Federal Budget 2018 - Missed Another Opportunity to Maximize ROI on Canadians’ Investments in Innovation

March 6, 2018
Russ Roberts, PhD
Senior Vice President, Tax, Finance & Advocacy

The 2018 Budget heavily bets the welfare of Canadians on investments in science and technological innovation, seemingly ignoring the core issue with such investments: the return on investment (ROI) and when it’s obtained.

Since the focus of these Government’s investments is generally pre-commercial and the return to Canadians accrues only very slowly, there is a serious issue as to what extent Canadians will benefit or whether the successes will simply slip away to other countries as our start-ups are acquired offshore and our graduates and technologists move on. Even if this were not to happen, and history says it will, the heavy orientation of this Budget to academia, while ignoring the retarded commercialization environment that businesses are currently working in is a missed opportunity. Some might consider this an imprudent investment of taxpayer dollars.

The following are doable improvements recognized by the business community as important to improving the investment climate:
• remove skews in the tax system to the growth of small- and medium-sized businesses (SMEs) in Canada;
• fix the close to $3 Billion Scientific Research and Experimental Development (SR&ED) Tax Incentive Program so that it is stable, predictable from the perspective of its users, and better oriented to supporting what businesses do in the real world, i.e., rapid development of technological innovation - not research; and
• build rewards into the system for firms that grow their Canadian innovations through exports.

All are being done by our competitors who seem more focused on obtaining the best possible return on their investments. The business community has highlighted these opportunities to the Government. A commitment to reforming the business tax environment by the Government, done right, could greatly help improve the ROI on what this Budget is committing Canadians to spend on science and innovation efforts. And, it would have been well received in the business community. As it stands, with the Budget’s strong orientation to science and academia, much of the return may only occur well into the distant future and be limited because of significant leakage of IP (Intellectual Property) and skilled knowledge workers to other countries.

The Standing Senate Committee on National Finance found that Canadians are losing faith in the tax system and its fairness. Also, tax lawyers and accountants are saying the CRA is broken. The Standing Senate Committee is calling for an independent, comprehensive review of the tax system. (1) The community is calling for a similar review. The Minister of Finance has said that he wants to see what happens with NAFTA. A legitimate point, but a concern is that a tax review of this nature inherently takes time to do well and there are lots of reasons being raised that justify a review besides what is occurring south of the border.

Last year’s budget announced that the SR&ED program would be reviewed. It has taken months to find out who is in charge and it now appears to be a relatively internalized review led by Department of Finance officials who say that they will NOT consult. Hence, Finance’s review of the program will not have the advantage of transparent, public consultations with the program’s users to understand why there is currently concern about the SR&ED program.

Is it not time that the Government take a step back and set aside the struggle that occurred with their small business tax reform effort? Given the economic challenges coming up, is it not better for all of us to get on with an expeditious review and achieve a more effective, internationally competitive environment for our businesses to grow here in Canada?

Can we not improve the tax environment to get an increased return on our investments by providing business with better incentives to exploit their successes here in Canada?

The Government needs to change its attitude and recognize:
• the need to develop a commercialization centric focus; and
• that business has legitimate concerns that hinder their willingness to grow their innovation investments to their fullest here in Canada.

The reality is that a much more productive business environment can be created. It would give all Canadians a much better return on their Science, Technology and Innovation investments. Hopefully, future budgets will reflect this.

(1) Report of the Standing Senate Committee on National Finance, “Fair Simple and Competitive Taxation: The Way Forward for Canada”, December 2017.