Industry Committee on March 7th, 2013

[Geoff Regan, Liberal, Halifax West, NS]

I think so. It's a broad question. I'm sure you could talk about it for quite a while, but let me go on to talk about other programs that are related.

While it's clear that broadband and Internet policies are important to our small and medium enterprises, we've heard concerns expressed that other programs are also important. For instance, we've heard that the changes to SR and ED are counterproductive. I've been told that the new approach to SR and ED is leading to business models that will limit the growth of our SMEs.

Can you shed any light on why this is happening and what we should be doing to encourage growth, not limit it?

[Scott Smith]

The changes to the SR and ED program have essentially changed the program from being a tax credit incentive to a direct incentive. The direct incentive may have the result of limiting the size of the growth of those companies, because once they grow beyond that certain point, they will no longer be eligible to make use of those programs. Indeed, some companies have adopted a strategy of limiting their size because they are going to continue to use this. It makes sense for them.

There is nothing on the other side of that for the larger companies, the ones that typically are commercializing. Again, this is about productivity and commercialization of R and D. Those larger companies are the more likely ones to take a product to the commercialization stage, because they have the capital, because they have the resources, and because they have the skills base to take a research and development idea to commercialization.

There is nothing on the incentive for them at this point.

[Geoff Regan, Liberal, Halifax West, NS]

One of my earlier thoughts about SR and ED, which I believed would have worked better than what's happened, was to say that we're going to keep this as a tax credit because we want businesses, not government, to decide what they should do and shouldn't do in terms of R and D, but we're going to require you up front to indicate that you're going to apply for this in relation to the R and D you're doing. The concern we were hearing, of course, was about the consultants who would make a fair buck by going back over a business's activities and trying to find things that fitted into this category and applying for the credit, rather than having legitimate R and D activity that was being done.

I know of a company in my riding that's done very innovative work, has a very innovative product that's selling around the world now, and has had no success with SR and ED because they claimed that they weren't doing R and D. They've got a really innovative product that they did R and D on, so it was very frustrating.

What's your view of where the government should have gone?

[Scott Smith]

I think there are a couple of things here that we need to think about. The way that the tax incentive program is designed, you actually need to turn a profit to be able to take advantage of it. Most of those smaller companies that could have been eligible for the tax incentive didn't get to the point where they could make use of it. Some of them still have it on their books. We need to find a way to deal with that.

But the other half of that is how monetize those tax incentives. Maybe here the government could look at finding a way for angel investors or foreign investors to make use of those tax incentives up front and make them flow-through, where you're going to see it on the other end. It would end up being revenue neutral, but it would give that opportunity to those smaller companies who don't have the capital, who don't have access to the capital, to find a way to do that.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Smith, and Mr. Regan.

Now we'll move on to the next round. We're down to five minutes.

Mr. McColeman.

[Phil McColeman, Conservative, Brant, ON]

Thank you, Chair.

And thank you for being here, Scott.

You mentioned that we rank number eight on one scale. Who are the world leaders?

[Scott Smith]

I think I brought that with me too—all I've got to do is find it.

No, I didn't.

The world leaders are mostly European countries and Japan and Korea.

[Phil McColeman, Conservative, Brant, ON]

Okay. In your mind, are there theories as to why they're in the position they are and we are where we are?

[Scott Smith]

There are a couple of reasons. According to that report, there's the fact that they were later in adopting new technologies. Countries like Japan actually started building their networks as the newer technology was available, so they actually have single investment as compared to the multiple investments that were made in Canada for changing the networks.

[Phil McColeman, Conservative, Brant, ON]

So they had a head start is basically what you're saying.

[Scott Smith]

They had a head start, yes.

[Phil McColeman, Conservative, Brant, ON]

It's a staggering number you mentioned—$4.3 trillion dollars of business being missed on the Internet. Put that in terms that a layperson would understand. What kind of business is out there in such high quantities that it's being missed?

