J.P. Deveau insists his concerns about pending reforms to R&D funding in Canada have little to do with his company, but, worries about how the reforms could affect younger, more vulnerable companies. Deveau is the founder and CEO of Dartmouth-based Acadian Seaplants Limited, which has grown over three decades into a leading exporter of products made from seaweed, including fertilizer, animal feed, and nutritional supplements. The company has 300 employees, exports to 70 countries, and spends about 5% to 8% of its revenues on R&D. I thought he was the perfect person to demystify the current plans to reform R&D funding.

First, some background: Ottawa wants to remedy Canada’s pitiful standing in the global productivity rankings, therefore wants to improve R&D funding. By investing in R&D, companies not only invent new widgets but also devise more efficient ways to produce those products and services, thereby improving productivity.

But the Canadian government has a scattershot means of financing research, with 60 programs offered by 17 departments. So a panel led by Tom Jenkins, the executive chairman and chief strategy officer of Waterloo, Ont.-based Open Text, studied the problem and made a list of recommendations, which Stephen Harper plans to act on this year.

The Jenkins task force has aimed to streamline the process of funding innovations, a goal that’s universally applauded. It advocated an arm’s length approach and put a single cabinet minister in charge of innovation to streamline the application process. Fair enough.

The task force also recommended the Scientific Research and Experimental Development program (SR&ED, commonly pronounced “shred”) be changed so it finances labour costs but no longer the costs of material and equipment. What’s more, SR&ED currently pays out refunds to young companies that aren’t yet profitable, but the proposed changes would end those so-called refundable payments so only companies with a profit would receive a tax credit.

It’s these recommendations to change the SR&ED program that stick in Deveau’s craw, because he understands how difficult it would have been for Acadian Seaplants to grow under the proposed system.

“We financed our survival and we financed our technology through that refundable SR&ED program,” says Deveau. “That refundability is so important to start-up companies.”

As for the proposal that SR&ED finance only labour costs, Deveau says that’s fine if you’re innovating in the IT sector, because then all you need is a PC. But for manufacturers, biotech, oceantech, and other industries, much of the innovation expenses are consumed by buying laboratory equipment and machinery to develop a prototype.

Deveaus is also worried about other proposed changes to SR&ED. Right now, any company can make an application for a SR&ED tax credit, and the credits are awarded based on the scientific and financial merits of the program.

So market forces decide what R&D projects merit time and expense, and the government comes in later to help with funding. Deveau says the system works because companies must make the investment up front and, a as result, unlikely to make flighty decisions.

Under the proposed changes, the government would decide what sectors qualify for SR&ED, then financing would be allotted based on a peer review. Deveau’s first concern about this is that a peer review would be time consuming; second, the “peers” might understand the science of a project but not necessarily grasp the economic upside of the R&D initiative.

The government is moving toward a legislative response to the Jenkins report, and already industry is weighing in with recommendations. The Canadian Manufacturers and Exporters association has expressed concerns about the changes to SR&ED, especially about the labour-only provision for funding.

This is an incredibly complicated issue, and I don’t pretend to have an all-encompassing grasp of it. But Deveau’s worries about how the change will affect some segments of the innovation community seem reasonable and should be addressed.

Next week I’ll share some other insights I’ve gleaned from innovators in the region.