8 ms·

Canada's R&D tax credit program hurts R&D in Canada

133 points by wwhchung 11y ago

mmastrac 11y ago
As a Canadian, I'd prefer it if the government took the entire SR&ED budget and put it into an early/mid-stage venture fund like VCAP: http://www.actionplan.gc.ca/en/initiative/venture-capital-action-plan http://www.actionplan.gc.ca/en/initiative/venture-capital-ac... I've seen SR&ED abused at companies I've worked at, and on the flip-side I've seen claims that should qualify as R&D get denied. By investing in startups (doing some due-diligence up front as any venture fund would), we can increase the amount of R&D in Canada while simultaneously reducing the operational cost of running it dramatically. Big companies can take advantage of this program by acquiring earlier-stage startups in their field.
- _delirium 11y ago
  Since only a small percentage of startups are doing significant R&D, that seems likely to just direct money towards general business development, the majority of which ends up being "business model innovation" combined with straightforward web development, vs. science/engineering innovation. Granted, that may not be much worse than the status quo if it's currently funding a ton of non-R&D things anyway, but it doesn't seem likely to really stimulate R&D, either.
Afton 11y ago
I'd also mention that what counts as 'R&D' is often paper thin. Normal developer activities can count if they are spun correctly. Whether that's a problem depends on the amount that you think of this as a general small business tax credit vs an incentive to do research.
- wwhchung 11y ago
  Yup. Many more issues, but this is one that isn't subjective and I can provide possible solutions to, so its the first I wrote about. :)
- stormbrew 11y ago
  I was once told of a restaurant that managed to get SR&ED for their chefs. Second-hand, and supposedly they've tightened the rules since then, but I feel like it's really telling of the flaws with the program at a fundamental level. Either make it a handout directly or tighten up the rules so that it can only apply to things with really rigid processes that are capital intensive, imo.
GnarfGnarf 11y ago
The SR&ED reporting process is a nightmare. I once spent 170 hrs. defending a piddling $100K claim. Hell is spending 8 hrs. in a room trying to explain polymorphism and encapsulation to an accountant. The whole process is geared towards engineering, physical processes and manufacturing. The subtleties and abstraction of software development make it look like we take no risks. The time-tracking requirements seriously degrade your productivity. I joked that if you discovered time travel, you wouldn't qualify for SR&ED because you were successful, so there was obviously no risk involved, ergo you don't qualify.
- nickff 11y ago
  >"I joked that if you discovered time travel, you wouldn't qualify for SR&ED because you were successful, so there was obviously no risk involved, ergo you don't qualify." You could even be prosecuted for tax avoidance, given the vague standard.
- wwhchung 11y ago
  I agree that there are many other issues with SR&ED (including the one you mentioned above). I just chose to tackle one that I could put clear numbers and examples to and viable solutions. With respect to the SR&ED process itself, that's going to be another post once I have a well thought out proposal and data to back it up. :)
- rbobby 11y ago
  It's pretty difficult to get software development to qualify for SR&D. The way it was explained to me by a consultant was to qualify there had to be technological risk of failure (i.e. it is unknown whether or not it is possible to do task X via software). So your average SAAS startup doesn't face technological risk, even though they face lots of business risks (might not be able to hire good enough developers, might not be able to produce bug free app, etc). However the first few companies using deep learning to do facial recognition from photos (eg. facebook automatic tagging)... well they would have faced technological risk. It wasn't known at the outset that deep learning would produce sufficient quality matches to be useful. On the downside... big organizations that can pay big bucks for assistance with writing SR&D applications can qualify for S&RD. Several of the big Canadian banks have recovered considerable amounts. Which is pretty outrageous on the face of things... how much actual SR&D and technological risk is being faced in a banking environment? None that I've ever seen (well... except for one project I was involved in... but that was a trivial "lets try this and see if we can use shared record locks as activity signals for a job scheduler"). In a way scientific/technological risk is a bad measure for software R&D. In general there is very little technological risk, and what risk there is is generally tackled via prototyping and/or early testing. The meat of the development costs comes much later... and there's no gov't tax support for that at all.
