Government Operations Committee on Oct. 18th, 2011

[The Vice-Chair, Conservative, Mike Wallace]

Thank you.

Mr. McCallum, you have five minutes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

I'd like to return to what I was talking about earlier but with perhaps a bit more clarity in the question. I think this report that came out yesterday did a number of things, but I'll just focus on three, and I'd ask each of you if you agree with it or not.

The government currently spends about $7 billion a year in these areas and they had to keep that level constant, so it was a question of reallocation. Given our challenges, you could argue that we should spend more, but in today's fiscal climate one might be lucky just to keep what we have.

Point number one is the SR&EDs now account for about a half, $3.5 billion out of $7 billion, and this makes Canada an outlier in terms of a very heavy dependence on indirect tax incentives versus direct spending. They propose to reduce over time the refundability of SR&ED, which would produce savings that they would then shift over to BDC for direct grants or expenditures or investments on late-stage risk capital financing and start-up funding. I think if you're a pure market person, you might not like that, because in a way it might involve some public agency choosing winners and losers, as opposed to the tax system, which is neutral. But the tax system, on the other hand, could be arguably not terribly effective and a shotgun approach.

Finally, I think everyone here would agree that they propose that CICP be made permanent and larger. Given what we've been saying, I think you would all agree with that.

My question, then, is do you agree, philosophically or in terms of your experience, with the proposal to reduce somewhat the money spent on SR&ED and to use those savings to do more through BDC on late-stage and start-up funding?

Mr. Gupta.

[Karna Gupta]

I would suggest it probably would make sense, because the money goes out first through BDC, and the SR&ED, by nature, comes to you after you have spent money. So you have to have some amount of cash in your pocket to spend it and then wait for the tax return. So inherently there is a delay and you're spending money early.

The second issue on the SR&ED side could be potentially the amount the consultant gets involved. So there is almost something taken off the top before the start-ups even see the money.

So there are some issues that still are desirable and need to be improved, but on balance my whole thinking here is if the total money going out the door is still the same and some is relocated from back end to front end through BDC, it is probably a good thing, because a lot of these start-ups need the money first.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

Ms. Preston.

[Monica Preston]

This is a tough one for me, because I really don't have enough insight. I think for our company the SR&ED program is an important part of what we do, and we are investing somewhere between 15% and 20% in R and D every year in our company. I really haven't looked at that to say what impact it would have on our company.

[John McCallum, Liberal, Markham—Unionville, ON]

Ms. Ing, I particularly want to hear you, because last time you said how much you like SR&ED, but you can't have everything, you have to choose.

[Lianne Ing]

Right. If you add the additional constraint that the total funding must stay even, I have to preface my answer, because I think it's difficult for me to really give a fair, unbiased answer.

As I mentioned before, our company is very heavily involved in very innovative front-end contract research and the SR&ED program has been very beneficial to us. Depending on how the reallocation occurred, I could potentially be persuaded.

[John McCallum, Liberal, Markham—Unionville, ON]

May I ask one quick question?

I mentioned this concern. I don't particularly have this concern, but some free-market types would be concerned if you give BDC a lot of control over what sectors they choose and what businesses they choose in terms of which ones are more promising. Do any of you have concerns about that, and if so, how would you satisfy those concerns?

[Lianne Ing]

If I may, that's one of the aspects of the SR&ED program, which for us has been very successful. The type of work we do, which is primarily focused on radiation and explosives detection, is a fairly small niche of expertise, not just in Canada but around the world. It's an area of expertise that doesn't often show up when people are looking at a strategic overview of where investment should go. We are often in an area that would fall between the cracks. The SR&ED program has been very effective because it allows us to choose where the most promising research can be conducted, and it allows us to benefit from those tax credits without having any additional filters put on as to where the research should be directed.

[Monica Preston]

I think it could change if you were to switch that just to BDC. I think it could change the landscape quite a bit in terms of the companies that would be willing to take out that capital and pay for the type of interest that goes along with that type of capital from BDC.

[The Vice-Chair, Conservative, Mike Wallace]

Thank you very much.

Do you have one quick comment, Mr. Gupta?

[Karna Gupta]

To your comment, the money must be used. It cannot sit in BDC. So the accountability of getting the money out the door is of primary importance.

[The Vice-Chair, Conservative, Mike Wallace]

Thank you very much.

I want to thank our witnesses today. We have no more people on the questioning list, so thank you for your input to this study, the information you've provided, and your opinions. We'll be looking at this over the next number of weeks and we'll be writing a review of where we're going and what we're doing. We appreciate your efforts in coming here today and answering all these questions.

With that, I'll adjourn, unless there's another issue. I don't see one.

The meeting is adjourned.