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BIOTECanada’s Response to SR&ED Phase 2 – BIOTECanada

BIOTECanada responses to the questions of the second phase of consultations on the Scientific Research and Experimental Development Tax Incentive Program.

BIOTECanada is the national trade association representing Canada’s biotechnology sector. The Association’s 230 member companies are representative of the broader industry ecosystem in Canada which provide high-quality jobs to build successful enterprises in Canada which are transforming health, agriculture, and industrial market segments domestically and globally. It is on behalf of the member companies that BIOTECanada is submitting the responses below to the SR&ED Phase 2 consultation.

The pandemic’s economic, social, and health impact effectively focused the attention of policymakers on the strategic importance of building a competitive domestic life science and biomanufacturing industry. Correspondingly, the Canadian government has been preparing for another similar global health emergency through a Life Sciences and Biomanufacturing Strategy and its corresponding government investments into the life sciences ecosystem. Leveraging world-class scientific research, the Canadian biotechnology and life science industry has performed well in recent years, delivering more than $26 billion of transactions with global pharma companies since 2019.

However, the biotechnology and life science industry is currently facing a capital shortfall1, with funding for biotechnology and life science companies falling from $0.8B in 2019 to $0.5B in 2023, a decline of about 37%.2 More than 120 public biotech companies globally and hundreds more private companies, laid off staff in 2023, with more than 10,000 jobs lost in the process. In challenging times like these, SR&ED allows promising biotechnology and life science companies to leverage scarce capital to continue to drive innovation.

Concurrently, competition for talent and intellectual property remains fierce as other countries prepare for the next global health crisis by building out their own domestic capabilities, leveraging incentives such as grants, subsidies, and lower tax rates to lure talent and intellectual property away from Canada. For example, Australia now offers refundable tax credits for R&D of 43.5% on eligible expenditures (up to 48.5% in limited cases), with larger companies (over $20 million) receiving a generous 38.5% tax credit.3 Australia also provides over $21.5 billion in funding for life sciences initiatives. As a result, Australia is a preferred jurisdiction for many non-Australian companies to conduct research. Consequently, it is imperative for Canada to at least maintain its competitive positioning.

Questions:

Q1. What are some of the challenges faced by research-and-development-performing small- and medium-sized Canadian public corporations when it comes to financing?

BIOTECanada response:

For biotech SME’s, investment capital is the lifeblood of successful research and innovation. However, it is important to recognize that investment is extraordinarily mobile; it will go to wherever it is provided the greatest security and return. Canada is home to numerous emerging and high growth biotech companies. Access to capital is precious and vital to survive to become anchor companies. Innovative companies are built on intangible assets, like intellectual property, and given capital is available in other markets in far greater quantity, the SR&ED Tax Credit is an essential tool in meeting both of Canada’s objectives. Importantly, investors see the SR&ED Tax Credit as a competitive advantage for Canadian companies vis-a-vis companies in other jurisdictions that are competing for the same investment dollars.

With the low threshold amounts established over 15 years ago in terms of expenditure limits and restrictions related to the CCPC status, many biotechnology companies are challenged to continue their R&D in Canada beyond the point they exhaust their eligibility for SR&ED ITCs. In addition, many companies may never qualify given their non-CCPCs status or simply their size. We currently have many of these corporations that continue doing some phenomenal research, but would further benefit from a more favorable tax regime with higher threshold amounts.

Q2. To avoid any potential disincentives to growth, would entrepreneurs favour a program with one single rate accessible to all, even it if means somewhat lower support for small Canadian-controlled private corporations?

BIOTECanada response:

No, BIOTECanada does not agree with a single rate accessible to all at the expense of support for CCPC.

