Investment Framework Guidelines (IF)

Innovation, Science and Economic Development (ISED) Canada introduced the Investment Framework (IF) as a crediting tool to encourage contractors to make long-term investments in Canadian small and medium sized businesses (SMB), in innovation-related areas involving R&D and commercialization activities. The IF awards credits on a multiplied basis, to reflect the estimated future potential economic benefit of an investment.

These guidelines are for general information purposes only. Detailed requirements will be contained in any formal RFPs that are released.

IF Eligibility Criteria (see Annex 1 for details)

Proposed transactions must meet all of the following criteria:

  • Involves R&D and/or commercialization activities
  • Investment is with a Canadian SMB
  • Meets the ITB eligibility criteria (causality, incrementality, timing and eligible donor)
  • Investment is an allowable IF investment (cash and/or in-kind)
  • Minimum investment duration of five years
  • Contains a business plan

Valuation (see Annex 1 for details)

  • Eligible cash contributions will be taken at face value.
  • Eligible in-kind contributions will be valued based on the value specified in the valuation report submitted by the company, which was undertaken by a qualified party (possesses a professional designation related to business valuation or similar area of expertise).
  • The total multiplied credits associated with IF transactions will not exceed twenty-five (25) percent of the total obligation value in a project, measured in CCV.

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Multipliers

Nature of Investment
Nature of Investment Multiplier
Cash for R&D activities, or License for IP 9
Cash to purchase, or in-kind transfer of, Equipment 7
In-kind transfer of Knowledge and/or Marketing/Sales Support 4

For IF transactions that are proposed in a Value Proposition proposal, only the non-multiplied, face value of the transaction's initial investment will be counted for VP evaluation and scoring purposes. The full multiplied values of the transaction will be confirmed and apply as usual after contract award towards satisfying the overall obligation.

Allocation of Credits

  • The multiplied credits resulting from an IF activity will be awarded along the following timeline:
    • fifty (50) percent up front, once the investment activity is made according to the IF Business Plan, and is reported and verified.
    • fifty (50) percent apportioned over the remaining years of the IF project, as annual reporting requirements are met.

Annual Monitoring

  • The contractor must report annually to the ITB Authority on the status of the IF project, in order to facilitate verification, monitoring and credit award.
  • Annual reporting requirements will consist of the contractor providing information confirming: SMB receipt of the IF investment; its continued use by the SMB as described in the Business Plan; and an update on the progress and impact of the R&D/commercialization project.
  • Credits may be revoked by the ITB Authority in any of the following circumstances:
    • Failure to meet annual reporting requirements, as outlined above;
    • Removal, in whole or in part, of the IF investment from the SMB prior to the end of five continuous years;
    • Use of the IF investment for purposes other than those outlined in the IF Business Plan;
  • Credits will not be revoked due to a failure of the IF activity or SMB.

Process

  • Companies wishing to submit an IF transaction to the ITB Authority may do so as part of their Value Proposition proposal, after contract award or as a banked transaction.
  • Companies should ensure that all required documentation is included at the time of transaction submission:
    • Completed and signed transaction sheet, with all attachments
    • Business Plan (see Annex 2 for template)
    • Valuation documentation (see Annex 1 for details)
  • Companies should use the standard transaction sheet template to submit an IF transaction and ensure that all IF details are included on the sheet and in the Business Plan.

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Annex 1
Definitions and Details

R&D activities:

A scientific investigation that explores the development of new goods and services, new inputs into production, new methods of producing goods and services, or new ways of operating and managing organizations. Eligible activities must involve one or more of the following:

  • – standard test/measurement/analysis;
  • – test/measurement/analysis report;
  • – specific TMA (thermo-mechanical analysis) methodology development projects;
  • – product/process design/engineering;
  • – customized product/process/technology development project;
  • – related evaluation and feasibility studies;
  • – applied research projects for new products concepts;
  • – applied research projects for new technology platform;
  • – applied research projects for new test/measurement/analysis;
  • – basic scientific research for creating better understanding and insights in new phenomena;
  • – research to advance scientific knowledge with or without a specific practical application in view;
  • – support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or research.

Commercialization activities:

A process through which economic value is extracted from knowledge through the production and sale of new or significantly improved goods and services. This can also include advertising, sales promotion and other marketing activities. Eligible activities must involve one or more of the following:

  • – business and market planning;
  • – project feasibility studies;
  • – identifying customer needs;
  • – market engagement and testing;
  • – profitability analysis and financing;
  • – launch advertising.

