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Reform Canadian SR&ED tax credit: American IT and innovation think tank

Report finds Canadian business investment in R&D far below global average
Canadian businesses under-investing in R&D, report says. | Skynesher / E+ / Getty Images

Canadian think tanks and business groups have for years now lamented the relative lack of productivity and investment in innovation by Canadian businesses, and now even the Americans are taking notice.

Canada is lagging not only the U.S., but the rest of the world, in business spending on research and development, says the Information Technology and Innovation Foundation (ITIF) in a new report.

The report starts out noting that “R&D-intensive companies are key to national growth and competitiveness,” and then goes on to catalogue how far behind Canada is.

Interestingly, it uses the comparison to lobby for increased American R&D tax credits.

Canadian businesses spend five times less than the global average “relative to the size of its economy” on R&D, the report states.

To fix the problem, the report recommends the Canadian government amend its most important tax credit for innovation – the SR&ED tax credit – and replace it with something more aligned with the American Alternative Simplified Credit.

The report also raises concerns about falling investment in R&D by American firms, however, and recommends that Congress double the Alternative Simplified Credit.

The report notes that American businesses spend 103 time more on R&D than Canadian firms, despite the fact the GDP of the U.S. is just 12 times larger than Canada’s.

"Our report finds that Canadian firms in advanced sectors spent five times less than the global average on R&D in 2021," the report states. "As a result, Canadian firms’ R&D spending lagged behind the global average in all advanced sectors even when adjusting for GDP.

"Similarly, U.S. firms lagged behind the global average in four advanced sectors. However, U.S. firms’ size-adjusted spending in all advanced sectors was still higher than Canadian firms’.

"Although U.S. firms’ spending was higher, their spending had either declined or remained stagnant in seven advanced sectors, compared with five for Canadian firms."

In defence and aerospace, the report notes that in 2021, 15 American firms made the European Union's R&D 2,500 list. Two Canadian firms -- CAE Inc. (TSX,NYSE:CAE) and Bombardier (TSX:BBD) – made the list.

The average American firm in the defence and aerospace sector spent US$626 million on R&D, while the average Canadian firm in the sector spent US$100 million, the report finds. 

In the pharmaceutical and biotechnology sectors, the average American firm spent US$523 million on R&D, while the average Canadian firm spent US$161 million.

The report concludes with a single recommendation: increase American and Canadian R&D tax credits.

Canada’s principal R&D tax credit is SR&ED: the Scientific Research and Experimental Development tax credit.

“The Canadian R&D tax subsidy rate of 19.1 per cent is slightly above the median for Organization for Economic Cooperation and Development (OECD) and BRIC countries (Brazil, Russia, India, and China), while the U.S. rate of 9.5 per cent is far below,” the ITIF report states.

“The U.S. Congress should at least double the rate of the Alternative Simplified Credit (ASC) from 14 per cent to 28 per cent. And the Canadian government should consider replacing the current SR&ED tax credit with one more akin to the U.S. ASC.

"This would involve limiting the credit to only expenditures above 50 percent of base period spending while at the same time at least doubling the SR&ED rate. This would give companies a greater incentive at the margin to invest in R&D.”

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