| By Elizabeth Pringle
Improving the Tax Credit Regime for Life Science Companies
Tax Credits
EY’s Beyond Borders 20161 reports that, on a global basis, revenue, R&D spend, net income and total market capitalization for the biotech sectors reached historic highs in 2015. Scientific innovation in therapeutic areas such as immuno-oncology and orphan drugs continued at a very rapid pace. However, the same report also cited evidence of slowing growth in the sector as well, perhaps signalling that the growth has peaked. For the Canadian life sciences industry specifically, the Globe and Mail reported in April of 20152 that the biotech sector is “ready and eager” for growth but without adequate financing, it will go nowhere. The suggested solutions are that life science start-ups need to be allowed to use flow-through share financing or some similar tax freebie. Some might say that the “tax freebie” mentioned above already exists in the form of the Scientific Research and Experimental Development (SR&ED) tax credit. Certainly life science companies have availed themselves of this benefit since its inception in 1985. However, let’s not forget that the 2012 federal budget dropped the tax credit rate for non-Canadian controlled corporations (nonccpcs) from 20 to 15 per cent - essentially taking away 25 per cent of the credit. The proxy rate also dropped from 65 to 55 percent and now only 80 per cent of payments to subcontractors and other third parties qualify instead of 100 per cent. Proxy and third party payments aside, CCPCs (which most startups are) were left relatively unscathed in that they still earn their federal SRED credit at a rate of 35 per cent. In 2014, Quebec cut their provincial R&D tax credit rates by 20 per cent. The more recent Ontario 2016 budget did not discriminate. The Ontario Innovation Tax Credit dropped from 10 to 8 per cent and the Ontario Research and Development Tax Credit dropped from 4.5 to 3.5 per cent. All told, these reductions in tax credit rates have a negative impact on life science companies. Although not as generous as in the past, the tax credits still play a key role for life science companies. BioAlberta’s recent discussion paper3 hails the tax benefits of the SR&ED investment tax credit to the life sciences community. The paper makes recommendations for further simplification of the credit to reduce the administrative burden and also recommends increasing the tax credit rate; suggestions that would be positively viewed by all industries. However, the BioAlberta paper does not cover the issue of lack of certainty associated August/September 2016 BIOTECHNOLOGY FOCUS 11
