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The CRA Launches Consultations on SR&ED – 2024

The Review Has Begun – CRA Launches Consultations on SR&ED 2024 (Photo Credit: Andrea Piacquadio via: Pexels.com)

The Department of Finance published a new statement on January 31, 2024, “Government launches consultations to increase Canadian research and development and intellectual property retention“. In this statement, the Government of Canada announced that they have launched consultations on SR&ED including how to improve support for research and development, and also how to create and retain intellectual property in Canada. This statement marks the beginning of the long-awaited review of the SR&ED program. What follows is a brief discussion of what led up to this review, the questions being considered, and a proposal for an anonymous option, to encourage good feedback.


The post-WWII Canadian economy was built on both public and private sector investment in infrastructure and other measures designed to stimulate the growth of consumer demand. Part of this strategy was the use of tax policies by the federal government to encourage private businesses to invest in research and development. The hope was this would drive productivity and innovation across the country. Out of these early tax policies the Scientific Research and Experimental Tax Credit (SR&ED) was born. The early purpose of driving productivity and innovation across the country should not be forgotten. Today the SR&ED Program provides more than $3 billion in tax incentives to over 20,000 claimants annually, making it the single largest federal program that supports business research and development (R&D) in Canada, and is administered by the Canada Revenue Agency (CRA).1

CRA Launches Consultations on SR&ED

The Canadian government announced its plan to undertake a full review of the SR&ED program in the 2022 Federal budget: “SR&ED in the Federal Budget: Changes Are Coming (2022,” and in the statement released on December 19, 2023, “Update on federal innovation policies and initiatives,” the department of finance stated:

The government will launch consultations in January 2024 on a cost-neutral modernization of the Scientific Research and Experimental Development (SR&ED) tax incentive program. SR&ED is a cornerstone of federal funding for innovation in Canada and provides firms with the support they need to conduct research and development (R&D) and develop valuable intellectual property. Consultations will focus on how to better target SR&ED to the broader goals of ensuring that support effectively benefits Canada and positions the country as an R&D leader.[2. Canada Revenue Agency. (December 19, 2023). Update on federal innovation policies and initiatives. Department of Finance Newsroom. Retrieved from: https://www.canada.ca/en/department-finance/news/2023/12/update-on-federal-innovation-policies-and-initiatives.html]

In 2021 the CRA released new Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives, replacing the Eligibility of Work for SR&ED Investment Tax Credits Policy. These new guidelines were stripped of the “Five Questions of Eligibility which were initially put forward by Justice Bowman in the case of Northwest Hydraulic Consultants Ltd. v. The Queen (1998), and have been the SR&ED standard for eligibility in the Tax Court of Canada since: 

  1. Was there a scientific or technological uncertainty? 
  2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty? 
  3. Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis? 
  4. Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement? 
  5. Was a record of the hypotheses tested and the results kept as the work progressed?2 

The new guidelines introduced the “Why” and “How” test in place of the five questions which left many SR&ED claimants scrambling to match this new policy to historical precedent. For more information see our articleAre the Five Questions still the SR&ED standard?

Prior to 2021, the last major changes that affected the Income Tax Act (i.e., modified the rates or removed eligible expenditures categories) were in 2014 under the previous conservative government, one year into a four-year second term. Strategically, the current government may want to be seen to be making progress, but any changes – particularly if they are “cost neutral” – are likely to upset some of their user base. Still, it’s preferable to cultivate hope, even if it’s not enacted. And as with any policy development, discourse is the best way to drive progress.  

With that in mind, there are two sets of questions for consideration, taken directly from the Government of Canada Website(s), which we outline below. For your convenience, we have also defined two key terms that are used (but not defined) by the CRA: “cost-neutral” and “patent box regime”.  

Cost-neutral Ways to Modernize and Improve the SR&ED Program 

The consultations on SR&ED are intended to focus on cost-neutral improvements to the SR&ED program that more effectively support innovative businesses and create economic opportunities for Canadians. Responses are expected to include proposals on how any costs stemming from an increase in the program’s generosity should be financed or offset from within the SR&ED program. Cost savings could include, among other potential changes, introducing additional eligibility conditions, better targeting the scope of eligible expenditures or activities, or re‑examining the program’s tax credit rate structure.3 

Key Questions for Consideration

The Department of Finance is seeking feedback from stakeholders on the following questions:

  1. How can the SR&ED program remain effective in supporting R&D investment by businesses of all types in Canada? How can the SR&ED program better support the growth and success of R&D-intensive Canadian businesses going forward?
  2. What improvements to the definition of SR&ED, the program’s eligibility criteria, and/or the program’s overall architecture should be considered?
  3. How does the SR&ED program complement the existing suite of support programs for R&D in Canada? How could this complementarity be improved?
  4. Are there more effective ways in which the overall level of assistance provided within the SR&ED program could be targeted? If so, what changes could be made to the SR&ED program to offset the costs of any proposed enhancements?
  5. How can the SR&ED program effectively ensure the retention of intellectual property (IP) within Canada, particularly to support innovative Canadian businesses to remain Canadian-owned and operated?
  6. How can the SR&ED program be improved and streamlined to make it easier for entrepreneurs to access support?
  7. How can your suggested enhancements be funded by existing support available through the SR&ED program? What potential changes could best focus support to benefit Canada, including by creating economic opportunities for Canadians?4

