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Expanding SR&ED to public companies benefits Canada

SR&ED

In the wake of the federal government’s 2024 budget, the overwhelming focus for the tech and innovation sector has been on the increase to the capital gains inclusion rate. But the budget also included a very positive announcement for innovation –the commitment to explore extending enhanced SR&ED tax credits to public companies, which was followed by the release of a consultation on that very question.

The Scientific Research and Experimental Development tax incentive program –or SR&ED– is Canada’s cornerstone innovation program, providing up to $4 billion in tax incentives to companies who engage in R&D activities in Canada. It’s a critical support to innovative companies, in particular for early stage innovation companies.

As currently constructed, there are two core parts to the SR&ED program. The first is a 15% non-refundable portion, which is available to all companies. The second portion is a 35% refundable credit, which is only available to Canadian-controlled private corporations. Unfortunately, this program has discriminated against public companies because of their choice of capital structure, and this needs to be reformed. One of the critical pieces of the program, and something over which TMX Group has been advocating for more than a decade, is allowing public companies to access the refundable credit portion of the program.

“While a common perception of public companies may be of multi-billion dollar corporations that are flush with cash, this couldn’t be farther from the truth. In fact, the majority of companies that trade on Toronto Stock Exchange and TSX Venture Exchange (TSXV) are small-to-medium sized enterprises.”

While a common perception of public companies may be of multi-billion dollar corporations that are flush with cash, this couldn’t be farther from the truth. In fact, the majority of companies that trade on Toronto Stock Exchange and TSX Venture Exchange (TSXV) are small-to-medium sized enterprises. The average market capitalization for a company listed on TSXV is $54M; 97% of issuers on TSXV are SMEs according to the StatsCan definition; and 75% of these companies are pre-revenue (Source: TSX Market Intelligence Group, March 31, 2024). As such, for most of these companies, SR&ED credits are only useful if they are refundable. Allowing public companies to access the refundable credits would spur more R&D investment among existing public companies and would encourage more innovation companies to go public – enabling all Canadians to share in their growth.

As Canada is facing a productivity crisis, with real GDP tracking at 7% below its long term trend capital programs like SR&ED are critical to the success of early stage companies, all hoping to become the next Shopify, Nuvei, and Lightspeed. The consultation period for this critical program closes on May 27, so we encourage everyone who cares about innovation and growing Canadian companies to submit their feedback to the government.

Copyright © 2024 TSX Inc. All rights reserved. Do not copy, distribute, sell or modify this article without TSX Inc.’s prior written consent. This information is provided for information purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this article, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information. This article is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for such advice. The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange and/or TSX Venture Exchange. TMX Group and its affiliated companies do not endorse or recommend any securities or companies referenced in this article. TMX, the TMX design, TMX Group, The Future is Yours to See., Toronto Stock Exchange, TSX, TSX Venture Exchange, TSXV, and Voir le futur. Réaliser l’avenir. are the trademarks of TSX Inc.

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About The Author /

DANI LIPKIN Director, Global Business Development, Toronto Stock Exchange and TSX Venture Exchange Dani Lipkin is Director of Global Business Development for Toronto Stock Exchange and TSX Venture Exchange. Prior to this role, Dani was Innovation Sector Head for Toronto Stock Exchange and TSX Venture Exchange and before that Dani was the Head of Business Development for Exchange Traded Funds (ETFs) and Investment Funds on TSX. He had also worked with the listings group for TSX, where he helped assist companies in going public. Dani holds a Bachelor of Management and Organizational Studies in Finance from the University of Western Ontario and an MBA from the University of Toronto.
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