lucisferre 11y ago
SR&ED is a terrible program that is actively hostile to software startups. To begin with under the definition of what the program considers claimable, in the strictest sense, most software work doesn't actually qualify, but the program is so poorly administered that most of them are able to successfully claim it anyways so they try, however you are always under the risk that your claim will be denied or clawed back. Adding to this problem for startups, first time claimants have a much higher chance of being audited, as well as any time a claim increases significantly over the previous year (think high growth company). If an audit goes poorly enough you can also have previous years claims clawed back. Then there is the time wasted in preparing and submitting, the pedantic time tracking that startups implement which is a drag on development teams in order to file these claims. Finally, because the process is confusing and daunting enough most companies will hire a SR&ED consultant to file the claim for them where they will likely pay around 20% of the total claim. In short, SR&ED is a great program for consultants to siphon money from tax payers but a terrible program for funding innovative startups.
- lazyant 11y ago
  On one hand you are saying that there's bad claims and on the other hand you complain about having to document and having audits. All you are saying is true except the conclusion in the last sentence, which may be a valid point but doesn't follow from the other facts.
  - nickff 11y ago
    You can have bad claims approved by very thorough and costly audits if the standard is poorly set (as is the case with SRED).
  - barkingcat 11y ago
    That's how poorly administered the system is. I've seen companies go through SR&ED and it's fairly random whether the paperwork is going to be accepted. Some companies document everything and end up being rejected for a random formerly unknown minutia, whereas other companies document less, and ultimately get approved for a bad claim. Anyone I've talked to who's even been close to the process (a claimant, a technical contact, an interviewee, an administrator) have had traumatic experiences with the process.
lazyant 11y ago
"there are some bad unintended consequences" != "SR&ED Hurts Canadian Innovation"
- wwhchung 11y ago
  Bad unintended consequences was a nice way of phrasing 'it sucks and is draining money away from real R&D/innovation'
waterside81 11y ago
It's great getting that money back and the author makes some good points about the shortcomings of the program, but as a recipient of this credit 3 years in a row now (just got our 2015 claim approved in record time), here's my issue with it: It just seems like a handout for optics' sake. In my circle of fellow SR&ED recipients, none of us have ever said "Well if it wasn't for this program, we wouldn't have hired these people, built that, researched this etc." Although in spirit it's meant to act as incentive to take risk, profit is all the motivation you need. I can't help but think that $4B could have been better spent on a few km of track for the subway in Toronto, for example.
- wwhchung 11y ago
  Yup. I chose to write about something I could put figures to rather than something that's much more subjective and I don't really have a good alternative for with data to back it up. I 100% agree though.
- peeters 11y ago
  Isn't the goal to keep the R&D in Canada? It might make no difference to how a startup is run, but I could see it making a difference of where the startup is run.
- tjl 11y ago
  I worked at a small startup (3 founders plus me) and the only reason I was hired was because of a Mitacs grant (the company puts up half and Mitacs puts up the other half) and SR&ED. I researched a number of topics related to NLP. I'm not working there any more because they had funding issues and couldn't pay for another half of a (longer) Mitacs grant.
HorizonXP 11y ago
SR&ED was pretty decent for me this year. I claimed almost $120k in qualifying expenses (a roughly $90k salary for myself and the proxy amount). I spent about two weeks putting together the application (along with the rest of my corporate tax return, so time was spent there too), and wrote up a few pages about the software development work that we did. It took about 2 months for them to respond, and I was approved without a request for additional supporting documents. I received $48k. I don't think I'll try and apply for it again next year, since I think it's going to be harder to justify the time expense, but overall, it wasn't so bad for a small claim. I can certainly see how larger claims than mine become onerous though.
- tlb 11y ago