Small- and Medium-sized Business (SMB):

A Canadian companyFootnote * with fewer than 250 full-time personnel as of the date of entering into an eligible transaction. Agents and distributors of foreign goods and services, as well as subsidiaries of firms that are Contractors or Eligible Donors on any contract with IRB/ITB obligations, do not qualify as Small and Medium Business. For the purposes of an IF transaction, the donor and SMB recipient cannot be the same company.

Allowable IF investment:

Cash contributions

  • A grant or a purchase of common or preferred shares.
  • Debentures or repayable loans are not permitted.

Companies will attach the following to the proposed transaction sheet:

  • a draft copy of the legal agreement between the contractor and the Canadian SMB; OR,
  • a signed certificate from the contractor and Canadian SMB, that confirms:
    1. the terms and conditions of the proposed investment; and,
    2. the estimated cash value of the investment.

In-kind contributions

  • licence for intellectual property;
  • equipment;
  • knowledge transfer (lending of an employee to provide technical and/or managerial “know-how”);
  • marketing and sales support (lending of an employee to undertake marketing/sales activities and/or share market intelligence/contacts); and/or
  • a licence for brand or trademarks.

To meet the 5 year investment retention rule, employees on loan must undertake activities in each year of the IF activity.

Companies will attach a valuation report to the proposed transaction sheet, which has been undertaken by a qualified party (possesses a professional designation related to business valuation or similar area of expertise). The valuation report will be detailed and contain a statement from the valuator regarding its expertise and adherence with the standards of its professional designation. The company will assume all costs associated with obtaining the in-kind valuation report.

The valuation approach should consider and use all standard, generally accepted report formats and valuation approaches (cost, income and market) and arrives at one conclusion regarding valuation which balances all three approaches. See chart below:

In-kind Contribution Valuation Methodology
Intellectual Property

Relief from Royalty: Net revenue expected to be generated by the intangible asset during its expected remaining life is multiplied by a selected benchmark royalty rate. The estimated royalty stream after tax is then discounted to present value.
Replacement or reproduction cost: Cost of constructing a similar intangible asset of equivalent utility at prices applicable at the time of the valuation analysis. This estimate may then be adjusted by losses in value attributable to obsolescence.
Multi-Period Excess Earnings Method: Present value of the incremental after-tax cash flows attributable only to the subject intangible asset after deducting contributory asset charges.

Equipment

Depreciated replacement cost: Determined by reference to the reproduction or replacement cost of new equivalent assets, optimized for over-design, over-capacity and redundant assets, and adjusted to reflect losses in value attributable to physical depreciation and obsolescence.
Market: Analysis of recent sale prices for comparable equipment.

Trademarks and Brand Relief from royalty: See intellectual property above.
Knowledge Transfer Cost to Donor, based on lent employee's salary and time.
Marketing/Sales support Cost to Donor, based on lent employee's salary and time.

Business Plan:

Companies will attach a Business Plan outlining the IF activity in more detail, using the template contained in Annex 2.

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Annex 2
Template
IF Business Plan

Protected B (when completed)

Template of IF Business Plan
IF Transaction Title:
Donor:
SMB Recipient:
Date:
 
Description of IF activity:

Provide a detailed description of the IF activity, including but not limited to: specific activities to be undertaken; goals; duration; value of the investment and how it will be used by the SMB; the anticipated impacts/outcomes for the SMB; and key IF activity assumptions and risks.

Anticipated length: 8—10 paragraphs.






Market Assessment:

Provide an outline of the opportunity, market size, key competitors, sales strategy and the donor/SMB recipient's competitive advantage.

Anticipated length: 3—5 paragraphs.





Company profile of SMB:

Provide a description of the SMB's operations, product lines, corporate structure and ownership.

Anticipated length: 2—3 paragraphs and organizational chart.






Certification and signatures

WHEREAS the ITB Policy requires that a proposed IF transaction be accompanied by a Business Plan outlining the IF activity in detail;

NOW THEREFORE, we the undersigned, in our capacities as senior officers at the Donor and SMB Recipient companies, do hereby declare and certify that the information included in and attached to this Business Plan is complete, accurate and can be relied upon by the ITB Branch for the purposes of monitoring the compliance of the proposed IF transaction.

IN WITNESS THEREOF THIS CERTIFICATION HAS BEEN SIGNED THIS ______ DAY OF __________________, 20____ BY A SENIOR OFFICER WHO IS DULY AUTHORIZED IN THAT BEHALF.

Donor

_________________________________
Signature

_________________________________
Name and Title of Senior Officer



SMB Recipient

_________________________________
Signature

_________________________________
Name and Title of Senior Officer

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