Major SR&ED Tax Credit Program Changes Announced

On April 2, 2024 I had the pleasure of joining the TMX Group as they hosted their Innovation Investment Roundtable, focused the SR&ED program as part of the ongoing SRED Consultations.

The Roundtable explored the challenges some companies face with SR&ED, changes that CRA has made to address some of those challenges, and the idea that the source of a company's capital, as long as it was a Canadian company, should not dictate the refundability (or not) of its ITCs.

Today, the Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance announced the outcome of these consultations which seems to have integrated the recommendations of this Roundtable as well as feedback from many others across the industry into the impending 2024 Fall Economic Statement.

In the 2024 Fall Economic Statement, the government is going beyond its commitment in Budget 2024 to further capitalize the SR&ED program by proposing to invest $1.9 billion over the next six years and make significant reforms to the program. Specifically, the government is proposing to:

These changes could have significant material impact on companies, helping support their growth at a time when accessing capital is tougher than ever and answering the questions I have asked for well over a decade:

Why should the nature of a SME’s investment dictate the amount of support they get from the Federal government via the SR&ED program?

With extending the refundability of SR&ED to eligible Canadian public companies, this questions is answered: It should NOT!

The restoration of capital expenditures as part of the eligible expenses of SR&ED is also of great significance. Based on the comments made, this announcement would revive the definition of Capital Expenditures that was removed from the SRED program in 2014. At that time Capital Expenditures were defined as expenditures for machinery and equipment that was all or substantially all used or consumed in the performance of SR&ED in Canada.

Of course this is just an announcement and the devil is always in the details. Questions like “How do you define eligible Canadian public corporations?” must be addressed in the legislation. I am sure John Oakey, FCPA, FCA, TEP, CC , Ryan Minor and the wonderful folks at Chartered Professional Accountants of Canada (CPA Canada) will be keeping a close eye on any such legislation as was done with the Clean Economy Tax Credits. Also, as we know from those, it can be years between an announcement in an Economic Statement or Budget and having concrete legislation passed into law. The looming election adds to that uncertainty so there are certainly no guarantees these changes will come to pass.

There were also some issues the announcement failed to address. One such issue was well articulated by Council of Canadian Innovators | Conseil canadien des innovateurs (CCI) , when they stated that they “had hoped to see the federal government take meaningful steps to stop subsidizing the R&D of foreign multinationals that contribute much less to the Canadian economy than homegrown companies…“.

As highlighted in recent months, companies like Huawei have benefitted greatly from SR&ED which some in the House of Commons have highlighted. The Logic highlighted this in an article in February 2024, stating:

Huawei Canada, for instance—which spent about $320 million on R&D in 2020, the last year it logged such spending in the country—disclosed in a 2019 report that it had collected $103 million from the incentive program to that point.

All of that aside, if these announcements do pass into law, then any fiscal year ends on or after December 16, 2024 (the day of the 2024 Fall Economic Statement) would be subject to this new policy which could mean a lot more support for Canadian SMEs.

Stay tuned and watch for episodes of SRED From The Shed discussing this announcement and the impact that some of these changes could have!

For additional coverage and commentary, see:

• Feds announce VCCI renewal, SR&ED and pension fund changes ahead of Fall Economic Statement - BetaKit
• Ottawa revamps flagship R&D incentive program with bigger tax breaks and new rules for public companies - The Logic
• CCI Response to SR&ED Policy Changes - Council of Canadian Innovators | Conseil canadien des innovateurs (CCI)