  Two weeks! Neglecting the rest of your startup for 2 weeks can easily kill 10% of its long-term potential. For $48k, so if you value your startup at more than $480k, you shouldn't do it. (Taking a 2-week vacation doesn't do that, because you're fresh and energized afterwards, rather than beaten down by the grim bureaucracy).
  - HorizonXP 11y ago
    Precisely why I wouldn't do it again. Right now, $48k was the difference between paying myself, or not. In the future, as we grow, that hopefully won't be the case.
- sospep 11y ago
  > I spent about two weeks putting together the application > I received $48k. > I don't think I'll try and apply for it again next year This doesn't compute.
deleted 11y ago
[deleted]
ska 11y ago
SR&ED can work very well for its intended audience. Most of the really vocal complaints I've heard were from people and companies that really shouldn't have applied in the first place. However, I agree that there is confusion and external pressure to apply which doesn't help things at all. Most startups, don't do this sort of R&D at all (or hardly at all).
byron_fast 11y ago
This is definitely true, but not news to anyone who has followed how government program "X" for business actually works. These programs are defined by who they favour, and it has nothing to do with merit as defined by business or legislators; it is defined by bureaucrats who invariably favor things that benefit them directly. I managed to get a decent amount of money back from SR&ED, but it required (as expected) an incredible time investment. A time investment that was negative to our business in every way; there's no way to reap a return on that later unless you return to SR&ED in the future. The best thing, as always, would be for the government to simply lower taxes and eliminate these circuitous loops.
cheez 11y ago
I actually had this discussion with my accountant yesterday: it only makes sense if you're so profitable that you're paying taxes. Guess who that favours ;) Not me!
- derekja 11y ago
  really? It's a refundable tax credit. Meaning if after the tax credit there is a balance it can be paid back out to you. See http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdnvstmnttxcrdt-eng.html#s4_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdnvstmnttx...
- boonez123 11y ago
  Get a new accountant.
  - cheez 11y ago
    That's the thought I had for other reasons, but good to know that it was justified.
bhouston 11y ago
This post is a load of shit, serious shit. Claim 1: > Promotes excessive executive compensation You can not claim executive compensation in a SRED claim. If you do it is fraud. It is an excluded expense see here: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxpndtrsfrtcprpss-eng.html#s10_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxp... Claim 2: > We’re paying foreign entities to take IP and profits out of Canada. Not a very good use of taxpayer dollars, is it? Actually that is illegal, see this: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxpndtrsfrtcprpss-eng.html#s9_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxp... Claim 3: > Removes emphasis on sustainable growth It isn't meant to be sustainable, it is mean to fund the initial R&D in something that is risky. As you grow, and you slow down R&D, yes it gets smaller -- by design. This is a really weird post and seems to be spreading FUD. SRED is not a perfect program, but the main faults outlined in this article are complete wrong.
- wwhchung 11y ago
  Hi there. Claim 1 is not incorrect. I am not stating executive compensation is used to claim SR&ED. I am stating it is used to suppress net profits to qualify for the higher rate. Also, Claim 2, there is no requirement for IP to be owned by the Canadian entity for its development to be qualified for SR&ED (I’ve verified this from multiple accountants and the CRA). As for Claim 3, you realize that this is indefinite right?
  - bhouston 11y ago
    If you say these are major issues, how often have you seen these two instances in the real world as a percentage of total SRED claims? Are these theoretical concerns or do you know that these are very serious practical concerns about SRED? Regarding Claim 1, you are advocating that company will sacrifice its growth in order to live off of SRED. The larger one’s SRED claims and the larger they are in respect to total expenditures, the more likely to gain scrutiny and audits. I’ve been SRED audited, it isn’t fun. If a company could make $1M, why couldn’t it make $2M? This seems like a contrived scenario. Regarding Claim 2, if a company is not going to act in its own best interests, it doesn’t matter who owns the IP. The company could license it for nothing to other companies even if it owned the IP. In both scenarios you are outlining companies acting against their own best interests. Maybe it is possible, but it doesn’t seem like a very common case. Do you have numbers to back it up, or just the theoretical possibility that it could technically happen?
