Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 3113 INFORMATION TECHNOLOGY ASSOCIATION OF CANADA ASSOCIATION CANADIENNE DE LA TECHNOLOGIE DE L’INFORMATION ITAC on Trade and Competitiveness | Page 2 THE VOICE OF THE INFORMATION AND COMMUNICATIONS TECHNOLOGY (ICT) SECTOR IN CANADA | www.itac.ca For these reasons, and because successful ICT entrepreneurs and business leaders fall into the higher income tax segments, it is important that Canada’s personal income tax policies also be considered as part of our innovation competitiveness. Incentivize export growth and collaborative R&D Business enterprise R&D investments (BERD) made by the private sector have a direct relationship on the innovative capacity of an economy. While Canadian governments offer strong R&D incentives, Canada’s gross expenditure on R&D has declined in recent years: a trend contrary to other OECD countries.4 Another troubling issue is the fact that just 12 companies—six of which are ICT firms—account for roughly half of all BERD in Canada.5 The ICT industry contributed over 31% of Canada’s total expenditure on R&D—over $4.9 billion in 2014.6 This too fell 9% between 2007 and 2014. If Canada is to realize its innovation potential, it is important this trend be reversed and Canadian businesses increase their investments in R&D. ITAC’s 2017 pre-budget submission calls on the federal government to launch a comprehensive review of R&D supports and credits.7 This is a highly complex area with diverse perspectives on where taxpayer investments can have the biggest economic impact. ITAC recommends the government pursue a balanced approach that allows for broad tax credit supports like the Scientific Research and Experimental Development program (SR&ED), as well as targeted investments focusing on leading-edge technologies and growth areas. • Reduce SR&ED grind-down to support export growth Currently, SR&ED credits “grind down” (i.e., are reduced) as firms grow above certain revenue thresholds. Too often, this occurs as medium-sized companies are expanding into new markets, which requires incremental R&D and other new expenses. Reducing R&D support at this crucial time makes exporting more challenging, and leaves businesses with fewer resources to invest in creating their next great product. Rather than hampering firms who try to sell internationally, Canada could align the SR&ED grind-down schedule with the amount of export revenue generated by a business.8 This would encourage businesses to focus on growing in new markets, while providing resources to keep them innovating and developing new exportable products at home. Additionally, this alignment could improve the cluster depth of mid-sized companies within Canada’s technology ecosystem.9 • Access unused SR&ED credits to support collaborative innovation between large and small businesses The World Economic Forum has identified “collaborative R&D” as a strategy to address challenges of innovation and scaling.10 By collaborating, different-sized firms can benefit from each other’s strengths: larger firms can learn from the innovative nature of startups, while smaller firms can access the larger firms’ deep networks, sales and value chains. While Canada has some government-led programs to encourage joint R&D, most are primarily focused on connecting small businesses and post-secondary institutions. As such, more should be done to make collaborative innovation a common business practice between large and small firms. For example, the government could consider allowing large corporations to commit a portion of their unused SR&ED credits to conducting collaborative innovation with smaller Canadian companies. • Reduce the complexities and burden associated with R&D support programs Beyond taxpayer investment in R&D, there is a critical need for a cross-government approach to reduce the time, cost and overall burden of applying for government R&D support. SR&ED is intended to be a predictable and easy process; however, ITAC members have regularly raised concerns that the complexity and long delays of SR&ED approvals force their companies to hire consultants or pay interest on bank loans, eroding the value delivered from taxpayer investments in R&D. Therefore, the Government of Canada should maintain Canada’s competitive corporate tax environment; and exercise caution not to implement overly targeted tax policies that make it difficult to retain top ICT talent. 3 ITAC will produce a paper in fall 2016, devoted to talent and skills development. 4 See Deep Centre, Canada’s Innovation Performance: A Scorecard 2015. March. http://deepcentre.com/wordpress/wp-content/uploads/2015/03/DEEP-Centre-Canadas- Innovation-Performance-March-2015.pdf 5 Conference Board of Canada, Running on Empty: Canada’s Persistent Business R&D Weakness. May 2015. http://www.conferenceboard.ca/commentaries/ technologyinnovation/default/15-05-29/running_on_empty_canada_s_persistent_ business_r_d_weakness.aspx 6 See: https://www.ic.gc.ca/eic/site/ict-tic.nsf/eng/h_it07229.html 7 ITAC, Budget Submission for 2017 Budget. 2016. http://itac.ca/wp-content/ uploads/2016/08/ITAC-2017-Federal-Pre-Budget-Submission-Final.pdf 8 See David Ross, “How to use SR&ED to reverse the decline of Canadian-owned mid- sized companies,” Research Money. Vol. 30, N. 6. April 18, 2016. 9 The lack of vital mid-sized firms in Canada’s technology clusters is discussed in: Lazaridis Institute, Scaling Success: Tackling the Management Gap in Canada’s Technology Sector. March 2016. 10 For more information including potential policy approaches, see: World Economic Forum, Collaborative Innovation: Transforming Business, Driving Growth. 2015. http:// www3.weforum.org/docs/WEF_Collaborative_Innovation_report_2015.pdf The Government of Canada should conduct a holistic review of Canada’s Tax and R&D framework to ensure it meets the needs of Canada’s technology industry—including opportunities to incentivize export growth, encourage collaborative R&D and reduce the administrative burden of applying for R&D supports.