G6 Consulting Inc Canada's R&D Tax Credit Experts
Federal Budget 2022 and SR&ED
On April 7th, the Canadian federal government has published its Budget 2022, which outlines commitments to Canada’s technology and innovation industries as well as the future of the SR&ED program.
The only reference to SR&ED in the Federal Budget 2022 is the following:
“The Scientific Research and Experimental Development (SR&ED) program provides tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct R&D. The SR&ED program has been a cornerstone of Canada’s innovation strategy. The government intends to undertake a review of the 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. Specifically, the review will examine whether changes to eligibility criteria would be warranted to ensure adequacy of support and improve overall program efficiency.
As part of this review, the government will also consider whether the tax system can play a role in encouraging the development and retention of intellectual property stemming from R&D conducted in Canada. In particular, the government will consider, and seek views on, the suitability of adopting a patent box regime in order to meet these objectives.”
What is a "patent box"
A patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns.
R&D tax credits are another form of tax break to incentivize R&D. The main difference is that R&D credits effectively reduce the cost of R&D, while patent boxes reduce the taxes on profits resulting from R&D.
Another development in the 2022 Federal Budget in regard to research and development in Canada is the announced creation of a Canadian Innovation and Investment Agency.
Here is the excerpt from the Budget 2022:
“In Canada, a new innovation and investment agency will proactively work with new and established Canadian industries and businesses to help them make the investments they need to innovate, grow, create jobs, and be competitive in the changing global economy.
Budget 2022 announces the government’s intention to create an operationally independent federal innovation and investment agency, and proposes $1 billion over five years, starting in 2022-23, to support its initial operations. Final details on the agency’s operating budget are to be determined following further consultation later this year.
At a time when other countries are making significant investments in this area, the government intends to invest in innovation, research, and development at the scale required to make Canada a global leader. Support delivered through the innovation and investment agency will also enable innovation and growth within the Canadian defence sector and boost investments in Canadian defence manufacturing.
The government will consult further with both Canadian and global experts in finalizing the design and mandate of the new agency, with details to be announced in the 2022 fall economic and fiscal update.”
The following example of how this agency will function is also provided:
“Shannon runs a small life science firm in London, Ontario, and has learned that a Canadian university researcher has discovered—through preliminary experiments—a new class of potentially life-saving cancer therapeutics. Shannon’s firm specializes in methods for quickly turning potential therapeutics into safe, market-ready pharmaceuticals through advanced drug development methods.
Her firm wants to partner with the researcher to initiate a new R&D program to develop these drugs, but does not have the capital it needs. Shannon sees a large global opportunity, but financial support is needed up front to help her company seize the opportunity.
Shannon’s firm could approach the Agency to seek guidance and support, and the Agency would quickly determine the feasibility of the project, the market potential of the technology, and could provide the firm with needed funding to capitalize on an exciting opportunity. If project milestones are achieved, Shannon’s firm could apply for additional funding as it works to sell its new product around the world and create jobs here in Canada.”