Canada's research and development funding system is too complicated and confusing, a government-appointed panel said Monday.

Creating a new arm's-length funding agency and putting a single cabinet minister in charge of innovation would streamline the application process and give the government a clear voice on the issue, Tom Jenkins, the panel's chair said.

The idea is to cut red tape and make it easier for companies to get access to cash and increase collaboration.

"Going forward, more of the world’s innovations may well happen elsewhere, outside of Canada," warned Jenkins, executive chairman and chief strategy officer of Waterloo, Ont.-based Open Text Corp.

"Governments in Canada spend more on supporting business R&D per capita than most countries in the industrialized world. And yet, we’re increasingly near the bottom of the pack when it comes to investing in business innovation. So if it’s not a lack of government investment, then why has our business R&D momentum been stalled for almost a decade?"

Gary Goodyear, minister of state for science and technology, said business investment and R&D help create high-paying, high-value jobs and maintain Canada's standard of living.

"Innovation, development of new products or new ways to use a product or new markets for the product: these are the ways that we need businesses to go, because this is absolutely vital to the nation’s economic growth," Goodyear said as he accepted the recommendations.

Time for NRC to change

The panel recommends rejigging the National Research Council's institutes and the Business Development Bank of Canada. The NRC's institutes would leave public policy research to other departments and become not-for-profit centres run by stakeholders.

Jenkins said the NRC has a history of taking innovative ideas, spinning them off, and reshaping its mandate.

"We're simply encouraging the NRC to go further, faster with those concepts," Jenkins said.

The report lists 17 institutes currently with the NRC, with a budget of about $290 million a year. The report says the council should, over five years, convert some of the institutes into non-profit organizations drawing funding from "collaborative activities," university affiliations and provincial governments. Others would fall under the new Industrial Research and Innovation Council the panel recommends be set up to manage all R&D funding.

The government should direct BDC to work with investor groups to help with startup cash, and develop new late-stage risk capital or growth-equity funds to provide investor cash to companies as a product is going to market, the panel found.

Changes proposed to SRED credit

The panel recommends basing an existing tax credit on labour costs, rather than applications. Many businesses find the Scientific Research and Experimental Development program so complicated that they hire consultants to help with their applications, eating up some of the credit they're awarded, the report says.

Right now, businesses can claim a credit for the cost of materials and equipment, which are the difficult part of the application process. If the government eliminated the credit based on those costs, and paid out credits based only on the cost of labour, it would simplify that process. And what the government saves in eliminating the tax credits for capital and material could be spent on direct funding like grants, Jenkins said.

The government can further help by basing contracting on a business's ability to be innovative, the panel concluded, which could move billions in procurement spending to creative companies.

The panel reviewed the federal government's approach to $5 billion a year in R&D spending, meeting with 160 stakeholders and getting 228 written submissions. The panelists also surveyed 1,000 businesses.