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Federal business subsidies have risen 140 per cent over the nine years ending in 2023–24, compared to 17 per cent over the previous nine years. New programs accounted for over half the growth. Clean economy measures, which rose $7 billion from 2014–15 to 2023–24, were the major contributor to growth in new programs. Even without the new climate change measures, business subsidies would have doubled over the period. Subsidies are likely to reach about $50 billion in 2027–28, which would represent 54 per cent of corporate income tax revenue, up from 42 per cent in 2014–15. Other key findings are: • Small and medium-sized enterprises benefit disproportionately from subsidies. These firms account for about half of output in Canada but receive approximately two-thirds of business subsidies. • Clean economy measures account for almost a fifth of business subsidies. The agri-food sector receives the second largest share, approximately 15 per cent, which is substantial relative to its four per cent output share. • Business subsidies are concentrated in a small number of programs. In the current fiscal year, the top 10 programs (out of almost 150 programs) account for almost 60 per cent of subsidies, and the top 20 for almost 80 per cent. • Spending programs account for a surprisingly small share of business subsidies — approximately 30 per cent in the current fiscal year. The tax system is the most important delivery mechanism (45 per cent), while government business enterprises and refundable tax credits account for just over 10 per cent each. What are taxpayers getting in return for the massive spending on subsidies? They are certainly getting more of the activities that are being subsidized and less of the activities that are not. However, this change in the composition of economic activity won’t necessarily improve well-being because market prices generally allocate society’s scarce resources to their best uses. That is, if markets are functioning properly, subsidies harm rather than help economic performance. On the other hand, if subsidy programs address a market failure, the resulting reallocation of activity may be more efficient. Federal business subsidies that have the potential to improve economic performance, or more generally, to enhance well-being, because they address a market failure accounted for 64 per cent of business subsidies in 2023–24. However, measures accounting for about two-thirds of this spending fail a benefit-cost test — they are not successful in raising Canadians’ real income. These programs should be reviewed to determine if they can be restructured to deliver a positive net benefit. If not, they should be eliminated. Measures accounting for 36 per cent of total spending in 2023–24 are not intended to correct a market failure and are therefore transferring income from one group of Canadians to another while harming economic performance. These measures include general business subsidies and initiatives providing income support. These measures should be carefully reviewed to determine if their income redistribution effects can be justified in the context of the real income loss they cause. Since 2019–20, subsidies implemented to mitigate the impact of climate change and to create good jobs by subsidizing high-productivity, high-wage industries have grown in importance and will continue to do so. Climate change mitigation measures should only be implemented if they complement carbon pricing, the government’s main and most cost-effective instrument for reducing emissions. If they meet this minimum condition, climate change mitigation measures should be assessed based on their relative cost-effectiveness in reducing emissions. The proposition that subsidies intended to create good jobs are sound public policy is controversial. The impact of these measures should be tested against the data before additional funds are committed.

There is a sound public policy case for subsidizing R&D. When firms perform R&D, they create knowledge that allows them to introduce new products, improve existing goods and services or reduce production costs. However, some of the knowledge created inevitably leaks out or spills over to other firms, allowing them to reap benefits from R&D without performing it themselves. These spillover benefits improve Canada’s overall economic performance, but firms do not consider them when deciding how much to invest in R&D, so a subsidy to encourage more R&D is the right policy response.

There is a sound public policy case for subsidizing R&D. When firms perform R&D, they create knowledge that allows them to introduce new products, improve existing goods and services or reduce production costs. However, some of the knowledge created inevitably leaks out or spills over to other firms, allowing them to reap benefits from R&D without performing it themselves. These spillover benefits improve Canada’s overall economic performance, but firms do not consider them when deciding how much to invest in R&D, so a subsidy to encourage more R&D is the right policy response.

Business investment in research and development (R&D) is widely recognized as providing benefits to the broader economy that exceed the benefits to the firms that perform the R&D. As a result of this externality or spillover, most governments provide support for R&D in order to encourage more of it. In 2017, 29 of the 35 members of the Organisation for Economic Co-operation and Development (OECD) provided tax incentives for spending on R&D. That’s up slightly since 2014, when we last prepared an international comparison of tax assistance for R&D. On the other hand, average support levels edged down from 2014 to 2017. In addition to these expenditure-based measures, 15 OECD countries provide preferential tax treatment for the income generated by commercializing R&D and other innovative activities. These income-based measures are often described as patent boxes, since they first applied to income realized from patented products and processes. In most cases, the qualifying patents did not have to be based on R&D performed in the country offering the incentive, so patent boxes were criticized for creating an incentive to shift taxable income without encouraging additional R&D. Recently, however, most countries have accepted the OECD recommendation that both the R&D and the income from its commercialization must be located in the same jurisdiction before an income-based incentive can be provided. With this linkage, income-based incentives can be a useful policy tool, particularly for large firms. Income- and expenditure-based incentives are likely to have similar impacts on the amount of R&D undertaken by large firms, but income-based measures have the advantage of providing a greater incentive to commercialize R&D in the implementing jurisdiction. They also blunt the incentive to shift the taxable income generated by commercializing R&D to lower-tax jurisdictions. However, smaller firms, who are more likely to be cashflow constrained, will respond less strongly to income-based measures since the subsidy is available with a delay. Further, small firms have limited opportunities to shift taxable income across international borders. Should the federal government implement an income-based tax incentive for R&D performed by large firms? A key consideration is what happens to tax revenue on income from commercialization of R&D. If a lower tax rate results in higher revenue as a result of tax base shifting effects, income-based measures have a clear advantage over their expenditure-based counterparts. Some competing jurisdictions have very low corporate income tax rates, so feasible reductions in federal tax rates may not generate tax base shifting effects large enough to make the policy a success. More information on how multi-national enterprises shift intellectual-property income out of Canada is required before proceeding with income-based tax incentives for R&D.

