New budget measures significantly reduce the value of the SR&ED tax credit. The rationale is that Canada’s business investment in R&D is low compared to other countries and has been falling steadily for the last few years, so the private sector must have failed to take proper advantage of the support being offered and the resources would be better used elsewhere. What this does not taken into account is that other factors have influenced the data on private-sector R&D investment, and comparisons and analyses based on that data are therefore unreliable.
Information on business expenditures on R&D by smaller R&D performers comes directly from the SR&ED database, and for larger companies is collected in response to surveys by Statistics Canada. Until very recently, the survey website has carried a definition of R&D similar to the definition of SR&ED in the Income Tax Act. Unfortunately the SR&ED definition is based on the 50-year old model of R&D in the original edition of the Frascati Manual, the OECD’s manual on research classification. It is considerably narrower than the definition in the current edition of the Manual, which is the one in use in most other countries. In consequence, much work that would be counted as R&D elsewhere has not been included in the Canadian statistics, skewing the international rankings for R&D expenditure. Another factor is the tightening of the documentation requirements for SR&ED claims over the last few years; if only work accepted as SR&ED has been included in the numbers reported to Statistics Canada, this could appear to be a drop in the level of R&D being performed.
For the new round of data collection, which began in October 2012, Statistics Canada has replaced the definition on their website with one much closer to the current OECD description - less academic and more business-oriented. The restriction to work in the natural sciences and engineering has been dropped, so R&D in the knowledge economy may begin to be included as part of Canada’s R&D effort. If Canadian R&D performers base their reports on these new standards, the data available to Statistics Canada may begin to more accurately represent the level of private-sector R&D.
New Statistics Canada definition of R&D:
“Research and development project” refers to creative work undertaken on a systematic basis in order to increase the stock of scientific and technical knowledge and to use this knowledge in new applications. The central characteristic of a research and development project (R&D) is an appreciable element of novelty and uncertainty. New knowledge, products or processes are sought. New knowledge involves the integration of newly acquired information into existing hypotheses, the formulation and testing of new hypotheses or the re-evaluation of existing hypotheses, the formulation and testing of new hypotheses or the re-evaluation of existing observations. An R&D project generally has three characteristics:
- a substantial element of uncertainty, novelty and innovation;
- a well-defined project design;
- a report on the procedures and results of the projects.
“Research and development (R&D) is systematic investigation carried out in the natural and engineering sciences by means of experiment or analysis to achieve a scientific or technological advance.
Research is original investigation undertaken on a systematic basis to gain new knowledge.
Development is the application of research findings or other scientific knowledge for the creation of new or significantly improved products or processes. If successful, development will usually result in devices or processes which represent an improvement in the "state of the art" and are likely to be patentable.”