Fate of R&D funding a nail-biter for small business
Canadian businesses with a penchant for innovation will be keeping a close eye on how the federal government's 2012 budget for changes to R&D grants and tax credits. The question is: How favourable to their interests will those changes be?
REUTERS/ Mike Cassese
Dan Ovsey
With only a few days left before the Conservative government reveals the details of the 2012 federal budget, many of the nation's small businesses are anticipating potential shifts in grant and tax-credit policy.
"Everyone's expecting the government to respond to the Jenkins report," says Jim Milway, executive director of the Martin Prosperity Institute in reference to a recent report by a panel of experts headed by OpenText Corp. head Tom Jenkins that called for reforms to the way the government distributes $5 billion in research and development funding every year.
The report offered several recommendations to the federal government, one of which was the simplification of the tax credit system so that small businesses with limited financial resources wouldn't need to spend funds on accountants who could help them attain public funding. Yet, some have argued that the report's recommendations of moving toward a grants-based system could also hinder R&D investment among small businesses by making public funding of those investments contingent on the approval of grants.
Precisely what the government will do is anyone's guess, but there have been loud murmurs from Ottawa that the current R&D funding model needs significant reform to ensure it's making an impact on the country's traditionally poor innovation ranking among OECD nations.
"They might be thinking: 'Are we getting anything for this and should we be spending this money? Is it a wise investment?'" says Mr. Milway.
It's precisely those sorts of questions that are making small business advocates nervous. Jay Myers, president and CEO of Canadian Manufacturers and Exporters, says he is concerned about potential changes to the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program – a mainstay of funding for innovation investment among the members of his organization.
"The recommendations of the Jenkins Panel was to reduce the amount of financial support available for businesses," says Mr. Myers. The smaller the company, the more important that is. One area where it would have strong consequences is the ability of start-ups to use the funding as an alternative to venture capital."
Currently many small businesses invest money into research and development projects or the establishment of innovative processes to enhance productivity and later receive refunds for those investments via tax credits. Yet, there are concerns that recommendations from the Jenkins report could force businesses to apply for a refund before they begin the R&D process – something that would stymie R&D for many small businesses who won't proceed unless they are certain they will be able to recoup some of their costs.
On the other end of the spectrum, proponents of a free market-oriented system are saying the SR&ED program is outdated and should be scrapped entirely for organic, free-market solutions.
Charles Lamman, associate director of budget and tax policy for conservative think tank the Fraser Institute, says Canada's currently poor level of performance in the R&D arena (relative to other OECD nations) despite the SR&ED's long history is proof that tax credits are not a viable means of stimulating innovation.
"We have had one of the most generous programs from a tax perspective and it hasn't been used," he says. "I think we need more competition in key industries because we know that competitive pressures are what spur innovation. It's not lectures from the government that are going to spur innovation. If there are competitive threats, businesses respond."
Mr. Lamman's views are echoed by Mr. Milway who says the government's proactive approach to establishing free trade agreements and opening Canada's economic borders to increased foreign activity will generate a natural kick-start to innovation.
"A major part of the recipe for business is to make them be more productive and more efficient by making them exposed to more competition," he says. "That's either going to put you out of business or force you to pull up your socks. I think that may have more dividends than anything else."
How well Canada's businesses respond to increased foreign competition remains to be seen. What's certain is that Canada's businesses are likely to see changes in the way research and development is funded. And precisely what those changes are is something they are to discover imminently.
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