Business subsidies in Canada: the “winner” is Alberta; the loser is the taxpayer The federal government and the four largest provinces in Canada spend about $29 billion a year on business subsidies, delivered through program spending, the tax system, government business enterprises and direct investments by government. These subsidies represent almost half of the corporate income tax revenue collected by the five jurisdictions. Surprisingly, given its reputation as a bastion of free enterprise, Alberta is the most prolific subsidizer. In the 2014-15 fiscal year, per person subsidies were $640 in Alberta, about $100 ahead of the next most generous jurisdiction, Québec. Alberta has probably added to its “lead” through measures introduced in the October 2015 Fiscal Update and the 2016 budget. Alberta also stands out by having the least transparent public reporting of business subsidies. What motivates governments to subsidize business? Abstracting from cynical efforts to win votes, business subsidies have two broad objectives: to improve economic performance and to achieve a social objective by supporting specific firms, industries or regions. On average in the five jurisdictions, the split between the two categories is about 70-30 in favour of economic development measures. Assessing value for money from programs with a social objective is subjective, but measures intended to improve economic performance should be assessed on their ability to raise real income. Business subsidies can only raise real income if markets fail to allocate labour and capital to their best uses. The classic case is R&D. When a firm undertakes R&D, some of the knowledge created inevitably spills over to the benefit other firms. Firms are focused on their own benefits and costs when deciding how much to spend on R&D, not the benefits received by other firms, so society has an interest in encouraging additional R&D. While markets generally do a good job allocating capital to its most productive uses, governments express concern about the ability of small firms to access external financing. Just over half of business subsidies are intended to address these two issues. Governments also provide subsidies in order to create what are often described as “good jobs,” meaning employment in high-wage, high-productivity industries. There is ample evidence that wages differ by sector even after differences in worker skills and working conditions are taken into account. That opens up the possibility that subsidizing high-wage jobs will make us better off. Almost 10 per cent of government subsidies are pursuing “industrial policy” objectives. But real income won't necessarily go up, even in these circumstances. Benefit-cost analyses of key programs suggest that, at best, only a third of subsidies intended to raise real income achieve their objective. The main reason these subsidies are unsuccessful is that they have to be funded, either by raising taxes or cutting program spending, both of which harm economic performance. And avoiding the pitfall of excessive subsidization can be challenging. For example, small firms performing R&D get about 43% of their funding from governments, which is substantially beyond an effective level. Industrial policy measures are particularly tricky to get right. Governments have to identify sectors and firms that pay a premium for a given set of skills and working conditions, determine the subsidy that generates a social benefit net of the costs of providing assistance and avoid transferring income from low to high-wage taxpayers. With so much money at play, business subsidies should be reported more transparently and managed more effectively. For greater transparency, governments should prepare a comprehensive annual report on business subsidies delivered through program spending, the tax system and through the activities of government business enterprises. The report would describe the programs, state their objectives and report funding levels. When discussing program objectives, the report should set out in general terms the expected benefits and costs of government intervention and discuss who benefits from the measure and who is expected to pay for it. Making a commitment to set out the expected benefits and costs of all new business subsidies as they are introduced might prevent the worst offenders from being implemented in the first place.

Small business has a well-deserved reputation as the driver of job growth and as a key contributor to innovation. In the 12 years ending in 2013, small and medium-sized enterprises (SMEs) accounted for about 90% of private sector job growth in Canada. What is less well-recognized, however, is that a small fraction of SMEs account for most of the job growth and innovation. As a result, governments have offered broad-based support for small businesses, rather than focusing on high-impact entrepreneurs. This approach is wasteful: firms that do not grow or innovate receive most of the benefits. Further, this approach can harm economic performance by promoting the expansion of smaller, lessefficient firms at the expense of larger ones. The federal government elected in 2015 is focussing new initiatives on innovative and growth-oriented businesses. Legislated reductions in the small business tax rate were reversed and targeted support for innovative SMEs was increased. While the change in direction is welcome, almost 85% of the $7 billion yearly funding for small business continues to provide broad-based support. The largest program is the special low rate of tax for small businesses, implemented to improve access to financing for capacity-expanding investment. This measure is harming economic performance because the cost of shifting capital and labour from large to smaller, less-efficient businesses outweighs the benefit from improving access to capital. Large subsidies for small business financing are also provided by the Business Development Bank of Canada (BDC). With access to cheap government funding, the BDC is profitable, but evaluated using a more realistic cost of financing, the bank operates at a substantial loss. This loss exceeds the benefit from improving access to capital, particularly for the bank’s direct-lending program. While there is a solid argument for supporting R&D, subsidies provided to small firms are so generous that they are harming economic performance. The federal government provides a 35% tax credit for R&D performed by small firms. Provincial tax credits raise the subsidy rate to about 42%. And those firms receiving support from the federal Industrial Research Assistance Program can have almost 60% of their project costs paid by the government. By way of contrast, large firms performing R&D receive subsidies from federal and provincial tax credits amounting to under a quarter of their costs, an intervention which improves economic performance. Canada has had what could be described as a small business policy – broad-based support for all small businesses. The newish federal government is moving to an entrepreneurship policy: new initiatives emphasize support for the high-impact firms and individuals that make an outsized contribution to Canada’s innovation and prosperity. Making the transition to the new framework will require overhauling legacy small business policies to free up resources for new initiatives and to secure fiscal savings. Three changes would pay big dividends: • Eliminate the small-business corporate income tax deduction. • Reduce the enhanced R&D tax credit rate to the same level as the regular credit. • Replace the BDC’s direct loan program with a loan guarantee program.

