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The Canadian Government has supported private sector research and development since as far back as the 1940s when businesses could deduct an amount from their taxable income for conducting scientific research. Throughout the years, federal support for research and development took many different forms. In 1986 the term “Scientific Research and Experimental Development” appeared for the first time and was used to differentiate between eligible development projects and otherwise routine engineering work. Since then, the Scientific Research and Experimental Development (SR&ED) program has continued to evolve into the program we’re familiar with today — and this trend will continue into the coming years.
Since the SR&ED program is one of the largest sources of government-funded financial support, it serves as a foundation for driving Canadian innovation. As such, there have been calls to modernize the initiative, many found in Canada’s 2022 federal budget. Upon review of the budget, some groups of interest have also advocated for further updates to the SR&ED program. Learn more about the suggested adjustments to the program for 2023.
Federal Calls for Modernization of the SR&ED Program
The 2022 budget indicates continued support for businesses engaged in innovative research and development (R&D) activities through the SR&ED program. Referring to the initiative as the cornerstone of the nation’s innovation strategy, the budget details how the Government examined the program to verify its effectiveness and consider ways to streamline it.
The Government is particularly concerned with eligibility criteria. It ponders whether or not making changes to these requirements would enhance the program’s efficiency and confirm it delivers sufficient support to qualifying businesses.
Another idea the Government will consider to boost the growth and retention of intellectual property that results from R&D carried out in Canada is to implement a patent box tax regime. This would result in less taxation on revenues generated from patents and incentivize companies to develop patents domestically.
Other Calls to Modernize
The overall response to the Government’s review of the SR&ED program in the 2022 budget has been altogether welcome. Still, several organizations suggest the initiative requires a more thorough examination to ensure the most beneficial updates.
One such organization is the Council of Canadian Innovators (CCI). Many of CCI’s members receive SR&ED tax incentive refunds. CCI has urged the Government to modify the program to remove unnecessary complexity and make it easier to navigate. Excited about the formal review suggested in the budget, CCI consulted with its members to draft recommendations for modernizing the initiative. The following are the six aspects of SR&ED CCI suggests altering:
Intangible Assets
Intangible assets, like intellectual property (IP), are essential to R&D projects. Yet, Canada has historically underinvested in creating and acquiring IP for R&D initiatives. Updating the SR&ED program to include the preparation and examination of intangible asset protection as eligible expenditures and other types of IP development can rectify this issue.
Commercialization and Continuous Improvement
To reflect the true innovation process, SR&ED-eligible expenses should be expanded to incorporate the continuous improvement that goes into developing a funded product or process. Continuous improvement is vital for bringing solutions to the market. This provision would increase support for businesses that frequently modify technologies to seize market share.
Resources for Auditors
Providing educational resources to auditors who evaluate technology enterprises applying for SR&ED tax credits will increase their understanding of needs. It will promote more comprehensive investigations into the project’s goals and the R&D needed to help companies grow.
SR&ED Expenditure Thresholds
SR&ED needs to adapt expenditure thresholds to meet the current needs of R&D-intensive businesses. This change should account for inflation and be more inclusive of Canadian enterprises that are either currently scaling up or preparing for growth.
Evaluation Metrics
SR&ED still lacks an adequate means of tracking return on investment. More effective metrics are required to assess the impact SR&ED tax incentives have on Canadian companies and Canadian Innovation.
Application and Funding Disbursement
The current application and disbursement process for SR&ED tax credits does not mirror the speed companies need to move to develop products and remain competitive. Conversely, it is quite complicated, requiring a significant investment of time and resources to complete. Simplifying the application process will help companies, particularly start-ups, take full advantage of this valuable tax credit program.
Trust Easly for Non-Dilutive SR&ED Financing Today and After the Program Update
While the Government continues its review of the 2022 budget, more opinions on what should change with the SR&ED program may come through. Regardless of the outcome of SR&ED’s modernization, Easly will be available to support innovative Canadian businesses with accelerated cash flow. We offer SR&ED financing through Easly Advances, which enables businesses to attain their SR&ED refund sooner as easily accessible, on-demand, and non-dilutive funding.
Get started today to learn more about Easly Advances.