mercurial 11y ago
France has something like that as well, and boy, you wouldn't believe the number of software companies which totally do massive amounts of R&D. And they really do, it's just that for them, R stands for Read and D for Debug.
bcantrill 11y ago
In my experience, SR&ED is a system that exists to employ government bureaucrats and their symbiotic ecosystem of consultants and auditors -- everyone else is a loser. And I felt this way before we at Joyent were audited; after we were audited (which came back clean, but was incredibly time consuming and extraordinarily painful) my opinions on SR&ED are much more pointed: we still have a Canadian office and it hasn't affected our hiring there (Joyent is hiring in Vancouver![1]), but I want absolutely nothing to do with SR&ED ever again in my life. (That is, we have not applied for SR&ED credits since and will never do so again.) If Canada wants to do something for startups, they should setup a sovereign wealth fund that does early stage investment in Canadian companies -- and then it should actively help make those companies successful. SR&ED is a transfer payment from Canadian taxpayers to Canadian consultants; it should be scrapped, not fixed. [1] https://news.ycombinator.com/item?id=10312448 https://news.ycombinator.com/item?id=10312448
- amackera 11y ago
  THIS There's a few other startup grant opportunities out there but they're mostly province dependent and not very accessible. What you're proposing is more of a startup incentive than an R&D incentive though. Not saying it's a bad thing, just different.
- benjaminfox 11y ago
  > If Canada wants to do something for startups, they should setup a sovereign wealth fund that does early stage investment in Canadian companies -- and then it should actively help make those companies successful. The Business Development Bank of Canada (a financial institution owned by the federal government) actually does this - it has a venture fund that's one of the largest in Canada. http://www.bdc.ca/EN/bdc-capital/venture-capital/strategic-approach/Pages/it-venture-fund.aspx http://www.bdc.ca/EN/bdc-capital/venture-capital/strategic-a...
- sintaxi 11y ago
  This is nonsense. SR&ED is not a grant you apply for, it is a tax credit that you are ENTITLED to for taking technical risk and venturing into areas of technical uncertainty. SR&ED is a tax credit and a perfectly reasonable one. The problem with SR&ED is that it is a badly abused which leads to painful auditing processes for everyone. Since Joyent Canada is (as far as I'm aware) a 100% wholly owned subsidiary of a US corporation it doesn't surprise me the CRA took a close look at the claims as Canadians ultimately wont see the extent of the benefits that the program hopes to achieve for Canadian corporations. The fact that you call it the "Canadian office" rather than the "Canadian company we own" illustrates a frame of thinking that likely makes the CRA uncomfortable. The program is designed to help Canadian companies. So.. you are an American, working for an American company, managing a team that is receiving Canadian tax breaks for generating I.P. for the American corporation and you are complaining that you received friction from the CRA? Yeah, no shit. > SR&ED is a transfer payment from Canadian taxpayers to Canadian consultants; it should be scrapped, not fixed. No, SR&ED is not funding from Canadian tax payers. Once again it is a tax credit for money spent on salaries for performing tasks that have abnormally high risk. Its critical to understand the difference before voicing an opinion on the matter. edit: wording
bvanvugt 11y ago
It's really important that programs like Canadian SR&ED are being scrutinized in the context of startups, and on that theme I'm really happy to see this discussion. I think it's more interesting to see how Canadian founders can shape these sorts of policies over the next 5-10 years, and this is a great starting point.
mikeklaas 11y ago
For all its faults, Zite/Worio would've surely folded without SR&ED credits. (In the end, we launched and were acquired by CNN.)
- wwhchung 11y ago
  Or, it could have folded and made something else. Or any number of other scenarios. But debating SR&ED being good or bad is too theoretical and everyone can point to examples on all sides. This is why I chose a very specific issue with SR&ED and proposals on how to fix it. I'm not stating that SR&ED does not have its benefits, but there are some glaring flaws that need fixing. Others include the SR&ED process itself, evaluation of SR&ED claims and more. However this is the first one I could concretely back up with examples and math and give real solutions to.

