Canada's R&D subsidies are too rich, require review: University of Calgary study

CALGARY – Canada needs to rethink its approach to research and development subsidies, according to a new paper by the University of Calgary’s School of Public Policy.

The study, issued Thursday, argues that tax breaks for R&D performed by small firms are high by international standards and that it’s likely the cost to taxpayers outweighs the benefit.

While it can be common for governments to boast about how generous they are when it comes to R&D, co-author John Lester questions whether that’s something to be proud of without qualification.

“It shouldn’t be cause for celebration, it should be cause for reflection,” he said in an interview.

“We’ve put in a lot of money for R&D and if it’s not money well spent, it’s billions and billions of dollars lost a year. You have to be careful about the (subsidy) level that you offer . . . and then how you deliver it.”

Through the tax system, federal and provincial governments together pick up nearly 41 per cent of the R&D tab for small Canadian firms, many of which are eligible for additional perks that have nothing to do with taxes, Lester said.

The paper looked at R&D subsidies in 36 countries and found Canada ranked third highest for small firms, behind just Chile and France.

The paper’s authors say when subsidies hit 25 per cent, it’s time to examine whether they’re worth it.

“The purpose of subsidizing businesses and R&D in particular is to make Canadians generally better off and that the test is whether the benefits to the overall economy exceed the costs,” Lester said.

“They don’t always and you can easily do too much.”

Enriching the companies themselves shouldn’t be the goal, he said.

The best policy is to have a uniform R&D rate for all businesses, regardless of age or size, the paper says. However, the authors concede taxpayers would likely get more bang for their buck with subsidies targeting young firms that would tend to be more innovative and have a steeper growth trajectory than their more established counterparts.

The study also urges policy-makers to ensure those receiving the subsidies actually get the benefit at whatever level is deemed appropriate.

For instance, a small firm with little taxable income may not get much out of a tax credit unless it’s refundable.

For larger multinational firms, Lester said a non-refundable tax credit should provide incentive for them to book income in Canada as opposed to another jurisdiction. And the value of perks that aren’t used at the same time they’re earned should be adjusted to reflect current worth.