Draft changes to a key research and development (R&D) tax credit program are being lauded by players in the Canadian tech ecosystem, as some argue they could address Canada’s productivity woes by further de-risking research spending.
The Department of Finance introduced draft reforms for the Scientific Research and Experimental Development (SR&ED), Canada’s largest federal program for business R&D, last Friday.
The proposed SR&ED reforms address longstanding pain points, experts told BetaKit, by reintroducing capital expenditures as claimable under SR&ED and making public companies eligible for the preferred tax credit rate. The changes would also increase the total amounts companies can claim, and allow them to stay within the eligibility threshold for longer.
Dani Lipkin
“This will enable growth-stage companies to invest more and scale faster.”
TMX Group
First introduced in the feds’ Fall Economic Statement last December, the updates were put into legislative limbo after Finance Minister Chrystia Freeland resigned and Parliament was prorogued in January.
Administered by the Canada Revenue Agency, SR&ED was first created in 1948 and provides billions in tax incentives annually to encourage Canadian businesses, including tech companies, to engage in research activities.
Canadian tech and business interest groups have been debating the merits of a SR&ED overhaul since the Trudeau government pledged to review the program in 2022. In early 2024, the government launched consultations on how to improve its approach, with a focus on improving the creation and retention of intellectual property (IP).
Benjamin Bergen, president of tech scaleup lobby group the Council of Canadian Innovators (CCI), welcomed the drafted reforms but acknowledged that the “economic and geopolitical environment” is different than when they were introduced.
“What we need is policies that help to protect and commercialize key intellectual property and ensure that Canadians benefit from homegrown innovation,” Bergen said in a statement.
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The organization has advocated for the program to incentivize domestic IP creation through a patent-box regime. Such a system would give tax breaks to profits generated from domestic IP.
Though the new draft legislation does not mention IP, the government said it would explore a patent-box regime in last year’s Fall Economic Statement, the details of which would be revealed in Budget 2025.
The draft legislation is open for public feedback until Sept. 12, according to the finance department. The House of Commons is set to resume sessions on Sept. 15, which is the earliest point at which this legislation could be tabled. If set into motion, the changes could apply retroactively to companies with fiscal years ending in 2025.
The return of capital expenditures
The draft legislation seeks to reintroduce capital expenditures, which include spending on equipment used for research and testing, not production. For example, companies would be allowed to claim up to 40 percent of their spending on machinery such as microscopes.
Business and tax experts told BetaKit that this change, if implemented, would positively impact Canadian tech companies’ research efforts and could make a dent in national productivity rates, which is typically measured as the gross domestic product output per hour worked. Canada’s labour productivity growth has declined over the past 30 years, according to the Bank of Canada, with the decrease accelerating after 2014.
Martha Breithaupt, a tax partner for credits and incentives at accounting firm BDO Canada, told BetaKit she sees a relationship between the removal of this provision in 2013 to Canada’s flagging productivity today, which is among the lowest of G7 countries.
“That coincided with a massive innovation and productivity downturn when it was taken out,” Breithaupt said.
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Incentivizing companies to invest in hard assets could create more jobs through new research pursuits and bolster investment opportunities, she said. Experts have argued that boosting IP protections, investing in artificial intelligence (AI), and increasing competition could also increase productivity.
Bryan Watson, managing partner of CleanTech North and longtime SR&ED expert and commentator, argued to BetaKit that the reforms are “absolutely a step in the right direction” for hardtech, medtech, and engineering companies. “Anything that’s not just coding only” could benefit from the capital expenditure claims, he said.
The potential legislation comes as Canadian hardware companies deal with the uncertainty of an ongoing trade war as well as a gloomy early-stage venture capital (VC) funding landscape.
For the year ending in March 2025, 40 percent of SR&ED tax credits were issued for software development while roughly 40 percent more went towards electrical, mechanical, and medical engineering, according to official program statistics.
Public companies could reap benefits
The drafted changes would allow publicly listed Canadian companies to also benefit from the enhanced SR&ED tax credit rate of 35 percent, which was previously only accessible to private Canadian companies.
That barrier had contributed to challenges for companies that sought to raise capital from the public markets but stood to lose SR&ED benefits to fund R&D efforts, such as life sciences companies with long-term research needs. At the BetaKit Town Hall: Vancouver last year, AbCellera vice-president of business development Anne Stevens said that companies who need to go public earlier lose out on tax credits under the current system.
Andrew White, CEO of TSX Venture-listed cleantech company CHAR Technologies, said that losing SR&ED eligibility was a downside to going public in 2016. CHAR converts wood waste into biocarbon to replace metallurgical coal, among other renewables.
White told BetaKit his company plans to reinvest in R&D for more intellectual property and chase new research avenues if the changes take effect.
Dani Lipkin, managing director of the global innovation sector at TMX Group, told BetaKit that it’s currently “harmful” for private companies to go public if they are reliant on SR&ED. The new changes could potentially level the playing field for publicly listed companies, he said.
“This will enable growth-stage companies to invest more and scale faster,” Lipkin added.
Feature image courtesy François-Philippe Champagne via LinkedIn.