The Changing Face of Incentives

1. The Changing Face of Incentives Craig Mulcahy June 4, 2019

2. Agenda • Direct Funding vs Indirect Funding • 2018/2019 Budget Changes • TRL Government Funding • SR&ED • SIF

3. Direct Funding vs Indirect Funding • Indirect Funding • Looks backward • Cash flow after the project • Approval only at end of project • Activity based not limited by specific program budget • Direct Funding • Looks forward • Cash flow during the project • Pre-approval process • Limited program budgets • Often competition for funds • Government picks winners Refundable credits – used for taxes owing first. If no taxes owing then company receives credit in form of a cheque. Non-refundable credits – Only used for taxes owing. Can be rolled back, or held for future year taxes owing

4. Federal Budget 2018 Highlights • Pursuant to the current government’s innovation agenda (ISED) Innovation, Science & Economic Development has undertaken a comprehensive review of all direct program funding • Innovation Canada (new) will be the “gateway” to accessing government funding programs. • 2018 budget introduced measures to consolidate 92 direct funding programs into 35. Current policy is focused on changes that would allow for simplified adjudication of eligible projects consistent with the government’s economic focus areas: specifically advanced manufacturing, sustainable technology, clean resources, agri-food, digital industries, health/bio sciences • Concurrently indirect funding ex. SR&ED are under an independent review by the Department of Finance (DOF). No immediate changes anticipated given governments corporate tax change “fatigue”. In the long term the refundable tax credit remains in the cross hairs due to perceived underperformance. • Government Refocuses Innovation Support Fundamentally the purpose of the refocusing effort is to address Canada’s well studied inability to scale corporate R&D

5. Federal Budget 2018 Highlights • Government Refocuses Innovation Support • Four Flagship Programs for all Funding: • NRC-IRAP responsible for funding projects $1M-$10M • SIF funding for projects $10M+ (COE’s and Business Network Centres will be transferred to SIF/ISED Administration) • Regional Development Agencies responsible for smaller local projects • Trade Commissioner Service for export market development initiatives • Spending announcements enhanced internal government agencies, facilities, or research institutions while little to private sector and particularly SME’s. • Procurement channels will be a significant focus of funding initiatives going forward through Innovative Solutions Canada (ISC), Build in Canada Program (BCIP, and IDEAS

6. Federal Budget 2019 Highlights • Government Refocuses Innovation Support • Zero Emission Vehicles – Temporary enhanced amortization rate of 100%. • Removal of profitability test for determination of enhanced SR&ED credit rate. • Prior year taxable income test. For CCPC’s with over $800,000 in taxable income reduced SR&ED credit from 35% refundable to 15% non-refundable.

7. Government Funding Landscape Indirect Funding Direct Funding

8. AREAS THAT TRIGGER GI PROGRAMS Accessingnew markets Capitalinvestment Green projects Factory expansion Job creation, training Innovation, R&D Adopting new technologies Page 8

9. TECHNOLOGY READINESS LEVEL FUNDING Ideation TRL 1 Funding Stream Basic principles of concept observed and reported. TRL 2 Ideation MARCH 8 hours Technology concept and/or application formulated. • IRAP • NSERC – Engage • NSERC – Engage + • SR&ED TRL 3 Ideation Analytical and experimental critical function and/or proof of concept. TRL 4 Funding Stream Development Component and/or validation in a laboratory environment. • NSERC CRD – Collaborative Research & Development • MITACS – Accelerate • SR&ED TRL 5 Development Component and/or validation in a simulated environment. TRL 6 Development System/subsystem model or prototype demonstration in a simulated environment. TRL 7 Funding Stream Commercialization Prototype ready for demonstration in an appropriate operational environment. • SIF – Strategic Innovation Fund • BCIP (Innovation Solutions Canada) – Built in Canada Innovation Program • CAP – Canadian Agricultural Partnership • Can Export TRL 8 Commercialization Actual technology completed and qualified through tests and demonstrations. TRL 9 Commercialization Actual technology proven through successful deployment in an operational setting.

10. Sample Funding Blueprint Chart maps out Ideation, Development and Commercialization stages of the project along with maximum allowable levels of funding, and an Application Submission Milestone which accounts for the time between application submission and application approval.

11. GRANT FUNDING SUCCESS: TIPS Approach them strategically: future growth plans, alignment with your strategy, timeframe, your capacity to invest Talk to the funders - understand what matters to them first Be specific about expected outcomes and outputs It’s not all about you – benefits to Canada Make constructive use of project plans and milestones Grants are very volatile,work with people who are connected Submitting an application is very competitive- choose the writers carefully

12. SR&ED – A Quick recap • Federal Investment Tax Credit ITC program • Approximately $2.7 billion awarded to 18,000 claimants in 2016 • 75% of claimants are small business • Approximately 200 large companies claim over 60% of the total SR&ED tax credits • Claims are filed with Corporate Tax Returns no later than 18 months from fiscal year end • 50% of claims are now in IT disciplines

13. Qualifying SR&ED Activities • Income Tax Act: SR&ED work must be…: • A systematic investigation or search… • Carried out in a field of science or technology… • By means of experiment or analysis. • Three types of eligible SR&ED: • Basic Research • Applied Research • Experimental Development (90%+ of all claims) NOTE: SR&ED IS NOT THE SAME AS R&D Drilling is a specifically EXCLUDED eligible activity for SR&ED

14. Current SR&ED Environment • New CRA Direct General, Jason Charon, former head of IRAP has signaled greater willingness to conduct outreach with the professional and claiming communities in SRED. • Initiatives include a return to industry based guidance documents for clarifying eligibility concerns of claimants. • The first guidance document is due out shortly and is directed at researching Doctors claiming SRED in their medical professional corporations • We are noting and CRA has confirmed a clearing of a substantial backlog in the SRED appeals inventory leading to faster resolution of Notices of Objection. • CRA has increased SR&ED staff levels over the last 24 months. The percentage of claims audited is up substantially.

15. ISED: STRATEGIC INNOVATION FUND • Innovation, Science and Economic Development Canada (SIF): • October, 2019 Application Date • The Strategic Innovation Fund builds on existing federal innovation programming, namely the Strategic Aerospace and Defence Initiative, Technology Demonstration Program, Automotive Innovation Fund and Automotive Supplier Innovation Program. Budget 2017 announced a new $1.26 billion five-year Strategic Innovation Fund to consolidate and simplify existing business innovation programming. Description • To allow for more focused support for business research and development projects over $10 million, the Strategic Innovation Fund will move away from supporting smaller projects to support larger projects that can lead to significant job creation and shared prosperity for Canadians. The Fund’s role in facilitating the growth and expansion of firms and attracting large-scale job-creating investments will remain unchanged. Funding • Stream 1: R&D and Commercialization • Stream 2: Firm expansion and growth • Stream 3: Investment Attraction and Reinvestment • Stream 4: Collaborative Technology Development and Demonstration Projects • Eligible costs are limited to non-recurring costs that are specifically related to the project, including: • Direct labour • Overhead (program limits apply) • Subcontracts and consultants • Direct materials and equipment • Other direct costs • Land and buildings • Costs associated with land and buildings must be necessary and reasonable to carry out the activity to which they relate. Funded Activities Processing Time • Step 1: Statement of Interest: 6-8 Weeks • Step 2: Full application: 2-3 Months

16. Questions? cmulcahy@bdo.ca