Calgary Chamber submission to the Department of Finance on the Scientific Research and Experimental Development (SR&ED) tax incentives

April 12, 2024

RE: Consultation on Scientific Research and Experimental Development

The Scientific Research and Experimental Development (SR&ED) program has demonstrated a strong return on investment by fostering innovation in manufacturing, energy, technology, and software, however, we know there is room for improvement. The Calgary Chamber of Commerce is encouraged by the federal government’s commitment to modernizing and improving the SR&ED tax incentives and providing the opportunity for recommendations to refocus and improve the program.

Canada lags the United States, and much of the world in Gross Expenditure on Research and Development (GERD), and Business Enterprise Research and Development (BERD). Canada’s BERD expenditure was second lowest in the G7 after Italy in 2020, despite having more tax support available to business for R&D than all G7 countries – excluding the UK and France. Additionally, Canadian firms made less use of intangible assets, such as intellectual property and copyright protection, compared to global firms. This negatively impacts our economy and overall productivity, as intangible assets are a driving force in modern open economies, representing 70 per cent of the value of firms listed on the TSX and 90 per cent of those listed on the S&P 500.

In Canada’s relatively small and open economy, innovation and research policy should be designed to maximize economic benefit, promoting the growth of export-oriented firms and ensuring programs such as SR&ED contribute to long-term sustainable growth. After reviewing the consultation paper released by the Department of Finance, engaging with Chamber members, and holding roundtable discussions with diverse stakeholders, we are pleased to present the following recommendations.

We recommend the Government of Canada:

Expand the scope of SR&ED eligible activities to incentivize Intellectual Property (IP) protection, commercialization activities and continuous improvement activities to effectively support research and development for businesses. These inclusions will allow Canadian businesses to receive support for the full life cycle of innovation, from concept to market. To encourage investment in intangible assets such as IP, the Government of Canada should allow for SR&ED claims to include the examination and preparation of new patents. Supporting innovators to reach commercialization will allow Canadian businesses to retain investments locally, increasing contribution to the Canadian economy.

Streamline the SR&ED claim process. A significant barrier for SR&ED claimants is the write-up process. Many firms with eligible work are not claiming SR&ED due to the administrative burden of this process. We recommend the write-up and assessment process for SR&ED be streamlined and refocused. Allowing for a robust pre-approval process, where applicants who have previously received approval for similar activities can have greater assurance of credit or an accelerated approval timeline, would also improve certainty on the claimant side and reduce administrative burden for reviewers. Furthermore, a decentralized model wherein regional offices have authority for approvals and pre-approvals would streamline the process, as compared to the current system exclusively located in Ottawa.

Improve awareness of the program and the understanding of the nuances in successfully claiming SR&ED. Provide an equal weighting on outreach and education relative to the administration of the SR&ED program. All potential claimants should be aware of the SR&ED program and those who are aware must be educated on the nuances of making a successful SR&ED claim, including administration timelines and eligibility criteria. This would save time and money both for those preparing SR&ED claims, and for those reviewing them.

Provide sector specific training for Technical Reviewers, Research and Technical Advisors (RTAs) and Financial Reviewers. CRA staff who are responsible for assessment should receive specialized training and education on the high-tech sectors they will be assessing. Technological uncertainty is subjective and will originate from a claimant’s perspective. CRA reviewers should be required to review a claimant’s previous SR&ED claims to assist in developing context for a potential claim. CRA technical reviewers have a range of education, training, and industry experiences, creating potential biases on the cumulative knowledge applied to assess eligibility of a claim. Work should be undertaken to alleviate this issue and shift the disposition of the SR&ED program from looking for reasons to disallow claims to finding reasons to support claims.

Expand SR&ED eligible activities for non-Canadian contractors. Companies are often required to award contracts to non-Canadian contractors due to a lack of expertise within the country. Were a firm able to provide justification for sourcing outside the country, contracted work should remain eligible for SR&ED, given that the economic benefits are still accrued in Canada.

