SR&ED in the Federal Budget: Fairness For Every Generation (2024)

April 16, 2024 SRED

On April 16, 2024, the Liberal government Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland, released the Federal Budget 2024: Fairness for every generation. If you are seeing this sentence, this article was copied without authorization from The InGenuity Group.

SR&ED in the Federal Budget – A Recap of Recent Budgets (pre-2024)

In the 2022 budget, the government stated they intended to undertake a review of the SR&ED program to ensure that it effectively encouraged R&D that benefits Canada. Specifically, the review was to examine whether changes to eligibility criteria would be warranted to ensure the adequacy of support and improve overall program efficiency. Since then, everyone involved in the SR&ED program has been waiting to see what changes – if any – are implemented. This budget, yet again, pushes decisions down the road.

SR&ED in the Federal Budget – This Year (2024)

The first phase of the SR&ED consultations began in January of this year (2024), when the Department of Finance officially began this review process in partnership with the CRA. These consultations closed April 15, 2024.

In the current budget (2024), the Government has indicated a continued commitment to “modernize and improve the Scientific Research and Experimental Development (SR&ED) tax incentives”¹. They continue to emphasize that they are exploring cost-neutral ways to enhance the program. A second phase of consultations, this time on “more specific policy parameters,” is planned for the next round of consultations.

Interestingly – and likely to the delight of some who have been lobbying for it, such as TMX Group – one of the areas of focus will be exploring whether Canadian public companies could be made eligible for the enhanced credit.

For a cost-neutral improvement, this will cost the government. The budget proposed to provide $600 million over four years, starting in 2025-2026, with $150 million per year ongoing for future enhancements to the SR&ED program. By government standards this is likely not much; however, it’s interesting that the improvements could not be completed without a nine-figure increase in funding.

Finally, the budget emphasized their ongoing consultations regarding the creation of a patent box regime, to encourage the development and retention of intellectual property in Canada. As the consultation just closed on April 15, 2024, the submissions are still under review.

The exact budget text relevant to SR&ED is as follows:

Boosting R&D and Intellectual Property Retention

Research and development (R&D) is a key driver of productivity and growth. Made-in-Canada innovations meaningfully increase our gross domestic product (GDP) per capita, create good-paying jobs, and secure Canada’s position as a world-leading advanced economy.

To modernize and improve the Scientific Research and Experimental Development (SR&ED) tax incentives, the federal government launched consultations on January 31, 2024, to explore cost-neutral ways to enhance the program to better support innovative businesses and drive economic growth. In these consultations, which closed on April 15, 2024, the government asked Canadian researchers and innovators for ways to better deliver SR&ED support to small- and medium-sized Canadian businesses and enable the next generation of innovators to scale-up, create jobs, and grow the economy.

Budget 2024 announces the government is launching a second phase of consultations on more specific policy parameters, to hear further views from businesses and industry on specific and technical reforms. This includes exploring how Canadian public companies could be made eligible for the enhanced credit. Further details on the consultation process will be released shortly on the Department of Finance Canada website.

Budget 2024 proposes to provide $600 million over four years, starting in 2025-26, with $150 million per year ongoing for future enhancements to the SR&ED program. The second phase of consultations will inform how this funding could be targeted to boost research and innovation.

On January 31, 2024, the government also launched consultations on creating a patent box regime to encourage the development and retention of intellectual property in Canada. The patent box consultation closed on April 15, 2024. Submissions received through this process, which are still under review, will help inform future government decisions with respect to a patent box regime.²

Commentary

In the prior year (2023), the Government stated they would proceed with their review of the program:

The Scientific Research and Experimental Development (SR&ED) tax incentive program continues to be a cornerstone of Canada’s innovation strategy by supporting research and development with the goal of encouraging Canadian businesses of all sizes to invest in innovation that drives economic growth.

In Budget 2022, the federal government announced its intention to review the SR&ED program to ensure it is providing adequate support and improving the development, retention, and commercialization of intellectual property, including the consideration of adopting a patent box regime. The Department of Finance will continue to engage with stakeholders on the next steps in the coming months.³

This years budget (2024) pushes the review further and makes the outcome uncertain, particularly in light of the upcoming election in 2025. It will be interesting to see what comes of this review as they explicitly stated in Budget 2022 that they would consider changing the eligibility criteria in order to ensure the “adequacy of support” and to “improve overall program efficiency”. One of the promises of the Liberal platform in 2021 (Liberal Party Promises SR&ED Reform) suggested they would expand the program, not reduce it:

