Modernizing SR&ED to cover patent costs is long overdue

June 8, 2021

By Dana O’Born, CCI’s Director of Strategic Initiatives

Intellectual property tends to be seen as an arcane topic — the domain of economists, policy wonks, business nerds and lawyers. So, for those of us who spend a lot of time thinking about IP, it was a surprise to watch patent policy burst into mainstream recently.

The issue of a patent waiver for COVID-19 vaccines is fascinating and complex, but the basic takeaway from the “Suspend the patents!” discourse can be summarized fairly simply: A patent is a social contract that grants legal rights allowing the owner of an idea to hold, protect and monetize it. And in the case of a life-saving vaccine in the midst of a global pandemic, suspending that temporary monopoly makes sense for greater public good.

The life-and-death stakes of COVID-19 have made the issue a global concern, but people generally don’t realize that patents and other forms of IP protection shape our society in profound ways every day. Nearly every part of the economic landscape, and every product and service you use is affected by IP issues in some way.

In the innovation economy, we often talk about patents and other forms of IP protection as tools that allow a company to establish “freedom to operate.” Using patents, copyrights, and contracts, a company can assert control over zones where it wants to develop products and services in domestic and international markets. As legal tools, IP rights can effectively block competitors from entering markets or developing products that compete with yours.

As governments around the world grapple with the economic wreckage that the pandemic has created, more thought is shifting to the strategies which can ensure a robust and more equitable economic rebound. Encouraging innovation through research and development is an obvious strategy for economic growth, but getting the details right is the difference between success and failure.

Canada has a strong track record when it comes to producing world-class research, but when it comes to commercializing it to scale globally, we kind of suck. At the moment, most Canadian-created IP is owned and commercialized by foreign companies.

Supporting better commercialization outcomes so that Canadian firms capture all the attendant wealth effects for our economy is an important priority. This is where Canada’s marquee R&D funding program in — the Scientific Research and Experimental Development tax credit (SR&ED) — can play a meaningful part.

SR&ED is a $4 billion program, and nearly every innovative company in Canada receives this tax credit. But it is outdated, having been created after the Second World War with the goal of strengthening Canada’s industrial competition to support innovation and reduce corporate costs. The goal of the program has stayed the same, but the game has changed.

One glaring hole in SR&ED is the inability to claim IP costs associated with research and development. Patent costs in particular are expensive for SMEs.

To encourage better IP ownership by Canadian entrepreneurs, we need to update SR&ED to include the generation, protection and prosecution of patents and other forms of intellectual property. To get the maximum economic benefit, the federal government should also undertake a broader effort to modernize SR&ED, so that we can get the most value out of our R&D funding in Canada.

Canada has consistently hovered around countries like Slovenia and Poland on global innovation score cards. This may not seem significant until you remember that both countries emerged out of collapsed socialist economies 30 years ago, long after Canada was already the 3rd nation in space. Canada has a large and growing deficit on IP payments and receipts. Properly designing innovation programs and updating existing ones like SR&ED to support ownership of IP by Canadian entrepreneurs can help reverse these trends.

Away from the spotlight of COVID-19 vaccines, the global patent system marches on unabated — with all its complexity and politics. The global race for IP ownership is more intense now than it was even 10 years ago.

This is why Canadian companies need help with their IP costs so that they can make the most out of their innovations and compete globally, which in turn will be a critical driver of Canada’s post-COVID economic recovery.

This CCI Perspective was also sent directly to subscribers of our newsletter.

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