Business investment in research and development (R&D) is widely recognized as providing benefits to the broader economy that exceed the benefits to the firms that perform the R&D. As a result of this externality or spillover, most governments provide support for R&D in order to encourage more of it. In 2017, 29 of the 35 members of the Organisation for Economic Co-operation and Development (OECD) provided tax incentives for spending on R&D. That’s up slightly since 2014, when we last prepared an international comparison of tax assistance for R&D. On the other hand, average support levels edged down from 2014 to 2017. In addition to these expenditure-based measures, 15 OECD countries provide preferential tax treatment for the income generated by commercializing R&D and other innovative activities. These income-based measures are often described as patent boxes, since they first applied to income realized from patented products and processes. In most cases, the qualifying patents did not have to be based on R&D performed in the country offering the incentive, so patent boxes were criticized for creating an incentive to shift taxable income without encouraging additional R&D. Recently, however, most countries have accepted the OECD recommendation that both the R&D and the income from its commercialization must be located in the same jurisdiction before an income-based incentive can be provided. With this linkage, income-based incentives can be a useful policy tool, particularly for large firms. Income- and expenditure-based incentives are likely to have similar impacts on the amount of R&D undertaken by large firms, but income-based measures have the advantage of providing a greater incentive to commercialize R&D in the implementing jurisdiction. They also blunt the incentive to shift the taxable income generated by commercializing R&D to lower-tax jurisdictions. However, smaller firms, who are more likely to be cashflow constrained, will respond less strongly to income-based measures since the subsidy is available with a delay. Further, small firms have limited opportunities to shift taxable income across international borders. Should the federal government implement an income-based tax incentive for R&D performed by large firms? A key consideration is what happens to tax revenue on income from commercialization of R&D. If a lower tax rate results in higher revenue as a result of tax base shifting effects, income-based measures have a clear advantage over their expenditure-based counterparts. Some competing jurisdictions have very low corporate income tax rates, so feasible reductions in federal tax rates may not generate tax base shifting effects large enough to make the policy a success. More information on how multi-national enterprises shift intellectual-property income out of Canada is required before proceeding with income-based tax incentives for R&D.

Business investment in research and development (R&D) is widely recognized as providing benefits to the broader economy that exceed the benefits to the firms that perform the R&D. As a result of this externality or spillover, most governments provide support for R&D in order to encourage more of it. In 2017, 29 of the 35 members of the Organisation for Economic Co-operation and Development (OECD) provided tax incentives for spending on R&D. That’s up slightly since 2014, when we last prepared an international comparison of tax assistance for R&D. On the other hand, average support levels edged down from 2014 to 2017. In addition to these expenditure-based measures, 15 OECD countries provide preferential tax treatment for the income generated by commercializing R&D and other innovative activities. These income-based measures are often described as patent boxes, since they first applied to income realized from patented products and processes. In most cases, the qualifying patents did not have to be based on R&D performed in the country offering the incentive, so patent boxes were criticized for creating an incentive to shift taxable income without encouraging additional R&D. Recently, however, most countries have accepted the OECD recommendation that both the R&D and the income from its commercialization must be located in the same jurisdiction before an income-based incentive can be provided. With this linkage, income-based incentives can be a useful policy tool, particularly for large firms. Income- and expenditure-based incentives are likely to have similar impacts on the amount of R&D undertaken by large firms, but income-based measures have the advantage of providing a greater incentive to commercialize R&D in the implementing jurisdiction. They also blunt the incentive to shift the taxable income generated by commercializing R&D to lower-tax jurisdictions. However, smaller firms, who are more likely to be cashflow constrained, will respond less strongly to income-based measures since the subsidy is available with a delay. Further, small firms have limited opportunities to shift taxable income across international borders. Should the federal government implement an income-based tax incentive for R&D performed by large firms? A key consideration is what happens to tax revenue on income from commercialization of R&D. If a lower tax rate results in higher revenue as a result of tax base shifting effects, income-based measures have a clear advantage over their expenditure-based counterparts. Some competing jurisdictions have very low corporate income tax rates, so feasible reductions in federal tax rates may not generate tax base shifting effects large enough to make the policy a success. More information on how multi-national enterprises shift intellectual-property income out of Canada is required before proceeding with income-based tax incentives for R&D.