The SR&ED Tax Credit is a vitally important tool for companies as they seek to attract investment to fund their experimental research and scientific development in Canada. As such, to retain innovation through the commercialization lifecycle and reap the associated economic benefits, Canada must continue to amplify the competitiveness of the SR&ED Tax Credit. Accordingly, changes to the SR&ED Tax Credit structure must be made understanding and appreciating the significant contribution the SR&ED Tax Credit plays in supporting early stage, pre-commercial and larger biotech companies. In this context, the industry urges the government to ensure changes to the SR&ED tax credit improve its efficiency, effectiveness and global competitiveness while also ensuring it is aligned with the direction and objectives of the Government’s Innovation Agenda.

Restricting SR&ED access to only CCPC companies limits its benefit to only those companies that comply with CCPC qualifications. As many Canadian biotech companies are required to secure financing from outside of Canada, they often do not qualify as CCPC and therefore cannot benefit from the SR&ED tax credit despite most of their operations and R&D being performed in Canada. In this context, making the rate available to non-CCPC would be a more practical approach for the biotech industry.

The rate should be increased for foreign companies (not leaving the rate of reimbursement at only 14%). The federal portion should also be reimbursed and not put aside as a reserve of “tax credits” to be used when a company becomes available. If the rate is increased for foreign owned companies, that the credit should be spent in Canada.

Q3. How should the concept of “Canadian” public corporations be defined, should the government proceed with measures to improve access to the SR&ED program’s enhanced credit for Canadian public corporations?

BIOTECanada response:

Yes, BIOTECanada recommends the government proceed with measures to improve access to the SR&ED program’s enhanced credit for Canadian public corporations, particularly for smaller, pre-revenue public companies. The definition of a Canadian public company should be a company incorporated in Canada and traded on a stock exchange.
Presently, only companies with Canadian ownership greater than 50% and/or immaterial ownership by not-for-profit (Universities or Hospital Foundations for example) are eligible for refundable SR&ED tax credits. This is an unrealistic criteria given the need for life science companies to raise significant capital relative to other industries and the accompanying scarcity of such capital domestically.

BIOTECanada recommends non-CCPCs with less than 50% Canadian ownership should be able to receive refundable tax credits for work and creating jobs through expanded research and development activities in Canada (tax carry- forward credits are not as effective for pre-revenue companies whereby their employees will pay income taxes to offset SR&ED expansion).

Q4. The SR&ED program currently has rules to prevent the multiplication of the expenditure limit by Canadian-controlled private corporations with common control. If enhanced support were extended to public corporations, how should relationships among legal entities be delineated?

BIOTECanada response:

BIOTECanada supports the rules currently in place to prevent multiplication of the expenditure limit by CCPC’s with common control.

Q5. Current global initiatives rely on accounting concepts of relationship and control to determine whether entities are included in a large business corporate group. Should existing international practices of this sort be adapted for determining relations for public corporations in the context of the SR&ED program?

BIOTECanada response:

BIOTECanada supports the international best practices currently in place for determining relations for public corporations in the context of the SR&ED program.

Q6. What is the optimal size-based metric (e.g., taxable capital employed in Canada, revenue) to phase out enhanced support for public corporations, including those in a corporate group?

BIOTECanada response:

SR&ED Tax Credit plays an important role in supporting early stage, pre-commercial and larger biotech companies. In this context, the industry urges the government to ensure changes to the SR&ED tax credit improve its efficiency, effectiveness and global competitiveness while also ensuring it is aligned with the direction and objectives of the Government’s Innovation Agenda. SR&ED is most critical to early-stage companies, but it is also important for mid- and late-stage companies to help them better compete globally. BIOTECanada would require additional time to determine a consensus of an optimal size-based metric, if any to phase out enhanced support for public corporations, including those in a corporate group.

Q7. How does refundability under the SR&ED program influence investment decisions and planning? To what degree would Canada become a more competitive location to undertake research and development (R&D), compared to other jurisdictions, if credits earned at the general rate were partially or fully refundable?

