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Innovation Canada: A Call to Action

3. Overview of Programs to Support Business R&D (continued)

Profile of Federal Government Support for Business R&D (continued)

Envelope Expenditure by Form of Support

The SR&ED tax credit is by far the largest program of federal support for business R&D, projected to comprise about 70 percent of envelope expenditure (Figure 3.3).

In the category of direct expenditure, non-repayable grant and contribution programs make up the largest proportion — $901 million in 2010–11, or 60 percent of the direct expenditure category. IRAP is by far the largest, with 2010–11 expenditure of $237.3 million, although it should be noted that this reflects a substantial two-year increase in budget as part of the government's stimulus program. (IRAP expenditure in each of 2007–08 and 2008–09 was about $86 million, or only a little more than a third of its 2010–11 budget, and about 8–9 percent of direct expenditure in those years.) There is a total of 29 programs or program components in the non-repayable grant and contribution group.

Programs providing repayable contributions are smaller — $248.7 million in 2010–11, or about 17 percent of direct spending. The Strategic Aerospace and Defence Initiative (SADI) is the largest of these programs, with 2010–11 expenditure of $112.7 million, although this annual amount will rise substantially as the program ramps up. There are seven programs in this group, with the remaining total largely delivered by the regional development agencies (see Figure 3.1).

Programs providing repayable contributions are smaller — $248.7 million in 2010–11, or about 17 percent of direct spending. The Strategic Aerospace and Defence Initiative (SADI) is the largest of these programs, with 2010–11 expenditure of $112.7 million, although this annual amount will rise substantially as the program ramps up. There are seven programs in this group, with the remaining total largely delivered by the regional development agencies (see Figure 3.1).

Envelope Expenditure by Type of Recipient

Figure 3.4 breaks down total expenditure by recipient and shows that 81 percent is projected to go to businesses, with the great majority made available through the SR&ED program. Much of the direct support for large businesses is repayable. The allocation of expenditure from direct programs in 2010–11 was roughly as follows: 11 percent to large businesses, 26 percent to small businesses, 27 percent to the academic sector (including students), 21 percent to NRC institutes and other federally performed R&D, 12 percent to Canadian non-profits, and 3 percent to "other" recipients (including provincial and municipal governments, foreign performers and other Canadian performers). The breakdown of indirect expenditure in 2007 — the latest year for which a breakdown by recipients is available — was as follows: 56 percent to large businesses, 40 percent to small Canadian-controlled private corporations (CCPCs), and 4 percent to other businesses, that is, small non-CCPCs and CCPCs in expenditure limit phase-out range.5

Figure 3.3 Program Envelope, by Form of Support, 2010–11a
Figure 3.3 Program Envelope, by Form of Support, 2010–11

Envelope Expenditure by Sector

Figure 3.5 (at the end of this chapter) lays out the allocation of both direct and SR&ED tax credit expenditure across all goods and services producing industries. In the case of the direct programs, a sectoral breakdown is provided for the $1.5 billion in 2010–11 expenditure. In the case of the SR&ED tax credit, the sectoral allocation of about $3.3 billion is for 2007, the most recent year for which a sectoral distribution is available. The following are some key observations around the envelope expenditure by sector.

  • Direct expenditure. Direct expenditure programs, in total, are heavily oriented toward goods-producing industries (about 72 percent), reflecting primarily a focus on manufacturing. Approximately 27 percent of direct spending programs support services producers, notably the professional, scientific and technical services subsector (about 12 percent) and information and cultural industries (about 5 percent). While direct program expenditure has increased by over $550 million from 2007–08 to 2010–11 (Figure 3.1), the sectoral allocations have remained relatively similar over that period.
  • Indirect expenditure. The estimated allocation of the SR&ED tax expenditure is spread more evenly across sectors and, as would be expected given its base of calculation, mirrors more closely the sectoral distribution of Canada's total business expenditure on R&D (BERD). For example, approximately 56 percent of SR&ED credits were associated with goods producers, a group that performed about 58 percent of BERD (the services shares are the complements).

It should be noted that the program expenditure in Figure 3.5 cannot be interpreted simply as funding a portion of the BERD total. While some programs transfer cash directly to business — notably the refundable amounts from the SR&ED program and the various grant and contribution programs (some of which are intended to be repaid) — other direct expenditure is by federal entities such as NRC or goes to academic institutions and not-for-profits.

Figure 3.4 Envelope Expenditure, by Type of Recipient, Total Direct Expenditure, 2010–11, and SR&ED Tax Credit, 2007

Total Direct Expenditure, FY 2010–11
Total Direct Expenditure, FY 2010-11

For 2010:

About 81% of all expenditures (direct and indirect) are projected to go to business.

About 86% of this amount is projected to be delivered through the SR&ED program and 14% through direct programs.