Business subsidies in Canada: the “winner” is Alberta; the loser is the taxpayer The federal government and the four largest provinces in Canada spend about $29 billion a year on business subsidies, delivered through program spending, the tax system, government business enterprises and direct investments by government. These subsidies represent almost half of the corporate income tax revenue collected by the five jurisdictions. Surprisingly, given its reputation as a bastion of free enterprise, Alberta is the most prolific subsidizer. In the 2014-15 fiscal year, per person subsidies were $640 in Alberta, about $100 ahead of the next most generous jurisdiction, Québec. Alberta has probably added to its “lead” through measures introduced in the October 2015 Fiscal Update and the 2016 budget. Alberta also stands out by having the least transparent public reporting of business subsidies. What motivates governments to subsidize business? Abstracting from cynical efforts to win votes, business subsidies have two broad objectives: to improve economic performance and to achieve a social objective by supporting specific firms, industries or regions. On average in the five jurisdictions, the split between the two categories is about 70-30 in favour of economic development measures. Assessing value for money from programs with a social objective is subjective, but measures intended to improve economic performance should be assessed on their ability to raise real income. Business subsidies can only raise real income if markets fail to allocate labour and capital to their best uses. The classic case is R&D. When a firm undertakes R&D, some of the knowledge created inevitably spills over to the benefit other firms. Firms are focused on their own benefits and costs when deciding how much to spend on R&D, not the benefits received by other firms, so society has an interest in encouraging additional R&D. While markets generally do a good job allocating capital to its most productive uses, governments express concern about the ability of small firms to access external financing. Just over half of business subsidies are intended to address these two issues. Governments also provide subsidies in order to create what are often described as “good jobs,” meaning employment in high-wage, high-productivity industries. There is ample evidence that wages differ by sector even after differences in worker skills and working conditions are taken into account. That opens up the possibility that subsidizing high-wage jobs will make us better off. Almost 10 per cent of government subsidies are pursuing “industrial policy” objectives. But real income won't necessarily go up, even in these circumstances. Benefit-cost analyses of key programs suggest that, at best, only a third of subsidies intended to raise real income achieve their objective. The main reason these subsidies are unsuccessful is that they have to be funded, either by raising taxes or cutting program spending, both of which harm economic performance. And avoiding the pitfall of excessive subsidization can be challenging. For example, small firms performing R&D get about 43% of their funding from governments, which is substantially beyond an effective level. Industrial policy measures are particularly tricky to get right. Governments have to identify sectors and firms that pay a premium for a given set of skills and working conditions, determine the subsidy that generates a social benefit net of the costs of providing assistance and avoid transferring income from low to high-wage taxpayers. With so much money at play, business subsidies should be reported more transparently and managed more effectively. For greater transparency, governments should prepare a comprehensive annual report on business subsidies delivered through program spending, the tax system and through the activities of government business enterprises. The report would describe the programs, state their objectives and report funding levels. When discussing program objectives, the report should set out in general terms the expected benefits and costs of government intervention and discuss who benefits from the measure and who is expected to pay for it. Making a commitment to set out the expected benefits and costs of all new business subsidies as they are introduced might prevent the worst offenders from being implemented in the first place.

Business subsidies in Canada: the “winner” is Alberta; the loser is the taxpayer The federal government and the four largest provinces in Canada spend about $29 billion a year on business subsidies, delivered through program spending, the tax system, government business enterprises and direct investments by government. These subsidies represent almost half of the corporate income tax revenue collected by the five jurisdictions. Surprisingly, given its reputation as a bastion of free enterprise, Alberta is the most prolific subsidizer. In the 2014-15 fiscal year, per person subsidies were $640 in Alberta, about $100 ahead of the next most generous jurisdiction, Québec. Alberta has probably added to its “lead” through measures introduced in the October 2015 Fiscal Update and the 2016 budget. Alberta also stands out by having the least transparent public reporting of business subsidies. What motivates governments to subsidize business? Abstracting from cynical efforts to win votes, business subsidies have two broad objectives: to improve economic performance and to achieve a social objective by supporting specific firms, industries or regions. On average in the five jurisdictions, the split between the two categories is about 70-30 in favour of economic development measures. Assessing value for money from programs with a social objective is subjective, but measures intended to improve economic performance should be assessed on their ability to raise real income. Business subsidies can only raise real income if markets fail to allocate labour and capital to their best uses. The classic case is R&D. When a firm undertakes R&D, some of the knowledge created inevitably spills over to the benefit other firms. Firms are focused on their own benefits and costs when deciding how much to spend on R&D, not the benefits received by other firms, so society has an interest in encouraging additional R&D. While markets generally do a good job allocating capital to its most productive uses, governments express concern about the ability of small firms to access external financing. Just over half of business subsidies are intended to address these two issues. Governments also provide subsidies in order to create what are often described as “good jobs,” meaning employment in high-wage, high-productivity industries. There is ample evidence that wages differ by sector even after differences in worker skills and working conditions are taken into account. That opens up the possibility that subsidizing high-wage jobs will make us better off. Almost 10 per cent of government subsidies are pursuing “industrial policy” objectives. But real income won't necessarily go up, even in these circumstances. Benefit-cost analyses of key programs suggest that, at best, only a third of subsidies intended to raise real income achieve their objective. The main reason these subsidies are unsuccessful is that they have to be funded, either by raising taxes or cutting program spending, both of which harm economic performance. And avoiding the pitfall of excessive subsidization can be challenging. For example, small firms performing R&D get about 43% of their funding from governments, which is substantially beyond an effective level. Industrial policy measures are particularly tricky to get right. Governments have to identify sectors and firms that pay a premium for a given set of skills and working conditions, determine the subsidy that generates a social benefit net of the costs of providing assistance and avoid transferring income from low to high-wage taxpayers. With so much money at play, business subsidies should be reported more transparently and managed more effectively. For greater transparency, governments should prepare a comprehensive annual report on business subsidies delivered through program spending, the tax system and through the activities of government business enterprises. The report would describe the programs, state their objectives and report funding levels. When discussing program objectives, the report should set out in general terms the expected benefits and costs of government intervention and discuss who benefits from the measure and who is expected to pay for it. Making a commitment to set out the expected benefits and costs of all new business subsidies as they are introduced might prevent the worst offenders from being implemented in the first place.

