Canada’s race car in the world economy is in a year-long pit stop

November 7th, in Finance Committee, we learned that, while Scientific Research and Experimental Development tax credits are already being withdrawn, the direct grants to replace them won’t be rolled out until later next year. This is like Canada’s race car in the world economy going in for a year-long pit stop. The cost? About 300 million dollars in investment or about 2000 ongoing jobs according to the expert witness in committee. Why didn’t the Conservatives plan this change carefully?

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The Conservative government is notorious for speeding up legislation through omnibus bills and time allocation that limits debate.

Why are the Harper Conservatives in such a hurry if they are not ready to implement the legislation and the resulting delay hurts the economy? This is just another example of poor economic management.

The federal Budget 2012 reduced the Scientific Research and Experimental Development (SR&ED) tax credit which encourages research and innovation among Canadian companies. The loss of investment from cutting SR&ED was to be replaced by direct grants that target specific research.

On November 7th, during pre-budget consultations atthe Standing Committee on Finance, I had the chance to discuss the changes to SR&ED with Karna Gupta, the President and Chief Executive Officer of the Information Technology Association of Canada.

Here is an excerpt from Mr. Gupta’s initial testimony to the committee:

The second area I want to cover concerns indirect tax measures to support innovation. In the budgets of 2012 and 2013 the government began to remove the indirect tax credit, which was known as SR and ED, from research and development and made some announcements on direct measures.

Consultation is under way on the direct funding initiatives, and we expect these will be rolled out later in 2014. This delay is hurting the industry quite a bit, particularly on advanced manufacturing, where funding is required now.

We continue to believe that indirect measures like SR and ED are one of the best ways to continue to support the Canadian ICT sector, in large part due to the small businesses. This is a predictable source of funding to drive the innovation.

One thing I would note is that the ICT sector jobs are highly migratory. If we do not have the proper instruments in place, these high-paying jobs and the innovation we’re seeing in the country may not be here for long.

So our recommendations, as submitted in the budget document, state that we do need to revisit the SR and ED, and in the meantime the government should continue to track the changes and what the impact has been. Our recommendation was to take the qualified pool balances from 15% to 17% or return capital expenditures for R and D.

Here is my interaction with Mr. Gupta:

Mr. Ted Hsu: Thank you, Mr. Chair.

My first question is for Mr. Gupta. You mentioned the idea of returning the eligibility of capital expenditures to SR&ED. It reminded me of the work I did in this committee a year ago opposing the removal of the eligibility of capital expenditures.

You talked about a time-delay in moving from indirect credits to direct spending. I’m wondering how many dollars of investment have we lost because of the time taken to transfer? Do you have a number for that?

Mr. Karna Gupta: I don’t think there is an exact number but we know when the SR&ED changes were made it was equal to about $300 million worth of funding that was removed. If you take that and extrapolate it particularly in the technology sector that would be equal to somewhere between 1,800 and 2,000 jobs on some sustaining basis. So that’s the kind of relationship.

What we don’t have is countdown by corporation, these 10 companies lost—

Mr. Ted Hsu: Oh sure, but I think you are saying a rough estimate of around 2,000 jobs lost because of this loss in investment.

Mr. Karna Gupta: The equivalent of. That money being removed from the system we’re basically extracting funds out of the economy and haven’t poured it back so it has a direct impact on the job.

Mr. Ted Hsu: That’s good. I wanted to know the impact of that government policy.

The Conservative government was not ready with a plan to implement this legislation. Consultations with industry had not been completed. As a result, the flow of support for R&D and industrial innovation has been cut, to the tune of something like 2000 ongoing jobs lost. Every country gives incentives to their companies to take the risk of doing R&D. The competition for commercial success is global and Canada cannot afford to fall behind. The government’s action is like calling in a race car for a pit stop without having the crew ready.

This is part of a larger pattern. The government announces programs and funding, gets the photo-op and then does not spend the money (‘lapsing authorities’ is the technical term), to the detriment of the country. As an MP, I voted on the government’s spending plans, and I expect them to have planned well in the first place, and then follow through with what they said they would do.

Here is a news article on this abuse of ‘lapsing authorities’:

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