The effects of R&D tax credits and allowances in Canada

Abstract

In Canada, as in many other countries that have adopted R&D tax credits and allowances, there has been considerable controversy over their effectiveness in increasing company-financed research and development. This study seems to be one of the first systematic attempts to estimate the effects of Canada's R&D tax credits and allowances. The results present a very consistent picture. The survey results, the econometric results, and some simple calculations based on rough measures of the price elasticity of demand for R&D all suggest that the special research allowance increased R&D expenditures by about 1 percent and that the investment tax credit increased them by about 2 percent. These increases seem to be appreciably less than the revenue losses to the government.