Getting Results: Cost-Neutral Steps Towards a 21st Century SR&ED Tax Credit

Canada’s Scientific Research and Experimental Development (SR&ED) tax credit is the single largest science and innovation policy lever in the federal government’s toolkit. With an expected annual outlay of nearly $4 billion in 2024, it is ten times larger than any other science and innovation policy tool. In a constrained fiscal environment, the Government of Canada should be seeking to maximize the long-term benefits of SR&ED for the national economy.

SR&ED’s refundable tax credit for Canadian-Controlled Private Corporations (CCPCs) is valuable to Canada. Providing a steady and predictable source of bankable capital for innovative businesses early in their life cycle allows them to take risks leading to technological breakthroughs and exportable innovations. At a time of higher interest rates and thus constrained access to investment capital, SR&ED’s predictable and nondilutive nature makes it even more valuable to innovators.

The economic impact of SRED’s non-refundable tax credit for all companies is more mixed. The dynamics of global innovation, and the importance of establishing freedom to operate via patenting and other intellectual property rights management strategies, mean that small open economies like Canada will see less net benefit from R&D subsidies than they would from incentives to commercialize and export their innovations globally.

In the case of Canadian subsidiaries of large foreign enterprises, SR&ED does not create net-new jobs for engineers and researchers, and for Canadian firms, this limits pathways to scale and growth, thus limiting the potential long-term contributions to Canada’s economy.

The incentive’s complexity – exemplified by high consultant fees – should also be reduced to ensure that more benefits make their way directly to innovators. A streamlined application process would ensure the SR&ED tax credit is more efficient and more effective for Canadian firms.

The Council of Canadian Innovators is recommending the following changes to SRED:

1. Rebalance innovation incentives for larger firms towards outcomes that matter.

2. Incentivize early investments into valuable intangible assets and allow for the inclusion of commercialization (i.e. patenting) and continuous improvement activities.

3. Modernize key program parameters such as expenditure and phase-out thresholds.

4. Ensure SR&ED supports long-term growth in Canada by implementing new transparency practices and evaluation metrics.

5. Make delivery more efficient through a mix of administrative streamlining and targeted training for personnel.

You can read our full policy brief here, which goes into much more detail about why the government should pursue each of these recommendations, and how they could be implemented.

‍About the Council of Canadian Innovators

Established in 2015, the Council of Canadian Innovators represents and works with over 150 of Canada’s fastest-growing technology companies. Our members are the CEOs, founders, and top senior executives behind some of Canada’s most successful ‘scale-up’ companies. All our members are job and wealth creators, investors, philanthropists, and experts in their fields of healthtech, cleantech, fintech, cybersecurity, AI and digital transformation. Our members are market leaders in their verticals, commercialize their technologies in over 190 countries, and generate between $10-$750 million in annual recurring revenue. We advocate on their behalf for government strategies that increase their access to skilled talent, strategic capital, and new customers, as well as expanded freedom to operate for their global pursuits of scale.