Business expenditures on research and development have been under-reported by Statistics Canada for almost 20 years. While many reports bemoan Canada’s lack of spending on Innovation compared with the OECD, we haven’t been using the same definition of R&D and this has caused it to be under-reported.

Until very recently, annual spending on R&D by Canadian businesses has been reported only for work that meets the definition of Scientific Research and Experimental Development (SR&ED) in the Income Tax Act. The definition of R&D used by most OECD countries is substantially different; it uses the current Frascati model that includes R&D in the humanities and the social sciences, and product development based on existing knowledge.

Because of these differences in definitions, Canada has been underreporting its expenditures on R&D since 1997. It is difficult to estimate the level of underreporting spread out over nearly two decades, but we tried to gauge the extent of the problem by looking at salaries spent on R&D. We tabulated the differences between the total salaries spent on personnel involved in R&D activities and the amount allowed to be claimed for SRED purposes for a sample of ten companies. Although measuring total R&D salaries will over report the amount that would be allowed under the Frascati definition, it is indicative of the problem that the differences in definitions have created. Our conclusion is that the R&D for our sample of companies may be underreported by up to 73%.

Are Business Expenditures on Research and Development Declining?

Numerous reports on Canada’s innovation economy have pointed out not only that Canada’s BERD expenditures are lower than the OECD average but also that they appear to be declining over time.

In recent years, the administration of the SR&ED program has become more structured, and expectations have been set for private sector R&D work to include formal experimental procedures and complete evidence records. According to program users, it is more difficult to get SR&ED credits approved now than in the past.

This may mean that not all R&D that was reported by companies in past years is captured with the tightening of the SR&ED program. Hence, if SR&ED is the number used by Statistics Canada for R&D reporting nationally, then R&D expenditures would have declined as the program was tightened.

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