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Research Canada: An Alliance for Health Discovery Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:

Tax Incentives for Scientific Research and Experimental Development: Fostering Innovation in Canada

Research Canada's Members


  • Alzheimer Society of Canada
  • Juvenile Diabetes Research Foundation
  • Arthritis Society
  • Kingston General Hospital, ON
  • Association of Canadian Academic Health Organizations
  • Lawson Health Research Institute, ON
  • Association of Faculties of Medicine of Canada
  • Leukemia & Lymphoma Society of Canada
  • Baycrest Centre for Geriatric Care, ON
  • Lung Association
  • BIOTE Canada
  • McGill University Health Centre Research Institute, QC
  • Calgary Health Region
  • Montreal Heart Institute, QC
  • Canada's Research-Based Pharmaceutical Companies
  • Montreal Neurological Institute, QC
  • Canadian Association of Occupational Therapists
  • Multiple Sclerosis Society of Canada
  • Canadian Cancer Society
  • Muscular Dystrophy Canada
  • Canadian Cystic Fibrosis Foundation
  • National Cancer Institute of Canada
  • Canadian Diabetes Association
  • Newfoundland and Labrador Centre for Applied Health Research, NL
  • Canadian Foundation for Dental Hygiene Research and Education
  • Osteoporosis Canada
  • Canadian Healthcare Association
  • Ottawa Health Research Institute, ON
  • Canadian Mental Health Association
  • Parkinson Society Canada
  • Canadian Psychiatric Research Foundation
  • Pfizer Canada Inc.
  • Capital District Health Authority, NS
  • Philips Medical Systems Canada
  • Capital Health, AB
  • Providence Health Care Research Institute, BC
  • Caritas Health Group
  • Provincial Health Services Authority
  • Carleton University
  • Queen's University Faculty of Health Sciences (ON)
  • Centre for Addiction and Mental Health, ON
  • Regina Qu'Appelle Health Region
  • Centre Hospitalier Affilié Universitaire de Québec Research Centre, QC
  • Rick Hansen Man in Motion Foundation, BC
  • Centre Hospitalier de l'Université de Montréal – Research Centre, QC
  • Samuel Lunenfeld Research Institute, ON
  • Centre Hospitalier Universitaire de Québec – Research Centre, QC
  • sanofi pasteur
  • Centre Hospitalier Universitaire de Sherbrooke – Research Centre, QC
  • Schizophrenia Society of Canada
  • Child & Family Research Institute, BC
  • St. Joseph's Health Centre, ON
  • Children's Hospital of Eastern Ontario Research Institute, ON
  • St. Michael's Hospital, ON
  • Clinical Research Institute of Montreal, QC
  • Sunnybrook Health Sciences Centre, ON
  • College of Family Physicians of Canada
  • The Canadian Society of Biochemistry, Molecular & Cellular Biology
  • Douglas Hospital, QC
  • The Royal College of Physicians and Surgeons of Canada
  • Father Sean O'Sullivan Research Centre, ON
  • Thunder Bay Regional Health Sciences Centre
  • Foundation for Research into Children's Diseases
  • Toronto Rehabilitation Institute, ON
  • Friends of CIHR
  • University Health Network, ON
  • General Electric Health Care, Canada
  • University of Ottawa Heart Institute, ON
  • Heart and Stroke Foundation of Canada
  • University of Toronto Faculty of Medicine (ON)
  • Hôpital Sainte-Justine Research Centre, QC
  • University of Western Ontario (ON)
  • Hospital for Sick Children Research Institute, ON
  • uOttawa Institute of Mental Health Research
  • Hotel Dieu Hospital, Kingston
  • York University
  • Infectious Diseases Research Center of Laval University, QC
  • Winnipeg Regional Health Authority, MB
  • IWK Health Centre, NS
 

About Research Canada

The Mission of Research Canada: An Alliance for Health Discovery is to help Canadians maintain and improve their health by ensuring Canada is a world leader in health research.

Research Canada is a not-for-profit, voluntary organization that is the national voice for health research advocacy in Canada. Working for all Canadians, its membership is drawn from all sectors dedicated to increasing investments in health research, including the leading health research institutes, national health charities, hospitals, regional health authorities, universities, private industry and others.

Research Canada recognizes that health research improves the health of Canadians, offers a real opportunity to contain health care costs, and contributes to the creation of knowledge-based jobs and economic growth.

Research Canada welcomes the opportunity to work with the government as it engages all sectors and works in partnership to build support for health research nationwide.

Introduction

Taxation is critically important in shaping the perception of the country and signaling to the world that Canada is open for business. Unlike many other factors that influence the generation of knowledge and innovation, taxation falls completely within the domain of the government. A competitive and stable taxation policy has the potential to be an effective tool for the Canadian government to promote innovation and investment activity in the country.[1]

Canada needs a tax system that encourages and supports public investment in the health research and development which is the basis for new discoveries that lead to improved lives, better jobs and business opportunities.

