If your business benefits from scientific research and experimental development (SR&ED) tax credits, the upcoming federal budget will likely have an impact on your company.
After a series of government reviews recommending change, Stephen Harper�s Conservative government has stated that comprehensive reform is coming to innovation funding in Canada.
The problem, according to the prime minister, is that Canada gets too little bang for its innovation-funding buck. Canada currently ranks 18th out of 31 Organisation for Economic Co-operation and Development (OECD) countries in business enterprise expenditure on research and development (BERD). Canada�s BERD is 1% of GDP compared with the OECD average of 1.6%; B.C.�s BERD is 0.75%. Never mind that our BERD is growing or that we are a resource-intensive country that might not need as much R&D to sustain full employment – Alberta�s BERD is 0.5% – the political consensus is that more innovation is needed.
At the World Economic Forum in Davos, Switzerland, Harper said, �We believe that Canada�s less-than-optimal results for [its science and technology] investments is a significant problem for our country.�
The prime minister added that his government plans to act soon on problems identified in that area by the Jenkins Report.
Among the report�s recommendations:
�simplify the $3.5 billion annual SR&ED program to focus solely on labour costs, thereby narrowing the current practice of including non-labour overheads in the base; and
�instead of sending businesses cheques in the mail, issue them tax credits against taxable income.
For early stage companies not yet paying tax, funding would consequently dry up. But according to the report, the money saved should be redeployed to �direct support initiatives� to help SMEs grow into larger, globally competitive enterprises.
Moreover, the government is focusing on outcomes, particularly on reducing the deficit while increasing employment. Spending efficiency is therefore key. What better way to achieve these outcomes than by directly picking the businesses that receive money.
But that�s picking winners, you say. Don�t worry, says Jenkins, an independent innovation council can be set up to handle the job. But all governments like announcing a job-creation story. It�s hard to see how any program could protect itself from impinging political imperatives.
How might SR&ED change in the forthcoming budget? Its focus will be narrowed, but it�s harder to predict what will fill the gap. We�re likely to see government co-funding alongside venture capital to ensure private-sector validation of public spending. This favours companies that want outside money, but will be unpopular with business owners wanting to keep full ownership.
Additionally, some sectors or regions might be favoured over others and more funding will likely go to later stage companies with products closer to commercialization, instead of those conducting longer term research and development.
In B.C., where innovation occurs among large resource and infrastructure companies and myriad SMEs across diverse industries, the picture might be mixed.
For large businesses with greater capital intensity, narrowing the base could reduce SR&ED. For early stage businesses, losing the refundable credits could severely curtail receipts, while the compliance costs of applying for direct funding may outweigh current administrative costs of the SR&ED program. However, access to more risk capital would be welcomed given the shrinking number of venture capital funds in B.C.
Since first-year majority governments tend to enact significant reform, business owners should prepare for changes to public R&D incentive funding.��
