Industry Committee on Nov. 1st, 2012

[Karna Gupta]

I think there are several. One of them could be this: a lot of our young companies talk about generating revenues on patents and royalties, similar to some of the other regimes, like the U.K.’s. Maybe that should be incented, so you force the right commercialization of the patents. There are a lot of patents that sit there and don't get commercialized. You want to incent the commercialization process to create the economic activity.

The goal is economic activity and job creation. If that's the intent, then you need to incent that portion so that when the patents are commercialized and generating revenue, those revenues get special treatment. Maybe that's one of the things to look at. There are policy issues on the table that we need to look at, to support that process.

[The Chair, Conservative, David Sweet]

You have about 20 seconds.

[Phil McColeman, Conservative, Brant, ON]

Thank you.

I'm finished.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. McColeman.

Now on to Madame LeBlanc for five minutes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you very much.

We have nevertheless had some interesting discussions about research and development and we have seen that the rate change from 20% to 15% will generate revenue for the government. The government has chosen to transfer some of that revenue to the Industrial Research Assistance Program, the IRAP. It cannot be blamed for this, but that results in a shortfall.

I would like to go back to Mr. Gupta and Mr. Lavoie. What would be the right combination to enable your members to compete in a research and development environment so that Canada could be competitive?

[Martin Lavoie]

As we said, the rate change will affect 2,600 companies that are considered large businesses under the scientific research and experimental development, the SR&ED, program. That is why the person at the end of the table said there was not much impact on the rate reduction. His business probably has a 35% tax refund, which was not affected by the budget. So that is 2,600 businesses, out of a total of approximately 23,000 or 24,000 businesses that use the SR&ED program. This reduction will affect those 2,600 companies.

The National Research Council Canada's Industrial Research Assistance Program, the NRC-IRAP, is a program we like a lot and that is very good for small businesses, but it is not available for businesses that have more than 500 employees. The largest businesses in the country, the multinationals, which often have more than 500 employees, suffer the greatest negative impact as a result of this rate change. We are not really talking about the same thing; we are talking about money, support for larger businesses, that is being taken away and perhaps handed over to smaller businesses.

I would say the same thing about the $400 million in venture capital that will normally go to start-up businesses. Although there is more direct support, we have not forgotten that the biggest hit is borne by large businesses. I do not want to turn this into an issue that pits large businesses against small businesses.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

No, indeed.

[Martin Lavoie]

All businesses are important. As I said, you have to take into account the fact that there are approximately 25,000 companies in Canada that are engaged in R&D and are eligible under the SR&ED program. However, the 75 largest businesses incur 50% of all R&D expenditures in Canada.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

We want to ensure that there is a favourable climate. So we do not want to take something away from one to give to the other. We want to ensure that we have an appropriate environment.

Talk to me a little about the importance of capital expenditures, in particular, for your sector.

[Martin Lavoie]

In our sector, and in the manufacturing sector in general, when say technology investments, we are talking first of all about investment in machinery and equipment. Many R&D expenditures are increasingly incurred for equipment specific to this concept of telecommunications products, whether it be high performance computers or cloud computers. This is machinery and equipment used to conduct R&D. It is often considered as capital.

Under the SR&ED program, if equipment is used to conduct R&D more than 50% of the time, you are entitled to tax credits. That also has an impact on production because the equipment may perhaps be used to conduct R&D and may wind up on the production line two years later.

For part of our sector, the manufacturing sector, which operates to a large degree in product refinement and the processing of natural resources, this is even more important. Two companies in the mining sector—you will be reading this in the newspapers—will be putting in place what are called pilot plants, which will test new ways of processing ore, for example. In that case, we are talking about capital that will be far more than just machinery and equipment. We are talking about buildings, land, about that type of equipment.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

This really is something important for a country like Canada, which has an appreciable comparative advantage in resources. However, we do not want to ship them in an unprocessed state to a country where value will be added, where jobs will be added, where they will be processed and so on. That is where research and development become important. That is where jobs are interesting and well paid.

In addition, does the fact that we have capital expenditures help keep businesses in Canada, or instead, rather than just keeping them here, does it help root them here so that jobs stay here?

[The Chair, Conservative, David Sweet]

That will have to remain a rhetorical statement for the time being. It's a good one, I know, but way over time, Madame LeBlanc.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I see.

[The Chair, Conservative, David Sweet]

Now on to Mr. Carmichael for five minutes.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you, Chair, and thank you to our witnesses as well.

As I've listened this morning, I feel the discussion really has centred on so much that does work. SR and ED works, IRAP works—there are a lot of good tools and devices available to industry and to SMEs to develop product and get it to market.

My first question is to Mr. Abielmona, with regard to your comment that with these tools we get it to commercialization and there it stops. You talked about your valley of death. I come from a business background, so I wrestle with the responsibility between taxpayer risk and how we manage that versus the business risk of the entrepreneurs, SMEs, and developers that bring these products to market.

To your comment of bringing it to commercialization and hitting the wall at that point, what would you recommend in commercializing, in ensuring that we take what we think are fairly strong competitive advantages to market? What do we do at that point? What would you recommend?

[Rami Abielmona]

One suggestion I have is, for example, within the CICP, a category that could be put in there just for SMEs. I come at it from an SME perspective. I didn't say that Canadian companies cannot commercialize their R and D; indeed, we can. It's just a matter of SMEs commercializing their innovations.