SR&ED Tax Incentive Policy

In November 2006, Research Canada released the results of its first public opinion poll on health research in Canada. Canada Speaks 2006 revealed that 83 per cent of Canadians agree that industry should be encouraged to conduct more research when they were asked if they agree with the following statement: The Federal Government should have tax policies and regulations that encourage private industries to conduct more health and medical research.

Canada's Scientific Research and Experimental Development (SR&ED) tax incentive program is one of the most advantageous systems in the industrialized world for promoting business investment in R&D, providing over $3 billion in tax assistance to innovative Canadian businesses in 2006. It is the single largest federal program supporting business competitive and dynamic business environment in Canada.

Research Canada supports the Government's commitment to identify opportunities to improve the Scientific Research and Experimental Development (SR&ED) program. The program, developed in a pre-NAFTA environment, should be modernized to meet the needs of a new North American and global economic order.

Health research in Canada has been a benefactor of the SR&ED Tax Incentive Program, which has provided critical incentives to move health discoveries to market, thereby strengthening Canada's health research industries. Within the health research industry sector, the program has supported the creation and development of both small- and medium-sized medical technology and biotechnology enterprises which strengthen Canada's knowledge-based economy.

SR&ED Delivering Benefits

Coley Pharmaceutical Group, Ltd. is a company that developed from the Ottawa Health Research Institute (OHRI). It was incubated in the OHRI for three years and then moved to Kanata, Ontario. The company is developing small molecules called adjuvents that stimulate the immune system and one of the key targets is AIDS patients who are immunologically compromised.  The research is done in Kanata and in the United States and Germany, with clinical trials ongoing at the Ottawa Hospital and elsewhere.

Testimonial

€œOur participation in the Scientific Research and Experimental Development (SR&ED) has benefited us in several ways.  The SR&ED program has allowed us to generate significant income tax credits that have helped offset the overall research costs in an otherwise expensive and risky industry and since we are an international company the program has made investment in Canadian research an attractive alternative to other locations. Due to the favorable SR&ED income tax treatment, it has also helped us with the business case for continued investment in new advanced research and development equipment.   In addition, navigating the sometimes confusing SR&ED program rules and documentation has been made easier through our involvement with the Executive Account Service where the Canada Revenue Agency (CRA) becomes more than just a 'black box' and an industry knowledgeable CRA account executive is available to establish a proactive relationship to gain knowledge of your business and can provide one stop shopping for information.€

- Trevor A. Mulzer, Controller, Coley Pharmaceutical Group, Ltd.

Fralex Therapeutics is a medical technology company that is developing and commercializing a therapy for the treatment of chronic pain, depression and anxiety. The company is planning its first applications in the treatment of chronic pain associated with musculoskeletal conditions, including fibromyalgia.

Fralex Therapeutics trades on the TSX under the stock symbol FXI.

The technology behind Fralex originated in the mid-1980s, when Dr. Frank Prato and other scientists at Lawson Health Research Institute and The University of Western Ontario discovered low-power electromagnetic pulseforms that could predictably increase the perception of pain in snails and mice, however, with the result that

pain was primarily increased. Their work progressed greatly in 1995 when Dr. Alex Thomas joined the group and developed the CNP pulseform to elicit the opposite response - the reduction of pain in rodents and snails.

Over the next 10 years, Drs. Prato and Thomas received funding from various government organizations to continue research and conduct numerous clinical trials. Fralex was formed as a spin-off company from Lawson Health Research Institute and partnered with several private sector companies to develop the technology for human applications.

Fralex was in receipt of SR&ED tax credits which were vital in the financial plan necessary to develop prototypes and attract the investment necessary to transfer the company to private ownership. Over this period, 339 humans were studied, as the research group examined various effects of pulsed electromagnetic fields. After developing a portable unit that was practical for in-home use, the researchers were able to demonstrate a notable reduction in pain for patients suffering from chronic musculoskeletal pain.

Gemma Biotechnology (GBT) whose lead product is a molecule isolated from breast milk which has the unique capacity of stimulating the neonatal immune system. Specifically, "lactation associated immunotrophic protein" (LAIT-Protein) stimulates B1 B cells to high rate production of "natural IgM" - a key component of the "innate immune system" and one of the first lines of defense against microbial infection. Importantly LAIT Protein has similar immune boosting effects in adults.

This product has been in development over the last six years and is developing towards its inclusion as a supplement in many foods for both human and animal consumption.

GBT partnered with Agriculture Canada to develop the Standard Operating Procedures (SOPs) for the isolation of LAIT protein from whey (the by-product created in the manufacture of cheese) and successfully accomplished this task in pilot plant. This partnership capitalized on the "Matching Investment Initiative" offered by Agriculture Canada, such that GBT was able to leverage its investment threefold. All of this investment by GBT was eligible for SR&ED and hence the return enabled further investment towards the ongoing development of LAIT-protein into a market-ready product.

