Limiting the SR&ED Tax Credit System

SR&ED tax credit limit | BCBusiness
The SR&ED tax credit limit could put a stopper on innovation.

“Fixing” the SR&ED tax credit system, as the federal government is rumoured to be considering in the next budget, may do more harm than good to B.C. businesses.

The next federal government budget is expected to include significant changes in how innovation in this country is funded.

Here’s hoping they don’t adopt wholesale – as has been indicated in several statements – a recent report on that very subject.

The “Expert Panel Report on Federal Support to Research and Development” makes several suggestions to correct the abysmal state of innovation in Canada. This state – among the lowest in the OECD – has been evolving for some time as successive governments struggled with the need for more innovation and their natural desire to get their fingers into everything that moves and bureaucratize it to death.

Among the panel’s six recommendations is an extremely important one for B.C. technology companies. That is a suggestion that the Scientific Research and Education Development program, known as SR&ED, be limited.

Currently, any company that creates new science or technology can apply for a tax credit for part of the cost of such development. The report recommends that be changed to only providing credits for the labour portion of such development.

This will have a significant impact among the 1,500–2,000 companies in B.C. that benefit from SR&ED.

That’s because most of these companies are small and privately held. They innovate, primarily in technology and science, through their brains, a small staff and a contingent workforce. The majority of their spending is on research or development, not on labour.

So they will lose a major method of financing if the new rules are instituted.

However, many traditional SR&ED beneficiaries, especially in the east, would love this new rule. For some time, large companies have been claiming any incremental tweak in their manufacturing processes as “innovation” – sometimes rejected, but more often accepted.

Because they’re established with other sources of income, they don’t depend on the SR&ED tax credits as much as smaller companies, who are traditionally in startup mode and so don’t have much income.

Further, the bigger, more established companies will be favoured under the new regime, because they usually have higher labour components.

B.C. is a jurisdiction filled with small, innovative startup companies, but very few large companies that employ larger labour forces. Clearly, this rule change will have a significant effect on these B.C. companies’ ability to finance their endeavours.

So, I’d encourage every small business involved in technology, manufacturing, science or health to contact their representative in Ottawa and voice their concerns over this potential change.

Without your input, a solution will simply become another problem.