mission CritiCal
How changing government R& D incentives can impact our ability to compete
For entrepreneurial companies like Recon Instruments in Vancouver, SR& ED ( Scientific Research and Experimental Development) tax credits have been as much of a boon to business growth as venture capital funding. “We’ve claimed SR& ED benefits in excess of $ 1- million over the past three years,” says CFO Todd Tessier.
As a maker of integrated display technology for sports head gear, R& D is an integral part of the company’s DNA. Like many executives of an R& D- intensive operation, Mr. Tessier is paying close attention to the recent federal budget changes to the SR& ED program and VC funding.
These changes include, among other things, increasing direct support to government- funded venture capital initiatives, including a $ 400million fund for VC activities, while “streamlining” the SR& ED program.
Government moves into the venture capital space are timely given that institutional players are no longer in that game, Mr. Tessier notes. “Moving more to a direct investment model is a step in the right direction, but we have to remember that SR& ED has also been a critical piece in helping businesses get off the ground and growing. You have to look at things from an ecosystem perspective if you want a vibrant economy.”
There are two elements of the proposed changes to the SR& ED program that could play a role in the competitive abilities of Canadian companies. One is the exclusion of capital expenditures from eligibility. The other is the reduction of the credit rate from 20% to 15% for larger R& D- based firms. Smaller businesses will continue to be eligible for the 35% tax credit.
Lynda Leonard, senior vice- president for ITAC ( Information Technology Association of Canada), says its membership is strongly reliant on indirect measures such as tax incentives to keep their R& D efforts afloat. “Indirect investment is predictable. If you do R& D and it qualifies, you get the credit. That’s predictable and fair. With direct investing you will either qualify and get the support or you won’t. And because it’s a finite envelope of funding, all applicants will not be served in that purpose.”
You have to look at things from an ecosystem perspective
The elimination of the capital expenditure credit could prove particularly detrimental for some businesses, she notes. “There is still a lot of capital intensiveness involved in R& D, especially in the information and communications technology sector. We have lots of members whose equipment and components are an ongoing capital requirement. Add that to the reduced tax rate of 15%, and the value of the credit is decreased significantly.”
This is worrying given that tax credits can be a compelling competitive drawing card for multi- national R& D companies, since they have a direct impact on cash flow. In many cases, companies calculate SR& ED credits as an asset, which can play a large part in building an argument for global companies to locate their R& D in Canada.
Mid- to large- sized companies will simply have a harder time in stating their case, Ms. Leonard notes. “R& D CTOs [ chief technology officers] wage competitive pursuits with counterparts all around the world to convince others why investment should go into their facility. It’s always a tough game for Canada, although SR& ED helped in that conversation. Lessening its value makes that conversation harder to win, and could ultimately cause us to lose R& D jobs. When anyone is making a transformative change like this, let’s just make sure we know what’s coming and going.”
The fact that government is recognizing the importance of improving competitiveness for new startups in the knowledge industry is a positive move, says Michael Turner, vice- president of system strategies for Wesley Clover, an Ottawa- based equity and investment management firm. “The new VC plan is almost all aimed at growth- stage companies trying to spread their wings to international markets, which is a good thing. Whatever the new direction, however, we need to be careful it’s done in a way that doesn’t damage certain aspects of Canada’s knowledge sector or lead to huge changes for big companies in capital intensive industries.”
Within any ecosystem, it’s always a matter of striking the right balance, Mr. Tessier agrees. “The key to success in a knowledge- based economy is a low tax rate, investment in research and immigration so we can bring much needed business talent into this country so we can remain competitive. Those are the core elements we need to consider here.”