The program is under review but don’t be surprised when changes come
Are you planning on beginning a new innovation project in order to attempt to develop a new product, enhance an existing product, or improve your production processes in a way which would make them better, faster, or cheaper? If so, you need to know that the funding that you would normally anticipate from the Scientific Research and Experimental Development (SR&ED) innovation tax incentive program to help fund your project(s) is under review and could very likely change.
The SR&ED program is a federally sponsored program that encourages domestic manufacturing innovations with refundable tax incentives for small to medium sized companies and tax credits for larger or foreign owned companies. To learn more about the SR&ED program, see the digital version of the July 2015 issue: graphicartsmag.com/issues/july-2015/ .
Since the publication of the federally sponsored Review of Federal Support to R&D in 2011, which had some significant criticisms of the program, we’ve continued to experience reductions in the monetary value of the SR&ED program. At its peak, the program was providing Canadian manufacturers with over $6 billion annually to support their innovation projects. Today the program has been cut to half that amount and provincially both Quebec and Ontario have reduced their SR&ED financial incentives.
Budget 2017 promised to begin comprehensive reviews of various federal departments in order to “eliminate poorly targeted and inefficient programs, wasteful spending, and ineffective and obsolete government initiatives.” The reviews are being led by Finance Minister Bill Morneau and Treasury Board President Scott Brison.
While we haven’t heard the results of these reviews yet, considering the changes to the tax act that the Liberals have recently announced, it would come as no surprise if the SR&ED tax incentives which benefits upwards of 20,000 companies in Canada also experiences changes. Let’s look at the recent history of the program.
The modern version of R&D tax credits began in 1986. At that time, qualifying companies were able to obtain refundable tax credits for the cost of labour, including overhead (or “proxy” in lieu of overhead), materials and capital used in the innovation process. In 2012, the base of eligible expenditures was narrowed as capital expenditures were eliminated from the program, contractor costs were reduced by 20% and the “proxy” allowable was reduced by 10% (spread over 3 years). Further, the general SR&ED investment tax credit was reduced by 5%. In Ontario, effective for tax years straddling June 1, 2016, the Ontario R&D tax credit rate was reduced 1% and the Ontario Innovation tax credit rate was reduced 2%. In Quebec, on December 2, 2014 the government introduced a minimum eligibility threshold in order to receive any R&D tax credits. That threshold, $50,000 was estimated to represent eliminating almost 40% of all claimants.
There are also the ongoing discussions about NAFTA, which currently allows U.S. and Canada SR&ED incentives, primarily because when the original agreement was negotiated, the U.S. had a similar type incentive program. But of course, this may not be the case going forward after the renegotiation of NAFTA. Based on all of the above, it would not be unreasonable to anticipate that if the trend continues, government participation in Canadian industry innovation via SR&ED is going to decrease.
When Canada was in the process of finalizing the original Canada-United States Free Trade Agreement in 1987, Simon Reisman, Canada’s chief negotiator, along with various Canadian CEOs led a cross-Canada seminar series on the contents and tax benefits included within the agreement. At that time, numerous panelists repeated the well-known business maxim “business decisions should be based on what’s best for the business, not necessarily what’s best for tax purposes.” You know what’s best for your business, and in order to make the most effective business decisions, it’s best if you know as many of the facts as possible in order to make those decisions.
Therefore, as part of your business planning strategy, if you are thinking of developing new products, improving existing products or revamping your production processes, it just might be prudent to move those plans forward, to take advantage of the existing generous tax incentives.