Canada: Responses To Gaps In Government Programs For Growth Stage Innovation Companies

After the federal government's initial rollout of its COVID-19 Economic Response Plan to provide economic measures to stabilize the economy (previously described in our blog post here), a number of voices from Canada's business community have warned of program eligibility gaps and, in particular, that early and growth stage technology and innovation businesses have fallen through the cracks. For example, the initial qualifying criteria for the Canada Emergency Wage Subsidy ("CEWS"), a program where an eligible company can receive a subsidy of up to 75% of its employees' wages, was a 30% decline in revenue since March, 2019. As a result, many high-growth or pre-revenue companies were not eligible for CEWS.

Other lending-based programs also appear to present challenges for many start-ups and early stage technology and innovation businesses. The Canada Emergency Business Account ("CEBA") program is being implemented by eligible financial institutions in cooperation with Export Development Canada to provide interest-free loans of up to $40,000 to small businesses and not-for-profits to help cover operating costs while revenues may be temporarily reduced due to impacts from COVID-19. Up to $10,000 of each $40,000 loan will be forgivable if the remainder is paid off prior to December 31, 2022. CEBA initially required qualifying businesses to have eligible payroll between $50,000 and $1 million in 2019 to qualify, leaving many early-stage technology companies unable to access the program. It also remains unclear if early-stage tech start-ups will be able to qualify for the Business Credit Availability Program, which provides working capital loans of up to $2 million through Business Development Canada (BDC). Lending criteria, which typically exclude start-ups without traditional assets to provide security for the loans, are in effect for this program.

The Government's Response to the Gaps

Various industry groups such as the Canada Venture Capital and Private Equity Association (CVCA), Council of Canadian Innovators and the Canadian Advanced Technology Alliance (CATA) have all publicly voiced their concerns with the federal government. In response to feedback from the innovation sector, the Government of Canada has recently announced a number of new initiatives targeting start-ups, entrepreneurs and innovation-based businesses.

1. Changes to the Canada Wage Subsidy Program Eligibility Requirements

Flexibility in calculating a loss of revenue for CEWS has been added to address high-growth companies and new businesses, as further outlined in our blog post here. Instead of simply comparing revenue to the previous year, employers now have the option to compare revenue for March, April and May of 2020 to the revenue of January and February of this year. For March, an employer now only needs to have suffered a drop in revenue of 15% (compared to 30% for April and May). While that still does not address the pre-revenue company with employees where all cost coverage is from financing rounds, it has at least addressed certain gaps in eligibility.

2. Changes to the Canada Emergency Business Account Program

The federal government announced the expansion of the CEBA eligibility thresholds to a minimum of $20,000 and a maximum of $1.5 million in payroll spending in 2019. These changes unfortunately still leave many of the most vulnerable and earliest stage start-ups ineligible as payments to contractors are not eligible for inclusion in calculating 2019 payroll, so young start-ups relying on independent contractors and founders' sweat equity continue to not qualify for the program. CEBA is being administered by banks and credit unions, and businesses interested in the program should contact their financial institution for more information.

3. BDC Capital Bridge Financing Program

According to the CVCA, BDC Capital recently launched a program to match investments for Canadian venture capital-based companies affected by COVID-19. The Bridge Financing Program includes three components: (i) investing alongside venture capital firms, (ii) accelerating capital into existing General Partners of BDC Capital, and (iii) increasing BDC's co-investment activity. BDC may match a current financing round, via a convertible note, for qualified existing and/or new investors investing in an eligible company. CVCA has reported that eligible companies must be Canadian-based, backed by qualified venture capital firms and have raised at least $500,000 in external capital, and must be specifically impacted by COVID-19. Details on the program are fairly limited at the time of writing and it is unclear what criteria may be applied to determine if a business has been "specifically impacted by COVID-19" or what venture capital firms will be qualified under this program. There have also been reports that BDC Capital is considering extending this investing matching program to include angel investors and angel-backed start-ups, but nothing has yet been announced.

4. $250 million to the National Research Council of Canada (NRC) – Industrial Research Assistance Program (IRAP)

The federal government recently announced a $250 million investment into NRC-IRAP, an existing Canadian government grant program designed to accelerate research and development projects of Canadian businesses. Innovative technical R&D projects may be eligible for funding. Navdeep Bains, the Federal Minister of Innovation, Science and Industry, has stated that the addition of capital is intended to allow companies to retain top tier talent in Canada, which the federal government recognizes as critical for economic recovery. More information about NRP-IRAP can be found here.

5. Additional Funding to Futurpreneur, Regional Development Agencies and Community Futures

On April 17, Prime Minister Trudeau announced $20 million in funding for Futurpreneur Canada, a national non-profit organization providing financing, mentoring and support tools to aspiring business owners aged 18-39. More information about Futurpreneur Canada can be found here.

Also announced is $962 million in new capital to Canada's Regional Development Agencies (RDAs) (federal agencies under Innovation, Science and Economic Development Canada) and the Community Futures Network of Canada, with the funding intended to support rural businesses and those that may not otherwise qualify for federal emergency programs such as the wage subsidy and business loans. More information about RDAs can be found here, and about Community Futures can be found here.

6. Commercial Rent Relief

On April 16, the federal government announced the implementation of the Canada Emergency Commercial Rent Assistance Program, as noted in our blog post here, to help small businesses with rent for the months of April, May and June. More details on this program are expected to be announced shortly.

Existing Government Programs for Companies in the Innovation Sector

It is also worth reminding companies in the innovation sector of long-standing government programs that can also be useful to help bridge businesses through leaner economic times, when it may be more difficult to secure equity financing and revenue growth may slow. Businesses may wish to revisit these programs, in addition to the programs noted above, as they rethink their budgets and strategy for the remainder of 2020.

Scientific Research & Experimental Development (SR&ED) Tax Incentive Program

SR&ED Program:   The SR&ED Program is a tax incentive from the CRA to encourage businesses in the technology sector and other sectors to conduct research and development in Canada. The tax incentive can be in three forms: an income tax deduction, an investment tax credit (ITC), and in certain circumstances, a refund. Qualified SR&ED expenditures can be deducted against income, or a SR&ED ITC can be earned and used to reduce income tax payable. A Canadian-controlled private corporation (CCPC) can earn a refundable ITC at the rate of 35% on qualified SR&ED expenditures of up to $3 million. Non-CCPC corporations can earn a non-refundable ITC at a rate of 15% on qualified SR&ED expenditures. More information can be found here.

SR&ED Loans: Businesses that are eligible for the SR&ED refundable tax credit may be able to access it in advance as a loan, using the SR&ED refund as collateral for the loan. There are a number of lenders across the country that provide this service.

Emergency Funding Proposal: CATA recently submitted a proposal to the federal government to release $200 million in backlogged SR&ED claims, which have been delayed by the pandemic, and to create a relief fund to provide interest-free loans to pre-qualified businesses that are already receiving the SR&ED tax credits. No response to such proposal has yet been provided.

Other Government Programs and Funding Sources

There are many more government grants and funding opportunities available to companies in the innovation sector, with some more tailored to specific industries (e.g. biotechnology). The following are some links to help connect businesses with these programs:

• Canada Business – a Government of Canada directory with information on starting a business, grants, financing, etc.;
• BC Economic Development Funding and Grants Database – a Government of British Columbia grant search directory;
• MaRS Funding Sources Directory – a database compiling provincial, national and international funding sources suitable for technology and science companies;
• UBC COVID-19 Research – a list of new funding opportunities and resources for research related to COVID-19 (with opportunities for academic researchers and for profit and not-for-profit ventures).

Originally published 21 April 2020

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