April 15, 2024
BIOTECanada is the national trade association representing Canada’s biotechnology sector.
The Association’s 230 member companies are representative of the broader industry
ecosystem in Canada which provide high-quality jobs to build successful enterprises in Canada which are transforming health, agriculture, and industrial market segments domestically and globally. It is on behalf of the member companies that BIOTECanada submits its recommendations for the SR&ED consultation.
The government made significant investments into building on the domestic life sciences
ecosystem and enhancing Canada’s biomanufacturing capacity through Canada’s Biomanufacturing and Life Science Strategy, and Health and Biosciences Economic Strategy
Table report. These investments and the corresponding life sciences and biomanufacturing
strategies will accelerate the growth of Canada’s biotech sector from start-up companies to
commercially viable companies beyond just a biomanufacturing response in a crisis. Importantly, the implementation of the federal biomanufacturing strategy, co-led by ISED and Health Canada, has begun to address the barriers hampering the growth and competitiveness of Canadian life science SMEs attracting record levels of investment capital being realized in
recent years. Accordingly, this consultation represents a timely opportunity to improve the
SR&ED tax credit to enhance the competitiveness of Canada’s tax environment and support
the growth of Canadian companies at a critical time.
However, Canada is still lagging in research and development (R&D) while other OECD
countries are increasing investments (Source: https://data.oecd.org/rd/gross-domesticspending-on-r-d.htm). Following the pandemic, most other leading economic jurisdictions in the world are also investing heavily into their domestic life sciences sector’s as they too understand the vital role biotechnology innovation is playing in the global economy. Globally, the competition for biotech ideas, companies, talent, and investment has never been more intense. Accordingly, it is imperative that Canada be aggressive and ambitious to establish a globally competitive innovation environment to fulfil the maturity and capacity envisioned in the Biomanufacturing and Life Sciences Strategy and encourage companies to invest and grow here in Canada.The federal SR&ED program has been a significant competitive advantage for many early stage and larger biotechnology companies for which scientific research and development is their primary ‘commercial’ activity. Moreover, the credit also provides new and small innovative companies the ability to maximize their revenue stream to drive an innovation forward more effectively.
All told, the SR&ED Tax Credit is a vitally important tool for companies as they seek to attract
investment to fund their experimental research and scientific development in Canada. As
such, to retain innovation through the commercialization lifecycle and reap the associated
economic benefits, Canada must continue to amplify the competitiveness of the SR&ED Tax
Credit. Accordingly, changes to the SR&ED Tax Credit structure must be made understanding
and appreciating the significant contribution the SR&ED Tax Credit plays in supporting early
stage, pre-commercial and larger biotech companies. In this context, the industry urges the
government to ensure changes to the SR&ED tax credit improve its efficiency, effectiveness and global competitiveness while also ensuring it is aligned with the direction and objectives of the Government’s Innovation Agenda.
In addition, to attract the commercial development and retention of biotechnology
companies, Canada should establish a globally competitive tax regime for research and
development intensive companies to compete with similar R&D tax incentives in other
jurisdictions by implementing an IP Box measure for later stage innovation companies.
For biotech SME’s, investment capital is the lifeblood of successful research and innovation.
However, it is important to recognize that investment is extraordinarily mobile; it will go to
wherever it is provided the greatest security and return. Canada is home to numerous
emerging and high growth biotech companies. Access to capital is precious and vital to survive to become anchor companies. Innovative companies are built on intangible assets, like intellectual property, and given capital is available in other markets in far greater quantity, the SR&ED Tax Credit is an essential tool in meeting both of Canada’s objectives. Importantly, investors see the SR&ED Tax Credit as a competitive advantage for Canadian companies vis-avis companies in other jurisdictions that are competing for the same investment dollars. The IP box regime will also encourage Canadian companies to obtain and retain IP, which will also spur their growth.
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?
Industry Response:
The SR&ED Tax Credit is an essential tool in meeting Canada’s objectives in the
Biomanufacturing and Life Science Strategy. Importantly, investors see the SR&ED Tax
Credit as a competitive advantage for Canadian companies vis-a-vis those in other
jurisdictions that are competing for the same investment dollars. Moreover, the SR&ED
tax credit also provides new and small innovative companies the ability to leverage their
R&D investments to drive an innovation forward more effectively. All told, the SR&ED
Tax Credit is critical in attracting investment and driving experimental research and
scientific development in Canada. In this context, the industry recommends:
- Establish a centralized mechanism to allow for semi-annual refunds as a prepayment of the total year’s return. Disbursing refundable payments on a more frequent basis than yearly would significantly assist cash flow for companies over the year.
- A filing by R&D focused companies with a consistent and successful history of SR&ED use should be subjected to less audits for purposes of reducing audit and substantiation expenses paid by R&D companies.
- A lower threshold of materiality should be applied to science heavy R&D sectors such as life sciences because these companies are more likely to be doing SR&ED eligible work.
2. What improvements to the definition of SR&ED, the program’s eligibility criteria,
and/or the program’s overall architecture should be considered?