SR&ED Tax Credit, 2007
SR&ED Tax Credit, 2007

Envelope Expenditure by Province

It was difficult on the basis of available data to determine accurately the geographic distribution of SR&ED tax credits. For example, from 2000 to 2007, some 40–50 percent of the SR&ED credits were claimed by multi-jurisdiction firms, but typically reported by location of head office. As a result, it was not possible to determine precisely in which region these firms are performing their SR&ED activities, and consequently to draw an overall conclusion about the distribution of SR&ED claims by region. Subject to these important caveats, the Panel's analysis has shown that, for the years 2000–07, the estimated average distribution of SR&ED tax expenditure for the firms operating in a single jurisdiction appears to correspond closely with the average provincial distribution of BERD — that is, mostly in Ontario and Quebec, with moderate amounts in the four western provinces and some in the Atlantic provinces.

The distribution of the direct expenditure total is more nearly in line with provincial population shares,6 though with a significantly larger proportion in the Atlantic provinces (about 12 percent of direct expenditure compared with slightly more than 7 percent of Canada's population) and somewhat less than proportional per capita in British Columbia, Alberta, Manitoba and Ontario.

Envelope Expenditure by Activity Supported

The great majority of R&D performed by business is for "experimental development" (Statistics Canada 2009), which the Frascati Manual defines as "systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed" (OECD 2002, p. 30). Allocation of the SR&ED tax credit, averaged over 2000–07, is estimated to be mostly in support of experimental development. Direct expenditure programs were more evenly spread, with 38 percent of 2010–11 expenditure estimated to be in support of experimental development, a roughly equal amount of 35 percent for applied research, 13 percent for basic research and 11 percent for "commercialization" (planning, marketing and production support, which are not eligible for SR&ED credits). Three percent of direct support was not categorized.

When direct and indirect programs are combined, it is estimated that the majority of federal support for business and commercially oriented R&D is directed to experimental development. This activity is usually very close to the market and therefore is less conducive to collaboration and partnership with other players in the innovation system. There also appears to be less spillover to the economy at large from this "close-to-market" R&D, the benefit of which is likely to be more fully appropriated by the R&D-performing business than would be the case for basic and applied research, which is usually more widely shared and also subject to more wide-ranging application.

In Summary

The picture conveyed by the envelope of business R&D support programs is one of dramatically contrasting scales. The great majority of support is delivered by one program, the SR&ED tax credit, which accounts for about 70 percent of the envelope, is not sectorally targeted and supports business R&D spending explicitly. The 59 programs in the direct expenditure envelope are extremely heterogeneous as to target, delivery vehicle and administering agent. IRAP is by far the largest and in 2010–11 accounted for about 16 percent of direct expenditure, although this reflects an extraordinarily increased allocation as part of the government's economic stimulus expenditure. The great majority of the other direct spending programs each account for less than 2 percent of the direct total, and may in some cases be too small to have significant impact. Moreover, the combination of small size and sheer number virtually ensures that there will be little awareness among potential business sector beneficiaries of many of the programs. This challenge is exacerbated by the large additional number of business innovation support programs delivered by provincial governments.

The Panel believes, for reasons presented in Chapter 5, that rationalization of programs is required to increase scale, reduce duplication, improve delivery efficiency and create much greater awareness among potential business sector clients.

Figure 3.5 Sectoral Distribution of Direct and Indirect (SR&ED) Expenditure
Sector Direct (2010–11) SR&ED (2007) BERD (2007)

a The total for manufacturing does not include petroleum and coal product manufacturing, which is instead included as part of oil and gas and mining (see note b, below). (Return to text)

b Includes mining, quarrying, oil and gas extraction and petroleum and coal product manufacturing. (Return to text)

Source: Based on figures provided by departments and agencies; and Statistics Canada (2011) for the sectoral allocation of BERD.

Goods Industries
Agriculture, Forestry, Fishing and Hunting
9.8% 1.4% 1.0%
Manufacturinga 52.7% 44.5% 49.2%
Construction 2.3% 1.1% 0.6%
Utilities 3.1% 0.3% 1.6%
Oil and Gas and Miningb 3.8% 8.7% 5.3%
Subtotal – goods industries 71.7% 55.8% 57.7%
Services Industries
Transportation and Warehousing
0.8% 0.7% 0.4%
Information and Cultural Industries 4.9% 11.2% 8.8%
Wholesale Trade 1.0% 0.1% 5.9%
Retail Trade 0.7% 0.6% 0.3%
Finance and Insurance, Real Estate
and Rental and Leasing
0.1% 2.0% 2.7%
Professional, Scientific and Technical Services 11.6% 23.6% 18.7%
Other Services 8.0% 5.7% 5.4%
Subtotal – services industries 27.0% 44.0% 42.3%
Unclassified 1.2% 0.2% 0.0%
Total – all industries 100.0% 100.0% 100.0%

5 The definitions of small and large businesses used by the SR&ED program and the direct programs are not fully comparable. In the case of many direct programs, the business's number of employees is used to define the size of the business. For the purposes of the SR&ED program, a "small CCPC" is one with prior-year taxable income of $500 000 or less and prior-year taxable capital of $10 million or less. These companies receive a refundable tax credit on their first $3 million of eligible expenses. (Return to text)

6 With the exception of Ontario and Quebec, provinces have a slightly smaller share of BERD relative to their share of Canada's population. (Return to text)