By Nelson Bennett

Thursday, March 29, 2012 – B.C. technology firms involved in capital-intensive research and development will lose some critical funding under a revamped Scientific Research and Experimental Development (SR&ED) program, announced by the federal government today in its 2012 budget. However, overall, changes to SR&ED are not as drastic as the sector had feared.

Ottawa is eliminating the credit for capital expenditures under SR&ED. Starting in 2014, only overhead related to labour for R&D will qualify for SR&ED credits.

That will hurt companies that do R&D requiring a lot of expensive testing equipment. For example, Ron Klopfer, CEO of Etalim Inc., which is developing a thermo-acoustic heat engine, said a sizeable amount of his company’s overhead is related to equipment, and said losing the SR&ED credit on those expenditures will be “a huge hit” for his company.

For the most part, however, the changes to SR&ED will not be as dramatic as many had feared, said David Kaplan, who developed a web-based program called SREDable that tech companies receiving SR&ED credits use for time-keeping and making claims.

An estimated 1,500 to 2,000 B.C. companies have received SR&ED tax credits. Many consider it the most important government incentive program for companies involved in innovation and R&D.

B.C.’s technology sector has been bracing for an expected overhaul of the program, as recommended by Tom Jenkins, who was commissioned to conduct a review of Canada’s policies on innovation, research and technology.

The SR&ED overhaul did not pan out quite the way many expected it to, Kaplan said. Finance minister Jim Flaherty’s budget reduces the SR&ED credit for larger companies and increases it for smaller ones – the opposite of what Jenkins recommended.

“It’s a hell of a surprise for large companies and not much of a dent for small companies,” Kaplan said. “I think that Flaherty actually made a good call here.”

Kaplan said the SR&ED tax credit rate for labour related to R&D for large companies will go down from the current 20% to 15%.

There is no change for smaller companies, which can get back 35% of the R&D-related labour costs.

Bill Tam, CEO of the BC Technology Industry Association, said the federal budget sets a positive tone for Canada’s technology sector, thanks to its focus on innovation.

“It was encouraging to see that the government continues to find the importance of innovation overall as a major pillar for future economic growth,” Tam said.

The budget addresses concerns over a lack of access to risk capital with a $500 million venture capital fund, $100 million of which will go to the Business Development Bank of Canada to support venture capital investments.

The budget also provides funding for the following programs:

• $110 million per year to the National Research Council to double support to companies through the Industrial Research Assistance Program;
• $95 million over three years, and $40 million annually thereafter, to make the Canadian Innovation Commercialization Program permanent; and
• $105 million over two years to support forestry innovation and market development.

“The forestry innovation piece, I think, for British Columbia, is going to be very important given our base of biomass related products and clean tech industries,” Tam said.

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