Navigating the SR&ED program in 2025
Over the years we have seen many changes to the SR&ED program, but the most important changes are not those that are a matter of law, but rather in the administration of the program. The administration of the SR&ED program impacts the real-world outcomes for taxpayers in terms of the effort required to get a claim approved by CRA and the actual tax credit benefit received. The administration of the program swings like a pendulum, going from relative ease of obtaining successful claims to one of difficulty. In years past, this was also geographical with one of the trends being East to West, Eastern Canada being the most difficult, and Western Canada being the easiest. Despite CRA stating equal administration of the program, those individual practitioners experienced in file preparation and audit across the country can testify to a very different reality. To correct for this, CRA has taken into consideration stake holder feedback, and implemented measures to ensure consistency across the country.
One of the interesting trends that corresponds to swings in the SR&ED program, is the prevalence of consultants and the competitiveness of fees. As the ease of winning claims increases, we observe an increase in the number of competitors, both in numbers and size, as well as a decrease in the fees being charged to perform the service. This trend continues through until the program becomes difficult again, at which time, we first observe an increase in fees, followed later by a decrease in the number of consultants and size of firms and practices. This trend is not surprising and indeed follows the rules of economics, and what we can observe from all this, is a balanced tug-of-war that maintains equilibrium. The secondary trend spans across these cycles, with an overall reduction in average fees, and increased efficiencies in the process.
At the present time, we are about to transition into a period of difficulty once again. The number of competitors is high and the fees are low. Moreover, we have just come off the peak of government give-aways and therefore it should be expected that in the near-term and foreseeable future that we will enter a period of austerity. This does not mean that the SR&ED dollars are going away, but it does mean that the effort required to get a claim across the line is going to increase. While some will see this as a negative thing, it satisfies the utility of removing the less-than-optimal actors from the program and ensures overall integrity so that the program can fulfill its primary purpose of stimulating innovation in Canada.
Undoubtedly, many have heard about the recent proposed changes to the program. These changes have not been fully disclosed to the public, and while CRA has stated that these changes will come into effect for taxation years ending December 16th, 2024, or after, it has also caveated that this is “unless otherwise stated”. With the proroguing of parliament and the high likelihood of a non-confidence vote shortly thereafter, it is unlikely that these changes will ever pass parliament. In addition to this, we must also consider that all proposed changes to the SR&ED program at the present time, are meant to be a net zero to the program’s annual spend as a whole, and therefore we should expect some equivalent subtractions from the program.
Compliance is one of the most important aspects of the program, but also one of the first casualties in lenient times. Taxpayers should expect and prepare for more stringent compliance enforcement by CRA over the next few years. As pressure is placed on CRA reviewers to reduce claim size the path of least resistance is compliance. In lean times it is easier to win a compliant claim than it is to win one with a remarkable innovation.