Unlocking SR&ED for Public Companies | The CSE Podcast E10-S5

🎙️ Our latest CSE Podcast episode is live - and this one tackles a major policy shift with real implications for Canadian public companies.

Host James Black sits down with Bryan Watson, Managing Director at CleanTech North, to break down recent changes under the Budget Implementation Act (C15) - and what they mean for innovation funding in Canada.

💡 Spotlight topic: Unlocking SR&ED tax credits for public companies

For decades, refundable SR&ED tax credits have primarily benefited private companies - but new legislation changes that. Public companies can now access the same non-dilutive funding mechanisms, creating meaningful runway for innovation across sectors.

⏱️ Timestamps:
00:00 Introduction & overview of C15
02:00 What changed in SR&ED eligibility
03:50 Why this matters for public companies
05:15 Non-dilutive funding & runway benefits
06:25 $6M expenditure threshold explained
07:20 What qualifies as SR&ED activity
09:50 Industries that can benefit (tech, mining, biotech)
13:30 Eligible expenses: salaries vs. capital
14:55 Financing SR&ED receivables
19:05 Documentation & audit considerations
23:10 Final thoughts & key takeaways

💬 “Why should we penalize companies based on their source of capital?” - Bryan Watson

With billions allocated annually and new accessibility for public issuers, this shift has the potential to reshape how Canadian innovation is funded - particularly in tech, biotech, and resource development.

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#CSEPodcast #SRandED #Innovation #PublicMarkets #SmallCap #Tech #Mining #CleanTech #CapitalMarkets #CSEListed

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Transcript

SPEAKER_01 0:10

Welcome everybody to the CSC podcast. And today I am thrilled to be joined by Brian Watson, Managing Director at Clean Tech North. I'm James Black from the CSC, and we're going to be talking about C-15. What is C-15 and ultimately what does this mean for public companies? This is a Budget Implementation Act. This is something that was recently passed and is going to have a profound, at least potentially profound impact on public companies here in Canada. And I've got no better um expert than Brian here joining me today to talk about this and shred tax credits and the wonderful world of uh of funding um public tech companies. So, Brian, welcome to the episode and uh thanks for finally joining me.

SPEAKER_02 0:49

Yeah, no, glad to be here after long last. And uh, you know, we talked about this, I think when the when when this was originally these changes were initially actually announced, we were working on them well before they were announced in December 16, 2024. Um we started talking about this, and uh well, it's not 2024 anymore. It's taken a little while. So I'm glad we're finally here.

SPEAKER_01 1:13

Yeah, no, I mean there's been obviously some changes in government and uh some legislation which was was waiting for its day. And uh, but here we are. And I know there's been a lot of um, and I'll give credit to other exchanges as well in Canada. There's been a lot of uh support behind uh these these new changes to the act. And maybe just to talk quickly to the guests, because what we're really trying to exemplify here with this episode is that you know, the public companies, the public technology companies have been sort of deprived of some real advantages that have been in the domain of private sphere. And now this opens up a whole new world of um tax credits for for research. And so let's let's get back to the basics here. What happened in the bill? Who does it impact, and some of the real high-level elements of this?

SPEAKER_02 1:58

Yeah, so so I mean, I think, you know, for this audience, we'll go through all of them, but for this audience, you know, the the the major, the the biggest change is, as you alluded to, um, Shred, the RD tax credit, uh, that's been around for more than 30 years now, um, has traditionally been much more beneficial to um uh CCPCs, Canadian controlled private companies, private being the problem there uh for uh companies that are listed. And I've known many companies over the years that have had to go public. There wasn't the type of capital in Canada to fund their operations and their growth. So, but there was on the public market. So they went public. Makes sense. But they were all people always penalized by losing that refundability, that cash back nature of that trend. And and for literally decades, uh, I've been asking the question why should we penalize companies based on their source of capital? I can understand if a company's you know not Canadian control, I can understand if it's you know just listed you know on an exchange and it has no operations here, but why based on their source of capital, being private or public? And so that question actually resonated. And uh, you know, uh after a um rather protracted but uh finally done process, um, that has now been changed. Uh a lot of people thought that this had uh actually changed as of uh some of the votes that were going on around the the the uh the budget in the House of Commons, but until that final uh uh uh royal assent, uh which was March 26th, it wasn't legal. Uh the you know, the the House of Commons had passed it, said it hadn't the Queen uh King now uh hadn't uh assented to it. Uh so it was not in the income tax act. It is now revised because that has passed. So, you know, it's been a long path, but as of now, companies, when they get the actual forms from CRA and various other things, will be able to claim uh effective uh this number 16 to 2024, which is interesting. Uh so you can come back claim quite a bit. Oh, okay, uh, potentially. Um, they'll be able to claim refundable shred at a higher rate for uh something that's a new definition, uh ECPCs, so not getting in controlled uh private companies, um uh eligible Canadian public companies, because why not make the acronym sound almost exactly the right? So if you're private, you can still get it, but if you're public, you can now get it. Now get that cash back feature, which is great because again, you know, early stage companies that have listed, you know, they may not be seeing revenue for a decade. If you're giving them a tax credit, basically, that is a you know, a deduction off that first year tax owing year, it's nice. Don't get me wrong, it can be nice, but it certainly doesn't help fund the operations uh for those intervening 10 years. Think of a biotech company, think of you know some of the companies on the critical minerals side and the processing side. I mean, they may not see uh their operations up and running uh so that they're in a taxable position for quite a long time. Um, so this is really a game changer and will really enable a lot of companies to not shy away from some of the public markets because they're going to lose that uh refundable uh tax credit, which for for many companies can be in you know up to a couple million bucks. Um that's material. Um so so yeah, that's the biggest single change, and I can get into the other ones as well.

