18 July 2023

Since 1976, Canada has been the worst-performing advanced economy in the Organization for Economic Co-operation and Development (OECD), and many governments of different partisan stripes have tried to reverse the trend, unsuccessfully. According to the OECD predicts, the country’s economic growth per capita will continue to stagnate in the next decades, if nothing changes.  

Currently, Canada’s tax rules provide private corporations with access to incentives that are not available to public companies. According to markets experts, the Canadian tax rules create an artificial barrier to growth by making some of the incentives accessible only to Canadian-controlled private corporations (CCPCs). 

Preventing public companies from accessing incentives that encourage more spending on R&D is making the job of reversing those trends more difficult, and the Canadian policy makers seems to have an inaccurate view of the country’s public companies. 

For a CCPC, up to 35 per cent of R&D spending can qualify for an investment tax credit with SR&D, counting on some or all that amount refundable in the form of cash payments directly to the company. But for public (or non-Canadian controlled) companies, the rate tops out at 15 per cent and is not refundable, which means that it can be used only against taxes payable – and, if the company still in the growth phase and are not generating taxable income, then even that 15 per cent credit may not be accessible. 

The government, at least, appears to be aware of the issue: in the past two federal budgets, Ottawa has pledged to review the SR&ED program in particular. But, while Canadian governments may want to help small business, such policies fail to recognize that two-thirds of Canada’s public companies are small and medium-sized enterprises (SMEs) by the classification of Statistics Canada, which defines any company with fewer than 500 employees a medium-sized business and any company with fewer than 100 employees a small business. 

The implications can go far beyond the taxes companies pay or the credits received. In 2021, for example, Ottawa changed the rules governing how companies grant stock options to their employees, providing tax benefits to employees who receive stock options from a CCPC but not to employees of a public company. 

No distinction is made between public or private companies for statistical or taxation purposes, which means a large private company with millions of dollars in annual income can access tax benefits that a small pre-revenue public company cannot. 

According to John McKenzie, TMX Group CEO, which operates Canada’s largest stock exchanges, “There is no other market in the world that has this well-developed public ecosystem for small-cap companies, but if government policy doesn’t understand that, then we can create artificial barriers for companies looking to use it to fund growth”. 

FI Group 

Source: The Globe and Mail.