Empowering Innovators: The Path to a World-Class SR&ED Program in Canada

By Nick Schiavo

CCI's Director of Federal Affairs

Canada’s innovation economy is brimming with potential, but too often, outdated policy frameworks are holding innovators back. By far the biggest innovation incentive in Canada is the Scientific Research and Experimental Development (SR&ED) tax credit, and for years, CCI has been advocating for strategies to fix shortcomings in how it’s administered.

SR&ED should be the crown jewel of our innovation ecosystem, driving greater productivity and economic growth. Instead, it’s a constant source of frustration for founders and innovators.

The good news is that the federal government has been consulting on ways to improve SR&ED since January, and a second consultation was launched in April following the 2024 federal budget. We’ve developed an updated policy brief with concrete recommendations to help Canadian firms grow.

This week, CCI submitted our brief for the federal government to consider. Here’s some of what we talked about:

Leveling the Playing Field for Public Companies

Canadian innovators often rely on public markets to secure early funding, especially compared to their American counterparts. Today, SR&ED creates an uneven playing field, with private companies enjoying greater access to enhanced tax credits, even though public companies often undertake similar research and development (R&D) activities while facing additional compliance burdens.

Allowing small, publicly traded Canadian firms to access the enhanced SR&ED credit would rectify an unfair situation and encourage more companies to go public while staying rooted in Canada. Defining a company's "Canadianness" while establishing an appropriate size threshold is crucial, and the government should consider factors like incorporation, location, and revenue to achieve this.

Supporting Companies at Every Stage

The SR&ED program doesn't always cater to the specific needs of scale-up companies. Scale-ups are crucial drivers of job creation and export growth, but they often find themselves in a growth phase and haven’t yet achieved profitability. The current system offers them limited benefits from the basic SR&ED credit.

We need a more nuanced approach. Specifically, we need a refundable version of SR&ED for scaling companies. This would provide much-needed cash flow during critical growth periods.

Embracing Change and Recognizing New Realities

The innovation landscape is constantly evolving. Traditional definitions of R&D activities may not always encompass the realities faced by modern innovators. Activities like iterative development and generating valuable intellectual property are fundamental for success, and the SR&ED program should acknowledge their importance.

SR&ED may not be the right vehicle for incentivizing IP creation, though, so the government should explore alternative support mechanisms. Expanding programs like the National Research Council's Industrial Research Assistance Program or introducing measures like accelerated capital cost allowances could be effective solutions.

Like wise, a shift towards a simpler, more streamlined approach to filing paperwork associated with SR&ED would help alleviate the cumbersome application process and administrative overhead required to complete it. A "file-and-audit" approach, with real-time disbursements, would significantly reduce the administrative burden for businesses. This would allow firms to focus on what they do best — innovation.

The Way Forward: Concrete Action for Real Results

These industry-informed recommendations are not merely suggestions but a call to action. By implementing these changes, the government can create a more supportive environment for innovators, foster a thriving innovation ecosystem, propel Canada's economy forward, and address our ongoing productivity emergency.

These changes to SR&ED have been a long time coming. The government first announced its intention to review SR&ED more than two years ago, and consultation has been underway since the beginning of this year.

The most recent round of consultations focused on several specific concrete questions, and we fully support the government digging in and getting the details right on SR&ED. But now is the time for action. Canada’s economy can’t wait. We need to see the government implement substantive reforms in 2024, and we will be watching the Fall Economic Statement closely for that implementation plan.

CCI's committed to working collaboratively with the government to ensure the SR&ED program effectively serves Canadian firms and the economic growth they generate. By embracing these recommendations and fostering a culture of continuous improvement, Canada can position itself as a global leader in innovation.

We look forward to the government's response and concrete actions to create a world-class SR&ED program that propels Canadian innovation to new heights.

‍

CCI’s updated policy brief can be viewed here. To learn more about CCI’s work on SR&ED, an innovation box policy, or with the federal government at large, contact Nick Schiavo at: nschiavo@canadianinnovators.org.

‍