TMX POV - Expanding SR&ED to public companies benefits Canada

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 Canada¹. 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. 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-revenue². 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 trend³, capital programs like SR&ED are critical to the success of early stage companies, all hoping to become the next Shopify (TSX:SHOP), Nuvei (TSX:NVEI), and Lightspeed (TSX:LSPD).

¹ Source: Government of Canada
(https://www.canada.ca/en/department-finance/programs/consultations/2024/consultation-on-scientific-research-and-experimental-development/consultation-paper-on-scientific-research-and-experimental-development.html)

² Source: TSX Market Intelligence Group, as at March 31, 2024

³ Source: Statistics Canada
(https://www150.statcan.gc.ca/n1/pub/36-28-0001/2024004/article/00001-eng.htm)

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