Small business has a well-deserved reputation as the driver of job growth and as a key contributor to innovation. In the 12 years ending in 2013, small and medium-sized enterprises (SMEs) accounted for about 90% of private sector job growth in Canada. What is less well-recognized, however, is that a small fraction of SMEs account for most of the job growth and innovation. As a result, governments have offered broad-based support for small businesses, rather than focusing on high-impact entrepreneurs. This approach is wasteful: firms that do not grow or innovate receive most of the benefits. Further, this approach can harm economic performance by promoting the expansion of smaller, lessefficient firms at the expense of larger ones. The federal government elected in 2015 is focussing new initiatives on innovative and growth-oriented businesses. Legislated reductions in the small business tax rate were reversed and targeted support for innovative SMEs was increased. While the change in direction is welcome, almost 85% of the $7 billion yearly funding for small business continues to provide broad-based support. The largest program is the special low rate of tax for small businesses, implemented to improve access to financing for capacity-expanding investment. This measure is harming economic performance because the cost of shifting capital and labour from large to smaller, less-efficient businesses outweighs the benefit from improving access to capital. Large subsidies for small business financing are also provided by the Business Development Bank of Canada (BDC). With access to cheap government funding, the BDC is profitable, but evaluated using a more realistic cost of financing, the bank operates at a substantial loss. This loss exceeds the benefit from improving access to capital, particularly for the bank’s direct-lending program. While there is a solid argument for supporting R&D, subsidies provided to small firms are so generous that they are harming economic performance. The federal government provides a 35% tax credit for R&D performed by small firms. Provincial tax credits raise the subsidy rate to about 42%. And those firms receiving support from the federal Industrial Research Assistance Program can have almost 60% of their project costs paid by the government. By way of contrast, large firms performing R&D receive subsidies from federal and provincial tax credits amounting to under a quarter of their costs, an intervention which improves economic performance. Canada has had what could be described as a small business policy – broad-based support for all small businesses. The newish federal government is moving to an entrepreneurship policy: new initiatives emphasize support for the high-impact firms and individuals that make an outsized contribution to Canada’s innovation and prosperity. Making the transition to the new framework will require overhauling legacy small business policies to free up resources for new initiatives and to secure fiscal savings. Three changes would pay big dividends: • Eliminate the small-business corporate income tax deduction. • Reduce the enhanced R&D tax credit rate to the same level as the regular credit. • Replace the BDC’s direct loan program with a loan guarantee program.

Small business has a well-deserved reputation as the driver of job growth and as a key contributor to innovation. In the 12 years ending in 2013, small and medium-sized enterprises (SMEs) accounted for about 90% of private sector job growth in Canada. What is less well-recognized, however, is that a small fraction of SMEs account for most of the job growth and innovation. As a result, governments have offered broad-based support for small businesses, rather than focusing on high-impact entrepreneurs. This approach is wasteful: firms that do not grow or innovate receive most of the benefits. Further, this approach can harm economic performance by promoting the expansion of smaller, lessefficient firms at the expense of larger ones. The federal government elected in 2015 is focussing new initiatives on innovative and growth-oriented businesses. Legislated reductions in the small business tax rate were reversed and targeted support for innovative SMEs was increased. While the change in direction is welcome, almost 85% of the $7 billion yearly funding for small business continues to provide broad-based support. The largest program is the special low rate of tax for small businesses, implemented to improve access to financing for capacity-expanding investment. This measure is harming economic performance because the cost of shifting capital and labour from large to smaller, less-efficient businesses outweighs the benefit from improving access to capital. Large subsidies for small business financing are also provided by the Business Development Bank of Canada (BDC). With access to cheap government funding, the BDC is profitable, but evaluated using a more realistic cost of financing, the bank operates at a substantial loss. This loss exceeds the benefit from improving access to capital, particularly for the bank’s direct-lending program. While there is a solid argument for supporting R&D, subsidies provided to small firms are so generous that they are harming economic performance. The federal government provides a 35% tax credit for R&D performed by small firms. Provincial tax credits raise the subsidy rate to about 42%. And those firms receiving support from the federal Industrial Research Assistance Program can have almost 60% of their project costs paid by the government. By way of contrast, large firms performing R&D receive subsidies from federal and provincial tax credits amounting to under a quarter of their costs, an intervention which improves economic performance. Canada has had what could be described as a small business policy – broad-based support for all small businesses. The newish federal government is moving to an entrepreneurship policy: new initiatives emphasize support for the high-impact firms and individuals that make an outsized contribution to Canada’s innovation and prosperity. Making the transition to the new framework will require overhauling legacy small business policies to free up resources for new initiatives and to secure fiscal savings. Three changes would pay big dividends: • Eliminate the small-business corporate income tax deduction. • Reduce the enhanced R&D tax credit rate to the same level as the regular credit. • Replace the BDC’s direct loan program with a loan guarantee program.

