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SUBMISSION TO HOUSE OF COMMONS STANDING COMMITTEE ON FINANCE

2007 PRE-BUDGET CONSULTATION

The Tax System the Country Needs for a Prosperous Future

Presented by the Partnership Group for Science and Engineering

August 15, 2007

SUMMARY

Canada’s economic health relies on its human, natural and environmental resources and a legislative environment that allows effective mobilization of these resources. In research and development (R&D) this economic health requires strength and balance in public, private and academic sector initiatives. The new federal strategy for science and technology provides the framework for strengthening Canada’s research and innovation performance across sectors. It also recognizes the need for measures to encourage industrial and private sector R&D.

Long-term research and monitoring that is essential to the public good must be conducted in the public sector and supported with public funds. A dynamic research environment in universities fosters new knowledge, its distribution to other sectors, interdisciplinary partnerships, education of students - and ensures a repository of expertise. This pool of skilled human resources is drawn on by the private and public sectors.

The research activities of the private sector are motivated by efficiency and profit margin: this sector requires a mix of realistic incentives and regulations. The corporate sector already benefits from generous R&D tax credits which particularly favour small firms. Credits are the main government tool for influencing the overall level of business-led R&D; the issue is thus whether they should be expanded or made more effective.

The Partnership Group recommends:
• Increased incentives to attract and retain the best scientists and engineers;
• Increased support for research infrastructure in federal laboratories and for indirect costs;
• Fiscal incentives to encourage private sector investment in R&D;
• Support for strategic international partnerships and access to international scientific programs/data.

Introduction

The Partnership Group for Science and Engineering (PAGSE) is an association of over 25 professional and scientific organizations representing 50,000 members from academia, industry and government sectors. It represents the Canadian science and engineering community to the Government and to advance research and innovation for the benefit of Canadians. PAGSE is not a lobby group, but a cooperative partnership that addresses broad issues of science and engineering policy at the national level.

In its last brief to the House of Commons Finance Committee PAGSE stressed the urgent need for a national science and technology (S&T) framework. It congratulates the Government for the strategy released in May, 2007: “Mobilizing Science and Technology to Canada’s Advantage”. PAGSE endorses the overall direction and principles of the strategy. The present brief takes the need for a balanced R&D sector into account and suggests fiscal measures to reinforce this balance.

The size and growth of the federal budget surplus ($3.5 billion in June 2007) indicates a healthy Canadian economy with strong fiscal and economic performance. Canada is on track to pay off its net debt by 2021. PAGSE sees no need for new taxation of individuals. Fiscal and tax incentives are, however, recommended to encourage industrial investment in R&D and to balance federal R&D spending.

Canada’s Research Environment
In Canada, research is conducted in several settings, each of which serves a unique purpose: public sector research for standards and regulation, public services, policy development and national databases; academic research to advance knowledge, to educate and train, and to provide information for standard setting and policy strategies; industrial research to develop new products, adapt to changing resource conditions, advance commercial development and market share. New information and insights from basic research feed entrepreneurial energy by providing opportunities for technological progress and market advantage. A strategy aimed at increasing industrial research must thus include measures to strengthen the scientific basis for innovation and new technology.

Other measures that could even the playing field between R&D sectors are: support for protection of intellectual property through patents, licensing or other measures; strengthening of logistical support for research in remote regions, particularly the Arctic; and improved support for research overheads/indirect costs. PAGSE proposes the federal indirect costs formula for university research be expanded, to include support for university research from federally-funded foundations.

Education and Economic Health
Studies have established a positive correlation between general education levels and Gross National Product. Countries with high academic enrolments have greater skill levels, employment levels, income, productivity and growth. The acceleration of technological progress in the global economy is changing the skills required and demanding ongoing education and upgrading. Canada’s universities and colleges must have a strong research environment in order to meet the demand and to train and retrain people to be productive, innovative and adaptable.

Post-doctoral fellowships and Canada Research Chairs have attracted outstanding scientists (including expatriates) to Canadian institutions; however, first-time applicants in Canada, even those with an international track record have difficulty getting research grants commensurate with their demonstrated ability. This needs to be fixed.

