Canada’s Scientific Research and Experimental Development tax credit program is undoubtedly one of the most popular industrial incentive schemes around. Shortened to SR&ED and usually referred to as “Shred,” the program provides a 35 percent investment tax credit, topping out at just over $1-million a year, to private Canadian companies that carry out eligible R&D activities in Canada. Many other Canadian entities, including public corporations, can tap SR&ED for a 20 percent tax credit, soon to be reduced to 15 percent, and several provinces add even more with their own programs.
By Terry Lavineway
While last week’s federal budget contained widely anticipated changes to the Scientific Research and Experimental Development (SR&ED) tax credit, it also contained many other aspects of funding and incentives to encourage innovation and commercialization.
$400 million to help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector.
The government recognizes that access to capital for small and medium-sized businesses in Canada is both critical for growth and difficult to find. The venture capital and angel investor industries in Canada have been inconsistent for many years for many valid reasons. This budget commits $400 million to help address this problem. At the time of the budget, the government was not clear how, where or when to deploy this capital to incentivize private sector investments, other than to allocate $100 million for Business Development Bank of Canada venture capital activities. Certainly this amount of money is worth tracking to see how it will be deployed to help companies in need achieve their growth objectives.
The Scientific Research and Experimental Development (SR&ED) program was one of the long-anticipated and highly debated areas expected to be addressed in the 2012 Federal budget. Politically, the government needed to show they were listening to their taxpayers over the last number of years given the amount of consultations, the amount of press and discussion about the SR&ED program and certainly “Innovation Canada: A Call to Action,” also known as the Jenkins Report.
The biggest change introduced relates to the tax credit rate available to SR&ED claimants that are not Canadian Controlled Private Corporations (CCPCs). The tax credit rate for non-CCPCs will decrease from 20 percent to 15 percent. This is a significant reduction. The government’s view is that the reduction of the corporate income tax rate since 2007 along with the corporate tax restructuring of non-CCPCs has resulted in growing pools of unused tax credits; these corporations are not generating enough taxable income in Canada to make use of all the SR&ED investment tax credits that they are generating. Therefore, the government reasons that they can reduce the rate from 20 percent to 15 percent without much impact. While this may be true in many cases, there are definitely large taxpayers in Canada that will be significantly impacted by this reduction. Only time will tell how this change will impact the amount of R&D performed in Canada by multinational corporations or even medium-sized corporations that do not qualify for the CCPC enhanced rate.
The other changes proposed are categorized as:
The eyes of the Canadian commercialization ecosystem will be focused sharply on Toronto and Ottawa this week as the Ontario and federal governments bring down new budgets that are expected to considerably reshape broad programs of industrial, research and business incentives in each jurisdiction.
At the federal level, where the budget arrives Thursday, the main concern will be around the future of the Scientific Research and Experimental Development tax credit, a widely used program that accounts for well more than half of Ottawa’s annual $7-billion support for research and development. More than 24,000 companies every year underwrite at least part of their operations through this refundable tax credit that gets paid out whether the company is profitable or not. The fear is that the federal government will follow the advice of the Expert Panel Review of the Federal Support to Research and Development, a task force that suggested SR&ED be scaled back and the savings redirected into more direct funding of research.
As part of our ongoing series examining the ecosystem necessary to bring technology to market, we asked serial entrepreneur Jason Flick to share some of his insights. This is his next commentary and we welcome your feedback
According to Statistics Canada, expenditures by Canadian universities on research and development totaled $11 billion in 2009-2010, up about 0.8 percent from the year before. Spending by Canada’s top 100 R&D companies, meanwhile, fell 9.4 percent in 2010 to $9.4 billion. Compare that university R&D figure to total VC funding for Canadian companies in 2010, which was less than $1 billion.
If these numbers are a surprise to you then I hope I have your interest. What I will talk about here are the successful adventures I have had with my companies levering this vast pool of IP and perhaps suggest a way for you to see some alternate funding options for your venture.
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