Canada's R&D; Leadership in Information & Communications Technologies
Significantly Lower R&D; Costs

Two key elements contribute to Canada's advantage as the most cost-effective location in the G-7 to conduct sophisticated ICT R&D:

• tax incentives to support applied research and experimental development in Canada, supplemented by investments in R&D infrastructure, and
• the lowest labour costs in the G-7

In the previously mentioned KPMG study, the company reported that Canada's advantage over the US in ICT R&D was 33%. Salary costs for scientists and technicians are a major factor in this sector and Canada has the lowest overall labor costs, including benefits, of the nine countries studied.

One of the principal forces behind Canada's success in attracting companies to perform Research and Development is a core tax incentive program, the Scientific Research & Experimental Development (SR&ED) Program. The tax incentives flowing from this program are the most generous among the G-7 nations.

It has been Canada's innovation policy for the past 30 years to rely extensively on tax incentives to promote R&D. The federal R&D tax treatment now includes an immediate write-off of both current costs and R&D machinery and equipment costs and a 20 per cent tax credit. The rate of R&D tax credit increases to 35 per cent for small companies.

The tax incentives significantly reduce the net cost of doing R&D in Canada and are designed to encourage risk-taking in this important area. The net after-tax cost of R&D expenditures can be less than 0.44 cents for each dollar spent, depending on the type of corporation and the province where the R&D is conducted. Additional information on the federal system of R&D tax incentives can be found on the Canada Customs and Revenue Agency web site at http://www.ccra-adrc.gc. ca/taxcredit/sred/menu-e.html.

The federal R&D tax provisions have been generously strengthened by provincial R&D tax incentives. Most provincial and territorial R&D programs follow the federal legislation and are based on a percentage of the SR&ED qualified expenditures incurred in the year. The exception is Quebec's R&D Salaries Tax Credit program which is based on expenditures incurred in the year for salaries and subcontracts for R&D. The following is an outline of the entitlements under provincial programs.

Manitoba

• Tax deduction: 100% SR&ED current and capital expenditures
• Tax credit: 15% non-refundable for R&D done in Manitoba

Saskatchewan

• Tax deduction: 100% SR&ED current and capital expenditures
• Tax credit: 15% non-refundable for R&D done in Saskatchewan

New Brunswick

• Tax deduction - 100% SR&ED current & capital expenditures
• Tax credit - 15% fully refundable, for R&D done in New Brunswick

Newfoundland

• Tax deduction - 100% SR&ED current and capital expenditures
• Tax credit - 15% fully refundable for R&D done in Newfoundland, SR&ED expenditures not reduced by government or non-government assistance

Nova Scotia

• Tax deduction - 100% SR&ED current and capital expenditures
• Tax credit - 15% fully refundable for R&D done in Nova Scotia, SR&ED expenditures not reduced by government or non-government assistance.

Ontario

• Tax deduction - 100% SR&ED current and capital expenditure
• Federal R&D tax incentives can be excluded from provincial tax.
• Tax credits - Innovation Tax Credit: 10% for small companies, fully refundable. Business Research Institute Tax Credit: 20% for R&D contracted to Ontario-based research institutes, fully refundable.

Quebec

• Tax deductions - 100%, SR&ED current and capital expenditures.
• Tax credit on R&D wages (all fully refundable) - 35% for small firms (assets under $25 million), 35%-17.5% for medium firms (assets $25-50 million), 17.5% for large firms (assets over $50-million)
• 17.5%-35% for contract R&D
• provincial income tax holiday for foreign researchers

British Columbia

• Tax deduction - 100% SR&ED current and capital expenditures
• Tax credit
  • 10% refundable for small firms for R&D done in British Columbia
  • 10% non-refundable for large firms for R&D done in British Columbia

Updated: 2004-07-23