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The vast majority of Canadian business leaders want the federal government to support a wider range of research and development (R&D) activities and provide tax relief for Canadian intellectual property (IP) to make their companies and, in turn, the economy more productive, finds a KPMG in Canada survey.

Amid high demand for the Scientific Research and Experimental Development (SR&ED) program across the country, more than eight in 10 leaders (84 per cent) would like the program to be simplified and expanded to encourage more investment in the innovations that create economic prosperity.

"Canada's lack of domestic research and development is a key factor in the country's lagging productivity, relative to other industrialized countries," says David Durst, Partner-in-Charge, Tax Incentive Practice, KPMG in Canada. "Canadian businesses have faced challenges transforming ideas and innovations into viable, profitable ventures that spur economic growth and lead to a higher standard of living for Canadians. Currently, there are tax incentives for early-stage R&D; however, widely available support to transition the resulting knowledge into commercialized patents is missing in Canada's approach."

Key survey findings:

  • 84 per cent of 534 business leaders at small- and medium-sized companies across Canada believe the process of applying for and receiving SR&ED tax credits needs to be simplified
  • 74 per cent say the amount of the SR&ED tax incentive/refund is not sufficient to warrant their investment
  • 78 per cent say they would conduct their own R&D if the investment tax credit (ITC) rate was higher than 35 per cent
  • 82 per cent believe SR&ED should be expanded to cover a broader range of activities and expenses, such as equipment and the commercialization of research, even if the program had a lower ITC
  • 86 per cent prefer to see federal government policies and tax relief that support business growth, innovation and productivity, over personal tax credits

SR&ED is the single-largest R&D support program in Canada, providing Canadian-controlled private companies with an enhanced 35 per cent refundable tax credit on their first $3 million of qualified R&D-related expenses, and public and foreign companies with a 15 per cent non-refundable credit for R&D conducted within Canada.

The survey reveals that business leaders view the current definitions of research activities and expenditures under the SR&ED program as too narrow, covering only scientific research and experimental development. Seventy-eight per cent acknowledged that the R&D their business performs is currently not eligible for SR&ED.

"Business leaders also want more routine R&D that yields productivity improvements for their company to be made eligible under SR&ED, even if the tax credit rate is lower," adds Mr. Durst. "The question becomes whether the federal government's review of innovation programs will support a broader range of R&D in Canada that may not be patentable, but directly improves business productivity."

Support for a Canadian patent box regime

The Department of Finance is currently undertaking public consultations until April 15 to modernize the $3.5 billion SR&ED program on a cost-neutral basis. Finance has also requested public input on a "patent box" regime, which would offer tax breaks to encourage companies to develop and keep IP in Canada.

Eight in 10 (81 per cent) of leaders say they would conduct more R&D if the government introduced a patent box model, which would provide a lower corporate tax rate on revenues derived from Canadian IP.

The government's stated objective in proposing a patent box regime would be to encourage new and existing Canadian businesses to conduct their R&D in Canada by providing a preferential tax rate for the income generated from the IP resulting from that R&D. In addition to providing direct support for initial R&D activity, other countries provide incentives to help ensure that the benefits of locally-developed IP stays within their economies to create jobs and other social and economic benefits, says Brian Ernewein, Senior Advisor, National Tax Centre, KPMG in Canada.

"Generally, the income tax system should be neutral in its treatment of business income to avoid distorting the allocation of investment capital and impairing competitiveness" says Mr. Ernewein. "However, there is a case for a well-designed, preferential intellectual property tax regime, under which the qualifying income is derived from R&D conducted in Canada. The additional support for R&D performed here could ease the path toward commercialization and reduce the pressure to locate patents and other IP outside Canada in order to benefit from lower tax rates elsewhere."

Read more about the upcoming federal budget.

About the KPMG Business Survey - Federal Budget 2024 Edition

KPMG in Canada surveyed 534 Canadian companies between February 3 and February 27, 2024, using Sago's Methodify online research platform. All respondents are business owners or executive-level decision makers. Thirty-one per cent helm companies with $500 million to $1 billion in annual gross revenue; 14 per cent, between $300 million to $499 million; 35 per cent, between $100 million and $299 million; 19 per cent, between $99 million to $10 million and the remaining one per cent, nine million or less. Seventy-five per cent of the companies are privately held and 25 per cent are publicly traded. Forty-two per cent are family-owned businesses.

About KPMG in Canada

KPMG LLP, a limited liability partnership, is a full-service Audit, Tax and Advisory firm owned and operated by Canadians. For over 150 years, our professionals have provided consulting, accounting, auditing, and tax services to Canadians, inspiring confidence, empowering change, and driving innovation. Guided by our core values of Integrity, Excellence, Courage, Together, For Better, KPMG employs more than 10,000 people in over 40 locations across Canada, serving private- and public-sector clients. KPMG is consistently ranked one of Canada's top employers and one of the best places to work in the country.

The firm is established under the laws of Ontario and is a member of KPMG's global organization of independent member firms affiliated with KPMG International, a private English company limited by guarantee. Each KPMG firm is a legally distinct and separate entity and describes itself as such. For more information, see kpmg.com/ca.

For media inquiries, please contact:

Nancy White
National Communications  & Media Relations
KPMG in Canada
(416) 876-1400