SPEAKER_01 5:32

Yeah, we'll jump in that for sure, Brian. I mean, it's non-dilutive too, in the sense that you're getting money back that you've already spent, you're not going into the markets and taking on new share capital, giving up a piece of the pie uh at an early stage when your valuation isn't you know, obviously the most exposed because you're you know, in many cases, these companies are not huge, right? Yeah, and so um, and you're right, pre-public or public, a lot of companies are in the pre-revenue stage. And um, that obviously is uh, you know, something where valuation is also a tricky um proposition, obviously in the public, you have a public value, and that's that's cool. But um, to have this runway is what I call it, the added runway through this uh this mechanism is is phenomenal. I just want to ask a couple questions uh before we talk about eligibility and and and all that. But the um I'm looking here, it's five million eligible expenditures.

SPEAKER_02 6:22

Was that six now? Uh so yeah, yeah.

SPEAKER_01 6:27

Okay. So that was that's I feel like they might have even gone up. So six.

SPEAKER_02 6:31

Well, so so the original proposition in the in the budget, uh sorry, in the in the fall economic statement 2024, I believe, was 4.5. And then in the in the budget, they actually upped it to six.

SPEAKER_01 6:42

Oh wow, okay. And over what period of time are companies allowed to per year?

SPEAKER_02 6:49

Per year. Per year. So yep, you've you're able to pull down um uh the shred rates based on expenses up to six million versus three million um uh prior by prior to prior to now.

SPEAKER_01 7:00

Phenomenal. Okay. And when you talk about eligibility, maybe let's jump into that pool. The the types of expenses, the types of companies that should be looking at this tool. Um, where would you start that thought process?

SPEAKER_02 7:14

Yeah, exactly. Well, uh, that's a great question. So so we'll go back to the the the the definition of shred, basically. Um Shred is based off pushing the bounds of particular types of technologies and getting into that realm where nobody really knows how to solve the problem. Or if they do, they're probably not gonna tell you. Google might know how to solve your algorithm problems, they're probably not gonna tell you. Um, so you have to basically start running experiments. Now that could be shop floor manufacturing experiments. Um, we don't know how to make this um particular food product dry in a way. So there's a it could be food science, it could be algatistical science, any domain of science, um, uh classical science, social sciences, uh uh uh not so much, uh, but any domain of science, engineering, um, uh where you are, you know, where there's no known answer. Uh, so you have to really ask the questions of, you know, you've done your research, you've gone out there, you've you've you've looked at the uh the literature uh reviews, you've looked at, you know, you've talked to the supplier of the technology, they've shrugged their shoulders and said, Yeah, you're not supposed to use it that way, but you need to use it this way. Um, you know, anything where you're pushing the bounds of those specific pieces of technology is usually grounds for uh starting a conversation with Shred, where you take on a basically experimental process uh to um try and solve that problem. Yeah, it might involve bubblegum and duct tape, it might involve a bunch of engineers, um, it might involve a lot of rapid testing with software. Um, every industry is a little bit different. Software tends to be a lot of really rapid uh iteration. Uh bio uh uh you know uh drug discovery, usually not as rapid iteration. So you know, the timelines are different, and it could be many, many years that you're in that experimental phase. But each year you can file, as long as you're documenting things properly, and we can talk about the documentation side later. Um, but as long as you're substantiating your claim, as long as your work is um uh is eligible for strength, um, you're entitled, which is an important word, you're entitled to that refund. So it's not a grant where there's a bunch of folks sitting around in a back room saying, I like that this company or I like this one. No, you if you as long as you qualify on the technology and you can substantiate the cost associated, you get that money in and it's in uh uh enshrined in the tax colour. It sounds like a bottomless pit. But uh well, it's usually about $4.5 billion. Um, so and I believe with the changes, uh, the parliamentary budget officer has uh uh expanded that to about by about 1.5 billion, I believe. Um you're looking sort of six-ish seven.

