The TL;DR: Nearly 20% of Canadian SMEs facing tariff-related costs won't survive more than six months without change, according to new CFIB data. With Canadian small businesses already paying 20-23% more in taxes than their US counterparts, strategic access to innovation funding like SR&ED has never been more critical for survival and growth.
The numbers are clear: Canadian small and medium-sized businesses are facing tough times. The latest data from the Canadian Federation of Independent Business (CFIB) shows that small businesses are struggling with rising costs, tariffs, and a tax system that puts them at a disadvantage compared to their U.S. peers. All of this is putting their survival at risk.
The Crisis in Numbers
Nearly one in five (19%) Canadian small businesses dealing with tariff-related costs say they won't make it past six months if things don't change, according to CFIB's August 2025 survey. Even more concerning, almost four in ten (38%) say they won't last a year under current conditions.
Tariffs are hitting businesses on several fronts:
- Small businesses are feeling the brunt of both U.S. and Canadian tariffs on steel and aluminum (59%), as well as Canada's retaliatory tariffs on other U.S. goods (58%)
- Nearly half (48%) are seeing lower revenues, 41% are dealing with supply chain disruptions, and 36% have put investments on hold
- Almost one in three Canadian SMEs will be negatively impacted by the loss of the $800 U.S. de minimis exemption
But tariffs are just one part of a bigger competitiveness challenge that's been building for years.
The Deeper Structural Challenge
According to CFIB's latest cross-border tax analysis, a microbusiness with four employees in Canada pays on average 20% more in taxes than a similar business in the U.S. For a small business with 25 employees, the gap grows to 23% more in taxes than its American counterpart.
This tax disadvantage adds to the immediate pressure from tariffs, creating a double challenge for Canadian businesses:
- Immediate survival pressure: Tariff costs and supply chain disruptions threaten short-term viability
- Long-term competitiveness erosion: Structural tax disadvantages make it harder to invest, grow, and compete
“U.S. tariffs aren’t the only competitive issue facing Canadian small businesses,” said Bradlee Whidden, senior policy analyst and co-author of the report. “When you look at the numbers, it's crystal clear: smaller businesses in Canada are already at a serious tax disadvantage.”
Why This Matters Beyond SMEs
While the CFIB data focuses on small businesses, the impact goes far beyond the SME sector. If 19% of small businesses can’t survive the tariff storm, that puts a significant portion of the Canadian workforce at risk.
Mid-market and large companies aren’t immune either. They face the same structural tax disadvantages and often have more complex supply chains, making tariff impacts even greater. Plus, they rely on a network of small suppliers, service providers, and partners—many of whom are now at risk.
“Canada is built on small businesses—they employ a large part of the country, and we need to keep empowering those entrepreneurs if we want to address the productivity crisis we’re facing,” says Michelle Auger, senior policy analyst at CFIB.
A Strategic Response: Innovation Funding as a Lifeline
In uncertain economic times, companies that can show innovation and technological progress have better access to funding, government support, and new market opportunities. That’s why Canada’s Scientific Research and Experimental Development (SR&ED) program isn’t just an opportunity—it’s a strategic necessity.
The timing couldn’t be better. Canada just announced the biggest improvements to its SR&ED program in years, with higher credit limits, broader eligibility, and the return of capital expenditure eligibility. These changes, effective for tax years starting after December 16, 2024, give businesses a real chance to boost cash flow while investing in their future competitiveness.
The New SR&ED Landscape
The enhanced SR&ED program brings several key improvements:
- Higher credit limits: The annual expenditure limit for the enhanced 35% refundable tax credit has increased from $3 million to $4.5 million
- Expanded eligibility: Canadian public corporations can now access the same enhanced 35% refundable tax credit on up to $4.5 million of qualifying expenditures
- More generous thresholds: The taxable capital phase-out thresholds have increased from $10-50 million to $15-75 million
- Capital expenditures return: Capital expenditures are once again eligible for both SR&ED deductions and investment tax credits
For a small business at the current maximum, this means you just got a potential $525,000 annual boost to your cash flow.
Making Innovation Funding Work in Crisis Mode
The key to making innovation funding work in tough times is understanding that R&D doesn’t stop during a crisis—it adapts. Businesses facing tariff pressures might be working on:
- Process innovations to cut costs and improve efficiency
- Supply chain alternatives using new technologies or partnerships
- Product adaptations to meet changing market needs
- Automation solutions to lower labor costs and boost competitiveness
Many of these survival-driven innovations qualify for SR&ED credits, turning essential business changes into funded R&D activities.
Strategic Partnerships: The Expert Advantage
“Small businesses don’t have much runway left. They’re doing their best to absorb the costs, but if nothing changes, they’ll have to make some tough choices,” said Corinne Pohlmann, Executive Vice-President of Advocacy at CFIB.
In this environment, businesses can’t afford to leave money on the table. The difference between a standard accounting approach and specialized R&D tax credit expertise can be huge—sometimes it’s the difference between staying open and shutting down.
Working with experts who know both the technical SR&ED requirements and the broader business challenges Canadian companies face is crucial. They can spot eligible activities you might miss in crisis mode, optimize your claims for maximum benefit, and make sure your documentation stands up to government review.
The Path Forward: Acting Strategically
Whether you’re an SME or a large company, Canadian businesses are facing real challenges—but taking strategic action can make all the difference. Here’s what you should consider:
For SMEs Under Immediate Pressure:
- Review your current R&D activities to see what might qualify for SR&ED credits
- Document your innovation efforts related to cost savings, process improvements, or adapting to the market
- Consider timing of equipment purchases and R&D projects to maximize benefits under the new rules
- Engage specialists early to make sure you’re capturing all eligible activities
For Mid-Market and Enterprise Companies:
- Review your innovation roadmap in light of higher credit limits and expanded eligibility
- Assess supply chain innovations and process improvements that could qualify
- Consider the return of capital expenditure eligibility for R&D that requires significant equipment
- Plan strategically around the new thresholds and phase-out rules
Optimism Through Strategy
The economic challenges facing Canadian businesses are real and urgent. The CFIB data shows an ecosystem under pressure, with survival on the line for many companies. But the enhanced SR&ED program shows that the federal government understands the need to support innovation and competitiveness.
“Canada can’t solve its productivity crisis without empowering its entrepreneurs,” the CFIB report notes. The improved innovation funding landscape, combined with strategic expertise, gives Canadian businesses a way not just to survive the current crisis, but to come out stronger and more competitive.
The key is to act strategically, with expert guidance, to get the most out of the opportunities available while navigating the challenges ahead. For Canadian innovators who are ready to think strategically and work with the right partners, there’s reason to be optimistic—even in uncertain times.
Ready to see how enhanced SR&ED benefits could help your business through today’s challenges? The program offers more opportunities than ever, but navigating the requirements takes expertise. Connect with R&D tax credit specialists who understand both the technical requirements and the business realities facing Canadian companies right now.
