Tax incentives are provided by governments across the globe to businesses across all sectors and industries in order to assist them in conducting scientific research and experimental development (SR&ED). These incentives lower a company's fundamental expenditure by altering the post-tax costs of R&D investments. This dissertation aims at examining and contrasting the advantages and disadvantages of SR&ED tax incentives, and then making a recommendation as to whether the Canadian government's SR&ED Tax Incentive Program should be continued or not.
The most prominent advantage of SR&ED tax incentives is their role in the development and innovation of new products and processes in every sector. Benefits from R&D developments extend to other areas of the economy, thereby allowing society as a whole to benefit from them; this results in an increase in overall economic productivity & growth. Two separate studies, one by Finance Canada and the other by Klassen, Pittman & Reed, found that the federal SR&ED credit resulted in an increase in R&D spending of $1.38 per dollar of forgone tax revenue, 32% higher than it would have been in the absence of SR&ED tax incentives (The Canadian Chamber of Commerce, 2011).
One joint advantage of SR&ED tax incentives is that they apply uniformly across all economic sectors, and because of the strict application procedures instituted by government tax agencies, they are not as subject to fraud of false declaration (Mercer-Blackman, 2008). This means that SR&ED tax incentives have an edge over other costly tax incentives since in contrast, they cause less economic strains in their implementation.
The opportunity cost of the disbursement of taxpayers’ money towards SR&ED tax incentives can be argued to be one of their negative features. Taxes alter fiscal conduct and may reduce economic productivity and efficiency, thereby affecting all segments of the economy. The forgone tax revenue from SR&ED tax incentives could have been utilized to increase government spending or decrease taxes in other areas (Parsons & Phillips, 2007).
One of the components of an SR&ED tax incentive program is an investment tax credit that is applicable on payable income taxes. Unused credits may be carried back 3 years, or forward 20 years, to reduce the amount of payable taxes in those years (“Assessing the Scientific Research,” n.d). The risk that companies face with regards to this credit is that they need to have ample payable taxes to make full use of this incentive. If the tax credits remain unused and are carried forward to subsequent years, businesses again run a risk of facing a decrease in the significance of these credits.
Government SR&ED tax incentive programs are founded upon the notion of providing nationwide economic growth through innovations in R&D (Taxpayers’ Ombudsman, 2011). In my opinion, the advantages of these tax incentives outweigh the drawbacks; these incentives