2019 Alberta Budget brings drastic cuts to tech funding including SR&ED

November 13, 2019 SRED

In this blog post, we discuss the cancellation of the SR&ED tax credit incentive program in Alberta’s 2019 budget released on October 24th and the reactions illustrated in the media. While some commentators have voiced their displeasure with the changes, others state that a more focused funding model with specified targets will actually benefit funding recipients and the overall economy. No matter which side of the debate you agree with, it is certain that techology companies, in particular, will be feeling the impact.

SR&ED and the 2019 Alberta Budget

The fact that the SR&ED Tax Credit program is the single largest source of R&D funding in Canada (over $3 billion in tax incentives distributed annually)¹ is possibly one of the reasons that the Alberta provincial government decided to cut the program entirely from its 2019 budget. According to the 2019 Alberta budget document, “the federal government already provides generous supports for research and development”² insinuating that the provincial government can justify their reduction in supporting the program as it is already adequately covered by federal contributions. The previous provincial government earmarked $100 million over five years to Alberta’s technology sector. In the October budget, the new United Conservative government dropped that figure to $35 million.³

Alberta’s 2019 Budget Claims

Alberta’s United Conservative Party, led by newly elected Jason Kenney tabled its first budget on October 24th, advocating a return to “a low-rate, broad-based corporate tax system.”⁴ This budget eliminated a total of five tax credit incentive programs, including SR&ED. The report states that by cutting these programs the government is better able to serve a wider population, claiming “It is estimated that over 100,000 Alberta corporations will benefit from the Job Creation Tax Cut, as opposed to approximately 1,500 corporations that would have benefited from the five targeted tax credits.”⁵ It was also claimed in the budget that by eliminating these five tax credits Alberta’s tax expenditures would be reduced by over $400 million by 2022 – 2023.⁶

Removing SR&ED out of the 2019 Alberta Budget

These cuts have removed almost all provincial support for Alberta’s burgeoning technology sector. While previous budgets provided increased funding for areas such as Artificial Intelligence (AI) in an effort to diversify the economy away from just oil and gas, the new budget essentially cuts off key funding that technology companies likely planned to access. Small technology startups who chose to build their businesses in Alberta in the hopes of leveraging SR&ED and other tax credit incentives to ramp up quickly are feeling particularly vulnerable. The budget has reduced corporate income tax from 12 to 8 percent over four years, which does nothing for small startups that often do not initially make a profit.⁷

Promises of Increased Stability

There are those who see the 2019 Alberta budget as a promise of increased stability in a future where the world’s reliance on oil and gas is beginning to decline in the face of much needed environmental awareness and activism. In addition, Alberta has consistently, year after year, overspent beyond inflation and population growth (currently 20 percent per person more than other provinces).⁸ In fact, Alberta is currently in a $7 billion deficit, so it is clear that belts will need to be tightened if the province hopes to move forward with debt reduction. The provincial government has addressed the fact that some may see the new budget as being detrimental to innovation by focusing instead on the aspect of commercialization.

“The low-rate, broad-based approach also supports innovation. Upfront
tax credits such as the SR&ED credit create an incentive for businesses to
undertake the initial research in a jurisdiction, but they do not provide a
strong incentive to commercialize successful research in that jurisdiction – a
part of the process that can result in significant economic activity and benefits.”⁹

Conclusion

There have been positive and negative comments about the SR&ED tax credit incentive program in the news media, with some recent articles discussing the idea of a more focused and strategic method of allocating funding. It would appear that the Alberta government has opted to move in this direction with their 2019 budget, whether or not they will be successful remains to be seen.