133 points by wwhchung 11y ago

As a Canadian, I'd prefer it if the government took the entire SR&ED budget and put it into an early/mid-stage venture fund like VCAP: http://www.actionplan.gc.ca/en/initiative/venture-capital-action-plan http://www.actionplan.gc.ca/en/initiative/venture-capital-ac... I've seen SR&ED abused at companies I've worked at, and on the flip-side I've seen claims that should qualify as R&D get denied. By investing in startups (doing some due-diligence up front as any venture fund would), we can increase the amount of R&D in Canada while simultaneously reducing the operational cost of running it dramatically. Big companies can take advantage of this program by acquiring earlier-stage startups in their field.

_delirium 11y ago
Since only a small percentage of startups are doing significant R&D, that seems likely to just direct money towards general business development, the majority of which ends up being "business model innovation" combined with straightforward web development, vs. science/engineering innovation. Granted, that may not be much worse than the status quo if it's currently funding a ton of non-R&D things anyway, but it doesn't seem likely to really stimulate R&D, either.

Afton 11y ago

I'd also mention that what counts as 'R&D' is often paper thin. Normal developer activities can count if they are spun correctly. Whether that's a problem depends on the amount that you think of this as a general small business tax credit vs an incentive to do research.

wwhchung 11y ago
Yup. Many more issues, but this is one that isn't subjective and I can provide possible solutions to, so its the first I wrote about. :)
stormbrew 11y ago
I was once told of a restaurant that managed to get SR&ED for their chefs. Second-hand, and supposedly they've tightened the rules since then, but I feel like it's really telling of the flaws with the program at a fundamental level. Either make it a handout directly or tighten up the rules so that it can only apply to things with really rigid processes that are capital intensive, imo.

GnarfGnarf 11y ago

The SR&ED reporting process is a nightmare. I once spent 170 hrs. defending a piddling $100K claim. Hell is spending 8 hrs. in a room trying to explain polymorphism and encapsulation to an accountant. The whole process is geared towards engineering, physical processes and manufacturing. The subtleties and abstraction of software development make it look like we take no risks. The time-tracking requirements seriously degrade your productivity. I joked that if you discovered time travel, you wouldn't qualify for SR&ED because you were successful, so there was obviously no risk involved, ergo you don't qualify.

nickff 11y ago
>"I joked that if you discovered time travel, you wouldn't qualify for SR&ED because you were successful, so there was obviously no risk involved, ergo you don't qualify." You could even be prosecuted for tax avoidance, given the vague standard.
wwhchung 11y ago
I agree that there are many other issues with SR&ED (including the one you mentioned above). I just chose to tackle one that I could put clear numbers and examples to and viable solutions. With respect to the SR&ED process itself, that's going to be another post once I have a well thought out proposal and data to back it up. :)
rbobby 11y ago
It's pretty difficult to get software development to qualify for SR&D. The way it was explained to me by a consultant was to qualify there had to be technological risk of failure (i.e. it is unknown whether or not it is possible to do task X via software). So your average SAAS startup doesn't face technological risk, even though they face lots of business risks (might not be able to hire good enough developers, might not be able to produce bug free app, etc). However the first few companies using deep learning to do facial recognition from photos (eg. facebook automatic tagging)... well they would have faced technological risk. It wasn't known at the outset that deep learning would produce sufficient quality matches to be useful. On the downside... big organizations that can pay big bucks for assistance with writing SR&D applications can qualify for S&RD. Several of the big Canadian banks have recovered considerable amounts. Which is pretty outrageous on the face of things... how much actual SR&D and technological risk is being faced in a banking environment? None that I've ever seen (well... except for one project I was involved in... but that was a trivial "lets try this and see if we can use shared record locks as activity signals for a job scheduler"). In a way scientific/technological risk is a bad measure for software R&D. In general there is very little technological risk, and what risk there is is generally tackled via prototyping and/or early testing. The meat of the development costs comes much later... and there's no gov't tax support for that at all.

lucisferre 11y ago

SR&ED is a terrible program that is actively hostile to software startups. To begin with under the definition of what the program considers claimable, in the strictest sense, most software work doesn't actually qualify, but the program is so poorly administered that most of them are able to successfully claim it anyways so they try, however you are always under the risk that your claim will be denied or clawed back. Adding to this problem for startups, first time claimants have a much higher chance of being audited, as well as any time a claim increases significantly over the previous year (think high growth company). If an audit goes poorly enough you can also have previous years claims clawed back. Then there is the time wasted in preparing and submitting, the pedantic time tracking that startups implement which is a drag on development teams in order to file these claims. Finally, because the process is confusing and daunting enough most companies will hire a SR&ED consultant to file the claim for them where they will likely pay around 20% of the total claim. In short, SR&ED is a great program for consultants to siphon money from tax payers but a terrible program for funding innovative startups.

