Health care businesses of all sizes and specialties can benefit from Canada’s Scientific Research and Experimental Development (SR&ED) tax credit program, though many are deterred from applying due to the program’s complex application process and the many tax regulations governing Canada’s medical community.
Health care businesses – such as clinics, bio-tech companies and research organizations – are one of the most common industries to benefit from SR&ED, a program that provides over $3 billion in tax incentives (distributed annually).
While much of Canada’s health care is publicly funded, private equity investors have increasingly taken an interest in the industry. SR&ED provides growing companies with non-dilutive funding, making healthcare startups an attractive investment for private equity investors.
A business perspective:
SR&ED is a federal tax initiative focused on supporting research and development efforts conducted by Canadian businesses.
To qualify for a tax credit, your business must fit into one of the following categories:
- Applied research – focused on practical applications.
- Experimental development: Creating/improving existing products, processes or devices.
When evaluating eligibility, the CRA asks two questions:
- Why was the work done: R&D work must have the goal of advancing technological capabilities or scientific knowledge.
- How was the work done? Companies must have conducted a “systematic investigation or search” that uses the scientific method and tests a hypothesis.
SR&ED in the healthcare field
Although medical businesses are one of the most common to benefit from SR&ED, they are also likely to struggle with complicated regulations and face frequent CRA reassessments. It’s vital to work with a knowledgeable financial expert when evaluating whether you’re eligible to apply for the tax credit.
Many medical professionals and organizations often don’t realize their work falls under the R&D sphere. If a physician or medical professional undertakes work with the goal of finding new information or knowledge (including clinical trials), that work may qualify. Still, healthcare businesses often struggle to apply due to the often-complicated business models healthcare companies operate under.
Universities and hospitals, for example, don’t pay taxes if they are publicly funded, meaning they wouldn’t qualify for SR&ED, though individual medical professionals and contractors working for these organizations can still apply.
Understanding who can apply can get complicated. Some business types include:
- An independent contractor/physician OR a Medical Professional Corporation (MPC) undertaking R&D work for themselves. In this case, you would be eligible to apply if the work falls under the SR&ED guidelines.
- A physician or MPC conducting R&D for another party, like a hospital. Your qualified expenditures could be reduced based on contract payments, though you would still be eligible to .
- An organization, such as a pharmaceutical company, biotech research firm, a life sciences firm or a diagnostics clinic undertaking R&D work for themselves or in collaboration with approved organizations such as universities, colleges, research institutions and other approved associations. You would be eligible to apply.
- A third-party organization, such as a pharmaceutical company, bio tech research firm, a life sciences firm or a diagnostics clinic conducting R&D for another party, like a university. You would still be eligible, though qualified expenditures could be reduced based on contract payments.
Documentation is vital when planning to apply for SR&ED. Ensure all work is documented, including who completed the work, under whose authority the work was completed, and who incurred what expenses. Zeifman’s experienced advisors can help with this process.
An investor’s perspective
Understanding investor interest in Canada’s healthcare industry
While Canada’s healthcare is publicly funded, there are many opportunities for both local and international private equity investors in the private sector. Many facets of healthcare aren’t covered publicly, including some research organizations, private pain clinics, dentistry, and bio-tech companies.
For those investing in healthcare businesses, especially startups looking to grow, SR&ED funding is an excellent option as it is non-dilutive. This means the company receiving funds doesn’t have to give up any equity, allowing investors to have more opportunity when negotiating terms.
Navigating healthcare investments: What you need to know
Investing in healthcare comes with its own unique challenges. For one, each province has its own regulations and compliance expectations. In some provinces, healthcare professionals need to be the sole or majority shareholder of their business, which can limit the extent of the investment. In Ontario, for example, dentists must own their practices and are unable to share patient fees with any party other than another dentist.
Still, there are ways to get around these challenges. It’s important to work with an experienced financial advisor when deciding on healthcare-related investment opportunities.
Other common regulatory issues investors face involves the protection of goodwill towards clients. Because the practice is responsible for serving their patients, agreements between outside parties often include restrictive covenants as well as termination provisions.
Investors looking to acquire a healthcare business may have licensing issues, especially if the province considers a license personal to the holder. In some cases, investors may have to apply for a license in order to complete the deal.
On your side – working with an experienced financial team
Both healthcare businesses and investors face challenges when applying for SR&ED tax credits and navigating investment opportunities. Our knowledgeable team at Zeifmans has worked with a number of clients in the healthcare industry. In terms of SR&ED claims, Zeifmans helps a variety of presenting and participating companies with their applications and is familiar with the Canadian and US SR&ED program. As advisors, we can:
- Identify eligible research and development activities to maximize your SR&ED tax credits.
- Advise you through complex assessment rules by reviewing all eligible R&D expenditures.
- Prepare the financial section of the claim on your behalf and assist with technical project write-ups.
- Ensure filing deadlines are met before listed dates.
To find out more, request a one-on-one consultation with a Zeifmans tax expert or send us an email at firstname.lastname@example.org.