Business spending on research and development (R&D) is generally recognized as a private activity providing broader economic benefits that justify government support. But subsidizing R&D has costs as well as benefits, and governments need to exercise judgement to ensure that subsidies are set at a level that results in a net economic benefit for society as a whole, not just for the recipients of the assistance. A key finding of the international comparison undertaken in this paper is that Canada and nine other of the 36 countries in the comparison group are providing R&D subsidies that are likely too high to generate a net economic benefit. Subsidy rates in this group of countries range from 25 to 45 per cent. The risk of excessive subsidization is confined to small firms in Canada, which receive a subsidy of almost 41 per cent through the tax system. Canada’s subsidy rate for small firms is the third highest, behind Chile and France. Other countries providing subsidy rates close to 40 per cent are Spain and India. This paper also assesses several design features of tax assistance measures, including enhanced benefits for small and young firms, refundability of benefits and incentives based on increases in R&D spending above a base level. While the best policy for R&D subsidies may be a uniform rate for all businesses regardless of age or size, the case for favouring young firms is somewhat stronger than for favouring all small firms. Focusing on young firms avoids providing benefits to small firms that are not growth-oriented; but, it is difficult to design a program that can be completely restricted to young firms since entrepreneurs would have an incentive to create new firms to avoid losing higher benefits. Even with this “leakage”, however, an age-dependent incentive could be more cost-effective than size-dependent enhanced benefits. There is a particularly strong case for providing refundability to young firms, which are unlikely to have taxable income while the first round of R&D is undertaken While refundability for large firms has the advantage of increasing the effective subsidy rate on R&D to its target level, it runs the risk of revenue losses as multinational firms have less incentive to ‘book’ taxable income in Canada. A reasonable compromise would be to adjust the value of unused credits and deductions to maintain their present value. International comparisons of tax assistance for R&D typically highlight country rankings and express satisfaction with the most generous regimes. This paper draws attention to the possibility of providing too much of a good thing, a warning that governments in Canada should keep in mind when preparing next year’s budgets.

The federal government implemented a new expenditure management system in 2007. Under the new system, departments are required to review programs on a four-year cycle to determine if they are aligned with federal responsibilities and priorities, if they are efficiently delivered and if they are providing value for money, or effective. Based on the results from these strategic reviews, which are expected to be supported by formal evaluations that provide the evidence base for decisions, departments are expected to identify five per cent of their direct program spending that could be reallocated to other priorities, including deficit reduction. This system has much to recommend it, but to realize the full potential of the new system two fundamental changes should be made. First, spending programs delivered through the tax system should be integrated into the expenditure management system. Integration implies that departments would be given responsibility for both tax and spending initiatives that are relevant to their mandates, and that tax-based expenditures would be subject to the government’s evaluation policy and be included in strategic reviews. Second, while departments should continue to have responsibility for evaluating program efficiency, evaluations of both tax- and spending-program effectiveness should be undertaken by an independent entity such as the Parliamentary Budget Officer. Effectiveness evaluations should be carried out using a variant of the benefit-cost framework that is now applied to government regulatory initiatives. In order for the reformed system to work, more resources will need to be allocated to developing the performance data needed to undertake effectiveness evaluations and to perform the evaluations. These changes go well beyond a recent recommendation by a House of Commons committee to include tax expenditures in departmental reports to Parliament, along with planned program spending. The government rejected the recommendation, arguing that the change would undermine the finance minister’s authority over the tax system. Reform cannot proceed unless the finance minister relinquishes his power, exercised jointly with the prime minister, to introduce, modify, or eliminate tax measures related to the mandate of a program minister without the consent of the minister.

The federal budget contains some sensible changes to the SR&ED investment tax credit, but the decision to reduce support for large firms to provide additional support for small firms is a step in the wrong direction. The Jenkins Panel* expressed concern about excessive subsidization of small and medium-sized firms and recommended cutting back on the enhanced SR&ED credit in order to finance more targeted support for these firms. Following that advice would have improved the social return on support for R&D; in contrast, the budget measures marginally reduce the benefits to society from subsidizing R&D. The budget also announced $400 million in additional funding for risk capital. Returns in the venture capital industry are very low and the additional funding is unlikely to be successfully deployed until returns improve. There is abundant evidence that the tax credit for investment in Labour-Sponsored Venture Capital Corporations is crowding out private investment and contributing to low rates of return; eliminating the credit is therefore an essential first step in restoring the financial health of the venture capital industry.

