For years, Canada’s Scientific Research & Experimental Development (SR&ED) tax credit has been a powerful resource for innovative companies across Canada. By claiming their share of the $4 billion in non-dilutive tax incentives doled out through SR&ED each year, businesses can use this funding to drive greater innovation—on Canadian soil—without having to hand over equity in exchange for capital.
But tapping into SR&ED funding hasn’t always been easy.
Aside from the challenges that businesses face when attempting to claim SR&ED without an experienced tax credit provider, there are also caveats to the qualification criteria that will limit just how generous this program can be on a case-by-case basis.
Ace among these caveats are the refundable vs. non-refundable portion of the tax credit.
Currently SR&ED features a 15 percent non-refundable portion of the credit—that is, a reduction in the amount of taxes owed, but not a formal tax refund—that’s available to all companies, regardless of their capital structure.
Then, there is a 35 percent refundable portion of SR&ED—ie. credits towards a formal tax refund if the total is greater than the tax owed— that’s only available to Canadian-controlled private companies (CCPCs).
The TL;DR read into this balance is to favor government investment into fledgling private companies. This hinges on the logic that public companies can seek out capital from outside investors, while earlier stage private companies that either want to maintain equity or require more R&D before being IPO-ready will benefit most from the government-backed capital infusion.
However, many in the Canadian tech sector think this logic is flawed.
An editorial published in CanTech Letter by Dani Lipkin, Director, Global Business Development, Toronto Stock Exchange and TSX Venture Exchange, explains that there’s a common misperception that public companies are “flush with cash.”
“[…] this couldn’t be farther from the truth,” Lipkin explains. “In fact, the majority of companies that trade on Toronto Stock Exchange and TSX Venture Exchange are small-to-medium sized enterprises.”
Lipkin goes on to highlight that the average market capitalization for companies on the TSX Venture Exchange is just $54 million CAD. To that end, 75 percent of issuers are pre-revenue as of March 2024, while Lipkin puts the total share of SMEs on the exchange at almost 97 percent.
That last point about “pre-revenue” is important in the context of the refundable vs. non-refundable balance of SR&ED.
With such a wide swath of Canadian public companies still mapping out their growth trajectory, shouldn’t these businesses have the same access to SR&ED funding that their CCPC peers enjoy?
The Budget 2024 hangover continues…
The question of broadening access to SR&ED isn’t a new one, but it’s being met with renewed interest from stakeholders across the public and private sector following the latest federal Budget. While there has been much coverage on the controversial new capital gains rate hike pitched as part of Budget 2024, the proposal also included more funding for SR&ED and continued consultations on how to make better use of the program to drive growth.
As Lipkin’s editorial points out, Canada is in the midst of what he calls a “productivity crisis” as the country is tracking toward a GDP shortfall of 7 percent. Despite the urgent picture this reality paints, the country is also somewhat cash strapped (hence the capital gains rate hike and subsequent provincial budget-tightening), which has in turn made government officials more prone to scrutinize any investments.
It’s understandable, therefore, that now is not the time for the government to close off innovation funding programs like SR&ED. However, CCPCs may justifiably be concerned about what would happen if the most valuable portions of the SR&ED program were made available to a wider swath of the population—especially if it means less cash to go around.
Of course, this is just one of many ideas being considered as government officials wrap up their second round of SR&ED consultations this week. While it remains to be seen how changes to the SR&ED program will impact future participants, businesses who claim SR&ED today may already be feeling some of the downstream effects of government scrutiny during rocky economic conditions.
SR&ED expertise and audit defense
One side effect of the federal government tightening their budget is that they are likely going to be more vehement when auditing tax credits until programs like the capital gains hike start to pay off.
While that doesn’t inherently mean you should expect an audit if you apply for SR&ED in 2024, it should be an incentive to ensure you’re compiling a defensible, audit-proof claim that can stand up to any added CRA scrutiny.
If you choose to go it alone—whether that’s defending your claim in the face of an audit or compiling your SR&ED claim in the first place—you’ll likely find yourself in over your head fast given the wide breadth of knowledge and expertise that goes into accurate, comprehensive, CRA-ready tech reports.
At Boast, we save our customers almost 60 hours a year compiling SR&ED, aligning key project, finance and payroll data into a single platform that gives our inhouse experts all they need to do the heavy lifting on our clients’ behalf.
To learn more about our sterling audit-defense rate and how we maximize SR&ED outcomes for our customers, talk to one of our R&D tax credit experts today.
SR&ED Consultations FAQ
- What is the Scientific Research & Experimental Development (SR&ED) tax credit? The SR&ED tax credit is a powerful non-dilutive funding program in Canada that provides $4 billion in tax incentives annually to innovative companies. It offers a 15% non-refundable tax credit to all companies and a 35% refundable portion to Canadian-controlled private companies (CCPCs).
- What is the issue with the current SR&ED program? The current program favors CCPCs over public companies by providing the more generous 35% refundable tax credit only to CCPCs. Many argue that this logic is flawed, as many public companies, especially those listed on the TSX Venture Exchange, are also small-to-medium enterprises in need of funding for innovation.
- Why is there renewed interest in expanding SR&ED to public companies? The latest federal Budget 2024 included more funding for SR&ED and consultations on how to better utilize the program. This has reignited discussions on expanding the refundable portion to public companies, especially amid concerns about Canada’s productivity crisis and GDP shortfall.
- What are the potential concerns with expanding SR&ED? CCPCs may be concerned about sharing the valuable refundable portion with a broader pool of companies, potentially leading to less funding available. The government may also be more scrutinous with tax credit programs like SR&ED due to budget constraints.
- How can businesses ensure a successful SR&ED claim? With the government likely to be more vigilant in auditing tax credits, it’s crucial for businesses to compile a defensible, audit-proof SR&ED claim. Working with experienced providers like Boast can ensure comprehensive and accurate tech reports, maximize outcomes, and provide audit defense support.
