Impact of the 2012 Canadian Federal Budget on SR&ED, Innovation Funding and Entrepreneurs


The Federal government has introduced their first budget, as a majority government, keeping innovation at the forefront. In fact a whole chapter of the Federal Budget released yesterday discussed increasing provisions for innovative startups, small businesses and entrepreneurs.

One area, which was highly anticipated, was the $7 billion annual innovation funding pool, over $3.6 billion of which is provided under the Scientific Research & Experimental Development (SR&ED) program.  Prior to introducing the 2012 budget, the federal government hinted that they would make major changes to the SR&ED program per the recommendations of the Jenkins Panel to support a more direct funding model from the savings created.

Impact on SR&ED:

Eliminate tax credits on eligible capital expenditures (such as machinery, computer equipment, etc.) incurred after January 1, 2014.  The impact to most small-medium enterprises (SME’s) is minimal as they typically do not have large capital expenditures dedicated to R&D activities.  However, this move might impact certain industries such as pharmaceuticals or manufacturing.

  • Decrease the proxy amount applied to labour expenditures for R&D from 65% to 55% to be phased in by January 1, 2014
  • Lower the arm’s length (non-related 3rd party) subcontractor expenditures allowed under the SR&ED program to 80% of the expenditures incurred.
  • Lower the federal rate from 20% to 15% for large corporations.  This doesn’t affect organizations that qualify for the 35% credit.

More direct funding  to support innovation:

  • Announcement of a Western Innovation Program which will provide financial support to innovative small and medium-sized enterprises in Western Canada
  • $400 million for venture capital activities for private sector investments through a structure yet to be determined
  • $100 million to the Business Development Bank of Canada to further support venture capital activities
  • $110 million per year in additional funding to the NRC-IRAP program which supports research and development projects carried out by small and medium sized businesses
  • $205 million to extend the temporary hiring credit for Small Business
  • $95 million over 3 years, starting in 2013-14, and $40 million per year thereafter for the Canadian Innovation Commercialization Program to connect innovative SMEs to federal departments through procurement
  • $50 million over 2 years to the Youth Employment Strategy to assist more young people to get skills and experience
  • $14 million over 2 years to double the Industrial Research Development Internship Program delivered through Mitacs
  • Announcement of a new Business Immigration Vision to attract innovative entrepreneurs to grow their businesses in Canada

Overall, the Budget commits to driving innovation and entrepreneurship, by streamlining the SR&ED program and introducing new funds to support R&D and commercialization, which is great news for Canadians.

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