Dr Darren Lawless

SR&ED — An essential tool in Canada’s innovation toolbox

By Dr Darren Lawless

Recently Paul Martin set the ambitious goal of moving Canada from 15th to 5th by 2010 in R&D spending as measured by the GERD to GDP ratio. Although recent world events may necessitate extending the timeline, the challenge will be substantial. For example, at a recent conference on the topic organized by RE$EARCH MONEY, it was estimated that $500-600 billion of new investment from both the private and public sectors would be required in order for Canada to achieve its goal. The enormity of the challenge is further highlighted by the realization that other countries ahead of Canada on the R&D ranking are unlikely to be passive and will also be seeking to improve on their innovation capability.

The challenge of improving Canada’s innovation ability has catalyzed considerable discussion and debate. Surprisingly, several large multi-national companies have questioned the utility and effectiveness of Canada’s SR&ED tax credit system. It has been insinuated that the tax credits are not worth the effort, and that innovation would be better served by lowering corporate taxes. The view that SR&ED tax credits are not beneficial is definitely not shared by many small and medium sized enterprises (SMEs) and by several larger international chemical firms I interact with.

For SME’s focused on doing R&D in Canada, the tax credits are an essential incentive that should not be misconstrued as the reason for conducting R&D. Companies that embrace the concept of sustainable growth and who seek prosperity will embrace innovation and will support R&D efforts. However, the ability to support innovation will be greatly affected by the availability of financial resources. Robert Cooper, a leading Canadian innovation expert, estimates that only one idea out of every seven concepts will succeed. That means sound business principles necessitate prudent financial management of resources assigned to R&D. Without the SR&ED tax credits, investment in innovation by SMEs, while highly desirable, would be severely constrained and limited.

The current SR&ED tax credit system is not perfect. The scientific nature of the work is often not well understood by accountants, whereas the intricacies of the tax system are often lost on individuals more focused on exploration and discovery. The result is that companies often don’t take full advantage of the benefits of the program. This problem can be overcome through increased communication. In the chemical industry, the Canada Customs & Revenue Agency, in conjunction with the Chemical and Allied Industries Group, does an excellent job of explaining the process through workshop seminars.

Increasing the speed at which companies receive the research money could also greatly enhance the effectiveness of the system. Rather than receiving one large tax refund cheque several months after the end of a fiscal year, it would be highly beneficial if the money could be received on a monthly or quarterly basis. The amounts paid out by the government could be based on a rolling forecast based on project time lines and expense monitoring provided by the company.

A final account reconciliation and technical report should still be provided at the end of the fiscal year with any necessary adjustments made at that time. Such a system would remove a major obstacle to innovation — namely cash flow. SMEs would be in a better position to take risks, safe in the knowledge that an idea that didn’t work wouldn’t financially damage the company.

The goal of improving Canada’s position on the global innovation scale is more than a noble quest tied to national pride. Recent studies have demonstrated a positive correlation between innovation and living standards, with the latter increasing with higher innovation proficiency. But in developing a national strategy to achieve our goals, we should avail ourselves and maximize the use of the tools that are currently available.

The SR&ED tax credit system is a good starting point. Rather than abandoning the system for the short-term benefits of lower corporate taxes, we should strengthen the system by making it faster and easier to access the funds that the system provides. By taking this action, we will increase the likelihood of achieving our goal of improving our global innovation ranking. The payback for all Canadians will be a higher standard of living.

Darren Lawless is Manager, Research and Business Development, Fielding Chemical Technologies Inc. (darrenl@fieldchem.com)