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* Overhauls scientific research and experimental development credit
* Rate would shrink to 15 pct from 20 pct
* Offers C$400 mln in new funds for venture capital sector
By Louise Egan
OTTAWA, March 29 (Reuters) - Canada's Conservative government plans to downsize its flagship tax credit for business research and development while allocating C$400 million ($400 million) in new cash for the creation of venture capital funds for high-tech startups.
The measures, contained in the federal budget on Thursday, are part of Prime Minister Stephen Harper's plan to overhaul the country's generous but labyrinthine system for business research and development in a bid to reverse its lagging performance and engender more companies like Blackberry maker Research in Motion.
The main incentive for businesses to invest in innovation and technology is a tax credit for scientific research and experimental development (SR&ED), which cost the government C$3.6 billion ($3.6 billion) last year.
The budget proposes shrinking the rate of that tax credit to 15 percent from 20 percent as of 2014, resulting in savings of C$770 million by the end of the 2016/17 fiscal year.
It also narrows the list of eligible expenditures on which the credit is based to exclude capital expenditures but still including salary and wages, materials, overhead expenses and contract payments. These changes will also come into effect in 2014.
Economists and policy makers have long lamented that while Canada spends much on R&D, its record on innovation is poor, making its economy less productive than that of the United States. The World Economic Forum last year removed Canada from its list of the 10 most competitive economies, citing low private sector R&D.
The budget measures shrink the benefit of the tax credit to businesss by C$1.3 billion, a disappointment for Albert Baker, a partner with Deloitte in Toronto.
"My first reaction to the budget overall and including the aspects dealing with SR&ED is that it is very evolutionary rather than revolutionary," Baker said.
"Other countries are doing more in that space, we are unfortunately scaling back we need to be enhancing the SR&ED program not reducing it," he said.
To address the limited funding for small start-up firms, the government committed C$400 million to help increase private sector investment in early-stage risk capital and support the creation of large-scale venture capital funds led by private investors. It had previously announced C$100 million for this purpose through the Business Development Bank of Canada.
The mechanics of how the public and private funds would be pooled and deployed remain to be worked out.
The changes in the budget reflect recommendations given to the government last year by a group of experts it had commissioned to study federal programs for R&D. The government said it will continue to study the other recommendations.