Reform the Scientific Research and Experimental Development Program to reduce red tape and the need for consultants, better align eligible expenses to today’s innovation and R&D, and make the program more generous for those companies who take the biggest risks, promoting productivity, new inventions, and the creation of good jobs.⁴

While it’s appreciated that the 2024 budget isn’t making any rash decisions, it is concerning that there are ongoing delays with the SR&ED program review. The government has made big promises before on the subject of innovation and failed to deliver either due to a lack of will or an underestimation of what it would take to accomplish; for example, the downgrade of innovation super clusters to… clusters. This has resulted in a fairly low trust battery when it comes to bold new commitments⁵. We believe that if changes are made, they may be timed to be within the year, such as with the Fall Economic Statement. It will be worth watching that update carefully, as it’s far enough out from the planned election that changes can be made and if they are controversial, there is time for it to dissipate.

The Real Surprise – Patents and Equipment Write-Offs

In reviewing the budget, one of the smaller announcements may have a bigger impact in the short term. This budget proposed to allow businesses to immediately write off the full cost of investments in patents, data network infrastructure equipment, computers, and other data processing equipment:

Incentivizing More Innovation and Productivity

Businesses that invest in cutting-edge technologies are a key driver of Canada’s economic growth. When businesses make investments in technology—from developing new patents to implementing new IT systems—it helps ensure Canadian workers put their skills and knowledge to use, improves workplaces, and maximizes our workers’ potential and Canada’s economic growth.

The government wants to encourage Canadian businesses to invest in the capital—both tangible and intangible—that will help them boost productivity and compete productively in the economy of tomorrow.

To incentivize investment in innovation-enabling and productivity enhancing assets, Budget 2024 proposes to allow businesses to immediately write off the full cost of investments in patents, data network infrastructure equipment, computers, and other data processing equipment. Eligible investments, as specified in the relevant capital cost allowance classes, must be acquired and put in use on or after Budget Day and before January 1, 2027. The cost of this measure is estimated at $725 million over five years, starting in 2024-25.⁶

This is an incredible proposal as it addresses a gap in support. SR&ED ITCs have a long history of struggle with capital expenditures. In 2012, the Canadian Government announced the cessation of tax credits on capital expenditures for SR&ED beginning in 2014. These were difficult to claim at the best of times and the recapture payment rules were unnecessarily complex. Patents, data network infrastructure equipment, computers, and other data processing equipment have historically been excluded from SR&ED. The ability to immediately write off the full cost of the investments will have an immediate, dramatic impact on companies of all types. The $725 million estimate seems low, by our standards. We will be curious to hear the thoughts of our peers in the industry as the budget has time to settle.

In the meantime, these are the proposed details:

Productivity-Enhancing Assets

Currently, assets included in Class 44 (patents or the rights to use patented information for a limited or unlimited period), Class 46 (data network infrastructure equipment and related systems software), and Class 50 (general-purpose electronic data-processing equipment and systems software) are prescribed CCA rates of 25 per cent, 30 per cent, and 55 per cent, respectively.

Budget 2024 proposes to provide immediate expensing for new additions of property in respect of these three classes, if the property is acquired on or after Budget Day and becomes available for use before January 1, 2027. The enhanced allowance would provide a 100-per-cent first-year deduction and would be available only for the year in which the property becomes available for use.

Property that becomes available for use after 2026 and before 2028 would continue to benefit from the Accelerated Investment Incentive.

Restrictions

Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for the accelerated CCA only if both of the following conditions are met:

neither the taxpayer nor a non-arm’s-length person previously owned the property; and

the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.

Short taxation year

Under the short taxation-year rule, the amount of CCA that can be claimed in a taxation year must generally be prorated when the taxation year is less than 12 months. When this rule applies, the accelerated CCA would apply in respect of an eligible property on the same prorated basis and would not be available in the following taxation year in respect of the property.⁷

Conclusion

This was definitely a budget with some surprises, particularly around the Accelerated Capital Cost Allowance related to Productivity Enhancing Assets (patents, data network infrastructure, etc). We won’t know the full impact until these have receive royal assent, as well as until the SR&ED review is completed. With a potential election in the next 24 months there is a lack of certainty about any proposed changes truly being enacted. However, as with any political promise, only time will tell.

We would encourage you to reach out to the CRA to provide feedback, particularly if you are a stakeholder: Contact us about SR&ED – Canada.ca

For commentary on the ongoing consultations, please see our series of articles on the topic: