According to a new research paper by Lester and Warda (2014 University of Calgary School of Public Policy), Canada ranks third of 36 countries (behind Chile and France, and just ahead of Spain and India) in terms of the size of R&D (research & development) subsidies for small firms, with about 40% of R&D costs returned to the companies (combined across federal and provincial levels of government). The rate for the US is around 10% (Chart 1).

Note that the Canadian government has been reducing its main R&D tax credit, the SR&ED (Scientific Research and Experimental Development) credit, between 2012 to 2014, in part by reducing the rate at which SR&ED overhead is calculated (under the “proxy” method) from 65% to 55%. This reduction is not discussed in the report.

The authors argue that R&D subsidies should be awarded to young firms more than to small firms. As in, “focusing on young firms avoids providing benefits to small firms that are not growth-oriented.” In addition, enhanced support appears to be the strongest for young firms as they may offer radically new inventions than older firms. Small firms, on the other hand, seemingly have a higher administration and compliance cost per dollar of subsidy received.

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This post was written by Syngli