We always have to judge. If we want to protect our IP, we have to go through this patent flow chart and we have to say: do we want to patent this? Do we want to copyright this? Do we want to keep it as a trade secret or do we want to publicly disseminate it? We'll lead down one of these paths, and in the end, if we choose the patent path, then we have to incur a lot of costs to do that, which again hits our cashflow. We have to make sure our cashflow is managed properly so that we can actually patent the stuff.

Then if we get into prosecution of IP, if we get into enforcement of IP, do we have the cashflow to do that? Probably not. If a big company comes at our patent and says there's an infringement case, we probably will just let that one go, unfortunately.

If, within CICP, for example, there was a category for SMEs, at least we would have a path that we could commercialize the R and D; we spent so much money to actually patent this, we can get it to commercialization. The enforcement part is another topic of discussion altogether.

I point to IRAP, which is a great organization and it's been helpful to us as an SME. But, at the same time, IRAP has also changed mandates. We've been involved with IRAP for three or four years. We had two major projects with them over a five-year span. In the beginning it was big “R”, small “d”. They really wanted a lot of research and not as much development, so they didn't even want to hear about pre-commercialization. Then it switched to small “r” and big “D”. That throws companies off, especially SMEs, because we have to plan for the next few years. We can't just do that over a yearly basis.

[John Carmichael, Conservative, Don Valley West, ON]

Thank you.

Mr. Gupta, you talked about patents and not looking at them in isolation. I think you're right on that. I look at our government structure, or our governance structure, if you like, within the tax regime. We have tax credits that are available to us, but we have the overall business tax that has been lowered to the extent that it has. Our government is about jobs, job creation, and economic growth.

As we come to the end of our session, can give me your thoughts on examining the IP regime and the Patent Act? Are there any other things we should be looking at within that framework that would be beneficial?

[Karna Gupta]

I think there are several things, and we have recently submitted several of them as part of the digital economy strategy to Industry Canada and to the ministry of finance. To foster the SMEs, you need to look at it from three vectors: one is the access to market, another is access to capital, and the third one is access to talent.

In terms of each one of them, there has to be some policy framework put in place so that Canada becomes the destination country for all of these. Only then can you create a condition where you have innovation taking place, and then the patent regime, if it is done right and comparable to the rest of the world, and we're competitive. We can try to commercialize products.

In the case of talent, there's been a lot of work in the current government and past governments looking at immigration issues. Yes, you need to have programs to send our kids to, these STEM programs, but that's not going to solve our problems. We need to have the best talent come here.

All of these pieces, from a policy point of view, need to support the question you're asking, and the patent is a big piece of it at the end, as you commercialize and have those in place.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Gupta.

Thank you, Mr. Carmichael.

That ends our second round now, and I'm going to stay tight on the five minutes. Then we'll be able to squeeze in the next short round of five minutes.

We'll go to Madam Gallant for five minutes.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Thank you, Mr. Chairman.

I would like to pick up where we left off with Mr. Abielmona, and that is after the IRBs. What has been explained to the committee is that the large, for example, American outfits were looking for contracts worth at least $10 million. Earlier in his testimony, he mentioned the American small business innovation research program.

How is it that through the U.S. program they are able to help commercialization for SMEs in this larger market, whereas what we have through CICP is not? What are we missing?

[Rami Abielmona]

Simply stated, I think we need a program in Canada that allows SMEs and only SMEs to be the front-line players. There has to be a program that's targeted to SMEs, whatever the definition of an SME is within that program. They are the primes of those particular contracts, so there's a conduit that goes in from SME to end client, and what we're facing, as I mentioned before, are those barriers to entry. We have a lot of barriers to crossing that chasm and getting to the end client.

We need a program that's specifically geared towards SMEs, such as IRAP, but as I mentioned, IRAP is more pre-commercialization. We need a program similar to IRAP, or maybe it's IRAP itself, but either way there has to be a program that's geared towards SMEs. If we don't do that...that's why I keep referring to the technology valley of death, and I know the previous questioning was along this line. If we don't do that, those entities—we're talking about small companies. We've grown from five to sixteen employees in three to four years; we're still a rather small company. If we don't do that, these companies will go under. If they do not have the funding support to bring it to commercialization, they will go under. How many companies do we want in Canada where we invest so much taxpayer money into R and D but then don't help them to cross that chasm so that they can commercialize? It's a losing situation.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

The CICP program is administered through the Office of Small and Medium Enterprises, but let's go beyond that.

Are you looking for an intermediary that will require the use of your technology in a government procurement program?

[Rami Abielmona]

No. I think the SMEs are able to find out off line who their users are and who the client base is. But there has to be a formal way of getting it to them, and there is no such formal way.

CICP is one way, but you're competing against everyone else, as I said.

[Cheryl Gallant, Conservative, Renfrew—Nipissing—Pembroke, ON]

Okay.

In your initial comments you spoke about the shortcomings in the Canadian prosecution enforcement and international filings. Specifically, what are the shortcomings in terms of prosecution and enforcement? Where do we fall short?

[Rami Abielmona]

Unfortunately, it goes back to funding. From an SME perspective, it's all about cash and cashflow management. We are given funding support to perform the first filing, but if there's a prosecution after that—and the other witnesses have pointed to that—it's really the legal fees that come at it. It's not really the process itself of the maintenance fees after the patent has been awarded. It's mostly the legal fees. There isn't a channel we can turn to. If the IP goes through prosecution, if it's granted, if it goes through enforcement for some reason, or if you want to file internationally, there aren't any programs to turn to in order to help fund those activities.