Update on Federal Innovation Policies and Initiatives Issued December 19, 2023
On December 19, 2023, the Department of Finance published a statement, “Update on federal innovation policies and initiatives“, on federal innovation policies and initiatives to begin in January 2024. The changes include a long-awaited review of the Scientific Research and Experimental Development (SR&ED) program, upcoming changes to the Business Development Bank of Canada (BDC), and the plan to transition the Industrial Research Assistance Program (IRAP) from the National Research Council (NRC) to the Canada Innovation Corporation (CIC) no later than 2026-2027.
SR&ED Review to Begin in January 2024
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)“. In the statement released on December 19, 2023, 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.1
We won’t know the full impact until the review is completed; however, it could be very dramatic if the eligibility criteria are modified again. In 2021 the CRA completely rewrote the Eligibility of Work policy, stripping it of the “5 Questions” which align with most Tax Court of Canada rulings and instead introducing the “Why” and “How” test in the “Guidelines on the eligibility of work for scientific research and experimental development (SR&ED) tax incentives“. This change was announced quietly and left many SR&ED claimants scrambling to try and explain their work to the CRA under the new policy.
Upcoming Improvements to BDC
In the statement, the department of finance discussed their plan to implement changes to the BDC which were recommended in a legislative review released on November 29, 2023, “Minister Valdez tables Business Development Bank of Canada legislative review report“. The statement released on December 19, 2023, stated:
Following a recent legislative review of the Business Development Bank of Canada (BDC), the government will also make the report’s recommended improvements to BDC. Delivering on these recommendations would allow BDC to expand its reach across Canada, better complement other business development supports, and continue to provide commercial financing to entrepreneurs and small businesses. As announced in the 2023 Fall Economic Statement, the government is also reviewing the overall role of BDC and Export Development Canada (EDC), including by increasing the risk appetite of the organizations where appropriate to best support Canadian businesses.2
Some of the more impactful recommendations that may affect SR&ED claimants include:
- Strengthening access to, and increasing visibility of, support for under-represented entrepreneurs;
- Improving the reach of BDC in underserved regions and rural communities across Canada;
- Facilitating greater information sharing and transparency with stakeholders and partners, and refining BDC’s risk appetite to support entrepreneurs with the greatest need.3
These changes could offer much-needed financial support to small and medium-sized enterprises (SMEs) and consequently prompt more successful innovation and SR&ED efforts.
Transitioning IRAP from the National Research Council to the Canada Innovation Corporation
The statement discussed the planned transition of the IRAP program delivery from the NRC to the CIC:
In order to ensure the National Research Council Industrial Research Assistance Program (NRC IRAP) can seamlessly provide its essential support to the thousands of small and medium-sized enterprises it works with each year, the transition of NRC IRAP to the Canada Innovation Corporation (CIC) will now take place following the full implementation of the CIC no later than 2026-2027. The government will be seeking advice from leading Canadian investors, including pension funds, about the launch of the CIC. In the interim, NRC IRAP will continue to be delivered by the NRC, and will support a select number of larger-scale R&D projects.4
The current IRAP program, which has been implemented through the NRC for over 75 years, offers “financial assistance, advisory services and connections to the best business and R&D expertise in Canada” to innovative SMEs across Canada, and is a form of government financial assistance that is commonly associated with SR&ED claims.5
It will be interesting how the transition to CIC will affect the existing IRAP staff from the NRC. The report “A Blueprint for the Canada Innovation Corporation” released in February this year stated:
IRAP employees will be transitioned seamlessly, and their employment continued under the CIC. The CIC enabling legislation will specify an extension of pension benefits under the Public Service Superannuation Act. The CIC leadership will work with employee unions to ensure that the transition takes place through an orderly process.6
As the IRAP program has such a long history of implementation through the NRC, it is unlikely to be as seamless as expected. IRAP recipients should expect delays to funding once the transition to CIC begins.
Similarly to the SR&ED program review, we won’t know the full impact of transitioning the IRAP program to CIC until it is fully implemented; however, the impact could be very dramatic. The initial budget of the CIC is stated as being $2.6 billion over four years,7 which is significantly higher than the most recently announced Government of Canada investment to the NRC of $962.2M over 8 years.8 This increase in funding will hopefully mean higher IRAP funding available to Canadian companies, making it easier for companies to finance their SR&ED work.
Conclusion
The content within the statement released by the Department of Finance on December 19, 2023, exhibits that there will be some major changes made which will affect Canada’s innovation ecosystem over the next few years. Hopefully, these changes result in positive outcomes for SR&ED claimants. Keep an eye on our page as we will continue to keep our readers updated regarding any changes or updates to the SR&ED program.