Nearly $200 million in tax credits for tech firms delayed amid COVID-19

Innovation, Science and Economic Development Minister Navdeep Singh Bains responds to a question during Question Period in the House of Commons on April 1, 2019
Innovation Minister Navdeep Bains during question period in April 2019. The Canadian Press/Adrian Wyld

Nearly $200 million in tax credits for tech companies are delayed amid the COVID-19 pandemic, and CEOs are warning they’ll need to lay off workers if the money doesn’t come soon. 

Ottawa has rolled out a host of emergency assistance programs for businesses over the past two weeks. In an effort to minimize the burden on companies dealing with the economic fallout from the spread of the coronavirus, the Canada Revenue Agency (CRA) announced on March 18 it would suspend most audits of businesses for four weeks. However, any company scheduled to be audited is not eligible to receive money from the 34-year-old scientific research and experimental development (SR&ED) tax credit, which distributes upwards of $5 billion to companies every year, until the process is complete.

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Talking Point

Over $195 million in federal SR&ED tax credits for tech firms are delayed despite government promises to free up cash to help businesses survive the COVID-19 pandemic. CEOs warn they’ll need to lay off workers if the credit money doesn’t come soon. Multiple tech industry associations have raised concerns about the issue with the government, as well.

“We were scheduled to have our audit tomorrow, and that has now been postponed indefinitely. We’ve got all of our paperwork in order, but because the folks that handle the audit are on reduced staff and don’t have a lot of direction, we don’t know when that money will be available to us,” said Paul Donald, CEO of Kitchener, Ont.-based Encircle.

The firm, which helps insurance companies process claims remotely, has 63 employees and has requested about $1 million via SR&ED. Encircle has received SR&ED money for several years without issue. Donald said the government has given him no indication it has any concerns with his application, but that if he doesn’t receive the money, his company will potentially lay off workers. 

The CRA audits up to a quarter of all SR&ED applicants, according to tax-credit consulting firm Boast Capital. Tech executives told The Logic companies can be audited if they ask for a significant increase in funds, if the CRA thinks there’s something questionable about their application or simply because they haven’t been audited in several years. 

Asked if the government would cancel all this year’s SR&ED audits, CRA spokesperson Etienne Biram said the program is “doing everything possible to ensure that businesses receive confirmation of their tax positions as soon as possible. It is also doing everything that it can to ensure that claimants receive the credits to which they are entitled as soon as possible, and are working to ensure that the auditors receive the support and guidance necessary to prioritise the processing of refundable claims.” 

Biram added that the value of claims for refundable credits assigned to the SR&ED program’s review teams is $195.2 million as of March 30, and that firms that want expedited processing of their audits can contact the CRA. 

Donald isn’t the only one concerned, however. Both the Council of Canadian Innovators (CCI) and the Canadian Venture Capital and Private Equity Association have written to the government asking them to suspend all audits. 

“The government should suspend all technical and financial audits until 2021 and pay SR&ED claims on submission. Claims and audits can take many several months/years for a claim to be processed, so suspending these audits would immediately help inject capital into companies that need it,” reads CCI’s submission. 

On March 19, Innovation Minister Navdeep Bains said he understood the issue, and that he’d look into it: “Anything we can do to unlock more capital in a timely manner needs to be addressed and so we’re looking at all government programming, including SR&ED.” 

Asked what Bains has done on SR&ED since March 19, Véronique Simard, a spokesperson for the minister, said, “Our government recognizes the challenges that COVID-19 presents. That’s why we have announced major new supports for families, for workers, and for businesses. We’ve raised the wage subsidy amount from 10 to 75 per cent for businesses that are seeing a significant revenue drop.”

Over the past two weeks, the number of companies waiting on claims has increased, according to Garron Helman, CEO of Toronto-based Venbridge, which provides loans backed by SR&ED to firms. “In the last two weeks we have not seen any claims approved,” said Helman. This is a particularly busy time for SR&ED claims, as companies with fiscal years ended December 2019 are getting their claims in. 

“They’re probably processing a couple hundred million [dollars] a week at this point. It’s a terrible time for the money to stop flowing,” said Helman. 

Boast Capital, which helps over 500 companies get more money from SR&ED, is seeing a similar slowdown. 

“As late as last week our clients were getting accepted as filed, but any that were being flagged for an audit—and only about 10 per cent of our clients do, which is well below the average—those companies are frozen and we don’t know when they’ll see the money,” said Lloyed Lobo, co-founder of Boast, adding that the CRA told his firm that resources for SR&ED have been reduced, and suggested Boast fax requests for expedited reviews for companies with cash-flow concerns. 

“The government is rolling out so many new programs. It’s going to take a few weeks for even the representatives through which the government is rolling these out to come to terms with the processes,” said Lobo. 

“They already have a program that’s giving out billions of dollars to tens of thousands of companies. Why hold that up?”

In 2017, 11,410 small companies, 5,758 mid-sized and 413 large companies claimed SR&ED credits, according to CRA data. 

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Some companies are weathering the delay by taking out loans secured against future SR&ED money. Ellen McGregor, CEO of Fielding Environmental, said her bank told her it will fund her against her expected $450,000 claim. However, she’s already laid off 28 workers, all of whom she intends to rehire. 

“Many innovative companies were in discussions with financiers, with investors, before COVID-19 hit, when you can’t deliver on an injection of liquidity—that was part of your sales pitch. It’s just another reason for people to backpedal and say, ‘Not this time, not gonna go ahead with the investment,’” said McGregor.