Business spending on research and development (R&D) is generally recognized as a private activity providing broader economic benefits that justify government support. But subsidizing R&D has costs as well as benefits, and governments need to exercise judgement to ensure that subsidies are set at a level that results in a net economic benefit for society as a whole, not just for the recipients of the assistance. A key finding of the international comparison undertaken in this paper is that Canada and nine other of the 36 countries in the comparison group are providing R&D subsidies that are likely too high to generate a net economic benefit. Subsidy rates in this group of countries range from 25 to 45 per cent. The risk of excessive subsidization is confined to small firms in Canada, which receive a subsidy of almost 41 per cent through the tax system. Canada’s subsidy rate for small firms is the third highest, behind Chile and France. Other countries providing subsidy rates close to 40 per cent are Spain and India. This paper also assesses several design features of tax assistance measures, including enhanced benefits for small and young firms, refundability of benefits and incentives based on increases in R&D spending above a base level. While the best policy for R&D subsidies may be a uniform rate for all businesses regardless of age or size, the case for favouring young firms is somewhat stronger than for favouring all small firms. Focusing on young firms avoids providing benefits to small firms that are not growth-oriented; but, it is difficult to design a program that can be completely restricted to young firms since entrepreneurs would have an incentive to create new firms to avoid losing higher benefits. Even with this “leakage”, however, an age-dependent incentive could be more cost-effective than size-dependent enhanced benefits. There is a particularly strong case for providing refundability to young firms, which are unlikely to have taxable income while the first round of R&D is undertaken While refundability for large firms has the advantage of increasing the effective subsidy rate on R&D to its target level, it runs the risk of revenue losses as multinational firms have less incentive to ‘book’ taxable income in Canada. A reasonable compromise would be to adjust the value of unused credits and deductions to maintain their present value. International comparisons of tax assistance for R&D typically highlight country rankings and express satisfaction with the most generous regimes. This paper draws attention to the possibility of providing too much of a good thing, a warning that governments in Canada should keep in mind when preparing next year’s budgets.

Business spending on research and development (R&D) is generally recognized as a private activity providing broader economic benefits that justify government support. But subsidizing R&D has costs as well as benefits, and governments need to exercise judgement to ensure that subsidies are set at a level that results in a net economic benefit for society as a whole, not just for the recipients of the assistance. A key finding of the international comparison undertaken in this paper is that Canada and nine other of the 36 countries in the comparison group are providing R&D subsidies that are likely too high to generate a net economic benefit. Subsidy rates in this group of countries range from 25 to 45 per cent. The risk of excessive subsidization is confined to small firms in Canada, which receive a subsidy of almost 41 per cent through the tax system. Canada’s subsidy rate for small firms is the third highest, behind Chile and France. Other countries providing subsidy rates close to 40 per cent are Spain and India. This paper also assesses several design features of tax assistance measures, including enhanced benefits for small and young firms, refundability of benefits and incentives based on increases in R&D spending above a base level. While the best policy for R&D subsidies may be a uniform rate for all businesses regardless of age or size, the case for favouring young firms is somewhat stronger than for favouring all small firms. Focusing on young firms avoids providing benefits to small firms that are not growth-oriented; but, it is difficult to design a program that can be completely restricted to young firms since entrepreneurs would have an incentive to create new firms to avoid losing higher benefits. Even with this “leakage”, however, an age-dependent incentive could be more cost-effective than size-dependent enhanced benefits. There is a particularly strong case for providing refundability to young firms, which are unlikely to have taxable income while the first round of R&D is undertaken While refundability for large firms has the advantage of increasing the effective subsidy rate on R&D to its target level, it runs the risk of revenue losses as multinational firms have less incentive to ‘book’ taxable income in Canada. A reasonable compromise would be to adjust the value of unused credits and deductions to maintain their present value. International comparisons of tax assistance for R&D typically highlight country rankings and express satisfaction with the most generous regimes. This paper draws attention to the possibility of providing too much of a good thing, a warning that governments in Canada should keep in mind when preparing next year’s budgets.

