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Ottawa’s proposed reforms to the SR&ED program fall short, critics say

The federal government introduced reforms to the scientific research and experimental development (SR&ED) tax credit program in August, but experts say that the changes made are not meaningful enough to support entrepreneurs trying to scale in Canada.

Government announces enhancements to SR&ED

The government’s draft legislation, announced on Aug. 15, listed amendments to previously announced tax measures.

For SR&ED, this meant increasing annual expenditure limit and taxable capital phase-out thresholds for the 35 per cent rate, expanding the claim criteria to include public entities, and allowing the credit to be used for capital expenditures. These measures reaffirm those announced in the 2024 Fall Economic Statement — with more program enhancements promised in Budget 2025.

Part of this reform is the inclusion of Canadian public corporations in the SR&ED eligibility criteria. To qualify, a public corporation must reside in Canada, have a class of shares listed on a stock exchange, or else be designated by the Minister of National Revenue as a public corporation, and not be controlled by non-resident individuals.

The enhanced tax credit expenditure limit, as announced in the 2024 Fall Economic Statement, is raised from $3 million to $4.5 million per annum, with phase-outs delivered based on gross revenue. The legislation includes that “the expenditure limit would be reduced on a straight-line basis when the corporation’s average gross revenue over the three preceding years is between $15 million and $75 million.” This is represents an increase from $10 million and $50 million, respectively.

For corporations not deemed as Canadian-controlled private corporations (CCPCs), there is a 15 per cent non-refundable tax credit on SR&ED expenditures.

Reactions to SR&ED draft legislation call for meaningful changes and modernization

In his CanInnovate newsletter, Kyle Briggs, entrepreneur-in-residence for the Faculty of Science at uOttawa, unpacks the promises and pitfalls of the renewed SR&ED legislation.

Briggs highlights an open letter he drafted when initial consultations were being made for SR&ED under the previous Trudeau government. In the open letter, Briggs noted that “about $4 billion is given out by the Canadian government every year under this program, completely dwarfing every other Canadian innovation support program.”

Despite the size of the program, Briggs remarked that large firms disproportionately benefit from the program supports.

Briggs’ open letter recommendations included requiring that parent companies of firms applying for the tax incentive be CCPCs to keep Canadian IP in Canada and refocus from multinational corporations to Canadian SMEs. He called for a default approval model, similar to the income tax model, where approval is contingent on documentation and is compliance checked annually.

Briggs also suggested that the SR&ED credit calculation be based on a fixed percentage of the salary of R&D employees, also requiring that qualifying firms submit annual reports showing tangible outcomes of IP development from the tax credit for 10 years at a minimum, with the collected data to be made publicly available through an annual report.

When the government finished its initial consultations on the tax credit, Briggs responded, arguing that the program’s supports were not geared toward early-stage company development and continued to favour late-stage firms. He also mentioned that SR&ED credits are still not subject to inflation, leading to a decrease in value over time.

Briggs also notes that structural changes to SR&ED were lacking, writing that “these changes do nothing to help with the valley of death [referring to the precarious gap between R&D and commercialization, which firms struggle to make it through, failing to scale up] that prevents commercialization of Canadian research outputs, and as such, any impact will be limited to the companies that first survive the gauntlet that is Canadian early-stage development.”

Briggs’ response to the newest federal legislation draft for the SR&ED tax program reiterates much of the same remarks in his response to the Trudeau government program iteration.

“Everything proposed in December is still there, and as far as I can tell, there is nothing much new,” he writes. He re-addresses the lack of inflationary upkeep tied to the newest reforms. Briggs also touches again on the complete lack of structural change to the program, with no amendments to how the credit is delivered.

The Council of Canadian Innovators (CCI) released their own reaction to the legislation, which includes praising government for cementing the measures first announced in the Fall economic statement.

In a statement released three days after the government’s draft legislation, CCI President Benjamin Bergen wrote, “We applauded the government last December when these reforms were first announced, and it’s good to see that the government is listening and moving forward. While this is a big step in the right direction, we must acknowledge the reality that we are living in a very different economic and geopolitical environment today than we were back in December of 2024.”

Indeed, since President Donald Trump instated U.S. tariffs on Canadian imports, Canadian companies have faced higher procurement costs, reduced operational efficiencies, supply chain weakness and more, most notably in manufacturing and mining, oil and gas sectors. Trump’s attack on science has also impacted Canadian R&D, with U.S. research and educational institution funding cuts and subsequent layoffs impacting eroding a once steadfast collaboration between Canadian and U.S. researchers and threatening global scientific integrity.

