New tools, attitudes required to assist Canada's success in digital economy

Budget industry reaction

The Canadian Advanced Technology Alliance (CATA) is looking beyond the federal Budget to the forthcoming revamped S&T Strategy for indications that the government is prepared to face challenges and seize on opportunities stemming from the rapidly accelerating digital economy.

The Budget did not contain any innovation-related business measures or changes to the scientific research and experimental development (SR&ED) tax credit program. Nor did it reflect any change in thinking about how the government can sustainably support the growth of the tech sector, according to CATA's senior VP tax and finance.

"I don't think we expected a large amount from this Budget given the emphasis on deficit reduction. We're looking forward to the new strategy," says Dr Russ Roberts. "The government has not caught up to the curve of the digital economy and the adaption of technology. There's lots of creative innovation going on that needs to be encouraged."

The Budget's announcement of an Open Data Institute to be delivered by the Canadian Digital Media Network is an example of the kinds of initiatives that need to be created to assist the sector. Roberts says enhancing the ability to interpret and utilize data is not only a government responsibility.

"This also has to happen in businesses themselves rather than just through institutes or the interface," says Roberts. "The underlying technologies of the digital economy are now mature enough to be utilized effectively to create new businesses and achieve rapid adoption and adaptation. Canada must create new businesses around these technologies that will take market niches away from others. That requires a whole range of company sizes and types."

Roberts says the cuts made to SR&ED in the 2012 Budget — which take effect this year — represent a "major change" that has shifted it out of synch with where innovation needs to occur (R$, November 9/12). The changes to SR&ED take as much as $1 billion out of the program and limit its use through a narrowing interpretation of eligible claims that have hit software companies particularly hard.

"I have a bias towards the tax system and so does the digital economy sector. When you make such a shift to direct support, software and manufacturing have taken the biggest hit straight on."

To address the imbalance caused by the changes to SR&ED, Roberts says the government needs to look seriously at the tax framework that innovation-intensive companies work within, as taxes have a major influence on investment thinking. One approach is the so-called innovation box, which has the backing of the CD Howe Institute and was supported by the Jenkins Expert Panel in its Review of Federal Support to R&D report.

Using a combination of tax credits and tax rates, an innovation box provides companies with incentives to boost their rates of patenting and commercialization. Roberts says several countries including the UK are already employing patent or innovation boxes with varying degrees of success.

"It can't be too complicated. If it's done right it can expand sales and increase rewards. We say very strongly it should be looked at," says Roberts. "You have to find a way to adjust the tax rates so there is a preference for investing in revenue streams that enhance innovation. Now that there are much better development platforms, the real art is figuring out how to use them effectively. The research is beyond the technology."

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