GBT has continued, now partnering with one of the largest manufacturers of dairy products in North America – moving from pilot plant to industrial scale using the SOPs created in partnership with Agriculture Canada. Again, GBT's financial investment in this ongoing development is an eligible expense under the auspices of the SR&ED program, providing ongoing capital to continue product development and minimizing the dilution of our equity in GBT!

An Alliance with Stakeholder Expertise on SR&ED

Many of Research Canada's members advocate for extending the SR&ED credit to all firms encouraging collaboration, extending the program to cover pre-commercialization activities and improving the administration and marketing of the program. In Research Canada's Brief to the Standing Committee, The Health Research Advantage: Fostering an Integrated Approach to Innovation in Canada and our Response to the Government of Canada's Science and Technology Strategy: Progressing towards a Functional Innovation System for Canada, we identify the concerns and arguments for changes to the program which are important to our members. In the former document, we do provide high-level recommendations in this regard. Research Canada believes our members are best positioned to make specific recommendations on the components of the SR&ED tax incentive program. Research Canada does support our members' position that the program requires modernization and key enhancements which will, in the end, increase business investments in health R&D in Canada and deliver value to Canadians.

For your convenience and your consideration, we have summarized below, those concerns and suggestions brought forth to Research Canada by some of its prominent members.

Extending the Credit to All Firms

Some of Research Canada members believe the Government should expand upon the refundable aspects of the SR&ED program, which currently does not support large firms and supports smaller firms in limited ways. By broadening this aspect of the program, more companies will deem the program to be of value and have greater incentive to invest in Canadian R&D, thus benefiting from the more progressive rules of the program.[2]

Over 70 per cent of small and medium sized biotech companies spend above $2 million annually in R&D due to the high costs of product development. By increasing annual R&D expenditure limit from $2 million to $10 million the government would facilitate access to extra funding for smaller enterprises.[3]

Collaborative R&D

Encouraging collaboration improves the flow of knowledge. Collaborators are likely to be more innovative. This is why some of Research Canada's members support specific Federal Government incentives, including tax policy incentives that improve alignment and integration within the health research enterprise. For example, new incentives could be based on increasing SR&ED tax credit rate for small business expenditures incurred on collaborative R&D. Providing incentives for collaboration by Canadian small- and medium-sized enterprises (SME's) with Canadian universities, teaching hospitals, Regional Health Authorities and government laboratories, for example, holds the possibility of promoting innovation and investment activity in Canada. Support for angel investors maximizes the potential financing benefits.

Extending the program to cover pre-commercialization activities

Canada lags amongst OECD members in terms of achieving international standards and accepted metrics for commercialization success – extracting economic value from knowledge. Research Canada commends the Government's focus on the need to achieve in this arena. The health research industry should be viewed as an opportune test case. Beyond direct economic benefit to the inventor and their institution, the expected leverage of public sector investment in discovery research, the training of highly qualified people (HQP); the creation of spin-off companies and the new employment opportunities created are all fundamental elements of a robust, sustainable innovation system.

There is another important driver. Discovery research and product development cannot reach the end user in the absence of the standards and rigors associated with the commercialization process. Hospital based and University health research enterprises in Canada are inventing the future of health care! Discoveries in these arenas, however, cannot be applied to patients in the absence of the commercialization process.

By increasing the scope of eligible tax credits, the Government will provide incentives towards creating a robust and competitive commercialization culture. Expanding the investment tax credits to cover patenting, prototyping, product testing and other pre-commercialization activities would attract private sector investments and mobilize our commercialization opportunities.[4]

Administration and marketing of the program

Further, for foreign-owned companies which conduct R&D in Canada, but whose head offices are located abroad; the incentive of the SR&ED program is mitigated by the time lag in receiving the credit and the subsequent devaluing of its impact on operations. This, in turn, can lead to a reduction in operations or in some cases withdrawal of the operation from Canada.[5]

Conclusion

Like the Government of Canada, Research Canada is committed to delivering value to Canadians and putting their interests first as we dedicate ourselves to improving their health and wealth through the creation of a fully functioning Canadian innovation system. We consider that Canada can make a quantum advance in the design, understanding, and accountability of the innovation chain at this time that will result in the flexibility to meet new opportunities and will deliver increased international competitiveness. The SR&ED Tax Incentive Program is a fundamental component of this system, and enhancements at its core will only let us harvest that which we have richly sown.

Endnotes

1. Exploring Canada's Innovation Character: Benchmarking Against Global Best, Conference Board of Canada, Report, June 2004, p. 27 [Return]

2. Investing in Canada's Future, BIOTE Canada's Proposed SR&ED Policy Amendments. [Return]

3. Hartman, Brian, Game Rules, All that glitters, The reality behind obtaining government funds,Canada's Soho Business Magazine, Dec 2006.[Return]

4. Recommendations of the House of Commons Standing Committee of Finance, Following the pre-budget consultations in the fall of 2006. [Return]

5. Conference Board of Canada, Tuning the SR&ED Tax Incentive Program, Ideas from the ICT Sector, July 2002. [Return]