1. Trends in Innovation Funding and SR&ED
July 2017

2. Topics Innovation Funding Influencing Factors
Canadian Program Mix / NS Mix
Trends in SR&ED
Claim statistics
CRA activities
Our Observations
The Future

3. Global Mix - Direct / Indirect Funding
- First – how do governments deliver funding: two means:
Indirect – mainly tax based incentive credits such as SR&ED
Direct – numerous forms of targeted funding (NRC IRAP, NSERC IRC, SDTC,…)
Chart shows mix of funding as % of GDP for various countries (2007 & 2008 data):
Canada is a leader – in top 4
But does not share a corresponding level of BERD Why? How to fix? BERD
Is it how Canada funds innovation?:
has highest proportion of indirect (lower now but still high).
~90% for Canada
~22% for USA
Source: Industry Canada Report "Innovation Canada: A Call to Action"
Data

4. Canadian Program Mix Looking closer at Canada's mix:
Data from the "Jenkins Report" on innovation
Divided funding supporting business performed R&D into ~4 main categories
Overall increase in total funding over the 4 years
SR&ED held ~3.4 billion –
~78% in to
~70% in 10-11
Source: Industry Canada Report "Innovation Canada: A Call to Action"

5. Nova Scotia Mix
Slide shows 4 main sources of innovation funding in NS –
ACOA & IRAP data from Atlantic Growth Strategy Subcommittee report on Innovation
NS SR&ED ITC's from NS provincial budget data
Federal SR&ED ITC's estimated based on Statistics Canada R&D investment data – may be a bit low.
Main Points of Note:
Direct funding more significant in NS: ACOA + IRAP = 63% VS SR&ED SR&ED ~37%
NS SR&ED is less than 1% of total
NS IRAP is ~2.3% of total
Sources:
Report of the Atlantic Growth Strategy Subcommittee on Innovation
Statistics Canada GERD data

6. Trends in SR&ED

7. SR&ED Claim Trends Chart:
CRA annual expenditures on SR&ED from to
last 3 years are projected amounts.
Orange – refundable (think large companies)
Grey – non-refundable (think small companies)
Blue – number of claims processed
Key Points:
Drop in Changes in legislation
Proxy, Capital, 20% to 15%, contracts & 3PP to 80%
Coincides with headcount increase from ~ 530 (08-09) to 700 (14-15)
Interpreting:
non-refundable credits – expenditures in year, but ~50% related to claims from other years.
refundable claim reduction – in year claims – in ballpark of legislative changes.
# of claims
– no data on refundable / non refundable
– significant drop - would explain $ reductions up to on own (w/o legislation changes)
Source: CRA Annual Tax Expenditures

8. Trends in SR&ED – CRA Stakeholder Session
Mid point of 3 year project:
3 Areas of Focus:
Service development
First Time Claimant Advisory Service (FTCAS)
Pre-Claim Consultation (PCC) (within 4mo of Y/E)
Pre-Claim Review (PCR) - Pilot
Outreach
National Team of Outreach Coordinators
Focus: Gov't. Dep (NRC, Agriculture, etc.), Universities, Industry Groups.

9. Trends in SR&ED – CRA Stakeholder Session
Integrity – "Easier & Harder"
Documentation & Information Requests
Request as required (vs. as standard protocol)
Consistency
"Reasonable & Credible"
"Large File Project" – Developing national approach to selecting and reviewing
Claims > $10M
>50% total expenditures claimed
Very small number of claims

10. Trends in SR&ED – CRA Stakeholder Session
Atlantic CRA SR&ED:
Better audit outcomes: ( ↑ "all work" eligible, ↓ "no work" eligible)
Increase in Experimental Production (EP) claims
More "reasonable" in scope / scale
Better relationships
Common Issues:
Capital and contracts claimed as materials
Business project vs. SR&ED project
How described / presented
Costs claimed
Support for labour hours – estimates without rationale
Failure to remove Government Assistance
The Atlantic SR&ED AD provided some comments on their observations

11. Trends in SR&ED – Our Observations
Challenges of SR&ED vs. R&D remain:
Continued perceptions:
"Rules have changed"
"CRA is auditing to manage budget"
(but seem to be decreasing…)
Considered overly burdensome
Must present SR&ED - not R&D:
In claim, during review, and in documentation
CRA may not "find" it for you
"Self-compliance" + audit function
Their decisions must be supported

12. The Future Ongoing review of funding programs
Some changes implemented already:
SR&ED Federal Budget
Recently announced Strategic Innovation Fund
Funding for "Super Clusters"
SR&ED proportion could see further decrease:
High % Indirect vs. Direct
Considered complex & burdensome:
Meaningful simplification may broaden eligibility
More eligible projects earning fewer tax credits
However, Administratively "efficient":
SR&ED ~2.3%
IRAP ~25%
SDTC ~10%
Why we could see further SR&ED reduction:
Attempting to increase BERD requires changes
SR&ED still significant & we're an outlier
Continuing complaints of inconsistency, burden, and unpredictability

13. The Future – My Prediction
Will remain with CRA and significant:
CRA review process:
May ease some…
Compliance organization
Program Complexity:
Bad news: SR&ED vs. R&D complexity
Good news: Impact can be reduced:
Understand the difference
Present SR&ED in your claims
Good news: Worth the effort:
up to ~45% funding (non-diluting)
can stack with other programs
no waiting for pre-approval
REASONS:
Still a big program even with downward trend
Diverting significant SR&ED $ to direct would require significant staffing
Higher administration costs would consume significant % of SR&ED $ diverted
CAVEAT:
Given significance of large and non-refundable claims, changes there could significantly impact overall SR&ED program size
More significantly impacting large claimants vs. smaller ones.
Key Points:
Stays with CRA and Significant therefore reviews won't change much:
To ensure SR&ED vs. R&D
SR&ED vs. R&D complexity will make process more challenging
CRA is a compliance organization:
CRA Report to Parliament has typically includes:
"Tax Recovery" amount ~12-14% of total.
Target of 75% of "audit activities" resulting an "adjustments".
Auditors need to find mistakes…

14. R&D and Government Incentives
Thank You
Greg MacDonald, PEng
Senior Manager
R&D and Government Incentives
What is SR&ED
What are the key components of eligibility