SPEAKER_01 10:02

Yeah, and I think in general we can agree that the more that's claimed against it, the better.

SPEAKER_02 10:07

Um realistically, this should be funding the productive capacity building uh uh for Canadian companies. And it's interesting, one of the other aspects of these changes reintroducing capital. You know, I've I've got a number of folks in the uh academic and accounting world that you know we've we've seen a lot of commentary around Canada's overall productivity dropping. Um, and some of them have correlated the numbers starting to drop as of when they removed capital from shred in 2014. So about a decade ago, you can experiment with large equipment, you had to buy this and you know it didn't work. You were taking technological risk and then it didn't work. Well, you know, are you gonna repeat that process over and over again? It's costly. Now, if that shred at least generates a 40% tax credit on on the capital cost, you know, it mitigates the risk. Um, and so you know, it'll be very interesting to see if we start seeing an uptick in uh Canadian productivity and investment in uh in hard technology.

SPEAKER_01 11:08

Yeah, I mean, there's certainly a narrative that uh we're losing out to other nations as far as that. And uh um this is a necessary step to help homebrew more, you know, world-class technologies and train people and uh create new IP in Canada that has uh a global appeal, right? And and and keep the corporations here too. And frankly, from uh the CSE's perspective and from the public markets perspective, maintain um more companies and attract more companies into the public listing sphere, you know. Um, and so they can access uh you know public financing, and obviously everyone kind of hopefully does well under that that um that construct. Absolutely. Yeah. So we talked about eligibility in general sense. Um it sounds to me this is not just you know your typical science experiment company. This could be a operator that's you know, like a mining company. They're they're they're looking for minerals, but they also have um, you know, uh something as far as an equipment.

SPEAKER_02 12:12

I've seen cavitation technologies to separate tailings ponds from uh critical minerals, you know, building those technologies. I've seen, you know, uh refining technologies, uh uh technology companies that have projects, so they actually have an active mine, and which isn't a criteria, but you know, often it's the case that they are experimenting with technologies to get the optimal amount of whatever out of, say, a tailing spond or you know, companies that have uh extraction technologies uh they're not public, but uh one like Destiny Copper, uh, which uh which is has a very low energy extraction technology for copper. That's great. A, it's clean tech too, which I love because it increases the amount of energy that it takes to smelt things out of rock. Um but B, um, you know, it it is a new technology that they're experimenting with and and could lead the way for cleaner, greener copper uh without the rust.

SPEAKER_01 13:08

Right. Now, in the realm of AI, um I'm assuming this isn't something that you can leverage to go and hire an army of AI bots to do you know marketing campaigns, but uh something generally.

SPEAKER_02 13:23

I know there's there's probably some shred in there somewhere, but uh yeah, yeah, no, I mean uh shred is based on primarily historically on on the brains, uh salaries of folks uh that are and and and contractors, employees and contractors all has to be in Canada, uh basically. Um uh everybody gets everybody's getting a T4, whether it's your company or the company that it's contracted with. Um, but now we're adding in some of those other expenses like like capital uh things like that.

SPEAKER_01 13:51

Equipment.

SPEAKER_02 13:52

Yep, capital equipment. So so you know, it could be a uh a clean room uh for your drug discovery uh or medical uh tech uh medical technology company. Um clean room might have to think about uh, but there are some some exceptions, like clean rooms. Uh uh buildings usually aren't aren't eligible, but uh you know, capital that is necessary to do the experimentation side. Gotcha. Gotcha. Yeah. Okay. And an AI company, there's not the capital usually, but there is statistical science. So you might have 30 statistical scientists working on a whiz-bang algorithm to do something. Yeah, that the their salaries would be eligible, uh, but they uh but but they wouldn't necessarily have the capital component to their expense base.

SPEAKER_01 14:40

Incredible. And so yeah, and as far as the tax credits are concerned, um you talked about the ability of these to be financed. Um yeah.

