The Importance of Innovation Policy in Canada

The idea of providing businesses with incentives to innovate has always been compelling. The Canadian economy wins when businesses invest in research and development as it propels economic growth and motivates productivity as well as creating jobs and companies of the future. Due to variations in government policies in different nations, companies are shifting massive amounts of profits they generate from research and development conducted in one country to others that have lower tax rates.

In Canada the federal Finance Department issued a consultation paper on “treaty shopping”, which is often a prelude to a tax crackdown. In fact, no OECD country is more dependent on tax credits to encourage companies to do R&D than Canada. Canada’s credit scheme and government policy is among the most generous, even after a couple of changes were announced in the 2012 budget. However, the federal government has constantly made noise about shifting away from tax credits. For instance, in a Speech from the Throne, the government’s R&D grant program was highlighted. However, no mention of the larger SR&ED program was noted.

In 2012, Ottawa issued $3.6 billion in SR&ED tax credits to more than 20,000 companies. On the other hand, the Industrial Research Assistance Program spent approximately $110 million on around 1,100 companies. Although the country may seem to be moving in the right direction at the moment, both the territorial and federal governments need to keep the best policies running. For instance, doing away with the SR&ED tax credits or worse still, reducing it, can be suicidal to the business environment. For a country that already suffers from lagging productivity and chronic underinvestment in business R&D, getting SR&ED policies right and in an effective way is crucial. It is also essential for all the governments and treasury to have a clear vision of the kind of R&D they want to foster.

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