The Scientific Research & Experimental Development (SR&ED) credit, a prominent program in Canadian research and development funding, continues to disproportionately benefit large companies, as per recent data. Despite this, the report also indicates a gradual narrowing of the gap between big and small enterprises.
The Scientific Research and Experimental Development (SR&ED) program is a tax incentive program administered by the Canada Revenue Agency (CRA) that provides over $3 billion annually to Canadian businesses for work they have done to resolve technological challenges and improve their technological knowledge base.
Persistent Disparities: Large Companies Still Commanding SR&ED Credits
While SR&ED aims to incentivize innovation across the businesses, data reveals that large companies still claim a significant share of the tax credits compared to smaller companies.
Critics, including leading entrepreneurs in Canada, have long criticized SR&ED for favoring big foreign companies over domestic ones. The federal government acknowledged the concerns and initiated a review of the program, which underwent its last overhaul in 2012.
Through SR&ED, companies can claim a refundable tax credit on expenses related to research and development, including researchers’ wages and materials. The program offers a 35% non-refundable tax credit on up to $3 million of these expenses for private Canadian companies, with public and foreign companies eligible for a 15% credit without a spending cap.
Recent Data Indicates a Shift in Beneficiaries
New data from the Canada Revenue Agency (CRA) unveils a change in the types of companies benefitting most from SR&ED, although large companies still maintain the edge. Large companies, with a gross income of at least $250 million, received an average total of about $1.1 billion in SR&ED credits each year from 2018 to 2022. However, this marks a decline from the average total of $1.6 billion in the preceding five years.
During 2021 and 2022, large companies received an average total of less than $1 billion annually in SR&ED credits. In contrast, small and medium-sized businesses saw a slight increase, collecting an average total of $2.4 billion over the last five years.
Behind the Numbers: Insights from Industry Professionals
David Douglas, a SR&ED specialist principal with us at Ryan, LLC, noted that the recent shift in SR&ED dollars away from large companies is incidental and not due to changes in the tax incentive itself. He suggests that market dynamics and other government initiatives are influencing this change.
Companies leveraging SR&ED argue for an overhaul of the program to ensure it genuinely benefits Canadian companies and fosters economic growth. The ongoing government review and consultation aims to address these concerns and modernize the program to align with Canada’s R&D, innovation, and commercialization goals.
Efficiency Concerns: SR&ED and Overall R&D Spending
The recent shift in SR&ED dollars away from large companies is an incidental reaction to market dynamics and government initiatives, according to Douglas. However, concerns linger about the overall efficiency of R&D spending in Canada. Despite the significant funds allocated to SR&ED, there is a consensus that more needs to be done to enhance the effectiveness of these investments.
Ben Bergen, President of the Council of Canadian Innovators, stresses that while R&D spending is substantial, the efficiency with which these dollars are utilized remains a critical challenge. This inefficiency, compared to G7 peers, is turning Canada into an innovation laggard.
A Call for Overhaul: SR&ED Review and Innovation Strategy
As Ottawa embarks on a program review and consultations to modernize SR&ED, the focus shifts towards ensuring the program aligns with an innovation economy strategy. The Department of Finance seeks input on retaining intellectual property in Canada and supporting innovative Canadian businesses.
“The purpose of the consultation is to hear directly from Canadian businesses, including smaller businesses and innovators, about how to better target SR&ED to ensure Canada is a leader in R&D, innovation, and commercialization,”
Caroline Thériault , Department of Finance spokesperson
Industry voices, including Kyle Briggs, CEO of Northern Nanopore, emphasize the need for SR&ED to incentivize economic outputs like generating intellectual property within Canada. Momentum is increasing for a shift from a jobs strategy to an innovation strategy, urging a comprehensive review that aligns SR&ED with the evolving needs of Canada’s economic landscape.
SR&ED and More Innovation Funding
In the dynamic landscape of research and development funding, SR&ED stands as a catalyst, speeding up the course of innovation in Canada. While recent data sheds light on challenges within the program, it remains a driving force for technological advancement and economic growth. At Ryan, we are eager to assist businesses in effectively navigating the intricacies of SR&ED application writing, ensuring their innovative endeavors align seamlessly with program objectives. Contact us today to discover how to determine if you’re eligible for SR&ED.
For those exploring alternatives, the Industrial Research Assistance Program (IRAP) offers a viable option. Our free guide comparing IRAP vs. SR&ED is a valuable resource, empowering businesses to make informed decisions that align with their unique needs. Beyond these programs, our Research and Development Funding Directory opens doors to diverse funding opportunities, providing businesses with a comprehensive toolkit for financial support and strategic growth.