Canada accepting applications for the new Strategic Innovation Fund

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1 18 September 2017 Global Tax Alert News from Americas Tax Center Canada accepting applications for the new Strategic Innovation Fund EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Tax/Americas-Tax-Center---borderlessclient-service Executive summary Innovative Canadian companies can now benefit from a federal funding program to support strategic quality business investments. On 5 July 2017, the Federal Government launched the Strategic Innovation Fund (the Fund) with a budget of CA$1.26 billion over five years and an objective to create well-paying jobs for the middle class. It is available to organizations of all sizes across all of Canada s industrial and technology sectors. In launching this funding program, the Government seeks to accelerate economic growth, strengthen the role of Canadian businesses in regional and global supply chains, and attract investment that creates significant employment benefits for Canadians. Detailed discussion Background The Fund is a consolidation of existing innovation programs, including the Strategic Aerospace and Defense Initiative, the Technology Demonstration Program, the Automotive Innovation Fund and the Automotive Supplier Innovation Program. Canadian companies investing in research and development (R&D) and commercialization, expansion and growth, investment

2 2 Global Tax Alert Americas Tax Center attraction and reinvestment, and collaborative technology development and demonstration should evaluate their eligibility for the repayable and/or non-repayable funding under the Fund. Project eligibility The Fund provides contributions to support four distinct activity streams with specific objectives: Stream 1: Encourage R&D necessary to accelerate technology transfer and commercialization of innovative products, processes and services Stream 2: Facilitate the growth and expansion of firms in Canada Stream 3: Attract and retain large-scale investments in Canada Stream 4: Advance industrial research, development and technology demonstration through collaboration between academia, non-profit organizations and the private sector For Streams 1, 2 and 3, the applicant must be a for-profit corporation incorporated under the laws of Canada and proposing to carry on business in Canada. Stream 4 is geared toward consortia that include academic institutions (e.g., Canadian universities, colleges, research institutes, not-for-profit entities). However, the Stream 4 lead applicant must be an entity that is incorporated in Canada, carries on business in Canada and is proposing to conduct industrial research and technology demonstration activities. Each stream of the program has its own project eligibility criteria. As part of the evaluation process, the Government uses a Technology Readiness Level (TRL) scale to assess the maturity level of a particular technology. When choosing a stream, applicants must evaluate their technology against the parameters for each level and then assign a TRL rating based on the project s current state. The scale has nine levels. TRL 1 is the lowest (scientific research begins to be translated into applied R&D) and TRL 9 is the highest (actual application of the product and/or process innovation in its final form or function). Eligible expenditures For all streams, eligible costs are those non-recurring costs related to the particular project, including: Direct labor Overhead (limits apply) Subcontracts and consultants Direct materials and equipment Land and buildings Other direct costs Costs related to Stream 4 can also include expenses related directly to other costs related to the organization of networking events and conferences and workshops in support of the collaborative R&D activities. Certain costs will not be reimbursed, including interest, Goods and Services Tax, depreciation of assets, advertising, and entertainment expenses. Application process Streams 1, 2 and 3 The Fund is now open and applications for Streams 1 to 3 are being accepted. There are no submission deadlines for these streams. Step 1 is the submission of a Statement of Interest or highlevel overview of the project. This will include a project description that includes details on how it meets the Fund s objectives. Applicants will need to demonstrate their basic corporate capability 1 to complete the project. Applicants will receive feedback on whether the Statement of Interest indicates potential for funding and if they should advance to Step 2 of the program, which is the submission of a detailed program application. Applicants will need to clearly demonstrate the benefits of their project in relation to key government priorities. Note that the application and information regarding the completion of a full application are not yet available. Applications will be assessed based on the project s anticipated benefits, including innovation, economic and public benefits. Applicants will be subject to a comprehensive due diligence process. Stream 4 Under Stream 4, contributions for collaborative consortia projects will be determined through a competitive selection process. The department will aim to hold one competition per year, with the first to be launched before 31 March The frequency of competitions could be adjusted based on demand. The Minister of Innovation, Science and Economic Development will determine which projects receive funding.

3 Global Tax Alert Americas Tax Center 3 Due diligence Proposed projects will be evaluated against the applicant s capacity and experience to implement the proposed project, to achieve the objective and to fulfill repayment obligations (if applicable). Factors taken into consideration may include management and workforce capability, corporate technical capability, financial stability and capacity, and market risk. Under Stream 4, applications will be assessed on a competitive basis to identify the projects that will provide strong innovation, economic and public benefits, and will also best demonstrate a commitment to further develop the technology for potential commercialization or research purposes. Contribution Agreement Successful applicants will be required to sign a Contribution Agreement. Note that the combined level of assistance from all levels of governments (federal, provincial, territorial and municipal) shall generally not exceed 75% of eligible costs. Recipients that are academic institutions can receive assistance up to a maximum amount of 100% of eligible costs. The program contains broad flexibilities to reflect the different needs and realities of a variety of companies and other stakeholders. For Streams 1, 2 and 3, program contributions can be repayable, non-repayable or a combination. It is not clear how the Government will design the repayment conditions, but they have indicated that repayments will be performance based and reflect a risk-sharing approach. Non-repayable contributions will only be considered for eligible activities that demonstrate strong economic, innovation and public benefits with clear strategic value or global significance in keeping with Canada s international obligations. The amount and terms of repayment will be determined during the due diligence review. Contributions will not be contingent on actual or anticipated export performance. Reporting requirements During the project, recipients will be required to submit periodic reports, annual consolidated financial statements, repayment forecasts (if applicable), project status updates and reports of project benefits. Less strenuous reporting requirements will also be in place after the completion of the project for a limited time. The Fund requires recipients to own the background intellectual property or hold sufficient background intellectual property rights to allow their project s activities to be carried out. In addition, they must hold sufficient rights to exploit the intellectual property resulting from their project s activities. Recipients may be required to provide the government with information regarding their intellectual property strategy as it relates to protecting the intellectual property resulting from their project s activities. Implications The announcement of a new incentive program in Canada to further global competitiveness is good news for Canadian companies. The new Fund effectively simplifies the administration of previous industry-specific programs for the Government and makes it easier for companies in all sectors to navigate the incentive landscape. Further, the Fund offers much-needed federal support not only for R&D, but also for business growth and expansion initiatives all under one program offering. However, as with all discretionary funds, success is strongly dependent on the quality of the submission and the ability to show that the project meets the program s objectives. The introduction of the TRL scale also introduces some additional challenges for companies to ensure that the rating is appropriate for their project, something that directly affects the stream for which they may be considered. Endnote 1. Corporate capability is not actually defined in the program s glossary.

4 4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Central Chris Chipman, National Incentives Leader Susan Bishop, BTI and SR&ED Practice Leader Matthew Pearson Elizabeth Pringle Ernst & Young LLP (Canada), Quebec and Atlantic Krista Robinson Ernst & Young LLP (Canada), Western Canada Kevin Eck

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Americas Tax Center 2017 EYGM Limited. All Rights Reserved. EYG no Gbl NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

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