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