Private Sector Participation in Research and Development (R&D)
Studies show that the key factor in companies choosing to do their R&D offshore is cost, including the tax regime. (This assumes an adequate R&D talent pool.) An important factor in attracting foreign companies to invest in research in Canada is to have an outstanding science and technology infrastructure. Tax incentives are essential to ensure that laboratories are top of the line, well maintained and staffed by the required technical support.

The private sector already benefits from a number of tax advantages, which have not always succeeded in stimulating industrial R&D: indeed some federal measures for a regulatory environment to stimulate a competitive marketplace have been completely inadequate.1 PAGSE recognizes that private sector companies are increasingly collaborating with the public and academic sectors through strategic alliances, research networks and partnerships. Collaborative research among sectors involves sharing of costs (financial leverage) and results, and may be more exploratory than purely industrial work. Firms consider it harder to capture the benefits of this work and thus limit their investments.2 Such collaborations can lead to uncertainties in the ability of companies to claim the federal tax credit for third party payments under the SR&ED program.

Improved synergies are needed between industrial and other R&D performing sectors. University offices of Technology Transfer could be invited to comment on mechanisms to achieve such synergies; existing mechanisms (e.g. Valorisation Recherche Quebec) could be studied as models.

Venture capital investment must be encouraged. Without being prescriptive, we recommend federal recognition of venture capital investment for expansion-stage financing. We also propose Canada extend the SR&ED Tax Credit program to cover the first stage of commercialization of new technologies. This would attract private venture capital and expand capital for the commercialization of new technologies from around the world.

RECOMMENDATIONS
1. Increase incentives to attract and retain the best scientists and engineers. Measures could include a limited (federal) tax holiday for new scientists to Canada; ‘starter grants’ for new researchers that realistically recognize their seniority and experience. We recommend the federal government assume the interest burden on student loans for graduate students who remain in Canada after graduation. The formula used could relate to the years a graduate works in Canada following graduation. We also recommend enhanced tax breaks for individuals or corporations donating to universities, colleges and learned societies, for R&D undertakings.

2. Increased support for research infrastructure in federal laboratories and for indirect costs. Support for government science has been static or declining over the last quarter century.3 This situation is compromising federal ability to fulfil its mandate of long-term monitoring, data collection, archiving and access. Responses to new economic and environmental threats, including extreme weather events and invasive pest species, require adequate background knowledge. Canada cannot afford to depend on foreign sources to acquire or purchase this information: to do so compromises Canada’s competitiveness.

3. Encourage private sector investment in R&D. The government could encourage greater uptake of industrial visiting fellowships and other researcher exchanges between sectors. The federal S&T strategy includes establishment of industry-led Networks of Centres of Excellence. Other initiatives would also benefit from new money: there should be no redistribution at the expense of existing R&D performing sectors. PAGSE recommends extension of the SR&ED Tax Credit program to cover the first stage of commercialization of new technologies. It also recommends a review of the incentives for collaboration between the private and academic sectors under the SR&ED program.

4. Ensure equal participation in national and strategic international partnerships, and access to international scientific programs/data. There is a mismatch between Canada’s international (bilateral) commitments and its ability to implement these negotiated agreements. Fiscal restraints have seriously weakened the ability of many federal departments to support travel, meetings and other costs of partnerships. Federal departments and Canadian universities need access to funds for basic implementation. PAGSE’s 2006 Brief suggested that an innovative form of “risk capital” is essential for Canada to establish or maintain its international credentials and to benefit from S&T on the world scene: we repeat this recommendation. We also recommend establishment of an International Opportunities Fund, to empower Canadians to partner on international initiatives for research and technology development.

1Mobilizing Science and Technology to Canada’s Advantage, 2007, page 55: “… the government will invest $9 million over two years to make Canada a best-in-class regulator…”
2Atkinson, R.D., Expanding the R&D Tax Credit to Drive Innovation, Competitiveness and Prosperity, The Information Technology and Innovation Foundation (U.S.), April 2007
3CSTA, LINKS: Linkages in the National Knowledge System, February 2005