OTTAWA — The lobby group representing Canadian scale-ups is calling for a major overhaul of one of the country’s biggest innovation-support schemes. Here’s what you need to know: 

The background: The federal government will pay out about $3.5 billion in scientific research and experimental development (SR&ED) incentives this year, Finance Canada projected. Firms can claim between 15 and 35 per cent of specific innovation expenses against what they owe in tax. Some Canadian private firms can get cash back if they don’t have significant revenues, a refund that can be worth up to $3 million. 

The ask: In a five-page submission published Thursday,the Council of Canadian Innovators (CCI) recommended Ottawa expand the program so that firms can claim the costs of getting patents for their inventions, as well as expenses incurred to keep improving their products and services. 

The Canada Revenue Agency (CRA), which administers the incentive, has a “fundamental misunderstanding of how tech is developed in 2022,” said Nick Schiavo, CCI’s director of federal affairs. The tax department treats “incremental improvements to tech that use data [as] just routine,” denying such applications. But scale-ups, particularly in AI, keep developing their products long past the eureka moment. The association also wants the CRA to bridge that knowledge gap with dedicated training for auditors.

The CCI is also recommending lifting the sliding scale that limits the incentive for firms with more than $50 million in taxable capital. The current cap was set in the 2008 federal budget; the association says it should increase significantly. “These thresholds haven’t kept pace with the technology market,” said Schiavo, citing the growing size of VC rounds. 

The paperwork: There’s a lot of it. Firms pay a phalanx of consultants and big accounting firms to help with filings, while startups like Vancouver’s Boast are trying to simplify it with AI. The CCI is calling for a new, streamlined online application system. It also wants the government to track the returns the country is getting for its tax breaks.

The timeline: The April federal budget promised to review the program, including how it can incent firms to make and keep IP in Canada, and changes to eligibility rules. Finance Canada has yet to launch consultations. The department did not respond to The Logic’s questions about when it plans to begin the review.