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?