Why are fewer companies filing SR&ED claims under $100,000?
One clear reason for the drop could be Quebec’s policy change in December 2014. The change excluded the first $50,000 of SR&ED-eligible expenditures. Note that this did not affect the federal SR&ED refund which for most small CCPC’s is 35% of eligible expenses. Although Quebec could be the reason for the drop in 2016, it does not explain the continued decline in subsequent years. While the data from Statistics Canada is not available, the number of new small businesses founded every year has remained fairly constant for the past 8 years. In addition, there have been no other material changes in the provincial or federal SR&ED programs, except for Alberta, which eliminated their provincial refund on January 1st, 2020, and therefore is not part of this data set.
There are two other reasons which may explain the reduction in the number of SR&ED claims less than $100,000. One is the work the CRA has done in the First Time Claimant Advisory Service (FTCAS) to educate entrepreneurs. As a result, there are fewer claims but the claims that are submitted are more likely to be eligible.
The second reason could be that the effort to file a small claim has outweighed the potential benefit of the refund. The CRA hired more financial and technical reviewers and has conducted more and more reviews starting in 2015 to 2016. This was in an effort to ensure program compliance and reduce the number of claimants that were filing ineligible claims. Considering the drop in small claims, the CRA may have achieved their goals while also redefining the risk/reward formula for smaller companies filing for SR&ED.
The chart below shows the percentage of first-time claimants for claims above and below the $100,000 mark. Interestingly, both are growing with a 23% increase over five years for claims of more than $100,000 and a 14% increase for claims less than $100,000.