Suggestions include improving program efficiency and structure

In their response, CCI recognizes the work done by government to program the program, but urges that “as important as these updates are, they cannot be the final word on reform."

CCI joined Canadian industry leaders in signing a joint letter to Minister of Finance Francois Philippe Champagne to initiate the proposed SR&ED enhancements in Budget 2025, “emphasizing the need for certainty, stability, and capital co-investment to strengthen Canada’s innovation ecosystem.”

The response notes that the program favours foreign entities, with many Canadian scaleups lacking the support needed to commercialize and retain IP in Canada.

The Council reinstates suggestions originally outlined in their 2025 Federal Pre-Budget Recommendations:

Capping enhanced credits to avoid subsidizing “zombie firms” that do not contribute to long-term growth; [Editor’s note: As defined by StatCan, zombie firms generally denote companies that experience low performance and increasingly use resources, lower productivity, and impact healthy firm growth. These firms still benefit from funding despite their poor performance. Five per cent of companies in Canada are categorized as “zombie firms, with a recent op-ed from Tom Goldsmith, founder and principal at founder and principal of Orbit Policy. The piece, published in the Globe and Mail, names Hudson’s Bay, Toys R Us and Linen Chest as recognizable examples.]
Increasing program transparency and establishing independent evaluation metrics to measure economic impact;
Complementing SR&ED with an Innovation Box — a preferential tax rate on profits derived from Canadian-developed IP, incentivizing firms to retain, license, and commercialize their intangible assets here in Canada.

In his response, Briggs highlights structural issues that may inconvenience large corporations, but which also represent a death blow to small companies. These issues include the amount of time necessary to review and process claims — up to 180 days, according to the Government of Canada site, with Briggs adding that decisions are frequently delayed — as well as the reduced capital inflow to companies due to hiring consultants to handle SR&ED claims, which results in 10-18 per cent of the credit going to third parties instead of the firms themselves.

Briggs notes the effect of the lump-sum SR&ED credit on small companies, which he says “require that innovative companies do one of two things: either they take fewer risks and spend less on R&D in the early stages to ensure that a denied claim will not end them, or they turn to SR&ED lenders to offset cash-flow, paying high interest rates in exchange while increasing the potential damage of a denied claim.”

Briggs suggests aligning SR&ED claims with cash flow requirements, which would allow the credit to increase risk tolerance with no impact on taxpayer dollars. He outlines the current “proxy method” that allows for companies to estimate salaries going toward R&D and add a 55 per cent overhead, claiming the total as expenditures.

Briggs proposes a solution: “Because SR&ED credit is directly proportional to R&D-related payroll, SR&ED should be integrated with the payroll tax system.”

He recommends calculating the percentage of each payroll tax submission for SR&ED eligibility and using the credit to reduce this amount on a monthly basis. Additionally, Briggs recommends that companies submit an annual report detailing yearly expenses, from which the tax deductions could be verified. By minimizing cash-flow implications, Briggs argues that qualifying companies would be subject to a simplified process that renders SR&ED lending obsolete.

Briggs also recommends vetting companies before they apply instead of after the application is already submitted.

By requiring companies to include a plan for how the credit will be applied to expenses in the upcoming year,” CRA [Canada Revenue Agency] could then provide advance notice to companies of ineligible expenses, which would allow for proactive adjustment to correct for any issues before they arise.”

By flagging expense ineligibilities before they arise, firms would no longer be faced with unforeseen denials, instead feeling more confident in their ability to take risks and innovate alongside steady cash flows while taking back more credit for company assets instead of flowing into SR&ED lenders and consultants.

Briggs’ suggestions all share a crucial factor for reimagining SR&ED approval and deployment: None of the proposed outcomes represent cost increases to the government, while also encouraging a greater portion of the tax credit going directly to the companies trying to commercialize innovation in Canada.

Briggs concludes by estimating that over 20 per cent of SR&ED is not flowing directly to the companies that could most benefit from it. Briggs adds that the lump-sum nature of current credit payment creates an unnecessary administrative burden that prompts companies to seek outside consultancy support, at the expense of their own R&D capabilities.

“I intend to submit suggestions along these lines in response to the feedback invitation in the hope that the current administration is a little more ambitious than the last.”