Bio-economy Roundtable on Sustainable Capital Formation

Canada’s emerging,or "junior" biotechnology companies -  those without a commercialised product on the market  -  make up 90% of the industry. These companies are developing innovative drugs, addressing food scarcity, and tackling growing environmental risks. However, over the last two years, they have reported growing difficulty in raising funds to continue these development efforts.

In support of our national strategy, the Canadian Blueprint: Beyond Moose and Mountains, BIOTECanada held the Bio-economy Roundtable on Sustainable Capital Formation on June 16 in Toronto, Ontario. The event was held to identify the underlying capital formation problems affecting Canada’s junior biotechs and propose innovative alternatives to create sustainable capital for the sector.

The roundtable was comprised of a diverse group of industry experts with legal, financial, commercial, and government expertise, invited by BIOTECanada to identify, analyse, and propose innovative alternatives to create sustainable capital for Canada’s emerging biotechnology companies. The roundtable concluded with the presentation of four key recommendations in support of sustainable capital formation.  Read our report and recommendations.

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Scientific Research and Experimental Development (SR&ED) Tax Credit Program

The Issue

The SR&ED program restricts refundable tax credits to companies classified as Canadian-Controlled Private Corporations (CCPCs). As a result, non-CCPC companies are moving their research investment out of Canada. Removing this restriction for refundable tax credits would stimulate more research investment and jobs by non-CCPC firms and create almost $1 billion in value to the Canadian economy.

Recommendation

1. We recommend removing the current CCPC restrictions on SR&ED for refundable tax credits.
2. Increasing the expenditure limit for refundable credits from $3 million to $10 million.

Background

• The SR&ED investment tax credit program was established in 1985 before international free-trade agreements and although some changes were made in the 2008 federal budget, the program does not reflect today's global business environment.
• The program penalizes public or non-majority-Canadian-owned firms (ie. Non-CCPC). If a company is a CCPC, it is eligible for a refundable tax credit of 35% on up to $3 million of annual R&D spending. If the company is not a CCPC, it receives tax credits of only 20% on its R&D expenditures and these are not refundable.
• Public companies or those whose majority ownership is located outside of Canada face a competitive disincentive to build research capacity and do work in Canada.
• Two-thirds of Canadian biotechnology jobs and investment in research and development come from non-CCPC companies.
• Non-refundable tax credits are not useful to most biotech companies as they report no taxable income, and are several years from profitability. Raising capital is a primary concern for these companies.
• When a Canadian company successfully attracts international investment it loses valuable refundable tax credits even though jobs, research and innovation are still conducted in Canada. This can, and has, lead investors to relocate activities and jobs outside of Canada.
• BIOTECanada estimates that removing the CCPC restriction would cost an additional $75 million per year (2% of the value of the program), but would create close to $1 billion in new wealth and economic gains.*

*Source:  Pellerin, W. Canada's missing billion dollars: Quantifying costs and benefits of modifications to the SR&ED tax credit program - the biotech industry example, September 2008, BIOTECanada