Bill 35 – Setting the Financial Stage for Alberta’s Innovation Employment Grant & Jobs Tax Cut
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Bill 35 (Tax Statutes (Creating Jobs and Driving Innovation) Amendment Act, 2020) sets the stage for the creation of the Innovation Employment Grant and adjusts to accommodate the Job Creations Tax Cut. In my view, as a regular Albertan, innovation is one of the most important areas of our economic recovery plan. (Innovation is the creation of a new product line, service, or technology based on.) If innovation is properly supported, this could be extremely beneficial to Alberta and its future. Has the UCP managed that? I’m not so sure.
The Innovation Employment Grant and How It Works
“[T]he Innovation Employment Grant will encourage economic growth by supporting small and medium-sized businesses that invest in research and development (R&D) with a grant worth up to 20% of qualifying expenditures.”Alberta Government on the Innovation Employment Grant
The idea behind this grant makes sense. If you make R&D more affordable, businesses will be more willing to innovate, take risks, and increase revenue. Like tax cuts, though, more money doesn’t necessarily mean more jobs or higher R&D investment. Companies, after all, must answer for financial losses. Their shareholders want profits. They may even invest it in R&D elsewhere. Rather than get into that debate, I’d like to focus on how this program works.
The Alberta Government says the Innovation Employment Grant will “[p]rovide an 8% payment towards a corporation’s R&D spending in a given year, up to its base level of spending.” The wording here is interesting. Not all small and medium businesses are corporations.
“Corporations” include out-of-province corporations, non-profits, religious groups, societies, Alberta, and out-of-province cooperatives. While I agree that all kinds of corporations can benefit the Alberta economy, the way the policy has been written leaves the door open for companies to shift large chunks of money out of the province. I’m not comfortable with this fact.
To determine how much to pay out for the grant, the government will average the corporation’s previous two years of R&D spending and pay 20% of the amounts over the base level spend. Here, I want to mention that 9.5% of corporations in Canada are two or fewer years old, and R&D isn’t usually an expense that corporations invest heavily in their first year.
One barrier corporations often encounter with R&D is that it’s an expensive, high-risk activity; it leverages large amounts of capital to gain an edge over the competition. Any financial gains are made long-term. (Research On Return Capital formula.) To get around some of these issues, corporations will often partner, merge, or outsource their R&D activity. These activities could also cause much of the money to leave the province as there doesn’t seem to be anything to prevent it, nor any requirement to keep any of the resulting revenues inside the province.
The Innovation Employment Grant will be part of the corporate tax system and pay out up to $4 million to small and medium corporations. It will phase out the grant for firms between $10 million and $50 million in taxable capital.
Will the Innovation Employment Grant Work?
Honestly, unless I’ve missed something significant, I don’t see this generating many jobs. First, many businesses won’t benefit because they don’t invest in R&D. They could be in an industry that doesn’t innovate a lot or that launched as the result of innovation. (They discovered a new product and started a business.) And many businesses don’t survive past their third year. However, government support is one of the biggest factors in R&D.
Money is another problem. The grant is phased out after $10 million, but I can’t see companies making under $10 million hiring large R&D departments. Many businesses of this size would likely merge, partner, acquire the expertise via an acquisition, or outsource, so that would be even less money and fewer jobs in Alberta.
There are many ways to determine innovation potential. The Vitality Index and the Commercial Confidence Index (CCI) are fairly common, but you might also find TFP (Total Factor Productivity) numbers useful. However, to identify innovators on a larger scale, we can look at patents (like legal copyright that prevents others from producing, using, or selling something for a set period).
I know that many of the patents applied for in Canada are from outside the country. The bulk of them are in chemistry, but other areas like civil engineering, transportation, and medical technology seem to do a good share of R&D as well. (You can search patents at the Canadian Intellectual Property Office.)
|University of Alberta||University of Calgary||University of Lethbridge||Grant Macewan|
|04/30/2019 – 10/22/2020||22||5||0||0|
|University of Toronto||University of British Columbia||McGill University||McMaster University|
|Total Held (Estimate)||3,353||1,788||935||880|
While we can’t compare the institutions this way, it’s clear that educational institutions drive a lot of innovation. Pity these institutions have been gutted and are undergoing a severe restructuring that could kill a lot of this work. It seems the Alberta Government didn’t know what it had and won’t know until it’s too late.
Government support is vital to innovation, but it isn’t some magic pill. Perhaps even more important than money and (arguably) education is culture and society. Investors and innovators both seek a society that fosters collaboration between companies, institutions, and industries. The more opportunities various industries have to see each other’s work and work together, the more natural innovation occurs.
Innovation also needs an environment that allows for the freedom to fail. Companies need to be willing to take risks, fund the resources needed, and help guide research and innovation in its chosen direction. Governments need to recognize programs that work, avoid success-driven funding models and have a financial ecosystem that supports R&D. It should aid in scaling, production, and reduce barriers to entry. We used to have Alberta Innovates, but that was yet another victim of the UCP’s austerity dreams.
Perhaps most importantly, governments and societies need to be knowledge-focused instead of profit-focused — innovation can often take months, years, or even decades to start paying off. And while this program doesn’t indicate that the money will be tied to RORC or a similar formula, the minister decides who gets how much. I worry this would bias investments and skew their idea of which industries (and who) have been the most successful. I also get the sense that Premier Kenney and the UCP think this process is a lot less risky and pays off a lot more quickly than it does.