Loss Of Innovation Funding Has Ripple Effects Well Beyond Research Labs
In the Alberta budget released Oct. 24, 2019, the provincial government announced that it will eliminate the Alberta tax credit component of the Scientific Research & Experimental Development (SR&ED) program for expenditures incurred after Dec. 31, 2019.
While SR&ED is often associated with developments in digital technologies or research labs, SR&ED has been, and will continue to be, a major incentive for the oil and gas industry as well. It is no secret in this province that some of the largest expenditures on research happen in the energy sector, including the greatest spending in the country on clean technology initiatives.
So, what do these changes mean for companies innovating in the energy space in Alberta?
For most Canadian-controlled private companies (CCPCs), whether you are developing downhole tools or water filtration technologies, you can expect a drop from 41.5 per cent (combined federal + provincial) to 35 per cent back on eligible expenditures incurred starting January 1, 2020, representing a decrease of 16 per cent from what you would have received for your efforts in 2018 or 2019. Obviously there is still a benefit worth pursuing (the 35 per cent remains fully refundable), but the reduction of this program makes it harder for innovative companies, especially those just trying to establish themselves in the market and drive their product to a commercially viable state. This is particularly true for smaller companies striving to get that first field trial, as the economic risks for all parties will be offset to a lesser degree in the absence of the Alberta SR&ED credit.
Another way to look at this for private companies is that whereas previously SR&ED may have paid for two of every five engineers, now it will cover roughly one of every three. Why look at it in this light? Because one of the primary aspects of SR&ED support is wages for technical and engineering employees, in a province with so many highly educated, skilled individuals struggling to find work, it is perplexing that a program which offsets the cost of hiring such people would be eliminated. That is, cancelling the Alberta portion of SR&ED does not only hurt companies, but also individuals.
For publicly traded companies, non-CCPCs, and CCPCs exceeding $50 million in taxable capital, the sting is more acute than for smaller CCPCs. Effective for expenditures after Jan. 1, 2020, your net SR&ED rate in Alberta will drop from 23.5 per cent (combined federal + provincial) to 15 per cent back on expenditures. Not only will eligible expenditures generate ~36 per cent fewer tax credits, but most importantly none of the remaining tax credits will be refundable. For some large energy companies with a presence in both the U.S. and Canada, there will now be one less reason to keep their engineering and development teams in Alberta. Consider that for E&Ps in particular, the lowering of corporate taxes from 12 per cent to eight per cent will not make up for the elimination of the refundable tax credit, especially as most will not be taxable in the near term.
Despite these changes, it is worth reiterating that the federal SR&ED benefits will remain for all corporations, and expenditures incurred in 2018 and 2019 are still eligible for the Alberta SR&ED benefit. The filing rules for SR&ED are such that for most companies there is time to submit these claims, and as such all companies are encouraged to carefully evaluate the work they are doing and take advantage while the provincial opportunity remains.
Large private companies (prior year taxable capital >$50 million) and public companies should also consider their tax horizons, noting that not only can the non-refundable SR&ED credit be carried forward for 20 years, but that it does factor into valuation in the event of an acquisition, which is a reality for many in the current economic climate.
As the energy sector continues to evolve, it is disappointing that the province of Alberta has taken the stance that “there are enough other incentives” for the development of new technologies, and has become the only province other than P.E.I. to not offer a provincial SR&ED credit to complement the federal program. While it is true that Albertans will remain at the forefront of energy technology development with or without this support, the industry certainly did not need even more headwind.