Canada’s R&D tax program. Why it may not be the one we need.

I wanted to share some key points from a piece I have been working on about Canada’s SR&ED program — the main tax credit the federal government uses to encourage business research and innovation.

Here is the short version:

WHAT IS SR&ED?

Every year, the federal government spends about four billion dollars giving tax credits to companies that say they are doing research and development. The program has been running for over 40 years.

THE PROBLEM

Most large companies do not plan their research around this program. Instead, they go back through their records at the end of the year and look for work they already did that might qualify. A whole industry of consultants exists just to help companies do this, charging 10 to 20 percent of whatever credit they recover.

The result is that most of the money goes to companies that would have done the research anyway. Independent economists have found that for every dollar spent on SR&ED, only about 1.4 cents of genuinely new research is created. The rest is a subsidy for work that was going to happen regardless.

After 40-plus years and hundreds of billions of dollars, Canada still has a productivity gap compared to peer countries. If the program were working, we would see it in the numbers. We do not.

WHAT WORKS BETTER

The research is clear on where public money produces the biggest returns:

1. Early childhood development. Every dollar invested in quality programs for young children from low-income families returns between six and seventeen dollars over time — through higher earnings, lower crime, and lower healthcare costs. This is the most well-proven return on public investment available to any government.

2. Direct public research funding. When the government funds university research and national science institutions, the knowledge created is available to everyone. Companies can build on it. The economic spillover is far larger than a tax credit going to a single firm.

3. Advance qualification for small firms. Countries like the UK and Australia let small companies get a decision on whether their planned project qualifies before they spend the money. This puts support where it was always meant to go — genuine innovators — instead of large companies with the lawyers and consultants to game a retroactive system.

THE BOTTOM LINE

Four billion dollars a year is serious public money. It deserves serious accountability. The evidence for better alternatives has been available for years. What is missing is the political will to act on it.

I am happy to discuss any of this further or share the full piece.

Best regards