Last month marked the one year anniversary since Canada became the first G7 country to legalize cannabis. On October 17, 2019, the Canadian Cannabis Regulations were updated to establish rules for the legal production and sale of three new classes of cannabis including edibles, extracts, and topicals, which are expected to become available for purchase in physical and online stores beginning in mid-December 2019.
With Canada currently representing the second-largest legal cannabis market in the world, innovation is now more vital than ever to maintaining a sustainable competitive Canadian advantage in the global cannabis value chain.
While legalization has attracted unprecedented levels of investment and has paved the way for accelerated research, clinical Cannabis research remains in its infancy with limited and often conflicting open-source information requiring heavy R&D investments to distinguish companies in this oversaturated market. Additionally, with the expansion of the market in terms of volumes and formats, much research is needed in harvesting/ processing technologies and product development.
Fortunately, costs of innovation in the cannabis industry can be offset with non-dilutive funding which can critically extend a company’s runway, bridge the funding gap to commercialization, and reduce the risk for investors.
Funding Cannabis R&D in Canada
The SR&ED tax credit program is the most lucrative source of non-dilutive funding for companies performing R&D in Canada, providing up to 68% back on eligible R&D expenditures for Qualified Canadian Controlled Private Corporations (CCPC’s) and 43% for Foreign-owned or public corporations depending on the province.
Examples of SR&ED in Cannabis include:
1. Edibles, Beverages, Extracts, and Topicals
- Enhancing nutrient content or eliminating allergens.
- Increasing product quality, yield, or shelf-life.
- Overcoming ingredient interference (i.e. chocolate) with potency testing.
- Maintaining formulaic stability, solubility, and dispersion
- Developing terpene-based organoleptic profiles.
- Scaling up and improving process efficiency.
- Overcoming limitations of processes that utilize reagents (ethanol, CO2, propane).
- Improving/developing extraction sequences and process parameters, and new isolation methods.
- Reducing water consumption, or improving heating/cooling processes.
- Developing innovative sustainable cannabis packaging solutions.
2. Medicinal & Pharmaceutical
- Developing novel cannabis treatments and medical procedures.
- Clinically assessing patient response to different doses, strains, and cultivation practices.
- Developing new, innovative methods to assess cannabinoid concentration.
- Developing methods to test medicinal ingredient accuracy for consumers and industry professionals.
3. Cultivation/Harvesting
- Testing the effects of climate/growing conditions (temperature and humidity, mineral composition of soil ph., and light exposure) and relative cultivation sequences on yield/ potency and the resulting product quality (yield, potency, terpenes profile).
- Assessing growth conditions relative to processing parameters and product efficacy.
- Developing new bio-stimulants for disease resistance, new fertilizer blends for boosting yield or developing biological pest controls.
- Performing gene editing and breeding studies.
- Integrating automation processes and equipment.
4. ICT
- Improving diagnostic and data analytics.
- Developing cloud biology platforms and software applications.
- Developing Smart Farming, IoT, and security systems.
Bridging the Funding Gap
SR&ED funding can be combined with other sources of non-dilutive financing at various stages of growth to bridge the funding gap from product development to commercialization.
Advanced SR&ED Financing: While the SR&ED tax credit program is critical for the viability of Canadian companies, it often takes over one year to receive the funding, which can be challenging, particularly for early stage companies. Advanced SR&ED accrual debt financing helps to bridge the financing gap by enabling companies to gain access to up to 80% of their SR&ED refund as soon as six months pre-filing.
Agri and Regional R&D funding: The Canadian Agricultural Partnership (CAP) is a five-year, $3 billion, federal-provincial-territorial agreement, that will replace Growing Forward 2 (GF2), and provides cost-sharing funding for processors and other agri-related businesses. The FedDev Rural Innovation Initiative (RII) regional stream is a non-repayable grant for SMEs operating in rural Southern Ontario within priority sectors that covers up to 50% of eligible project costs for a maximum of $100,000.
Commercialization: The Industrial Research Assistance Program (IRAP) supports companies that are investing in new technology projects that lead to new products, processes, or services in Canada, with an emphasis on commercialization. IRAP will cover labour and subcontractor costs. IRAP can be paired with SR&ED to increase the total funding amounts, provided adequate deductions for overlap are made.
Export: CanExport is a government funding program that provides funding to Canadian small and medium-sized enterprises (SMEs) to support new export market development. Previously, the CanExport program excluded the agriculture and food processing sectors, since companies in these industries were already eligible for export funding through the AgriMarketing program. However, as of August 22, 2019, the program will also be expanded to include supporting companies from Canada’s agriculture, agri-food and agri-products industry, including fish and seafood. CanExport’s funding limit for SMEs will also increase to $75,000 to cover up to 75% of eligible expenses.
Having a first mover advantage with federal legalization, Canada is poised to lead the world in cannabis R&D and evidence-based cannabis policy; however, this will require continued investment in R&D and the commercialization of ‘Made in Canada’ innovations in cannabis.