Suitability of Creating a Patent Box Regime

A patent box regime provides a preferential (very low corporate) tax rate to income derived from certain types of intellectual property to incentivize research and development in that country. Also referred to as intellectual property (IP) regime—this approach taxes business income earned from IP at a rate below the statutory corporate income tax rate. The main difference between R&D credits and patent boxes is that R&D credits allow for tax breaks based on R&D spending, while patent boxes reduce the taxes on profits resulting from R&D. The National Bureau of Economic Research has drawn into question whether these policies are effective in driving domestic innovation and points to them encouraging profit shifting to minimize tax liability in the. Interestingly, the US does not use patent boxes, though 13 European Union member states do.

Key Questions for Consideration

  1. In contrast to its international peers, Canada has a net balance of payments deficit (receipts minus payments) on charges for the use of IP that has grown over the last two decades. In other words, businesses in Canada outlay more to entities in other countries for the use of IP than they receive from international sources for the same purpose. What sort of dynamics might be underlying this trend? What factors have contributed to Canada’s negative balance?
  2. Would implementation of a patent box regime improve Canada’s competitiveness as a location for developing, commercializing, and retaining ownership of IP? With respect to competitiveness as a location for developing IP, how would support through a patent box regime compare to support provided through the SR&ED program?
  3. How important are tax considerations in decisions regarding where to commercialize IP and where to locate IP? Which factors besides tax rates impact businesses’ decisions around where to locate and commercialize IP derived from R&D conducted in Canada? How should the Department of Finance account for these factors in determining how businesses might alter their behaviour in response to the implementation of a patent box regime?
  4. What would be a competitive combined federal-provincial/territorial tax rate under a Canadian patent box regime?
  5. The Action 5 Final Report identifies the IP assets that are in the scope of a nexus-compliant approach.  Should all these assets be eligible for a potential patent box regime in Canada? Are there differences in business practices with respect to different types of IP assets that should lead the Department of Finance to expect that commercialization and IP location decisions for each asset would respond differently to a patent box regime?
  6. If Canada were to implement a patent box regime, compliance with the nexus approach would require businesses to report detailed information around expenditures incurred in the development of eligible IP, similar to requirements in place under regimes in other jurisdictions that are compliant with the nexus approach. Drawing on experience with nexus-compliant regimes in other jurisdictions, please share any comments on challenges and best practices in this regard.
  7. Are there design features of a patent box regime that the Department of Finance should consider specifically to limit new fiscal costs to the government?5

Have Your Say

Feedback is being solicited from all Canadians and stakeholders, including innovative businesses conducting R&D in Canada, advocacy groups, research organizations, academics, and tax practitioners. It can be provided directly via: 

Email: SRED-PB-RSDE-RPB@fin.gc.ca with “SR&ED Review” as the subject line for consultations on SR&ED or “Patent Box” as the subject line for consultation on the suitability of a patent box regime.

Mail: Director General
Business Income Tax Division
Tax Policy Branch
Department of Finance Canada
90 Elgin Street
Ottawa ON K1A 0G5


We won’t know the full impact until the review is completed; however, the key buzzword of the consultation appears to be “cost neutrality”. Changes could happen very quickly, so be sure to sign up for our mailing list to receive up-to-date summaries and analysis of key lobby group positions for the consultation, as well as results from our own qualitative research. It could be dramatic if the eligibility criteria are modified again, but time will tell if the rubber meets the road in implementation. More to follow.

Show 5 footnotes

  1. Government of Canada. (April 7, 2015). Evolution of the SR&ED Program – a historical perspective. Retrieved February 26, 2024, from: https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/evolution-program-a-historical-perspective.html
  2. Government of Canada. (April 24, 2015). Eligibility of Work for SR&ED Investment Tax Credits Policy – 2015. Retrieved February 22, 2024, from https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/eligibility-work-investment-tax-credits/eligibility-work-investment-tax-credits-2015.html#s2_1
  3. Government of Canada. (January 31, 2024). Consultation Paper: Scientific Research and Experimental Development. Retrieved from: https://www.canada.ca/en/department-finance/programs/consultations/2024/consultation-on-scientific-research-and-experimental-development/consultation-paper-on-scientific-research-and-experimental-development.html
  4. Ibid
  5. Government of Canada. (January 31, 2024). Consultation on Creating a Patent Box Regime. Retrieved from: https://www.canada.ca/en/department-finance/programs/consultations/2024/consultation-on-creating-a-patent-box-regime.html

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