Draft revisions to a significant research and development (R&D) tax credit program are receiving praise from the Canadian tech ecosystem. These changes could help address Canada’s productivity issues by reducing the risk associated with research spending.
The Department of Finance announced proposed reforms to the Scientific Research and Experimental Development (SR&ED), Canada’s largest federal program for business R&D, last Friday.
Experts told BetaKit that the proposed SR&ED reforms tackle longstanding issues by making capital expenditures claimable under SR&ED and allowing public companies access to the preferred tax credit rate. The changes also propose increasing the claimable amounts for companies and extending their eligibility threshold.
“Growth-stage companies will be able to invest more and scale faster,” said Dani Lipkin of TMX Group.
Originally introduced in the federal government’s Fall Economic Statement last December, the updates were delayed after Finance Minister Chrystia Freeland’s resignation and the proroguing of Parliament in January.
Managed by the Canada Revenue Agency, SR&ED began in 1948 and provides billions in tax incentives annually to encourage Canadian businesses, including tech companies, to pursue research activities.
Canadian tech and business interest groups have debated an SR&ED overhaul since its review was pledged by the Trudeau government in 2022. In early 2024, consultations were launched to focus on improving intellectual property (IP) creation and retention.
Benjamin Bergen, president of the Council of Canadian Innovators (CCI), welcomed the reforms but noted a different “economic and geopolitical environment” since their proposal.
“We need policies that protect and commercialize key IP and ensure Canadians benefit from local innovation,” said Bergen in a statement.
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The organization has advocated for incentivizing domestic IP creation through a patent-box regime, which would offer tax breaks for profits from domestic IP.
Although the new draft legislation does not mention IP, the government pledged to explore a patent-box regime in last year’s Fall Economic Statement, with details expected in Budget 2025.
The draft legislation is open for public feedback until Sept. 12. The House of Commons will resume on Sept. 15, the earliest this legislation could be tabled. If passed, the changes could apply retroactively to companies with fiscal years ending in 2025.
The return of capital expenditures
The draft legislation proposes reintroducing capital expenditures, covering equipment for research and testing, not production. Companies would be able to claim up to 40 percent of machinery spending, such as on microscopes.
Experts told BetaKit this change could positively impact Canadian tech companies’ research efforts and improve productivity, typically measured as GDP output per hour worked. Canada’s labor productivity growth has declined over 30 years, according to the Bank of Canada, accelerating after 2014.
Martha Breithaupt of BDO Canada sees a connection between the removal of this provision in 2013 and Canada’s current productivity issues, which are among the lowest in the G7.
“It coincided with a significant innovation and productivity downturn,” said Breithaupt.
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Incentivizing capital investment could create jobs through new research pursuits and boost investments, with experts highlighting IP protections, AI investment, and competition increases as other productivity enhancers.
Bryan Watson of CleanTech North and SR&ED expert, said the reforms are a positive step for hardtech, medtech, and engineering companies. “Anything not just coding” benefits from capital expenditure claims, he noted.
This potential legislation emerges as Canadian hardware companies face trade war uncertainties and a challenging early-stage venture capital funding landscape.
For the year ending March 2025, approximately 40 percent of SR&ED tax credits were for software development, with around another 40 percent directed to electrical, mechanical, and medical engineering, as per official statistics.
Public companies could reap benefits
Draft changes would allow public Canadian companies to access the enhanced SR&ED tax credit rate of 35 percent, previously only available to private firms.
This restriction had challenged companies raising capital from public markets, causing them to lose SR&ED benefits, critical for life sciences firms with long research timelines. Anne Stevens of AbCellera noted at the BetaKit Town Hall: Vancouver that early public companies lose tax credits under the current system.
Andrew White, CEO of CHAR Technologies, said losing SR&ED eligibility was a downside when going public in 2016. His company, converting wood waste to biocarbon, plans to reinvest in R&D and pursue new research paths if changes occur.
Dani Lipkin of TMX Group stated that “currently it’s harmful” for private companies reliant on SR&ED to go public. These changes could potentially level the field for public companies.
“This will enable growth-stage companies to invest more and scale faster,” Lipkin added.
Feature image courtesy of François-Philippe Champagne via LinkedIn.