Espresso Capital Partners

On October 17, the long awaited “Jenkins Report” on R&D in Canada was presented to the federal government. While the scope of the report was on all government R&D programs, there were a number of recommendations to government on the SR&ED program specifically.

Since the SR&ED program is very important to Espresso Capital, we wanted to summarize some of the key recommendations as it relates to Espresso and clients. A link to the full report is at the bottom of this article.

 

Key Recommendations (from Espresso’s point of view):

1. Simplify SR&ED by eliminating the materials portion of the claim and only allowing labour-related costs. Some discussion of increasing the labour related claimable amount.
2. Less money overall to SR&ED program and more to picking certain companies and sectors for hand selected direct support.
3. Create a new Industrial Research and Innovation Council (IRIC) to coordinate government sponsored R&D programs.
4. Bigger role for BDC in angel investment and working with angel investors

Note that this is a report by industry experts and delivered to the Federal Science Minister, Gary Goodyear. Goodyear said he will examine the balance between direct and indirect R&D spending, but he wouldn’t commit to implementing the report’s main findings or provide a timetable for making changes. It isn’t clear when, or even if, any or some of these recommendations ever see legislation or policy changes.

 

What does this mean for Espresso and our clients?

1. By simplifying the SR&ED program by eliminating of the materials-related costs in SR&ED the impact will likely result in lower SR&ED claimable expenses overall and a potentially large impact to the SR&ED consulting industry.
2. However, Espresso is primarily focused on KBI (knowledge based industries) which has a typically very low material component and much higher labour-related costs. The result will very likely have a small impact on Espresso clients and portfolio.
3. The industries most impacted will be secondary manufacturing industries such as plastics, printing, packaging, and food processing which have historically used the material-related component of SR&ED to their advantage.
4. The cash refund of SR&ED for CCPC’s would only be available for a set period of time, after which, the benefit would revert directly or partially to non-refundable tax credits. Depending the ‘set period of time’ chosen, this could impact some potential Espresso clients negatively as we only fund companies with a cash refund component.
5. A potentially positive recommendation is to allow non-CPCC start-up companies to take advantage of cash refund SR&ED tax credits for a set number of years. This would potentially Espresso’s market as currently, only CCPC’s are eligible for cash refunds.
6. The proxy method of calculating overheads may be reduced which would reduce the size of claims overall.
7. There is mention of a ‘voucher’ program with no details around it. It appears to be some sort of certificate program that determines eligibility up front. This would be excellent from Espresso’s viewpoint as it eliminates the vagaries of subsequent CRA review as to what is eligibility. This would be more in line with the digital media tax credit programs run by several provinces.
8. The creation of IRIC has potential to alleviate a major headache for Espresso and its clients. The biggest risk and headache we suffer is the process of deciding which expenditures are eligible for SR&ED and which aren’t. This is far too subjective for anybody’s liking as the SR&ED program has far too much interpretation as to what is eligible and what is not. We would hope that a new and independent research organization such as IRIC would take over management of the SR&ED program. This has the hope of making the eligibility requirements clear and consistent across the country.

Summary

We are pleased that the Panel recognizes the challenges faced by start-ups and agree with their recommendations of a wider range of support to help them during the start-up and late stages of their
development cycles.  Anything that reduces fraud and subjectivity in the process would be very welcome. We look forward to seeing what new programs will be introduced.

 

Full text of the R&D Expert Review Panel Report as released 17-Oct-2011 here

 

The official announcement of the panel’s formation (Industry Canada)

 

Biographies of panellists