SR&ED and NRC IRAP are both substantial business support programs offered by the Canadian federal government.  However, one of the major differences between the 2 programs is that NRC IRAP endorses direct up-front funding, whereas SR&ED is a tax credit for expenses that have already been incurred.

In light of the recent Jenkins report, there has been significant discussion over the benefits and drawbacks of direct funding.  Direct funding allows the government to “pick winners” and scrutinize where funding is allocated, according to government policy.  Because companies who receive direct funding have to present a business case for each and every funding application, it allows the government to put “checks and balances” in place to ensure that the funding will be utilized for its intended purpose.  Direct funding mechanisms were pivotal in building capabilities in what became leading sectors in Ontario.

However, the downside of direct funding models, is that, according to a research paper by Nelson and Langlois (1983), the practice of “picking winners” by the government was the least successful form of government support.  Direct funding generally creates a larger administrative burden, especially to smaller enterprises and start-up ventures, who can ill afford to have an in-house grant writing team.  A Canadian firm intent on bringing its technology to market will likely be deterred from seeing assistance through direct funding because the lengthy approval process can delay the onset of time-sensitive work.

Secondly, a move towards direct funding could threaten the global competitiveness of Canadian enterprises.  International trade agreements, such as the World Trade Organization Agreement on subsidies and Countervailing Measures, cap direct subsidies to business.  For example, the controversial US-Canada lumber dispute revolved around Canadian stumpage fees being too low, making the fees de facto subsidies.

Finally, under a direct funding model, there is no legal process to appeal or obtain redress for disagreements between the administrators and the applicants for the funding.  A direct funding approach has no legislative support, and applicants can easily be discriminated upon if their objective does not directly advance government policy.  On the other hand, the tax credit system provides legislated rules so that any dispute about eligibility or payment can be heard by the courts.

There are arguments to be made for both tax credits and direct funding.  However, at the end of the day, it is important to keep in mind that entrepreneurs (and the start-up ventures they create) are the backbone and future of our economy.  It is paramount that these start-up ventures obtain the upfront capital necessary in order to undertake risky ventures, some of which will evolve and transform the economic landscape both in our country, and around the world.  Will the next RIM please stand up?

Software development is a key industry when it comes to R&D in Canada – in 2008 there were over 55,000 computer systems design and related companies operating in Canada, and that number continues to grow. Between smartphone apps and cloud computing, with infinite applications in every industry, we need to keep ahead. The government is offering a host of incentives to continue to develop the reach of IT in Canada, including a cross-province range of Digital Media Tax Credits. The SR&ED program is no exception. However, it can be difficult determining what software development activities are eligible to be considered “scientific research and experimental development.”

So, as a software company, what do you need to take advantage of the SR&ED tax credit? To determine your eligibility in qualifying for SR&ED refunds from a software or high-tech perspective, consider these questions:

-          Do we possess the intellectual property of the developed product? Can we sell the original or a modified version of the software?

-          Have we deviated from routine software development to overcome a technological constraint?

-          Was the product developed by qualified software engineer(s)/developer(s)?

-          Did we do more than just “trial and error”? Did we learn anything new?

If these situations apply to software your company has produced or is currently working on, you could be eligible to receive money back. For more information, or to evaluate the eligibility of your company’s software development product, contact NorthBridge Consultants.

Canadian Prime Minister Harper reiterated possible amendments to the Canadian SR&ED program at the World Economic Forum at Davos, Switzerland on Thursday.   “We believe that Canada’s less than optimal results for those investments is a significant problem for our country,” Mr. Harper stated.

Suggested changes, as previously mentioned by the Globe and Mail, follow from the much-discussed Jenkins Report, such as potentially limiting refunds to labour-based expenditures. However, the goal of the SR&ED will remain to support innovation in Canada.