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Conservative cuts to SR&ED jeopardize Canadian competitiveness

Posted by Ted Hsu on November 2, 2012 | No Comments

I recently spoke with a constituent who owns his own company and takes advantage of government incentives for innovation such as SR&ED and NRC-IRAP. His company, which employs many people, exports around the world and competes on the basis of the unmatchable quality of their product. He explained to me how important it was for his small company to be able to custom manufacture a certain item, how he went overseas to buy the machinery to manufacture it, and how much he appreciated the lack of an import duty on manufacturing equipment.

What’s the idea behind this lack of an import duty?

The idea is that Canadian workers need to become as productive as possible, and having the best machinery and equipment in the world will help keep and create good manufacturing jobs in Canada. Increasing the productivity of Canadian workers will be central to supporting Canada’s economy and quality of life in the decades to come.

The same idea lies behind the Scientific Research and Experimental Development (SR&ED) tax credit. We want Canadian businesses to invest in research and development, and to constantly innovate so that they and the workers they employ can compete in the world economy.

Unfortunately, the Conservative Budget 2012, as implemented in the second omnibus budget bill C-45, contains a reduction in the SR&ED tax credit from 20% to 15% of eligible expenses, and eliminates the eligibility of capital expenditures for the tax credit. This especially hurts industrial sectors such as aerospace, automotive, information and communications technology, and oil and gas technology.

We want companies to be investing in capital equipment for the purposes of innovation, not simply to improve equipment, but because the best equipment and machinery, and the people who figure out better ways to use them, will be important to our competitiveness, and to keeping good manufacturing jobs in Canada.

The elimination of eligibility of capital expenditures, when combined with the reduction of the overall SR&ED tax credit from 20% to 15% of eligible expenses is very serious. The latter cut was not even a recommendation of the so-called Jenkins Panel’s “Review of Federal Support to Research and Development”. This overall cut increases the marginal tax rate for innovative companies. For example, it punishes sectors like oil and gas technology, one of the primary engines of technology growth in the Canadian economy. When oil and gas companies around the world decide, say, that they want more efficient, safe, healthy or environmentally friendly technology, they come to shop in Canada.

The government has said that it would reinvest the savings from cutting SR&ED into direct grants, but there is no evidence that direct grants work better than tax credits. There is only the fact that other countries don’t rely on tax credits to the extent that Canada does. I would also be somewhat wary of having the government choose winners and losers through direct grants, and the costs inherent in the grant application and selection process.

The Liberal Party calls on the government to take the time to seek out and listen to testimony from those affected by changes to SR&ED, and to consider amending the changes contained in Bill C-45.

Ted Hsu

Liberal Critic responsible for Science and Technology, Federal Economic Development Agency for Southern Ontario and Federal Economic Development Initiative in Northern Ontario

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  1. Profile photo of Keshav Chandra Keshav Chandra said on

    Ted Hsu: Excellent post!

    This is the first time I have seen liberals talk about businesses. How to help them being more productive, profitable creating income. Yes, governments are not good at being able to chose winners and losers, let alone the private sector. Yes tax incentives are better. The only question i would have is whether any tax incentive is too broad in scope to cover things that don’t need incentives.

    The example you chose is an excellant one regarding imports. Imports from China? :)

    Nevertheless cheap imports if they help business productivity thru capital investment is a great regulation to keep.

    I don’t know how compettive energy sector is. They could possibly afford higher cost associated with capital equipment purchases if they are of domestic origin.

    So my question to you would be: Will raising tarrifs on imported capital equipment from China as an example promote our own industry? They are already keeping their foreign exchange in their favour.

    I think in the old days there was a depreciation allowance. I don’t know if it is still there. Americans had an acclerated depreciation allowance for right offs much better than ours. It was a well know irritant in the industry.

    Glad to hear some bread and butter issues being discussed by the liberal party!

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    • Profile photo of Ted Hsu Ted Hsu said on

      No I don’t think raising tariffs on imported manufacturing equipment from China will promote our own industry, it would probably hurt it, especially those Canadian manufacturers who use those manufacturing inputs to keep our Canadian products and workers competitive. The Canadian Manufacturers and Exporters tell me that cutting import duties on foriegn sourced manufacturing inputs (like equipment, machinery) is not something that they are concerned about. Another thing to consider is that a piece of machinery “from China” may have a lot of parts made in other countries. That’s just the way the global supply chains are these days.

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      • Profile photo of Keshav Chandra Keshav Chandra said on

        Imposing a tariff on an import from China on a capital good definitely does not work in favor of those industries which buy such a good at an advantage. What is not obvious in that argument is can such goods be manufactured in Canada although at a higher price. These will stimulate jobs and manufacturing in Canada, along with the multiplier effect. The Chinese are keeping their exchange rates artificially low to keep prices of exports cheap. That goes against the rules of the free trade as I understand it. So in fact they are subsidizing exports and undercutting competition from manufacturers of similar good that could be manufactured here in Canada.

        Chinese are practising protectionsim for their own industry.

        As regards components being manufactured elsewhere outside China: I think the argument needs to be carefully examined as they don’t in my opinion want imports of components that they can produce themselves. They have the infrastructure to produce anything they care to want. Their industry is as advanced as any in the world. To me that argument is not likely a strong factor.

        Obviously my argument is without factual assessment regarding Canadian capabilities to produce such goods at a reasonable price. But the association is telling you something in regards to the issue.

        There was that company in London Ontario. Part of it was outsourced to Brazil and the other to the US at half the wage rate.

        I think we need to introduce more automation in manufacturing. That is where we need to give tax incentives to produce such capital equipment here in Canada. The automation factor is the one which reduces the cost of the widget that gets manufactured. Our auto industry was retooled for that long time ago, but I don’t think it has followed into other sectors of the economy. Automation is expensive. But that is the only way to compete with China though they have I bet more automation in their manufacturing than we might be aware of. They got the brains and the zeal to go along which we it seems have lagged behind. Canadians have grown soft! Lost their zeal. Especially the liberals and the NDP! They want to live off the corporate taxes! ;)

        Yes, the corporations are not spending money at this point in time and they are afloat in cash according to what I am hearing.

        I think we need to shake up the people economy attitudes.

        :)

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  2. Profile photo of Ted Hsu Ted Hsu said on

    Here is a link to a facebook post that has a couple of video clips from yesterday’s testimony in the Finance Committee on the topic of SR&ED cuts
    facebook.com/TedHsuMP/posts/319363871503831

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