The terminology “scientific research and experimental development” (SR&ED) was introduced in 1986 as a new title in section 2900 of the Income Tax Regulations published by the federal government to clearly distinguish between qualifying development and simple current development and current development.
The beginnings of SR&ED can be traced back to 1944. The federal government uses the Income Tax Act to stimulate research and development activities. Companies could already immediately deduct from their taxable income an amount equivalent to 100% of the current expenses related to scientific research.
Today, SR&ED tax incentives are a proven cornerstone of Canada’s innovation strategy and in Quebec, which already supports more than 22,000 Canadian companies and 4,000 in Quebec.
At the federal level
The federal government has decided to increase support for SR&ED to help more Canadian small and medium-sized enterprises invest in research and development.
Until December 15, 2024, the federal component of the SR&ED tax incentive program was as follows:
Most corporations other than Canadian-controlled private corporations (CCPCs) receive a 15% non-refundable tax credit on qualified SR&ED expenditures;
CCPCs receive a fully refundable enhanced tax credit at a rate of 35% on up to $3 million of qualified SR&ED expenditures per year. The expenditure limit is gradually reduced when the taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million;
CCPCs receive a 15% tax credit for eligible expenditures that exceed the expenditure limit. Depending on whether or not a CCPC’s income in the preceding taxation year exceeds its qualifying income limit, these credits may be partially refundable;
Unincorporated businesses, individuals and certain trusts benefit from a partially refundable tax credit of 15% on qualified SR&ED expenditures;
To further encourage Canadian businesses to invest in innovation and drive economic growth, the federal government, in its 2024 Fall Economic Statement, 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. More specifically, what is changing:
The limit on expenditures on which the rate is increased to 35% is increased from $3 million to $4.5 million. As a result, eligible CCPCs would be able to claim up to $1.575 million per year under the enhanced and fully refundable tax credit:
The taxable capital phase-out thresholds Increase from $10 million and $50 million to $15 million and $75 million, respectively;
Eligible Canadian public corporations will be able to benefit from the enhanced 35% refundable tax credit on up to $4.5 million of qualified SR&ED expenditures per year;
Restoring the eligibility of capital expenditures for the income deduction and the SR&ED investment tax credit is perhaps the most notable measure. This aspect of the SR&ED tax credit, which allowed for the consideration of expenditures on equipment used for R&D, had disappeared in 2014. The rules should be the same as those that existed prior to 2014 and would apply to property acquired on or after the date of the 2024 Fall Economic Statement, in the case of rental costs, amounts that first become payable on or after the date of the 2024 Fall Economic Statement.
These reforms will come into force for taxation years beginning on or after December 16, 2024. This means that the first companies to benefit from it are companies whose fiscal year ends in December 2025.
These include biotechnology companies, innovative pharmaceutical companies, generic and contract manufacturing companies, companies that offer contract research services, medical device companies, and health information technology companies.
It is also more than 750 companies, which employ about 40,000 people (2022 data), which testifies to the vitality of the sector.
The new Budget Plan for Quebec, which was published by the Ministry of Finance on March 12, 2024, following the speech by the Minister of Finance, Éric Girard, did not result in any change in the method of allocating R&D tax credits. The previous year’s rules therefore remain in force with regard to obtaining and monitoring these tax credits.
The SR&ED tax credit therefore still represents 30% of eligible R&D expenses for SMEs and 14% for large companies, which are refundable. The R&D tax credits will support Québec companies to the tune of more than $2.7 billion over the 2022-2027 period, which will benefit approximately 4,000 companies annually, including approximately 20% in the life sciences sector.
It should be noted, and this is rather good news, that the provincial government seems to have made the decision not to drain the SR&ED program to meet its objective of making $2.9 billion in total savings over the next 5 years.
My « 2 cents »
The SR&ED tax credit program is extremely important, if not vital, for companies in the life sciences sectors. It allows companies to recover part of the R&D expenditure, which provides them with a source of financing that they reinvest the following year in their R&D activities
This program is de facto an entire part of a company’s financial strategy, without which maintaining competitive R&D operations would become very difficult, if not impossible, for some companies. This is all the more true in the current context where it is very difficult for a pharma/biotech company to obtain private Series A and other investments, the tendency being to decrease in the number of “tickets” in favor of the amount invested. The existence of the SR&ED program therefore allows a company to be able to extend the waiting period while maintaining its R&D operations.
The federal government’s initiative is therefore to be welcomed. The most important point for me is the fact that capital expenditures are once again eligible for the SR&ED tax credit. This measure will allow many SMEs to acquire expensive R&D equipment, such as sequencers, imagers, mass spectrometers or others, in which they would not have been able to invest, thus allowing these companies to maintain an extremely competitive level of R&D and innovation.
The fact that the Quebec government has decided to maintain the provincial SR&ED as it is, without weakening it, is a step in the right direction and seems to indicate that the province will follow in the footsteps of the federal government. It is worth remembering that Quebec’s SR&ED program is the most generous of all Canadian provinces, with 30% refundable for CCPC corporations, and 14% always refundable, for non-CCPC corporations, compared to 10% refundable/10% non-refundable in Ontario.
This 14% refundable aspect for non-CCPC companies has an unexpected and surprising collateral effect, to say the least, which is to be very attractive to American companies wishing to establish themselves in Canada. Indeed, with the U.S. H.R. 8333-Biosecure Act, whose adoption by the Senate leaves no doubt, many U.S. life sciences companies with R&D operations are looking for an alternative to replace their service providers based in China.
The high level of expertise available in Quebec, combined with the 14% always repayable for a U.S. company incorporating in the province, positions Quebec in a favorable way to welcome these companies. It is also common for me to be involved in such discussions with American companies, which also express their surprise and interest in the generosity of the provincial SR&ED component.
The SR&ED tax credit program is a pillar of Canada’s innovation and technological independence. As a result, it must not only be maintained, but also improved. Of course, we can always do better, such as making expenses related to filing patents eligible for SR&ED. But it must be recognized that the federal initiative is a step in the right direction, and it would be good, I believe, if it could find an echo at the provincial level. So, to answer the question asked in the title of this article, “Do we have reasons to be optimistic?”, my answer is straightforward, and it’s YES!
Contact us today to learn how you can leverage the updated SR&ED program to grow your business and stay ahead in an ever-evolving market.
