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Consultation Paper: Scientific Research and Experimental Development

Introduction

Businesses in Canada have access to various sources of federal assistance for research and development (R&D) activities. Historically, a cornerstone of this landscape have been the Scientific Research and Experimental Development (SR&ED) tax incentives, which deliver support through a deduction against income and an investment tax credit. In 2021, the tax credit provided approximately $3.9 billion to over 22,000 businesses in Canada.

Businesses also benefit from direct program assistance for R&D, with federal support for business innovation and growth provided largely through four key platforms:

In 2022-23, IRAP worked with over 9,000 small- and medium-sized enterprises (SMEs), providing $489.4 million in funding to more than 3,400 Canadian SMEs and advisory services to over 6,200 additional firms. Additionally, the Strategic Innovation Fund, which was created in 2017, has invested upwards of $8 billion in funding to more than 115 projects.

Recent investments underscore the government's enduring commitment to encouraging innovation. In Budget 2022, for example, the government provided $750 million over six years to support the further growth and development of Canada's Global Innovation Clusters (formerly called the Innovation Superclusters Initiative). As of December 2022, the clusters had supported more than 500 projects worth $2.37 billion, involving over 2,465 partners and generating more than 855 patent applications, copyrights, trademarks, or trade secrets. Moreover, in the 2022 Fall Economic Statement, the government provided $962.2 million over eight years, with $121.1 million per year ongoing, to modernize the National Research Council's (NRC) scientific infrastructure. The NRC serves as an indispensable partner to Canadian businesses and innovators.

Canada's renewed efforts to support business innovation take place in the context of declining SR&ED expenditures over the last decade (see the chart below). This has resulted in persistently weak business expenditure on R&D relative to international peers.

Real SR&ED Expenditures by Country of Control, 2011 to 2020
Real SR&ED Expenditures by Country of Control, 2011 to 2020

Note 1: *The Canadian-controlled line above includes listed Canadian corporations (other than those controlled by non-residents) and their Canadian subsidiaries and excludes small Canadian-controlled private corporations (CCPCs) (defined as those eligible for the enhanced SR&ED investment tax credit).

Note 2: The expenditures displayed above do not include eligible capital expenditures.

Note 3: Expenditures by firms with "unknown country of control" are excluded. They generally accounted for under 10% of total expenditures over the period presented above.

Note 4: Budget 2019's repeal of the use of taxable income as a factor in determining a CCPC's expenditure limit for the enhanced credit is omitted in this graph to facilitate comparison with previous years. That is, the "Canadian-controlled" amounts for 2019 and 2020 include expenditures by corporations that were designated as Small CCPCs due to the Budget 2019 change.

Text version
Year Small CCPCs Canadian-controlled* Control from other countries
2001 3,862 9,158 4,723
2002 4,066 9,168 5,268
2003 4,320 8,315 5,531
2004 4,868 8,481 6,195
2005 5,069 9,001 6,276
2006 5,300 7,873 6,658
2007 5,504 6,984 6,998
2008 5,954 6,464 6,633
2009 5,941 6,292 6,662
2010 5,646 6,050 7,661
2011 5,493 6,519 6,088
2012 5,306 6,477 6,426
2013 4,819 6,670 6,465
2014 4,523 6,079 6,036
2015 4,579 5,750 5,746
2016 4,587 5,163 5,924
2017 4,523 4,746 5,733
2018 4,849 4,955 5,964
2019 5,179 5,188 5,795
2020 5,232 4,547 5,590
2021 5,080 3,733 4,925

Review of the SR&ED Program

It is against this backdrop that the federal government announced its intention to review the SR&ED program, first to ensure that it is effective in encouraging R&D that benefits Canada, and second to explore opportunities to modernize and simplify it.

The Canada Revenue Agency (CRA) is working to improve the service experience it provides to businesses through the SR&ED program. As part of these efforts, the CRA has made it easier for businesses to find the information they need online, released simplified Eligibility of Work Guidelines, and launched an interactive SR&ED Self-Assessment and Learning Tool. Additionally, the CRA has transitioned the SR&ED program to a new national workload system to improve the consistency, efficiency, and quality of claim reviews. The CRA is also working to better target compliance efforts towards addressing high-risk activity and willful non-compliance to maintain the fairness and integrity of the SR&ED program.

As a next step in the review process, the Department of Finance is seeking input on a series of questions concerning the SR&ED program.

Cost-Neutral Improvements

This consultation is intended to focus on cost-neutral improvements to the SR&ED program that more effectively support innovative businesses and create economic opportunities for Canadians. Responses are expected to include proposals on how any costs stemming from an increase in the program's generosity should be financed or offset from within the SR&ED program. Cost savings could include, among other potential changes, introducing additional eligibility conditions, better targeting the scope of eligible expenditures or activities, or re‑examining the program's tax credit rate structure.

Key Questions for Consideration

The Department of Finance is seeking feedback from stakeholders on the following questions:

  1. How can the SR&ED program remain effective in supporting R&D investment by businesses of all types in Canada? How can the SR&ED program better support the growth and success of R&D-intensive Canadian businesses going forward?
  2. What improvements to the definition of SR&ED, the program's eligibility criteria, and/or the program's overall architecture should be considered?
  3. How does the SR&ED program complement the existing suite of support programs for R&D in Canada? How could this complementarity be improved?
  4. Are there more effective ways in which the overall level of assistance provided within the SR&ED program could be targeted? If so, what changes could be made to the SR&ED program to offset the costs of any proposed enhancements?
  5. How can the SR&ED program effectively ensure the retention of intellectual property (IP) within Canada, particularly to support innovative Canadian businesses to remain Canadian-owned and operated?
  6. How can the SR&ED program be improved and streamlined to make it easier for entrepreneurs to access support?
  7. How can your suggested enhancements be funded by existing support available through the SR&ED program? What potential changes could best focus support to benefit Canada, including by creating economic opportunities for Canadians?

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