David Crane on
The Economy

Stimulating the demand side of innovation is a start

Sage advice the other day from University of Toronto president David Naylor — advice new Liberal leader Stéphane Dion would be wise to heed.

He said that, although Canada is rich in resources and competes successfully to attract foreign auto producers to invest in assembly plants here, it’s not enough for a successful country.

As Naylor put it, Canada has to look at its “national asset mix” just as a portfolio manager would. What we need, he said, is “a responsible diversification of our portfolio of economic activities so that Canada can claim a very serious share of knowledge-based global industries.”

Right now, with the exception of companies like Research in Motion, CAE and Manulife Financial, we seem to be moving in the opposite direction.

As Naylor put it, “Canada’s drive towards a bigger stake in the knowledge-based global economy may already be stalling out.”

And a constant chipping away at tax rates — the favoured strategy of the C.D. Howe Institute, the Canadian Council of Chief Executives and the Harper government — will not do the job either, though admittedly it doesn’t hurt.

Much more needs to be done.

Naylor’s plea, not surprisingly, was for greater investment in our education system and in university-based research.

And these are important. This is the supply side of the equation. Innovation starts with people who have been educated to be innovative. Fortunately, Canada appears able to graduate talented people and to develop new knowledge from research.

But there has to be a demand side as well — companies seeking innovative people and new ideas, and knowing how to use them. Otherwise, we are just investing in seed corn for foreign enterprises that will hire away our talented people and pay a pittance for access to their early-stage discoveries.

This is the big Canadian problem — the limited take-up by Canadian companies of new ideas developed in our universities and the lack of capital and support to start and grow new businesses.

Yet this is where many of our new jobs will have to come from in the future, as the process of globalization accelerates and reconfigures the world’s economic geography.

As the New York Federal Reserve has put it, new jobs come from new activities. RIM is a great example of that. Our challenge is to encourage and support new activities in existing businesses or new ones.

So we need to boost the demand side for innovators and innovation. There are various ways to do this, but one of the best is to create new markets through the use of tougher standards, say for energy efficiency, or new regulations, say for emissions from motor vehicles, or new procurement, say for smart information systems for the health records of all Canadians, including an electronic health card for every Canadian.

All of these processes force companies to innovate, which creates the demand for innovators and for research and development. Solutions have to be found if the companies want to stay in business. U.S. competitiveness expert Michael Porter spelled this out many years ago.

The fact that Sweden was one of the first countries to impose tough controls on acid rain meant that its companies also developed the first smokestack and other technologies to capture the chemicals causing acid rain — and were able to subsequently sell the same technology to companies in many other parts of the world.

The fact that Europe, early on, was able to agree on a shared standard for cellphones has been an important factor in the success of Nokia and Ericsson in that industry.

And the fact that California has imposed tough fuel standards on vehicles and electric power plants means that it will benefit both from cleaner air and new businesses serving those needs.

The decision by the Ontario government to require fixed shares of electricity from renewable energy creates a market for innovative energy technologies while its energy conservation and efficiency goals should have a similar effect in encouraging entrepreneurs to create new products.

Many businesses will moan about the slightest change forced on them. But this approach is essential if we are to encourage Canadian innovation.

We have to create demand, and hence markets, for innovation. Demanding standards, tough regulations and procurement that looks beyond off-the-shelf purchasing and forces a next-level stage of technology development should all be part of an innovation strategy.

Unless we pay more attention to the demand side for innovation, the supply side will move to other countries and Canada will be the loser.

David Crane’s column usually appears on Sunday in the Toronto Star. He can be reached at crane@interlog.com by email or by fax at 416-926-8048.

R&D Tax Credits — Is your company missing out?

Innovation is the key to success in today’s business world. However, your company may be missing out on a major source of funding for the innovative work that you do.

‘Scientific Research and Experimental Development’ (SR&ED for short) is a mouthful to say but straightforward in its intent: to support innovation. This federal tax credit program encourages the development of new or improved products or processes. With a complementary Ontario tax credit, the program is the largest source of government support for industrial research and development. Your company could be eligible for credits adding up to as much as 68 percent of the investments made in research and development.

Taking advantage of these credits is certainly straightforward enough, especially when you consider the following facts.

Fact #1: Your company probably does R&D

Even if your company hasn’t achieved a major scientific breakthrough of some sort, you may still qualify. In truth, some work in most manufacturing companies, and others as well, falls within the scope of this program. You may qualify simply by working towards technical advancements or solving technological or process related problems in your business in a systematic way.

The government is willing to support experimental development which is defined as “… work undertaken for the purposes of achieving technological advancement for the purposes of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto.”

Even better, it’s not just initiatives related to your core business that can be considered. Projects that seek to reduce the energy consumption or the environmental impact of your company may also be eligible.

Fact #2: Even your unsuccessful projects qualify

Let’s face it; things don’t always work out as we would hope. The SR&ED program helps you recover a major portion of your research costs even where that research has not been ‘successful.’ So long as you have learned something of value from the research activity, it is an eligible cost. This could become a key element in your company’s ongoing project planning and risk analysis.

Fact #3: The financial reward is worth the paperwork

Yes, there will be some paperwork, but don’t let this dissuade you. The financial benefit to your company will be substantial. Remember, up to 68 percent of your R&D costs can be recouped. By taking the time to document your company’s activities you are creating the foundation for a successful tax claim.

For example, if you keep track of the time spent by your employees on an eligible research project, a portion of their salaries can be claimed, as can a portion of other related costs such as materials consumed and machinery leased among other costs.

To learn more about eligible activities, developing a proper project description, and tracking relevant costs contact accounting firms specializing in the field of SR&ED and then the Canada Revenue Agency.

Research and development is an investment in your company’s future. Taking advantage of SR&ED tax credits ensures you get a return on that investment today. Make sure your company is not missing out.

(Gary Bateman, P.Eng., MBA., C.A. is a specialist in the field of SR&ED tax credits. He is also the author of “A Declaration of Taxpayer Rights; Your Family’s Complete Tax and Estate Planning Guide.” Gary can be reached via e-mail at gary@batemanviner.com or visit his website: www.batemanviner.com.)