The federal government implemented a new expenditure management system in 2007. Under the new system, departments are required to review programs on a four-year cycle to determine if they are aligned with federal responsibilities and priorities, if they are efficiently delivered and if they are providing value for money, or effective. Based on the results from these strategic reviews, which are expected to be supported by formal evaluations that provide the evidence base for decisions, departments are expected to identify five per cent of their direct program spending that could be reallocated to other priorities, including deficit reduction. This system has much to recommend it, but to realize the full potential of the new system two fundamental changes should be made. First, spending programs delivered through the tax system should be integrated into the expenditure management system. Integration implies that departments would be given responsibility for both tax and spending initiatives that are relevant to their mandates, and that tax-based expenditures would be subject to the government’s evaluation policy and be included in strategic reviews. Second, while departments should continue to have responsibility for evaluating program efficiency, evaluations of both tax- and spending-program effectiveness should be undertaken by an independent entity such as the Parliamentary Budget Officer. Effectiveness evaluations should be carried out using a variant of the benefit-cost framework that is now applied to government regulatory initiatives. In order for the reformed system to work, more resources will need to be allocated to developing the performance data needed to undertake effectiveness evaluations and to perform the evaluations. These changes go well beyond a recent recommendation by a House of Commons committee to include tax expenditures in departmental reports to Parliament, along with planned program spending. The government rejected the recommendation, arguing that the change would undermine the finance minister’s authority over the tax system. Reform cannot proceed unless the finance minister relinquishes his power, exercised jointly with the prime minister, to introduce, modify, or eliminate tax measures related to the mandate of a program minister without the consent of the minister.

The federal government implemented a new expenditure management system in 2007. Under the new system, departments are required to review programs on a four-year cycle to determine if they are aligned with federal responsibilities and priorities, if they are efficiently delivered and if they are providing value for money, or effective. Based on the results from these strategic reviews, which are expected to be supported by formal evaluations that provide the evidence base for decisions, departments are expected to identify five per cent of their direct program spending that could be reallocated to other priorities, including deficit reduction. This system has much to recommend it, but to realize the full potential of the new system two fundamental changes should be made. First, spending programs delivered through the tax system should be integrated into the expenditure management system. Integration implies that departments would be given responsibility for both tax and spending initiatives that are relevant to their mandates, and that tax-based expenditures would be subject to the government’s evaluation policy and be included in strategic reviews. Second, while departments should continue to have responsibility for evaluating program efficiency, evaluations of both tax- and spending-program effectiveness should be undertaken by an independent entity such as the Parliamentary Budget Officer. Effectiveness evaluations should be carried out using a variant of the benefit-cost framework that is now applied to government regulatory initiatives. In order for the reformed system to work, more resources will need to be allocated to developing the performance data needed to undertake effectiveness evaluations and to perform the evaluations. These changes go well beyond a recent recommendation by a House of Commons committee to include tax expenditures in departmental reports to Parliament, along with planned program spending. The government rejected the recommendation, arguing that the change would undermine the finance minister’s authority over the tax system. Reform cannot proceed unless the finance minister relinquishes his power, exercised jointly with the prime minister, to introduce, modify, or eliminate tax measures related to the mandate of a program minister without the consent of the minister.

The federal budget contains some sensible changes to the SR&ED investment tax credit, but the decision to reduce support for large firms to provide additional support for small firms is a step in the wrong direction. The Jenkins Panel* expressed concern about excessive subsidization of small and medium-sized firms and recommended cutting back on the enhanced SR&ED credit in order to finance more targeted support for these firms. Following that advice would have improved the social return on support for R&D; in contrast, the budget measures marginally reduce the benefits to society from subsidizing R&D. The budget also announced $400 million in additional funding for risk capital. Returns in the venture capital industry are very low and the additional funding is unlikely to be successfully deployed until returns improve. There is abundant evidence that the tax credit for investment in Labour-Sponsored Venture Capital Corporations is crowding out private investment and contributing to low rates of return; eliminating the credit is therefore an essential first step in restoring the financial health of the venture capital industry.

The federal budget contains some sensible changes to the SR&ED investment tax credit, but the decision to reduce support for large firms to provide additional support for small firms is a step in the wrong direction. The Jenkins Panel* expressed concern about excessive subsidization of small and medium-sized firms and recommended cutting back on the enhanced SR&ED credit in order to finance more targeted support for these firms. Following that advice would have improved the social return on support for R&D; in contrast, the budget measures marginally reduce the benefits to society from subsidizing R&D. The budget also announced $400 million in additional funding for risk capital. Returns in the venture capital industry are very low and the additional funding is unlikely to be successfully deployed until returns improve. There is abundant evidence that the tax credit for investment in Labour-Sponsored Venture Capital Corporations is crowding out private investment and contributing to low rates of return; eliminating the credit is therefore an essential first step in restoring the financial health of the venture capital industry.

Invasive species are a major threat to biodiversity when dominant within their newly established habitat. The globally distributed Argentine ant Linepithema humile has been reported to break the trade-off between interference and exploitative competition, achieve high population densities, and overpower nests of many endemic ant species. We have used the sensitivity of the Argentine ant to the synthetic trail pheromone (Z)-9-hexadecanal to investigate species interactions for the first time. We predicted that disrupting Argentine ant trail following behaviour would reduce their competitive ability and create an opportunity for three other resident species to increase their foraging success. Argentine ant success in the control was reduced with increasing pheromone concentration, as predicted, but interactions varied among competing resident species. These behavioural variations provide an explanation for observed differences in foraging success of the competing resident species and how much each of these individual competitors can increase their foraging if the competitive ability of the dominant invader is decreased. The mechanism for the observed increase in resource acquisition of resident species appears to be a decrease in aggressive behaviour displayed by the Argentine ant, which may create an opportunity for other resident species to forage more successfully. Our demonstration of species interactions with trail pheromone disruption is the first known case of reduced dominance under a pheromone treatment in ants.