SPEAKER_02 14:51

Yeah, so so uh historically, so I've I've been working with a firm, uh uh Venbridge and um and uh Easley. Um uh and so Easley historically for the last number of years has been financing Shred. Um so that government receivable. The problem with this, the the Shred is um, and there's been other jurisdictions that have have worked on this to do prepayments and various other things. But if I incur a big expense, I've got a December 31st year end, I incur a big expense to Q1. I can't file my taxes until December 31st of that year. So that's you know, eight months, 10 months, and even then, I'm not gonna file my taxes in January generally. Uh, it'd be nice if everybody was that on the ball. It usually takes a good uh you know, three months, sometimes six to get those taxes followed and audited and everything else. And this may be uh an increased uh issue with public companies because there's a little bit more uh uh diligence on that than private ones. Um so then you've incurred it in January, you didn't file your taxes till the next, let's be let's be optimistic, end of March the next year. And then CRA has to review the file, uh possibly audit it. It might be you know a year and a half, two years from when you incurred that expense to when you're getting the file check. So trend financing historically has financed that on a quarterly basis. That's what easily does, pulling that receivable forward, factoring that receivable from the government based on you know your shred consultant generally that you're working with, the work that they're doing, whether it's you know employment hero or another one that that that they pull together all the salaries, they pull together the capital, they give an estimate to an easily and say, look, this company, you know, credibly, we've done the math, we've looked at the projects, they're probably gonna get $500,000 in this quarter. So, you know, depending on the lender, easily it's about uh uh 80% loan to value. Um, so we could fund $400,000 of that. That means you can use that capital in that fiscal year rather than waiting 15 months, 18 months, uh, you know, to get that money out. Uh the other end. If you don't need the cash, let it sit there. But I don't know a lot of companies that don't need a little bit of liquid cash right now, uh, even just to soak up some of the um exogenous shocks that uh keep happening in the market these days.

SPEAKER_01 17:13

So the market is unpredictable, yeah. But and again to your point um about the impact of public companies, uh and for sure this conversation is gonna be one of many that that follow it or around this and how to leverage it. But uh yeah, it in matter of disclosure, absolutely, you're taking on financing. But the um, you know, the one thing the market likes is the less lumpiness in your financials, the better. And obviously, in small cap that's that's tough because there aren't um you know often consistent revenues amongst especially an exploration company, there's no revenue. Um but um certainly uh what you're trying to do is buy time. Uh if you're a mining issuer, you're trying to buy uh more time on your property and more drill holes and more more testing and results that you report back to the market because that's sort of the ammunition you need to go and get financed. And then with the tech side, I mean, every story is different. We've seen these these companies all have a different narrative. And the market shocks you mentioned. I mean, you could be in the blockchain space, you could be in crypto, you can be in AI or a combination of all those.

SPEAKER_02 18:15

And sentinel can be experiencing the sass apocalypse that's happening right now, or uh just what I've heard is the assassination. You know, it's it's yeah, there's lots of there's lots of shocks out there. Uh and having a little bit of flexibility in your cash to be able to absorb those, elasticity in there makes all the difference.

SPEAKER_01 18:33

No, disruption is a consistent that's an oxymoron. But um, okay, and just a couple last points, Brian, but uh making sure you're working with a reputable firm or someone knows what they're doing. You just mentioned it. So there's modeling, there's some prediction um based on the financing side, but even just the application preparation. So what high-level items should people be prepared to uh, you know, be ready for when they go and file?

