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Shaping the future of Canadian innovation: the Jenkins panel report


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R&D Tax Update, October 17, 2011 (11-6)

Today, the final report was delivered by the independent expert panel chaired by Thomas Jenkins, Executive Chairman of OpenText Corporation; the panel was tasked with reviewing federal support for research and development (R&D). Innovation is one of the most important contributors to persistent and sustained economic growth and a key solution to Canada’s lagging productivity, as discussed in Deloitte’s The future of productivity: An eight-step game plan for Canada. Canada’s review of its support for innovation is critical and a positive move to ensure that Canada grows and prospers in the future. We commend the panel for its efforts in providing recommendations that address Canada’s innovation challenges.

Deloitte webcast

On October 24, 2011, Canadian business leaders and Deloitte partners will discuss the report’s findings with a focus on finding solutions that will make Canada a more innovative and prosperous nation. To register for this live webcast click here.

The Jenkins panel’s recommendations

The panel delivered six broad recommendations that could change the way the Canadian government supports private-sector research and development (R&D). These recommendations include the following:

  1. Create the Industrial Research and Innovation Council (IRIC) as an arm’s length funding agency to help entrepreneurs commercialize ideas
  2. Simplify the scientific research & experimental development (SR&ED) program for small-medium enterprises (SMEs) by narrowing the base for tax credits to labour-related costs and increasing the tax credit rate. In addition, the refundable portion of the tax credit should be reduced over time. The savings should be redirected to a more comprehensive set of direct support for SMEs.
  3. Increase government procurement to encourage business innovation in Canada
  4. Focus the institutes of the National Research Council (NRC) on collaborative R&D involving business, universities, and provinces, while shifting the public-policy related research activities of the NRC to other federal agencies
  5. Establish new risk capital funds to support start-up and later stage companies through the Business Development Bank of Canada
  6. Appoint a federal minister of innovation

Deloitte’s view

We commend the panel on its consultative approach in developing its recommendations. In particular, we applaud the suggestions to increase the availability of funds to start-up and later stage companies, and increase the government’s procurement. In addition, we believe that simplifying the SR&ED program is a great objective but may create a bias in the program towards labour-intensive sectors at the expense of non-labour intensive industries. Furthermore, capital investments, both tangible and intangible, have been shown to be essential for greater productivity and should not be ignored for the sake of simplicity.

The panel did not explicitly deal with approaches to making Canada more attractive to foreign investment — possibly as a consequence of the mandate they were given to remain within the current funding envelope. The economic turmoil around the world is spurring many countries to seek to support their businesses through their R&D incentives. In fact, many leading economies have recently enhanced their R&D incentives, with two more large R&D intensive economies (Germany and Sweden) considering the introduction of tax-based R&D incentives. Deloitte’s recently published Global Survey of R&D Tax Incentives provides a summary and comparison of the R&D tax incentives provided in 27 countries including Canada. Despite weathering the difficult economic downturn more successfully than other countries, Canada still needs solutions that will help businesses deal with a high Canadian dollar and the strong global competition for jobs. This should be an area of future analysis.

Deloitte believes that Canada must have broad-based tax incentives for all industries and these should be complemented by grants directed at specific sectors or industries. The panel does consider this solution but was asked to keep the spending budget untouched thereby reducing one type of incentive for the sake of the other. Certainty is critical to Canadian businesses and refundability is key, especially in this difficult economic time.

In our pre-budget submission to the House of Commons Standing Committee on Finance, Deloitte recommends fostering an increase in business innovation in Canada by extending refundability of SR&ED credits to all businesses, not just certain private companies. Such an action would appropriately reward the risks inherent in carrying out R&D in Canada, and would help attract foreign investment in Canada. We see this to be important to the growth of innovation in Canada. Refundability can be phased in to ensure the costs to the government are reasonable and the return on investment is carefully evaluated.

 

This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.