Editorial - 15-9

You can almost smell it in the air. The use of tax incentives to stimulate private sector R&D spending is about to change as governments re-evaluate their effectiveness and place in the larger suite of incentives linked to innovation and economic growth. And while it’s feasible that they may be phased out in certain jurisdictions it’s unlikely they will completely disappear from the Canadian S&T landscape.

In the wake of the dispute between the federal and Ontario governments over the latter’s Super Allowance, the province has ordered up a review of all tax incentives. And in British Columbia, incoming premier Gordon Campbell has pledged to eliminate all business subsidies, although it’s unclear whether that includes R&D tax incentives.

At the national level, the federal government is putting the final touches on its Innovation White Paper, which will almost certainly contain policy direction on the use of incentives to spur innovative activity. The scientific research and experimental development tax incentive program currently costs approximately $1.5 billion in foregone tax revenue but studies have shown that the economic benefits it generates are modest at best.

Canada touts its R&D incentives as the most generous in the world, which begs the question of why Canada’s R&D spending lags near the bottom of industrial nations as a percentage of GDP. Literacy levels, cultural factors, competitive financial systems and business ownership patterns also have a profound impact on innovation. It’s time to examine R&D tax incentives in a larger perspective.