As in most countries, Canada supports industrial R&D through a combination of direct and indirect government funding. Traditionally, the majority of that support has been indirect, delivered via the Scientific Research & Experimental Development (SR&ED) tax credit program. While this approach remains prevalent, a number of changes in recent years have increased the proportion of direct funding.
Companies involved in R&D should be particularly interested, as a number of recent developments, as well as key aspects of existing funding programs, have enhanced the appeal of the Canadian R&D landscape. In 2015 the government of Canada merged the Ministry of Science and Technology with Industry Canada to create Innovation, Science and Economic Development Canada (ISED). Its revised mandate is to work “with Canadians in all areas of the economy and in all parts of the country to improve conditions for investment, enhance Canada’s innovation performance, increase Canada’s share of global trade and build a fair, efficient and competitive marketplace.” Subsequently, the 2017 federal budget included an “Innovation and Skills Plan” that outlined a combination of new programs, and changes to existing ones. The focus was on improving the commercialization of innovations, streamlining programs that support business innovations, and attracting increased foreign investment.
Direct Funding: Canada’s Innovation and Skills Plan
Superclusters — One of the more significant direct funding additions was the creation of the Innovative Superclusters Initiative, designed to accelerate growth within highly innovative industries. Providing significant support to a small number of industry-led consortia, Canada hopes the five-year, $950 million program will both accelerate the growth of participating companies and maximize their significance globally. As part of this, the involvement of international companies is encouraged.
Strategic Innovation Fund — Through the consolidation of a number of existing programs, the Strategic Innovation Fund (SIF) is designed to simplify access, accelerate processing, and provide a more “results focused” program. The SIF is comprised of four streams:
- Expansion and growth of existing firms
- Attracting new investments
- Collaborative R&D and technology demonstration
The 2017 budget’s Innovation and Skills Plan also identified six sectors that the government will support with the objective of making Canada a world leader in innovation: advanced manufacturing, agri-food, clean technology (cleantech), digital industries, health/bio-sciences, and clean resources. Of the six, cleantech, digital industries, and agri-food are being focused on first, and the magnitude of support, as well as the funding mechanisms, varies by sector:
Cleantech — Through a mix of existing and new funding support, cleantech is the most significant of the three initial sectors. Through 2022, support for finance growth/expansion, R&D and technology demonstration/adoption, and enhanced collaboration is just over $1 billion, of which just under 50 percent targets the development of clean energy, transportation, and cleantech development/adoption in the natural resources sector.
Digital industries — Support for the digital industries includes a mix of measures to further both digital infrastructure and capabilities, as well as Canada’s leadership in artificial intelligence (AI). The Canadian Institute for Advanced Research (CIFAR) will administer funding under the Pan-Canadian Artificial Intelligence Strategy. The goal is to support collaboration between AI expertise in Montréal, Toronto-Waterloo, and Edmonton, and to attract and develop top AI talent.
Agri-food — Innovation supported in this sector will include advanced research in agricultural science and genomics at Agri-Food Canada, with a focus on emerging issues such as climate change impacts.
Indirect funding: SR&ED Tax Credit Program Remains Strong
Although there has been a reduction in the relative proportion of indirect funding Canada provides for R&D through its SR&ED program, it is still a significant part of total funding (85 percent in 2013, per the OECD1). The SR&ED program provides credits on qualified expenditures incurred (as opposed to incremental R&D only) with a basic tax credit rate of 15 percent (nonrefundable).
Canada offers a range of valuable advantages and attributes, such as economic stability, geographic proximity to both U.S. and European markets, and strong support for innovation on multiple levels. Many provinces also provide credits through the SR&ED program ranging between 10 percent and 20 percent. While project eligibility rules follow the federal program, rules governing expenditure eligibility and calculation of the credits can vary. Some provinces offer fully refundable credits, while others offer only partially refundable or entirely nonrefundable credits.
Certain aspects of the SR&ED program are particularly relevant to international companies considering establishing Canadian R&D operations. For example, the SR&ED program requires neither that the R&D performer claiming SR&ED credits retain ownership of the resulting intellectual property (IP), nor that the IP remain in Canada. In addition, companies that perform R&D are not required to reduce their SR&ED claim because of any payments they receive for performing R&D for related or non-related foreign companies. This provides organizational and tax planning flexibility on a global basis.
For example, consider a scenario in which a foreign company (ForCo) establishes an R&D center in Nova Scotia, Canada (CanCo), such that ForCo fully funds CanCo operations and all IP is transferred to ForCo. In this scenario, CanCo’s SR&ED claim would not be impacted by the IP transfer, nor by the fact that they receive payment for the R&D performed; rather, they would earn a 15 percent, fully refundable Nova Scotia tax credit, as well as a 15 percent nonrefundable federal tax credit. (It’s worth noting that even if CanCo performed SR&ED for an unrelated foreign customer who fully funded the R&D and retained ownership of the resulting IP, CanCo would still not need to reduce their claim by the payment received. However, if they were paid to perform R&D for a Canadian customer, CanCo would need to reduce any SR&ED claim by the amount received.)
In practical application, SR&ED works well with other funding programs. While the additional assistance does reduce the amount of SR&ED tax credits received, the combined federal and provincial tax credits remaining usually warrant filing. More importantly, repayment of any government assistance (such as conditionally repayable loans) earns federal tax credits in the year of the repayment (however, only if the repayment had previously been deducted from an SR&ED claim).
Canada’s Potential May Align With Yours
In addition to a stable economic and political landscape, Canada’s strong mix of funding programs — along with substantial government focus on fostering innovation and attracting investment — makes it a location worth considering for companies expanding their global R&D footprint. Given that funding options vary significantly from country to country, understanding both their eligibility criteria and how they interact is key in both identifying those that align best with your R&D goals and comparing potential expansion locations.
1 Appelt, S. et al. (2016), “R&D Tax Incentives: Evidence on design, incidence and impacts”, OECD Science, Technology and Industry Policy Papers, No. 32, OECD Publishing, Paris.