INST Committee Report

            This Committee has no problem with the policy; it fully endorses the federal government providing financial support, business expertise and technical advice and assistance to R&D performers and users of R&D results. Instead, the Committee will deal with issues on how this policy is translated into programs, whereby consideration will be given to their design effectiveness and administrative accountability. This will enable us to determine the program’s capacity to generate "value for money" on behalf of the Canadian taxpayer/citizen. Specifically, the Committee will address three R&D support programs: the Industrial Research Assistance Program (IRAP); Technology Partnerships Canada (TPC); and the Scientific Research and Experimental Development (SR&ED) tax incentive.

            Simply stated, IRAP helps small and medium-sized enterprises (SMEs) turn good ideas into commercially viable products and services. At a cost of about $135 million per year, IRAP attempts to increase the innovation capabilities of SMEs in a bid to become the national enabler of technological innovation for Canadian SMEs, which is consistent with its 50-year history. Administered by the National Research Council of Canada, the program’s core competencies are in technology and innovation management, which can be divided into three categories: (1) technical advice; (2) network facilitator; and (3) shared funder of innovation projects. IRAP officials described their activities as follows:

            At a glance, IRAP consists of 262 industrial technology advisors who are scientists and engineers located in over 90 communities across Canada, serving more than 12,000 SME clients annually. IRAP provided financial assistance to 4,343 innovation projects undertaken by 3,359 SMEs at a cost of $89 million in 1999-2000.

            IRAP is often described as an exception to the general rule that government programs suffer from "being over-administered," as it is run in a "business-like manner." It certainly stands the test of its clients endorsing the program. This endorsement, however, does have its drawbacks, as has been pointed out by the Auditor General of Canada (AG). IRAP suffers from insufficient detail and due diligence in reporting results and describing reasons why government funding was required. The Committee, therefore, recommends:

8. That the Government of Canada improve the reporting of the Industrial Research Assistance Program’s project results without disturbing the "business-like manner" in which the program is delivered.

            Given the critical situation of reported low productivity of Canadian SMEs, the increasing market demand of innovative products and services, and the government’s commitment to double its funding of R&D activities, the diffusion of technologies and dissemination of technical knowledge takes on increasing importance. Indeed, the Committee considers IRAP to be one of the most effective programs among the federal government’s S&T policy instruments and, therefore, recommends:

            Organized as a Special Operating Agency, TPC is an investment fund (annual budget: $350 million) through which the federal government provides repayable contributions toward research conducted in Canadian companies in areas of strategic economic importance. By partnering with research companies and altering the time profile of a project’s cash flow (see Exhibit 6.2), TPC encourages Canadian private-sector investment in maintaining and growing the technology base and capabilities of Canadian industry. TPC officials stress the fact that:

            In effect, TPC uses financial instruments (e.g., royalties, fixed repayments, warrants, etc.) to shorten the payback period, reduce the financial exposure and free up the R&D budget of a partnering research company. In terms of its economic impact:

            According to its current design, TPC’s share in eligible project costs is not to exceed 33%. Projects must be in a qualifying technology sector: aerospace and defence industries, environmental and enabling technology (e.g. advanced manufacturing and processing technology, advanced materials, biotechnology and selected information technology). One additional constraint is currently being questioned:

            Although the TPC program is still young, the Committee is aware that TPC has passed AG audits for due diligence in assessing "value for money" in its project funding, with only minor reporting problems. The Committee, however, believes the TPC program can be made more effective at relatively no cost to the taxpayer by removing what appears to be a rather artificially crafted expenditure constraint. No one satisfactorily explained to the Committee the rationale behind the one-third, two-thirds split between aerospace/defence and advanced enabling technologies of total funds invested. It would seem far more logical to free up TPC funds to all qualifying industries and advanced technologies; this would allow it to optimize its investment portfolio. Furthermore, given the increasing market demand of innovative products and services and the government’s commitment to double funding of R&D, the Committee recommends:

            The federal government, through the Canada Customs and Revenue Agency (CCRA), operates the SR&ED tax incentive program. This program offers individuals, corporations and partnerships a tax deduction of up to 100% of qualified current scientific research and experimental development expenditures and eligible capital expenditures. The program allows eligible firms to offset tax owing, and individuals and SMEs may qualify for a cash refund of tax credits.

            This program has long been recognized as one of the most generous R&D tax credit programs anywhere (see Figure 6.1). Consequently, each year 11,000 Canadian firms, mostly SMEs, claim $1.4 billion in SR&ED tax credits from this program. These tax credits can also be augmented by a number of provincial tax credit programs. Finance Canada has determined the program’s impact is extremely favourable: for every $1.00 of support the government puts in, it generated approximately $1.38 of additional R&D spending by firms; so it is extremely favourable.

            The program is not without its distractions, however. The common complaint of the Canadian business sector, particularly SMEs, is the lack of timeliness in determining the eligibility of certain activities. In fact, Canada’s AG has just reported on this problem:

            The Committee was told that the problem was so serious that some exacerbated SMEs just gave up on the program. While no one was able to quantify the loss in R&D that Canada suffers as a result, one witness reported what she claimed to be a startling statistic:

            The Committee believes that SR&ED provides sufficient incentive and is indeed a generous contribution to private R&D; there is nothing on the benefits side that needs fixing. However, while we recognize that CCRA is working hard to correct administrative problems and that Canada’s tax code is a complex one in terms of R&D definitions, the Committee believes the merging of eligibility of R&D expenditures between IRAP and SR&ED would provide a reasonable solution to some aspects of the administrative problem. The Committee, therefore, recommends: