Canadian Parliament by Saffron Blaze

The Canadian Parliament in Ottawa. Photo by Saffron Blaze, via http://www.mackenzie.co licensed under CC BY-SA 3.0.

The Department of Finance Canada recently released its Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018, which shows increased spending on the SR&ED tax incentive program. In a reversal from last year’s projected downward trend, this year’s report forecasts upward growth.

A comparison between the 2017 version of the report and this year’s shows a slight increase in the amount of funding the Liberal federal government plans to allocate to the SR&ED program. In comparing the projected figures for the year 2017 between both reports, there is an almost one percent increase in projected spending – from $2.8 billion to $2.83 billion. However looking at the year 2018 between both reports, the projected spending has gone up two percent – from $2.905 billion to $2.925 billion.1

The purpose of this article is to examine the trends for the SR&ED program based on a comparison of the two reports.

What is an FTE?

A Federal Tax Expenditure (FTE) is something that reduces the amount of federal tax that can be collected. The primary purpose of the Report on Federal Tax Expenditures is to estimate the costs of these FTEs. Not only is the SR&ED program one of these FTEs, it has been previously reported that SR&ED is the 12th largest FTE in Canada.2

The Department of Finance Canada has been publishing these reports since 1994, but they have announced estimates going back as far as 1979.3 Usually, these reports are released in advance of the Federal Budget, but this year’s report was released on March 7, 2018 (according to the update notice on the report’s download page on the Department of Finance Canada’s website), about a week after the Federal Budget 2018 was presented to Parliament on February 27, 2018. What caused the delay in the release? According to a media spokesperson for the Department of Finance Canada, “The target date for tabling the main estimates for 2018-19 and 2019-20 was set to April 1 rather than March 1, following changes made last year to the Standing Orders of the House of Commons. This change allows the Government to better align the Main Estimates with the spending described in the Budget.”4

Effects of the Previous Government Still Linger in the Report

Since companies and individuals have two years to carry back SR&ED expenditures to previous tax years, complete figures are only available up to the year 2015, any amounts after that are still “projected”. If one examines the most up-to-date, non-projected figures up to 2015 in the 2018 report, the lingering effects of Stephen Harper’s Conservative government are still visible. For instance, the 2017 report noted that “about 3,800 individuals and 21,900 companies claimed [the SR&ED] credit in 2014.”5 The 2018 report notes that those numbers decreased slightly in 2015, the final year of the Harper Conservative government: “about 3,700 individuals and 21,200 corporations claimed this credit in 2015.”6

Recall that there was fallout from Federal Budget 2012, which introduced changes to the SR&ED program, such as reducing the refundable tax credit from 20 to 15 percent, which led to increased scrutiny from the Canada Revenue Agency (CRA) in the wake of these changes. However, the remainder of the report remains positive, because the projected figures in the years following 2015 are now generally growing in total, rather than declining.

Huge Increase in Expenditures “Carried Back to Previous Year” Between 2015 and 2016

When the Liberal federal government took power in late 2015, they announced an innovation agenda. That level of forward-thinking has boded well for the projected figures for the year 2016. Again, these are only projections, but the federal government is estimating that the amount of SR&ED “earned in the current year but carried back to previous years” in 2016 will almost triple the amount spent in this category in 2015. The 2018 report says that in 2015 this amount accounted for $35 million in FTEs. However, the federal government estimates that in 2016 the amount will account for $90 million! 7

The following table illustrates a comparison of the 2015 and 2016 figures in the 2018 report :8

Millions of Dollars20152016
(Projected)
Personal Income Tax44
Corporate Income Tax
Non-refundable portion
Earned & claimed in current year410450
Claimed in current year but earned in prior years905875
Earned in current year but carried back to prior years3590
Total - Non refundable portion1,3501,415
Refundable Portion1,2901,260
Total - Corporate Income Tax2,6402,675
Total2,6402,680
Source: Government of Canada. Department of Finance Canada. (2018, March 7.) 2018 Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations. Pg. 249.

Note that the amount “claimed in current year but earned in prior years” went down between the two years, but that might be a sign that individuals and companies were more concerned about claiming tax advantages for the years that the Conservatives were in power.

Things seemed to settle in 2017, with the “earned in the current year but carried back to previous years” amount retreating back to $65 million, then growing to $70 million a year for the years 2018 and 2019.9 Still, that is more than double the amount the federal government spent in 2015, the final year of Stephen Harper’s mandate. The CRA deferred all questions to the Department of Finance Canada, since they were the authors of the report, and a media spokesperson in that department noted that “with regard to amounts of SR&ED credits ‘earned in the current year but carried back to previous years,’ variations year-over-year can often be driven by whether there are large firms making use of the carry-back provisions.”10 Reading between the lines, it seems as though these large firms might have been more optimistic about carrying back amounts to previous years with a new government in power.

Projected Spending on SR&ED to Eclipse $3 Billion in 2019

The other major noteworthy trend is that the Liberal government is projecting to spend more than $3 billion on the SR&ED program in 2019. If those projected numbers hold true – something that probably will not be fully known until the 2021 report is released– that means that it will be the first time that spending on SR&ED will be more than $3 billion since the year 2013.11 (Again, remember that the previous Conservative government introduced measures in the 2012 Federal Budget to curtail the SR&ED program in the wake of media reports that companies were abusing the SR&ED incentives.)

The figures from the most recent years notated in the 2018 report are below 12:

Millions of Dollars2016
(Projected)
2017
(Projected)
2018
(Projected)
2019
(Projected)
Personal Income Tax4444
Corporate Income Tax
Non-refundable portion
Earned & claimed in current year450475495515
Claimed in current year but earned in prior years875925960995
Earned in current year but carried back to prior years90657070
Total - non-refundable portion1,4151,4651,5251,580
Refundable portion1,2601,3601,3951,455
Total - Corporate Income Tax2,6752,8252,9253,030
Total2,6802,8302,9253,035
Source: Government of Canada. Department of Finance Canada. (2018, March 7.) 2018 Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations. Pg. 249.

Compare the growth of those numbers to what was reported last year:

Millions of Dollars2016
(projected)
2017
(projected)
2018
(projected)
Personal Income Tax111
Corporate Income Tax (Non-Refundable portion)
Earned and claimed in current year420440445
Claimed in current year but earned in prior years9309701005
Earned in current year but carried back to prior years404040
Total Corporate Income Tax (Non-Refundable Portion)138514451500
Total Corporate Income Tax (Refundable Portion)130513501405
Total Corporate Income Tax269028002905
Total269028002905
Source: Government of Canada. Department of Finance Canada. (2017, February 23.) 2017 Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations. Pg. 249.

These increases may seem peculiar because it was only last year that the Globe and Mail ran an article with a headline that noted the CRA had “tighten[ed the] screws” on the SR&ED incentive program.13 If that is indeed the case, what could account for the sudden projected growth in spending on the SR&ED program?

According to the media spokesperson from the Department of Finance Canada, “the trajectory can largely be attributed to the natural growth in R&D expenditures based on growth in the size of the Canadian economy and inflation.”14

The Year 2019 Shows Another Trend

Another thing that is notable about the 2018 Report on FTEs is that the amount “earned and claimed in current year” will be worth $515 million in government spending by the year 2019 – the last time it was exactly this high was in 2014.15

Summary

While the true effects of the Liberal federal government’s innovation agenda will not be clear in these reports for perhaps another year, if not longer, the signs in the projections bode well for the SR&ED program as a whole. There has been a significant shift to increasing the projected amount of the FTEs since the year 2016, the first full year that Justin Trudeau’s Liberal government was in power, compared to the lead up to the change in government. It is important to note that according to the Department of Finance Canada, estimates between 2012 and 2015 are based on data provided by the tax filings of businesses making use of the SR&ED program, whereas the 2016 estimates are based on near complete data. For 2017 on, the amounts shown are based entirely on modeled projections.16 While a truly accurate figure will not be available until modeled projections are converted to complete data, the projected figures indicate positive growth for the SR&ED program as a whole and appear to be a sign that the tax incentive program is growing again.

