The Government of Canada refers to the annual Scientific Research and Experimental Development (SR&ED) program as “the cornerstone” of Canada’s innovation strategy, yet many contend that Canadian innovation remains low.
While the Federal 2021 budget did not directly address SR&ED, but it rather eluded to improving Canada’s economy and focus of improving Canada’s innovation landscape. In the Federal Budget 2022, Ottawa announced plans to review the $4 billion annual SR&ED program, with a primary focus of improving Canada’s ranking on research and development (R&D).
As of today, the Government has remained silent about the proposed ongoing SR&ED review, so withthe 2023 Federal budget scheduled for release on March 28, 2023, many are anticipating an update on the ongoing SR&ED review.
Sensible changes and simplification would be a welcomed initiative, many lamenting that many Canadian businesses find it hard to understand the SR&ED program and if their project(s) could be eligible.
“In many ways, the [SR&ED] program does a progressive job in pushing innovation forward in Canada, but the Canada Revenue Agency’s (CRA) definition of eligibility has progressively narrowed over the years. There are much needed improvements required to the innovation support ecosystem so that direct and indirect funding may be coordinated, and that intellectual property (IP) can thrive, grow, and reside in Canada.”
– David Douglas, Principal Practice Leader of Government Grants at Ryan
Thoughts Regarding Changes to the SR&ED Program
Experts in the industry opined about the SR&ED review, suggesting upcoming changes should become more favourable to larger corporations such as a refundable credit, arguing that these larger corporations are more likely to commercialize and leverage R&D innovations than smaller corporations. Yet many larger corporations are not always in a taxable position and hence the SR&ED tax credits are not always directly supportive.
Others lament that the nature of SR&ED incentive is a reimbursement after the money has been spent, and smaller companies with shallow pockets are hindered to finance their R&D initiatives. Government grants are important in harmonizing, and stacking of funding, the timeline of R&D to help companies commercialize their technology and scale-up their business projects.
The C.D. Howe Institute published a report in July 2022 titled ‘Tax Support for R&D and Intellectual Property: Time for Some Bold Moves’ in relation to what the SR&ED review could, should, and would benefit from including in this next round of changes.
The C.D. Howe Institute’s ‘Tax Support for R&D and Intellectual Property: Time for Some Bold Moves’ Report
In the budget 2022 announcement, Ottawa officials included a commitment to assess the merits of implementing a special low rate of taxation on profits from intellectual property (IP), also known as a Patent or IP Box.
“The ultimate objective of the SR&ED program is to raise the economic well-being of Canadians. The program is achieving this objective, but its effectiveness could be improved. Unfortunately, the upcoming review is focussed on issues that will have, at best, a minor impact on the net social benefit of the program. The best way to improve the effectiveness of the SR&ED investment tax credit is to align support for large and small firms more closely with the spillover benefits they generate.”
– John Lester, C.D. Howe Institute Author of the ‘Tax Support for R&D and Intellectual Property: Time for Some Bold Moves’ Report
In this report, Lester states two bold and highly controversial recommendations that he believes are required for improving the SR&ED program:
- Support for R&D performed by large firms should be increased and support for smaller firms should be reduced. This rebalancing would leave smaller firms with substantial subsidies while increasing support where the social benefits from R&D are greater.
- The social benefits from basic and applied R&D are higher than the social benefits from experimental development. The credit rates should vary to reflect this difference.
Overall, Lester argues that his recommendations would result in more R&D, a higher success rate for R&D that is performed, and more commercialization activity undertaken in Canada.
While this is a helpful academic perspective, there is an entire sector of early-stage technology companies that are highly dependent on the cash flow from the refundable SR&ED tax credits and create spin offs from university research. However, the point is well taken that coordinated funding between large and small companies is important in support of balancing our innovation ecosystem.
Simplifying the Scientific Research and Experimental Development (SR&ED) Program
Furthermore, part of the federal government’s plans for the SR&ED review is to explore ways to simplify the program and improve the incentive’s eligibility criteria to ensure ongoing innovation support and overall program efficiency.
The C.D. Howe Institute’s John Lester states that while “simplification is a worthy goal; the Canada Revenue Agency should gather evidence on the costs firms incur in applying for a SR&ED tax credit. The resulting information could help focus efforts to simplify the program.”
While the C.D Howe Report considers the cost of compliance for SR&ED to be an issue, it is important to consider the cost of compliance to all federal funding programs, both direct and indirect, because direct funding can often have an even higher cost for internal and external resources.
Thus, simplifying the SR&ED program is indeed a worthy goal, but there needs to be greater efficiency in allocating funding across all levels of government funding. Perhaps the upcoming Budget 2023 will signal progress on these concerns.
Understanding the Federal SR&ED Tax Credit Program
Discrediting SR&ED Misconceptionsis an important article our team recently wrote which highlights common confusions about the SR&ED program and encourages business leaders to seek out support in accessing the tax credit because self-assessment in eligibility it often non-sufficient due to a lack of understanding in what classifies as innovation.
Here is a list of other important articles you may be interested in reading to learn more about the federal SR&ED program for Canadian businesses:
- Article: IRAP or SR&ED: Which R&D Funding is Right for Your Business?
- Article: Will the SR&ED Credit Impact My Taxes?
- Article: What is SR&ED? Research and Development Funding
- Article: How to Determine if You’re Eligible for SR&ED
- Article: The How & Why of SR&ED Tax Credits
- Article: Applying for SR&ED During Experimental Production
- Article: Your SR&ED Application Failed, Now What?
Additionally, you can learn about the key differences between Canada’s two most popular funding programs for supporting innovative research projects in the detailed analysis of the Industrial Research Assistance Program (IRAP) grant and the Scientific Research and Experimental Development (SR&ED) tax credit by downloading the free IRAP vs. SR&ED slide deck.