SPEAKER_02 18:58

Yeah, so so first off, the historic one, which is you know, generally salaries, um, a that the work is all done in Canada. So if you've got contractors, have it in your contract that all work is done in Canada and that you own that shred, just write it into the contract, keeps it simple. Um, but then you know, further to that, um, what what what substantiates shred is the amount of time that you are working, or your engineers or the people that are doing the shreddable work are doing shreddable things. You can have people that are you know doing front end on a software company, back end, and you know, you know, they're actually you know insane evil genius uh statisticians doing weird algorithms, but they are also doing the front end of the website, the how it looks and everything else. The front-end stuff, generally not eligible. It's the creative, it's the you know that sort of stuff. The back end stuff, absolutely eligible. So, you know, having the time sheets, this is one of the reasons I like uh things like employment hero. They have the a job management system, they've got all the timesheets, so they got that evidence naturally generated. Yeah, and so you've got to be able to parse Tom's salary or Sally's salary between that eligible and non-eligible uh to a fairly granular degree. Um, there's lots of methodologies for capturing that evidence, uh, but uh but you've got to substantiate that Tom and Sally are spending 42.6 percent and 37.8% of their time on shred. And then yeah, that that's multiplied through to the eligible expense base that uh that has now grown in terms of six million versus three. But uh yeah, you need to substantiate those expenses up. On the capital side, introducing capital now, you know, you need to be able to substantiate that the piece of capital, a you know, whatever the widget is that you needed to test your shred, your hypothesis they would test the solution to your problem. Um the that that that capital is being used to a certain threshold. If it's 100%, you don't use it for anything else except to solve this problem, no problem. Just 100% shreddable, you get 40 uh 40 uh credit on that, um, and and you're good. But a lot of capital, that's not the case. It may be uh mixed use. Um, so you need to substantiate, um, and even for the 100%, you need to be able to substantiate that it's 100%. And if it's not 100%, you need to substantiate between you know 50 and 100 or 50 and 90 percent. You know, is it 75%? If it falls below that 50% threshold, that is another treatment, and then you may not be able to claim it. And it also impacts things like capital cost allowance uh and depreciation and various other things as well. So, so you know, we won't get into the into the accounting weeds of that. I'll leave that to my wonderful CPA Canada working group. Uh, but the the crux of it is you need to be able to prove to CRA that you are documenting the experimental process for one, yeah, and then the amount of resources that are allocated to that experimental process to a fairly good. Annual level and just keeping up to keeping a logbook, keeping the timesheets, you know, those sorts of things are all good ways to substantiate that. So, yeah, there's lots of literature out there, happy to talk about it some other time, uh, other other ways to document this stuff. Um, but you need to that because you have these are all subject to audit, they can be big numbers. And so CRA uh has been uh, you know, with for example the new clean economy tax credits, they're at right now at a 100% audit rate because they were new. How are they gonna treat the ECPCs and the capital cost claims? I don't know. Um, it could be subject to a 100% audit rate. It might not be. Uh we don't know yet. Uh there's there's no there's no stated uh policy right now. Um, I'm hoping that it's not. I'm hoping that it's a what's we'll call the risk-based audit, uh, uh, where they look at it and you know assess whether there's a real risk here uh of of fraud or not. Um and and and go from that. Uh, but we just don't know.

SPEAKER_01 22:59

We just don't know. Um, so just to recap, four and a half billion dollars are tagged in the budget for shred. His for yeah, yeah, could be higher. Yeah, but um, you know, again, our hope is is this provides more life to the public company sphere in the sense that you've got companies that um you know, again, every dollar counts and and every project uh you know needs life in the form of funding. And and this this definitely gives runway to to companies now that are in the public space that are doing these um innovative projects. Um, as we just discussed, there's there's other industries too. So um I'm looking forward to it. I this is just we're we're just at the beginning now, even though it's been a long process to get here. We're just at the beginning, Brian. Um, any any resources other than I'll mention this. The article you wrote, it's on beta kit, came out yesterday, April 1st. It wasn't an April Fool's joke, which was even better. In the title of it, it's Canada's budget bill is finally law. Here's what uh here's what that means for for innovation. Um, I'll put the link below. It's a great read. It's a good starter. Hopefully, this conversation was a good starter. Um, Brian, anything else you want to mention on this uh before we leave you for the day?

SPEAKER_02 24:13

No, I mean I think I think really you know the key is going to be working with folks that know what they're doing in this sphere. There's a lot of change. There's likely going to be audits. We've seen them with the clean economy tax cuts, which some of your companies may want to take advantage of with the uh uh uh things like the clean technology manufacturing tax cuts, which are eligible for uh critical minerals extraction and processing. So 30% refundable. So that's good. But but you know, we can do another session on those. But honestly, I think the the biggest key, and this has been the case for Shred forever, make sure you're working with a reputable firm that knows what they're doing, and make sure you keep your evidence because there's nothing worse than you know having gone for three years without an audit, and all of a sudden maybe you got a little lax on your evidence. That's the time when you're probably gonna get audited. So you always want to make sure because it's a material amount of money for a lot of companies. So keep that evidence and uh and stay tuned. We will be talking about any changes, how the audits are rolling out, uh, things like that. Um, and and there are some moving targets. Um, we have advocated for things like IP costs to be included in there, uh, with potential clawbacks if the company's sold outside of Canada. So there are definitely some more changes potential for potentially for uh the Shred program in the near future. Uh so watch this space and uh we'll certainly happily update you on uh any of any others.

SPEAKER_01 25:35

That's great. Okay, well, Brian, thanks so much. That's Brian Watson, managing director of Clean Tech North, uh, based uh sort of around Toronto. We'll uh we'll be talking very soon, Brian. Thanks again for joining me after all this time. Wonderful to see you. Thank you very much. We'll talk soon.