Industry Response:
To retain innovation through the commercialization lifecycle and reap the associated
economic benefits, the changes to the SR&ED Tax Credit structure must be made with
an understanding and appreciation of the significant contribution the SR&ED Tax Credit
plays in facilitating the effectiveness of investment capital deployed by early stage, precommercial companies. In this context, the industry urges the government to ensure
changes to the SR&ED will serve to improve its efficiency, effectiveness and global
competitiveness while also ensuring it is aligned with the direction and objectives of the
Government’s Innovation Agenda.
The refundable federal SR&ED program has historically provided research heavy
Canadian companies with a significant competitive advantage. The SR&ED tax credit
could be significantly more impactful in company growth and driving R&D in Canada if it
were expanded for many early-stage biotechnology companies for which scientific
research and development is their primary ‘commercial’ activity. Presently, only
companies with Canadian ownership greater than 50% and/or immaterial ownership by
not-for-profit (Universities or Hospital Foundations for example) are eligible for
refundable SR&ED tax credits.
An important objective of the SR&ED program is to incentivize investment in research
and development in Canada. The spin-off benefits to the Canadian ecosystem of
increased R&D activities undertaken by companies will enhance innovation in Canada
more broadly. Accordingly, the industry recommends:
- Non-CCPCs with less than 50% Canadian ownership should be able to receive refundable tax credits for work and creating jobs through expanded research and development activities in Canada if ‘significant benefit to Canada’ is clearly demonstrated (tax carry forward credits are not as effective for pre-revenue companies whereby their employees will pay income taxes to offset SR&ED expansion).
- Allow clinical trial experimental drug material manufacturing to be eligible for SR&ED.
- Add patent / IP costs as SR&ED-eligible expenses for new or existing IP controlled by Canadian parent companies. These expenses for life science companies are critical expenditures and should be encouraged and not discouraged.
- To create company “stickiness” in Canada and align with Canada’s Biomanufacturing and Life Science Strategy goals, new R&D and manufacturing facility infrastructure expenses should be more eligible for SR&ED, with more clarity provided on what is claimable.
- Allow for annual tax net operating losses (NOLs) in R&D life science companies to be
claimable in future years. The timeline for companies scaling up and moving towards
commercialization and profitability can be 20 or more years in Canada (“long
runway” life science R&D companies). The ability to claim tax losses as a Canadian
company when they do ultimately commercialize and realize profits will significantly
help retain these companies in Canada.
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?
Industry Response:
The SR&ED Tax Credit plays a significant role supporting early stage, pre-commercial
companies, and larger Canadian biotech companies. BIOTECanada acknowledges
improvements that CRA has made to establish greater consistency of the SR&ED
program and audit process across Canada. BIOTECanada would be interested in better
understanding what consistencies were established across the country and the
corresponding metrics CRA is using to track regional performance.
- The SR&ED Tax Credit plays a significant role supporting early stage, pre-commercial companies, and larger Canadian biotech companies. BIOTECanada acknowledges improvements that CRA has made to establish greater consistency of the SR&ED program and audit process across Canada. BIOTECanada would be interested in better understanding what consistencies were established across the country and the corresponding metrics CRA is using to track regional performance.
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?
Industry Response:
The intent of the SR&ED program should be to incentivize investment in
research and development in Canada, regardless of the company’s and/or
investor’s country of origin. Ultimately the benefits of increased R&D activities
undertaken by non-Canadian companies will offset and fund these changes
through increased economic output by greatly enhancing innovation in Canada
and make Canada more globally competitive.
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?
Industry Response:
Canada has established itself as a competitive jurisdiction to invest and drive R&D
primarily due to the SR&ED Tax Credit program that competes against a multitude of
global competitors modeling public policy Canada has established. Ensuring the SR&ED
remains at the forefront of attracting investment is integral to the goals of long term
economic growth by improving the globally competitiveness of SR&ED to benefit
research and development intensive SMEs. This can be achieved by:
- Increasing the SR&ED enhanced investment tax credit rate to incentivize more research and development in Canada for economic development and opportunity multipliers to offset costs.
- Increasing the cap for SR&ED refunds for the life science sector to reflect inflationary pressures.
6. How can the SR&ED program be improved and streamlined to make it easier for
entrepreneurs to access support?
Industry Response:
The federal SR&ED program has been a significant competitive advantage for many
early-stage biotechnology companies for which scientific research and development is
their primary ‘commercial’ activity.
Canada should continue to further streamline the submission process to maximize the
financial returns to a company.
As per above, CRA should build greater administrative consistency in-house by
establishing life sciences expertise to allow life science SR&ED applications to be
processed by the same CRA expert life science group.
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?
Industry Response:
Enhancing and streamlining the SR&ED program will retain innovation through the
commercialization lifecycle and further reap the associated economic benefits. Canada
must continue to support the competitiveness of the SR&ED Tax Credit. Accordingly,
changes to the SR&ED Tax Credit structure must be made with an understanding and
appreciation of the significant contribution the SR&ED Tax Credit plays in supporting
early stage, pre-commercial biotechnology companies and larger companies.
In this context, the industry recommends the government ensure changes to the SR&ED
will serve to improve its efficiency, effectiveness and global competitiveness while also
ensuring it is aligned with the direction and objectives of the Government’s Innovation
Agenda and the Biomanufacturing and Life Sciences Strategy.