Goals

Canada’s approach to supporting innovation is broken. We waste time and money on arbitrary programs that don’t reach truly innovative companies. Instead of distributing funds based on who fills out the best forms, we should reward companies that have already proven their value by attracting private investment. By implementing a direct co-investment model within 5 years, Canada will:

• Increase Canada’s creation rate for startups with startups with a $1 billion enterprise value to 2 per million people
• Increase private R&D investment to 2% of GDP 

Background and Motivation

The Scientific Research & Experimental Development Tax Credit (SR&ED) was introduced in the mid-1980s to encourage businesses to perform research and development in Canada. It has grown into one of Canada’s largest R&D support programs, providing over $4.2 billion in tax credits in 2024^1,2. Alongside this program the Industrial Research Assistance Program (IRAP) provides direct funding to small and medium-sized enterprises for innovation projects, with an annual budget of ~$400 million³.

Despite this massive investment of over $4 billion per year, Canada’s innovation outcomes have been disappointing. Canada produces only 0.81 startups with a $1 billion enterprise valuation per million people, while the United States generates 1.8 per million⁴. Smaller innovation economies far outperform both: Israel creates about 5.6 such startups per million – the highest density in the world. As the Conference Board of Canada notes one of Canada’s greatest innovation challenges is “the failure to turn our strong research and development into commercial success.”⁵​

One of the core contributing factors is that while our government investment in innovation is very high our matching private sector investment lags considerably with very low R&D spending. As a result, as of 2022, we spent just 1.55% of our GDP on research and development, compared to 3.46% in the United States and 5.6% in Israel⁶. 

What’s worse, even the investments we make yield poor returns. The World Intellectual Property Organization’s Global Innovation Index 2023 found that “Canada produces less innovation outputs relative to its level of innovation investments.”⁷ In other words, while we have high education levels, generous government funding programs, and some business R&D spending, it is not yielding results with new products, high-growth firms, or intellectual property.

The truth is that SR&ED, IRAP and related programs aren’t just ineffective – they’re actively wasteful. The application process for SR&ED is so complex that many companies hire specialized consultants who can take 20-30% of the incentive funds⁸. Companies focus on meeting bureaucratic eligibility criteria rather than pursuing genuine innovation. Small businesses are especially burdened by excessive documentation and unclear guidelines, which disrupt their cash flow and distract from actual innovation work.

What’s more, many of these benefits flow to large corporations with teams dedicated to maximizing government benefits, rather than to the emerging companies that could become tomorrow’s economic champions.

We need a fundamentally different approach. Instead of trying to predict which companies deserve support based on paperwork and bureaucratic criteria, we should identify winners by looking at who has already attracted private investment. By providing matching government funds to companies that have secured private capital, we can amplify market signals rather than trying to outsmart them.

The solution is simple: instead of paying for hopeful ideas, Canada must start investing directly in proven successes. This means leveraging public markets and private sector venture capital as clear indicators of a company’s real potential. If private investors trust a company’s ability to grow, the government should amplify their confidence by matching their investment. This direct support will supercharge Canada’s existing winners, attract further investment, boost economic growth, and create high-quality jobs.

Real-World Solutions

Israel’s Yozma program revolutionized the country’s innovation ecosystem by adopting a success-focused approach. Launched in 1993, Yozma provided attractive tax incentives and established hybrid venture capital funds, where the government contributed up to 40% of the total investment, with private investors supplying the majority⁹. This model led to a dramatic 60-fold increase in venture capital investments, from $58 million in 1991 to $3.3 billion in 2000¹⁰. During the same period, the number of startups supported by Israeli venture funds grew from approximately 100 to 800¹¹. Today, Israel has the highest concentration of startups per capita globally, with over 6,000 startups and nearly 100 valued at over $1 billion¹². Yozma’s success stemmed from amplifying private market signals rather than replacing them with government intervention.