What do you think about this year’s results in the Report on Federal Tax Expenditures?
Share your experiences or insight by commenting below, or adding to the conversation on our LinkedIn group, Facebook page or Twitter.

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Show 16 footnotes

  1. Government of Canada. Department of Finance Canada. (2018, March 3.) Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018. Pg. 249. Retrieved June 10, 2018 from https://www.fin.gc.ca/taxexp-depfisc/2018/taxexp-depfisc18-eng.pdf and Government of Canada. Department of Finance Canada. (2017, February 26.) 2017 Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations. Pg. 249. Retrieved June 10, 2018, from https://www.fin.gc.ca/taxexp-depfisc/2017/taxexp-depfisc17-eng.pdf
  2. Anonymous. “2017 Report on Federal Tax Expenditures Shows Less Government Spending on the SR&ED Program.” SREDucation.ca. Retrieved June 10, 2018 from https://www.sreducation.ca/ftes-report-shows-less-spending-sred-program/
  3. Ibid.
  4. Department of Finance Canada Media Relations. (June 22, 2018.) “Questions on the 2018 Report on Federal Tax Expenditures. Email to SREDucation.
  5. Government of Canada. Department of Finance Canada. (2017, February 26.) 2017 Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations. Pg. 249. Retrieved June 10, 2018, from https://www.fin.gc.ca/taxexp-depfisc/2017/taxexp-depfisc17-eng.pdf
  6. Government of Canada. Department of Finance Canada. (2018, March 3.) Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018. Pg. 249. Retrieved June 10, 2018 from https://www.fin.gc.ca/taxexp-depfisc/2018/taxexp-depfisc18-eng.pdf
  7. Ibid.
  8. Ibid.
  9. Government of Canada. Department of Finance Canada. (2018, March 3.) Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018. Pg. 249. Retrieved June 10, 2018 from https://www.fin.gc.ca/taxexp-depfisc/2018/taxexp-depfisc18-eng.pdf
  10. Department of Finance Canada Media Relations. (June 22, 2018.) “Questions on the 2018 Report on Federal Tax Expenditures. Email to SREDucation.
  11. Government of Canada. Department of Finance Canada. (2018, March 3.) Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018. Pg. 249. Retrieved June 10, 2018 from https://www.fin.gc.ca/taxexp-depfisc/2018/taxexp-depfisc18-eng.pdf
  12. Ibid
  13. Bouw, Brenda. (2017, June 13.) “Ottawa tightens screws on R&D incentive program.” The Globe and Mail. Retrieved June 10, 2018, from https://www.theglobeandmail.com/report-on-business/small-business/sb-growth/ottawa-tightens-screws-on-rd-incentive-program/article35152620/
  14. Department of Finance Canada Media Relations. (June 22, 2018.) “Questions on the 2018 Report on Federal Tax Expenditures. Email to SREDucation.
  15. Government of Canada. Department of Finance Canada. (2018, March 3.) Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2018. Pg. 249. Retrieved June 10, 2018 from https://www.fin.gc.ca/taxexp-depfisc/2018/taxexp-depfisc18-eng.pdf} The number dropped to $410 million in 2014, and has been steadily growing since then. What accounts for this growth? The media spokesperson from the Department of Finance Canada indicated that this is due to the Liberal federal government’s commitment to fostering and growing innovation: “Our Government has made significant new investments as part of our ambitious plan to make Canada a world-leading centre for innovation, because we know that the innovations we make today will create new and exciting job prospects for existing workers, and better opportunities for our children and grandchildren.”[16.Department of Finance Canada Media Relations. (June 22, 2018.) “Questions on the 2018 Report on Federal Tax Expenditures. Email to SREDucation.
  16. Ibid.

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