Provide an option for recourse or review. In the past, claimants had the option to challenge the conclusion drawn by a Research and Technical Advisor (RTA) if their claim was found to be ineligible by discussion with an independent sector specialist. This option was removed and communications between claimants and sector specialists are no longer allowed. We recommend a consultation process be expanded to include an independent review process for claims that are contested. This would allow greater collaboration and sectoral understanding between claimants and the CRA.

Expand SR&ED eligibility to include activities completed in a joint venture or limited partnership. Restrictions currently exist in the eligibility of investment tax credits (ITCs) being allocated to limited partnerships or joint ventures. This is a barrier for firms who are completing research and development work through these ventures and would otherwise be eligible for SR&ED and other ITCs. Consideration could be given to the membership of a joint venture in an eligibility assessment. For example, if all members were Canadian controlled private companies, economic benefits would accrue in Canada, making the case for SR&ED eligibility.

Foster collaboration between similar programs across the federal spectrum of support. The National Research Council of Canada’s Industrial Research Assistance Program (IRAP) has similar goals to the SR&ED tax incentive program. IRAP exists to provide direct funding to Canadian SMEs to increase their innovation capacity, and both programs are designed to financially support innovation in the Canadian economy and require firms to prove their activities are eligible prior to receiving support from the program. Consideration could be given to fast-tracking SR&ED applicants who have successfully received IRAP support, and vice versa, given the similarities across programs. Given the similar desired outcomes, and potential for shared claimants to the SR&ED and IRAP programs, perhaps a streamlined portal where applicants could submit applications for both programs simultaneously could be a longer-term goal.

Consider rebalancing the tax incentive rate for Canadian Controlled Private Companies vs. non-Canadian Controlled Private Companies. Canadian controlled private companies (CCPCs) receive a higher tax incentive rate than non-Canadian controlled private companies (non-CCPCs). However, some non-CCPCs have significant operations, workforce and accrue substantial economic benefits in Canada. Companies with operations that are accruing economic benefits in Canada, despite not being Canadian controlled, are disadvantaged by the lower incentive rate. This disadvantage will prompt non-CCPCs to favour investment in other jurisdictions, whereas a more equal incentive structure could promote greater investment in Canada. Other federal funding streams, such as those offered through Prairies Economic Development Canada, assess eligibility based on where economic benefits accrue, and where workforce is located, not where ownership is located.

Provide a more predictable qualification process. The CRA’s existing pre-approval service through the pre-claim consultation program should be restructured to improve the speed and predictability of the claims process. The lack of processing speed and predictability of claims have a disproportionate impact on smaller firms, who may not be able to wait for long approval timelines or may not be willing to make the significant time and human capital investment for a SR&ED claim with a lack of certainty that they will receive a credit. When the pre-approval process is undertaken, a claimant may not have access to supporting documentation, however, the RTA should make their assessment based on available facts and circumstances relating to the challenges and obstacles at that time.

We are encouraged by the Government of Canada’s commitment to engage on the SR&ED program and believe that this program could be refocused and revitalized to support Canada’s innovation ecosystem and realize strong economic returns for all Canadians. Innovation will drive Canada’s economy, increase per capita productivity, support our ambitious climate goals, and help to realize a diverse and inclusive workplace across the country, and we believe SR&ED will have an important role to play in encouraging businesses to succeed in Canada.

ABOUT THE CALGARY CHAMBER OF COMMERCE

The Calgary Chamber of Commerce exists to help businesses reach their potential. As the convenor and catalyst for a vibrant, inclusive and prosperous business community, the Chamber works to build strength and resilience among its members and position Calgary as a magnet for talent, diversification and opportunity. As an independent, non-profit, non-partisan organization founded in 1891, we build on our history to serve and advocate for businesses of all sizes, in all sectors across the city.

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