What Needs To Be Done

Immediately redirect current spending from SR&ED, IRAP, and CanExport into a streamlined matching investment program:

• Immediately abolish the current SR&ED, IRAP, and CanExport programs to free up  their $4 billion plus annual budget. These programs have failed to deliver any meaningful innovation outcomes despite their significant cost. Eliminating them will free up substantial resources that can be redirected more effectively while removing the administrative burden they place on innovators and government alike. The transition should be structured to minimize disruption, with a two-year phase-out period that gives companies time to adjust their financial planning. ‍
• Create a Follow-On Non-Dilutive Capital Program that matches private investments. When a company successfully raises private capital, the government should provide matching funds as non-dilutive capital in the form of debt. This debt would carry no votes, no board seats, and no security interests, preserving founder control and company autonomy. Repayment would only be triggered upon a sale of the company, an IPO, or if the company or its IP is moved outside Canada. This approach leverages the due diligence of sophisticated private investors while amplifying their effect. With approximately $7 billion in annual venture funding currently in Canada, the redirected $4 billion can be used to add 50% or more to every investment. Unlike SR&ED and IRAP, which can only be used for research and development activities, the capital that companies can deploy across their entire growth strategy – including sales, marketing, and other commercialization activities essential for scaling. This flexibility recognizes that successful innovation requires not just creating IP but effectively bringing it to market. By supporting the full spectrum of growth activities, we’ll transform the Canadian investment landscape by making startups more attractive to global investors and giving companies more runway to achieve scale and compete globally.
• Establish a streamlined internal administration system for the new program. The program should be managed by a very small team of experienced investment professionals within the government, with minimal bureaucracy, little overhead, and rapid decision-making. The Canada Revenue Agency would simply need to validate accredited investment firms to match, rather than assessing complex paperwork to determine if engineering work qualifies as R&D. Applications should require only proof of the private investment and basic company information, with decisions made within 15 days rather than the months it currently takes for SR&ED. This lean approach would dramatically reduce the administrative costs for both businesses and government while speeding up capital deployment to innovators .

Success can be measured through clear metrics such as the increase in startups valued $1 billion+, the size of the startup ecosystem, total venture capital attracted, and new job creation. 

Common Questions

• Won’t eliminating SR&ED hurt small companies that rely on these tax credits? The new program will actually provide more immediate and substantial support to promising small companies. Current SR&ED recipients wait months for reimbursement and lose 20-30% to consultants, while our program will deliver matching funds directly and quickly after a company raises private capital.

• How can you be sure the market is picking the right companies to support? Private investors risk their own capital based on rigorous assessment of a company’s potential, providing a strong market validation signal. Our current system relies on government bureaucrats with no commercialization experience to determine worthiness, which has proven less effective than market-based selection.

• Will this approach just further concentrate resources in already advantaged regions like Toronto and Vancouver? By following private investment patterns, we’ll support companies where talent and market opportunity exist. This will actually be more regionally equitable than current programs, which disproportionately benefit large corporations in major centers that can afford expensive SR&ED consultants.

• How will this approach support early-stage research that might not immediately attract private investment? Basic research will continue to receive support through university and research institution funding. This program specifically addresses the commercialization gap – helping promising innovations scale once they’ve demonstrated initial market potential.

• Will this new program apply to publicly-listed companies? No. This program is designed to support early and growth-stage companies that are still raising private capital through venture funding rounds. Publicly-listed companies already have access to capital markets and can raise funds through public offerings, making them less dependent on government support for innovation. Our focus is on helping promising private companies reach the scale necessary to consider public listing, addressing the critical growth stage where many Canadian innovators currently struggle.

• Won’t this approach just subsidize investments that would happen anyway? The matching formula is designed to increase the total capital available to Canadian innovators, making our ecosystem more competitive globally. Evidence from similar programs shows they increase the overall size of investment rounds and attract additional international capital that wouldn’t otherwise flow to Canadian companies. Increased funding never guarantees success, but it can increase the odds in our favour and increase the volume and value of Canada’s startup ecosystem.   

Conclusion

Canada must pivot from paying for potential to rewarding proven success. By cancelling wasteful programs that reward promises and consultants and instead establishing a streamlined matching investment fund, Canada can rapidly improve its innovation ecosystem, create quality jobs, and position Canada as a global leader in innovation.