBritish Columbia 10 42 28Manitoba 20 48 36New Brunswick,Newfoundland andLabrador, Nova Scotia,Saskatchewan andYukon 15 45 32Northwest Territoriesand Prince Edward Island 0 35 20Ontario (small/large firms) 10/4.5 42 24Quebec (small/large firms) b 37.5/17.5 48 27The federal credit is 35 percent for small CCPCs and 20 percent for other firms. The base for the federal credit is reducedby the amount of provincial credits.b The Quebec credit is paid on wages and salaries plus 50 percent of contracts. The federal–provincial rate is expressed as apercentage of R&D costs eligible for the SR&ED credit.Source: PricewaterhouseCoopers (2011) and calculations undertaken for this review.3 These estimates are based on a web-based survey undertaken in May and June 2011 on behalf of the Panel.6-8
Program Mix and DesignBox 6.3 Stacking of R&D SupportFirms undertaking R&D in Canada have access to a wide range of federal and provincialsupport programs, and can frequently obtain financial support for the same project frommore than one program. For example, in 2007, some 86 percent of small firms claiming theSR&ED credit made use of at least one other (federal and/or provincial) R&D supportprogram. In that year, approximately 70 percent of all small firms received financialassistance amounting to 40–50 percent of their spending on R&D and almost 10 percent ofsmall firms (about 1600) received assistance amounting to more than 50 percent of their R&Dspending.Within the federal government, the key constraint on “stacking” — that is, the use of two ormore programs to support a given initiative — is a Treasury Board requirement that fundingfrom all government sources (federal, provincial and municipal), including tax credits, cannotexceed 100 percent of the eligible costs of a project. However, lower limits are typicallyestablished for individual programs. For example, the stacking limit for IRAP projects is75 percent of eligible costs, which consist of wages, contract expenses and overhead.Programs also limit the proportional amount of funding that can be provided by theprogram itself to support any one project. In the case of IRAP, this “stand-alone” limit is also75 percent, but the base is smaller because of the exclusion of overhead expenses.It is important to bear in mind that IRAP does not automatically provide the maximumsubsidy to firms — some firms may receive the maximum, but this would be the exception,given that the average subsidy rate is actually closer to 20 percent. a But as stated above, asubstantial number of firms are able to obtain government assistance that exceeds half oftheir spending on R&D.The Panel believes that the government should undertake a comprehensive study of theappropriate level of public support for a project, including the maximum allowable stackingrate. Over-subsidization is a potential concern because, beyond a certain point, subsidizationno longer generates a net benefit for the economy as a whole.aThis number is based on a web-based survey undertaken in May and June 2011 on behalf of the Panel.information on how firms are able to “stack”benefits from tax credits and direct assistance.It also illustrates the present limits on stacking.The research and consultation undertaken bythe Panel point to both the need andopportunity to improve several aspects of theSR&ED program in ways that would increase thenet public benefit of the program. It is likely thatfiscal savings could thus be obtained whileincreasing the net benefit that is currently beingdelivered by the program. The savings would beavailable to finance the incremental costs ofimplementing the Panel’s recommendations,which are directed primarily toward SMEs, asoutlined in other chapters. The followingrecommendation in respect of the SR&EDprogram constitutes the Panel’s advice withregard to a more appropriate mix and design oftax incentives and direct support.6-9
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The Context of the ReviewChapterThe
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The Context of the Reviewspreads wi
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The Context of the ReviewBox 2.2 De
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The Context of the ReviewIn absolut
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The Context of the ReviewInnovation
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The Context of the Reviewdevelopmen
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Page 131 and 132: ConclusionChapterConclusion9We are
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