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

The federal government’s proposed reforms to the Science Research and Experimental Development tax credit program aren’t significant enough to support entrepreneurs trying to scale in Canada, critics say.

All the reforms the government proposed last December are still there, “and as far as I can tell, there is nothing much new,” says Kyle Briggs (photo at right), entrepreneur-in-residence in the Faculty of Science at the University of Ottawa.

Kyle

“The Carney government is moving forward with SR&ED reform as originally planned by the Trudeau government,” he said on his CanInnovate website.

Ottawa introduced reforms to the SR&ED credit program in August.

The government’s draft legislation listed amendments to previously announced tax measures.

 For the SR&ED program, this meant increasing annual expenditure limit and taxable capital phase-out thresholds for the 35 percent rate, expanding the claim criteria to include public entities, and allowing the credit to be used for capital expenditures. 

These measures affirm those announced in the 2024 Fall Economic Statement – with more program enhancements promised to come in Budget 2025. 

The SR&ED reforms would include Canadian public corporations in the SR&ED eligibility criteria. To qualify, a public corporation must be headquartered 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-residents. 

The enhanced tax credit expenditure limit announced in the 2024 Fall Economic Statement would rise from $3 million to $4.5 million per year, with phase-outs delivered based on gross revenue.

The proposed 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 represents an increase from $10 million and $50 million, respectively. 

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

Critics call for meaningful changes and modernization

In his CanInnovate substack, Briggs unpacks the promises and pitfalls of the proposed SR&ED reforms. 

He highlights an open letter he wrote when initial consultations were being made for SR&ED under the Trudeau government.

In his open letter, he 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 pointed out that large firms disproportionately benefit from the program's funding.

His recommendations included requiring that parent companies of firms applying for the tax incentive be CCPCs to keep Canadian intellectual property in Canada, and refocusing SR&ED funding from multinational corporations to Canadian SMEs.

Briggs called for a default approval model, similar to the income tax model, where approval is contingent on documentation and is compliance checked annually. 

He also suggested that the SR&ED tax credit calculation be based on a fixed percentage of the salary of R&D employees, and that qualifying firms be required to 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. 

After the government finished its initial consultations on the SR&ED program, Briggs argued that the program's funding wasn’t geared toward early-stage companies and continued to favour later-stage firms.

He also noted that SR&ED credits are still not subject to adjustments for inflation, leading to a decrease in value over time. 

Briggs also said that structural changes to SR&ED were still lacking, writing that “these changes do nothing to help with the valley of death [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 draft legislation for the SR&ED program reiterates much of the same points in his response to the Trudeau government’s proposed reforms – including the lack of adjustments for inflation.  

Briggs also underscores again the complete lack of structural change to the SR&ED program, with no amendments proposed on how the credit is delivered. 

The Council of Canadian Innovators (CCI) released its own reaction to the proposed legislation, praising the 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 (photo at right) 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,” Benjamin Bergen, CCI president, said in a statement. 

“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,” he said. 

Since the Trump administration imposed 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 significant funding cuts to research, science agencies and programs, and scientists has also impacted Canadian R&D.  Experts say U.S. research and educational institution funding cuts and subsequent layoffs have eroded a once steadfast collaboration between Canadian and U.S. researchers and threaten global scientific integrity. 

Improve SR&ED program structure and efficiency

In its response, the CCI recognized the work done by the government to improve the SR&ED program, but urged that “as important as these updates are, they cannot be the final word on reform."

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

The CCI’s response, like that of Briggs, noted that the program favours foreign entities, with many Canadian scaleups lacking the support needed to commercialize and retain IP in Canada. 

The CCI reiterated suggestions originally outlined in its 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 StatsCan, zombie firms generally denote companies that experience low performance and increasingly use resources, resulting in lower productivity, and impacting healthy firm growth. These firms still benefit from federal funding despite their poor performance. Five per cent of companies in Canada are categorized as “zombie firms.” Tom Goldsmith, founder and principal at Orbit Policy, in a recent op-ed in The Globe and Mail, cited Hudson’s Bay, Toys R Us and Linen Chest as examples.]

• Increasing program transparency and establishing independent evaluation metrics to measure economic impact.
• Complementing SR&ED with a “patent box” preferential tax rate on profits derived from Canadian-developed IP, incentivizing firms to retain, license, and commercialize their intangible assets here in Canada.

Some SR&ED structural issues deal a “death blow” to small companies

Briggs in his response highlights structural issues that may inconvenience large corporations, but which 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 a Government of Canada site. Briggs adds that decisions are frequently delayed.

He also points out the reduced capital inflow available to companies due to hiring expensive consultants to handle SR&ED claims, which results in 10 percent to 18 per centof the funding from the tax credit going to these 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 companies’ cash flow requirements, which would enable the companies credit to increase risk tolerance and increase R&D spending with no impact on taxpayer dollars. He outlines the “proxy method” that allows for companies to estimate salaries going toward R&D and add a 55-percent overhead, claiming the total as expenditures.

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

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, he recommends that companies submit an annual report detailing yearly expenses, from which the tax deductions could be verified.

By minimizing cash-flow implications, Briggs maintains that qualifying companies would have access 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, the 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,” he says.

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

Briggs says his suggestions all share a crucial factor for reimagining SR&ED approval and deployment: None of his proposed reforms represent cost increases to the government. Yet a greater portion of the tax credit would go directly to the companies trying to commercialize innovation in Canada.

Focusing on capital inflow to qualifying firms, Briggs estimates that over 20 percent of SR&ED funding is not flowing directly to the companies that could most benefit from it.

He also points out 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. 

Briggs said he plans to submit his suggestions to the Carney government in response to the invitation for feedback, “

“in the hope that the current administration is a little more ambitious than the last.”