Canadian startups may find themselves with a significant financial advantage this holiday season due to a key provision in Bill C-69, which passed in June 2024. The bill, primarily focused on clean energy investment tax credits, includes a crucial amendment addressing a 2021 decision by the Tax Court of Canada that ruled that government-issued loans at below-market rates were considered a form of government assistance. This decision had significant implications for how such loans were treated under the tax code, leading to restrictions that impacted businesses, particularly those relying on government programs like the Scientific Research and Experimental Development (SR&ED) tax credits.
Before 2021, most businesses treated government-issued loans the same as private loans, even when issued at more favorable terms, such as below-market interest rates or extended repayment schedules. However, a ruling from the Tax Court in 2021 changed that view. The case involved Québec-based CAE Inc., an aerospace, defense, and healthcare company, which received a $250-million loan from Industry Canada’s Strategic Aerospace and Defence Initiative. CAE attempted to use this loan alongside SR&ED incentives, but the court ruled that the loan was considered government assistance, which made it incompatible with the SR&ED program. As a result, companies that had received government loans at preferential rates faced the possibility of paying taxes on those funds, even though they were fully repayable, which posed challenges for companies seeking to combine them with other government support programs.
The impact of this decision was significant, particularly for early-stage startups and small businesses that rely heavily on government assistance to fund research, development, and innovation. The SR&ED program, for example, has been a crucial resource for Canadian companies, with more than 21,500 claims filed in the year ending March 31, 2024, amounting to over $4.2 billion in claims. These changes led to concerns that businesses could face financial setbacks or be forced to forgo valuable tax credits due to the new tax treatment of government loans.
In response to this, Bill C-69 introduced a key change that provides relief to businesses that receive government-issued loans. The bill now includes the term “excluded loan,” which exempts certain government loans from being treated as government assistance for tax purposes. Specifically, loans issued by a government, municipality, or public authority in Canada to a Canadian resident or partnership for the purpose of earning income from a business or property will no longer be classified as government assistance, provided the loan meets specific criteria. These criteria include that the loan must be documented in writing, must not be forgivable, and must have a clear repayment plan in place at the time the loan is issued.
The introduction of the “excluded loan” provision addresses the gap created by the Tax Court’s 2021 ruling and provides clarity for businesses that have received favorable loans from government bodies. By ensuring these loans are not considered government assistance, businesses can now access other programs, such as SR&ED, without the complications created by the earlier tax treatment. This change is particularly beneficial for startups and small businesses that may not have the financial stability of larger corporations but rely on government support to fund critical research, development, and innovation activities.
This new provision opens up several opportunities for startups to recover funds that may have previously been lost due to the unfavorable tax treatment of government loans. For example, Bryan Watson, an expert in the field, has advised startups to review their SR&ED history and determine if they can now capture potentially large sums of money that would otherwise have been unavailable. According to Watson, this change could result in businesses recovering hundreds of thousands or even millions of dollars.
The introduction of the “excluded loan” provision is a step forward in simplifying the financial landscape for Canadian startups and ensuring that they can continue to access crucial government support programs. This change is especially timely for companies looking to grow and scale their businesses, as it helps eliminate financial barriers that may have previously hampered their access to both government loans and tax credits.
For many companies, particularly those in the tech, research, and development sectors, the new tax treatment could help unlock much-needed capital. The flexibility provided by Bill C-69’s amendments allows businesses to use favorable loans without the threat of double taxation, which had been a significant obstacle before. As the Canadian startup ecosystem continues to evolve, this change in tax policy could be pivotal in enabling businesses to remain competitive in both domestic and international markets while continuing to innovate and create jobs.
Overall, Bill C-69’s provision marks a significant victory for Canadian startups, providing them with the financial flexibility needed to take full advantage of available government support programs and fueling the growth of Canada’s innovative sectors. Startups and businesses are encouraged to reassess their financial history in light of these changes to ensure they are not missing out on opportunities to recover substantial funds and maximize their growth potential.