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Ottawa should dramatically cut its generous research and development tax breaks and plow the cash back into targeted grants for businesses, according to a new study by the University of Toronto's Mowat Centre for Policy Innovation.

A radical overhaul is warranted because the nearly $5-billion a year in R&D tax incentives Ottawa and the provinces offer now aren't working, according to a study being released Friday, Canada's Innovation Underperformance: Whose Policy Problem Is It?

"Canada is an extreme outlier in weighting its investment in innovation so heavily toward tax incentives and away from direct support to sectors," argued Tijs Creutzberg, the report's author.

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The single largest R&D program in Canada is Ottawa's flagship Scientific Research and Experimental scheme, which offers tax credits and refunds to companies that do R&D. Several provinces piggy-back additional tax incentives on the federal plan.

Canada relies more heavily on tax breaks to encourage business R&D than nearly all other Organization for Economic Co-operation and Development countries. Innovation powerhouses, such as Sweden and Germany, on the other hand, offer few tax breaks, but hefty subsidies.

Already weak by international standards, R&D spending by companies has been falling since the recession. And Canada's record of turning knowledge into innovative products is poor.

"Given our track record and national aspirations to do better, clearly now is a good time to fundamentally rethink the way in which . . .governments collectively support innovation," the report argued.

The study comes just days ahead of Monday's release of a federal task force report on the nearly $7-billion a year Ottawa spends on R&D outside its own research labs.

In spite of its problems, businesses and industry groups have told Ottawa they want the Scientific Research and Experimental program expanded so that its most generous benefits are available to larger public companies.

The Mowat Centre study pointed out that "overlapping and confusing" federal and provincial innovation programs are hurting the country. "Federalism is at least part of the problem," the report said.

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Mr. Creutzberg's conclusion: Ottawa should step back and let the provinces make "strategic investments."

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