BIOTECanada response:

Currently, eligibility for refundability is driven by CCPC-status, among other factors. However given the scarcity of capital in Canada, our member companies often lose CCPC status due to taking funding from non-Canadian investors (U.S. investors specifically). Nevertheless, there are significant short-, intermediate- and long-term benefits to Canada in encouraging the growth of these companies domestically, as they grow Canada’s talent pool and create high-wage jobs. As a result, we believe that non-CCPCs with less than 50% Canadian ownership should be able to receive refundable tax credits if a ‘significant benefit to Canada’ is clearly demonstrated (e.g. job creation, Canadian-owned intellectual property advancement). BIOTECanada also recommends:

  • Increasing the cap for SR&ED refunds for the life science sector to reflect inflationary pressures.  The cap hasn’t changed for over 15 years.
  • Increasing the SR&ED enhanced investment tax credit rate to incentivize more research and development in Canada for economic development and opportunity multipliers to offset costs.

Because revenues for life science companies are back-end-loaded or, in many cases, never occur, non-refundable tax credits are of little value to early- and mid-stage life science companies.

Q8. Would it be preferable that the government make the general rate refundable, but at a reduced rate? What would be an acceptable trade-off in this regard?

BIOTECanada response:

No, it would not be preferable that the government make the general rate refundable at a reduced rate. BIOTECanada recommends an enhanced refundable rate with a higher cap. See Q7 above.

Q9. In your view, should SR&ED-eligible activity be broadened from the existing OECD definition of SR&ED, generally used by Canada and other countries offering R&D tax credits? If so, how would you propose to amend the current definition? Why would any additional activities warrant government support?

BIOTECanada Response:

Yes, SR&ED-eligible activity should be broadened, particularly for smaller pre-revenue companies to allow for example, expenses incurred elsewhere when no expertise exists in Canada; and allowing IP / patent costs to be SR&ED eligible. See Q10 below

Q10. Can you provide specific examples of activity that you think should be eligible for the SR&ED program that are not currently eligible? Would such a change bring additional predictability to claimants?

BIOTECanada response: 

Yes, specific examples below should be eligible for SR&ED:

  • Allow clinical trial experimental drug material manufacturing to be eligible for SR&ED regardless of where these activities occur.
  • Add patent / IP costs as SR&ED-eligible expenses for new or existing IP controlled by Canadian parent companies.  These expenses for life science companies are critical expenditures and should be encouraged and not discouraged.

Q11. How could the SR&ED program be enhanced to support businesses conducting R&D in the digital age, particularly in respect of software development and the emergence of artificial intelligence?

BIOTECanada response: 

The SR&ED program should be enhanced to support business conducting R&D in the digital age, in software development and AI, in support of SR&ED eligible programs.

Q12. To what extent do businesses face financial challenges and trade-offs in protecting their intellectual property (IP) in Canada and abroad? Would it be appropriate for the government to provide additional support to these activities under the SR&ED program? If so, what would be a cost-effective approach? 

BIOTECanada response:

Biotechnology companies face financial challenges and trade-offs in protecting their IP in Canada and abroad.  Yes, it would be appropriate to provide additional support to these activities under the SR&ED program. There are significant short-, intermediate- and long-term benefits to Canada in encouraging the growth of these companies domestically, as they grow Canada’s talent pool and create high-wage jobs. 

  • Add patent / IP costs as SR&ED-eligible expenses for new or existing IP controlled by Canadian parent companies.  These expenses for life science companies are critical expenditures and should be encouraged and not discouraged.

References

  1. https://www.fiercebiotech.com/biotech/biopharma-vc-slips-last-years-q4-and-where-investors-are-likely-place-future-bets-pitchbook#:~:text=Venture%20capital%20invested%20%2429.9%20billion%20in%20biopharma%20in,in%202022%2C%20according%20to%20a%20new%20PitchBook%20analysis.
  2. https://www.biotech.ca/policy-matters/industry-data/
  3. https://business.gov.au/grants-and-programs/research-and-development-tax-incentive/sector-guides-for-r-and-d-tax-incentive-applicants/biotechnology