It seems the Federal and Ontario Governments have truly opposing agendas and policies. While areas like carbon tax receive a lot of press coverage, each government’s position on SR&ED tax credits and innovation, in general, appears to be heading to different directions.

Good News for Profitable CCPC’s

The recent federal budget enhanced the refundable SR&ED tax credits for Canadian-controlled private corporations (CCPCs) that were bound by a financial threshold. Canadian companies that are scaling will no longer lose the federal 35% refundable SRED tax credit if their taxable income exceeds $800K. These companies would otherwise drop down to a non-refundable SR&ED tax credit of 15%, roughly a 60% drop. Having the freedom to access the 35% enhanced federal SRED tax credit and 8% Ontario OITC goes a long way to leverage cash flow for R&D and Ontario startup funding.

On the other hand, the Ontario Budget stated it wanted to review the Ontario Innovation Tax credit (OITC). The Ontario budget references an economic paper by John Lester, which essentially concludes that R&D tax credits over a certain amount or percentage do not incentivize companies to spend more on R&D. The inference in the Ontario budget is that it will reduce the OITC, currently at 8%. The OITC only applies to smaller businesses, which means startups will have an even harder time financing R&D spending.

On the grant front, the federal budget continues to promote innovation and provide substantial funding through programs such as the Strategic Innovation Fund, Superclusters, IRAP, SDTC, and FedDev.

Some Programs Have Been Removed

Ontario has eliminated virtually all clean-tech or climate change grants and export grants such as the Export Market Access and Export Manager program. Many other programs have been frozen pending review. Given the big push to get companies in Ontario to export, canceling the trade show grant came as a surprise.

In any case, the Government of Ontario would probably argue that it is not killing innovation, but putting an end to inefficient and wasteful government programs. If that is the case, what is their innovation policy or message on how will they incentivize or help Ontario businesses to become innovative? I think the Innovative Solutions federal program is a good program. This program puts out “Challenges” whereby SMEs can bid on innovative work federal government agencies need to develop. An example is a portable package autosampler which can safely extract samples of potentially highly toxic substances at the border in a timely manner. Funding is up to $150K for the proof of concept and $1M for the solution.

These types of challenges help SMEs fund R&D; commercialize a new product and obtain a lead customer while at the same time meet the needs of government agencies to remain technically relevant. A similar program for Ontario would be a worthwhile effort.