There is a strong consensus that to be competitive, Canada needs to be at the forefront of research and development. So it's worrisome that the federal system for encouraging technological innovation -- Canada's Scientific Research and Experimental Development program (SR&ED) -- has come under fire from the Auditor-General and a House of Commons standing committee on public accounts. Both reports question the usefulness of the present incentives and criticize the way Canada Customs and Revenue Agency (CCRA) administers them.
Such criticism often leads to calls for the government to stop throwing money into research, leaving it instead to the private sector. But that would be a mistake. The problem is not in the SR&ED program itself but rather a failure to communicate.
The Organization for Economic Co-operation and Development says that Canada has one of the most generous systems to encourage companies' scientific research. But in our experience, many businesses entitled to tax benefits under the program fail to take full advantage because the principal elements of the program are extremely technical and not readily understood.
Canada's SR&ED program is vital to our long-term growth and leadership. It is the largest federal program that supports industrial research and development and accounts for 27 per cent of all government R&D support. However, its benefits are delivered through the income tax system and most of us are uncomfortable dealing with technical tax rules.
Those who do understand the tax rules -- the accountants, lawyers and other consultants -- are often equally uneasy with the concepts and language of science and technology.
The result is that despite being ranked first among the G7 countries in terms of technology potential, Canada continues to suffer from a serious innovation gap.
Federal officials, industry members and tax experts need to resolve the program's communication problem by ensuring that the people who conduct R&D and the people responsible for managing research programs understand each other.
Everyone involved needs better information, including the basics, to take full advantage of the program.
There's no question that there's room for improvement. But neither the Auditor-General nor the Commons committee give much credit for the initiatives under way. Currently, industry representatives are working with the CCRA to improve the tax incentive system so it is more understandable and practical for both industry and government.
Despite some bad press, incentives are still widely considered the best way for countries to create better standards of living for their citizens. Dynamic Asian economies understood this back in the 1960s, and virtually all industrialized countries have research incentive programs today. Fostering innovation is key to ensuring we are not left behind to become just a supplier of raw materials.
Once companies have a better understanding of how the SR&ED system works, they will be in a better position to consider the R&D incentives in making major investment decisions. In a few situations this has already occurred, with encouraging results -- it's no accident that DaimlerChrysler opened a large research operation on this side of the Detroit River.
The SR&ED program offers corporations another reason to locate here. In fact, it is because of our generous SR&ED program that companies such as DaimlerChrysler, Motorola, Linear Technology and Cisco Systems, have benefited from doing business in Canada. The SR&ED program is far from a wasteful handout, as implied by the Auditor-General's report. It is about creating new opportunities and boosting the economy across all sectors. These investments are crucial for Canada to remain competitive. Earl Viner is national practice leader of KPMG's R&D tax practice and co-author of Canada's Scientific Research and Experimental Development Program -- A Practical Guide . The views expressed in this article do not necessarily represent those of KPMG.