Changes to SR&ED welcome, but not enough

The Canada Revenue Agency announced changes to the Scientific Research and Experimental Development (SR&ED) program. As the Globe reports in Ottawa moves to streamline R&D tax-credit program, this is part of the effort to improve the system following last year's Budget. The changes should be welcome news fro firms investing in R&D, and for tax payers who want to see more accountability in the program. We also need to see more business investment in R&D. These changes however do not go far enough. Part of the issue with the SR&ED program is that it focuses too much on the SR and not enough on the ED.

The OECD's Frascati Manual defines three forms of research: basic research, applied research and experimental development. Here is the exact definition from the Frascati Manual:

Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental development is 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. (2.1.64)

Here is how CRA defines the three under What work qualifies for SR&ED tax incentives?:

“scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is
(a) basic research, namely, work undertaken for the advancement of scientific knowledge without a specific practical application in view,
(b) applied research, namely, work undertaken for the advancement of scientific knowledge with a specific practical application in view, or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto,
and, in applying this definition in respect of a taxpayer, includes
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer,
but does not include work with respect to
(e) market research or sales promotion,
(f) quality control or routine testing of materials, devices, products or processes,
(g) research in the social sciences or the humanities,
(h) prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas,
(i) the commercial production of a new or improved material, device or product or the commercial use of a new or improved process,
(j) style changes, or
(k) routine data collection;

SR&ED does not consider key components outlined in Frascati: things like installing and improving for example - that is, putting into practice incremental innovation. In short, SR&ED is biased toward basic research and ignores the very important aspects of actually getting R&D into markets. Now, one may say we have to draw the line somewhere because we don't want just anything to be eligible as this would be prohibitively expensive. Fair comment. But Canada is a country with  one of the highest per capita spends on HERD, has world leading basic research, yet a lackluster BERD where firms lag our international counterparts. This is compounded by a need to focus our inventions on innovation - on how we get innovations to market. Without supports for actual market entry, we are doomed to repeat the failures of the past: giving away our inventions for other countries to commercialize for us and, ultimately, to sell back to us. It`s time we moved incentives to where they are needed: upstream, as in the form of innovation vouchers to let the market decide where to access P3RD support, and supports for activities that actually relate to the market, understanding customers, and incremental innovation. We have a 19th Century view of research, when we need a 21st Century approach to innovation. It`s time we focused on "adoptation" and market entry for our research, and on commercialization inventions. That would be money well spent.