[Scott Smith]

It's all to do do with commerce and trade, and so it involves selling product over the Internet. But it's more than that: it's about logistics and how you track products; it's about efficiency and productivity. I think that $4.2-trillion number incorporates both volume of sales and efficiencies.

[Phil McColeman, Conservative, Brant, ON]

So it's right across all sectors, all services, all products then?

[Scott Smith]

Correct.

[Phil McColeman, Conservative, Brant, ON]

It's all encompassing. I understand it now.

Again, from a small business entrepreneurial point of view, when I had my business a couple of things drove me. One was customer demand, to make changes in my business to react to customer demand, and lowering my overhead, my expense side. I sat on my chamber of commerce's board of directors for a while. I think most of the people who were with me at the time were of the opinion that they'd rather do it themselves than be involved with government incentive programs.

How do your members today reflect on the issue of the government being involved in the viability of their business?

[Scott Smith]

I don't think you can make a generalization like that. I have met small business owners who think exactly as you did, that they would rather do it themselves. They take a certain pride in what they do and they're not interested in government services. There are many who would take advantage of government services if they knew they were available. They don't. There are many that do take advantage of government services and prosper for it.

I think there are many education programs, incentive programs, that small business should be taking advantage of. They're not designed to pick winners; they're designed to help everyone. It's about connection.

[Phil McColeman, Conservative, Brant, ON]

Going back to a previous comment you made, is it about developing new programs or connecting to what's already in existence?

[Scott Smith]

I think there are some additional incentive programs that could be developed, changes to the tax structure, as an example. We've already talked about the SR and ED program. There need to be some changes there that would advantage everyone and help the entire country prosper. I think the first step is taking a look at what's already out there in inventory so that everybody understands what's out there.

[Phil McColeman, Conservative, Brant, ON]

Of course, that's one of the dilemmas for a small or medium-sized business, having the resources to actually navigate through the maze of what governments seem to be rolling out and presenting. That's just a perspective and an opinion on my part.

In your opinion, are there any cultural influences between the high-performance countries and Canada, or the leaders you mentioned who have influence?

[Scott Smith]

The cultural influence, I think, would be leadership. There is a clear distinction between some companies that grow and some companies that don't grow. It has to do with the leaders of those companies. That's something we can look at from a skills perspective in this country. How do you grow entrepreneurs? How do you grow leaders?

[The Chair, Conservative, David Sweet]

Thank you, Mr. McColeman.

Now on to Mr. Harris for five minutes.

[Dan Harris, NDP, Scarborough Southwest, ON]

Thank you Mr. Chair.

Thanks, Scott, for being here.

Following up on that point, I think that digital literacy is critical. I think it has to become a fundamental component of business programs so that people going into business actually have a fundamental understanding. When I ran a small web design business, getting small and medium enterprises to invest even 500 dollars into a storefront website was like pulling teeth. Certainly if you're going to try to sell things online, the cost goes up greatly because of the security requirements to ensure that you're going to be taking proper care of people's personal and financial information.

But all of this is going a bit off of from where I wanted to go. The lack of business adoption of the Internet definitely speaks to a lag in productivity, I think, and it's one of those challenges that Canada is facing.

I want to talk about the rural areas and the challenges that small and medium, and even large, enterprises face when you're operating in a rural environment. Working in the oil sands, for instance, companies are having to make multi-million dollar investments to get connectivity to those sites, by setting up a tower, getting the equipment and gear in, and getting that running.

Are you experiencing a lot of questions and concern from your smaller chambers in rural areas about connectivity or the lack thereof? Many people in rural areas are still dealing with dial-up.

[Scott Smith]

What concerns me is that we hear that more from consumers than from businesses.

There are some rural areas that have limited connectivity, and that needs to be dealt with; but we're not hearing that from business, and we should.

[Dan Harris, NDP, Scarborough Southwest, ON]

Is that because for businesses it's not even on their radar because their own customers aren't able to get online?