lazyant 11y ago
On one hand you are saying that there's bad claims and on the other hand you complain about having to document and having audits. All you are saying is true except the conclusion in the last sentence, which may be a valid point but doesn't follow from the other facts.
- nickff 11y ago
  You can have bad claims approved by very thorough and costly audits if the standard is poorly set (as is the case with SRED).
- barkingcat 11y ago
  That's how poorly administered the system is. I've seen companies go through SR&ED and it's fairly random whether the paperwork is going to be accepted. Some companies document everything and end up being rejected for a random formerly unknown minutia, whereas other companies document less, and ultimately get approved for a bad claim. Anyone I've talked to who's even been close to the process (a claimant, a technical contact, an interviewee, an administrator) have had traumatic experiences with the process.

lazyant 11y ago

"there are some bad unintended consequences" != "SR&ED Hurts Canadian Innovation"

wwhchung 11y ago
Bad unintended consequences was a nice way of phrasing 'it sucks and is draining money away from real R&D/innovation'

waterside81 11y ago

It's great getting that money back and the author makes some good points about the shortcomings of the program, but as a recipient of this credit 3 years in a row now (just got our 2015 claim approved in record time), here's my issue with it: It just seems like a handout for optics' sake. In my circle of fellow SR&ED recipients, none of us have ever said "Well if it wasn't for this program, we wouldn't have hired these people, built that, researched this etc." Although in spirit it's meant to act as incentive to take risk, profit is all the motivation you need. I can't help but think that $4B could have been better spent on a few km of track for the subway in Toronto, for example.

wwhchung 11y ago
Yup. I chose to write about something I could put figures to rather than something that's much more subjective and I don't really have a good alternative for with data to back it up. I 100% agree though.
peeters 11y ago
Isn't the goal to keep the R&D in Canada? It might make no difference to how a startup is run, but I could see it making a difference of where the startup is run.
tjl 11y ago
I worked at a small startup (3 founders plus me) and the only reason I was hired was because of a Mitacs grant (the company puts up half and Mitacs puts up the other half) and SR&ED. I researched a number of topics related to NLP. I'm not working there any more because they had funding issues and couldn't pay for another half of a (longer) Mitacs grant.

HorizonXP 11y ago

SR&ED was pretty decent for me this year. I claimed almost $120k in qualifying expenses (a roughly $90k salary for myself and the proxy amount). I spent about two weeks putting together the application (along with the rest of my corporate tax return, so time was spent there too), and wrote up a few pages about the software development work that we did. It took about 2 months for them to respond, and I was approved without a request for additional supporting documents. I received $48k. I don't think I'll try and apply for it again next year, since I think it's going to be harder to justify the time expense, but overall, it wasn't so bad for a small claim. I can certainly see how larger claims than mine become onerous though.

tlb 11y ago
Two weeks! Neglecting the rest of your startup for 2 weeks can easily kill 10% of its long-term potential. For $48k, so if you value your startup at more than $480k, you shouldn't do it. (Taking a 2-week vacation doesn't do that, because you're fresh and energized afterwards, rather than beaten down by the grim bureaucracy).
- HorizonXP 11y ago
  Precisely why I wouldn't do it again. Right now, $48k was the difference between paying myself, or not. In the future, as we grow, that hopefully won't be the case.
sospep 11y ago
> I spent about two weeks putting together the application > I received $48k. > I don't think I'll try and apply for it again next year This doesn't compute.

deleted 11y ago

[deleted]

ska 11y ago

SR&ED can work very well for its intended audience. Most of the really vocal complaints I've heard were from people and companies that really shouldn't have applied in the first place. However, I agree that there is confusion and external pressure to apply which doesn't help things at all. Most startups, don't do this sort of R&D at all (or hardly at all).

byron_fast 11y ago

This is definitely true, but not news to anyone who has followed how government program "X" for business actually works. These programs are defined by who they favour, and it has nothing to do with merit as defined by business or legislators; it is defined by bureaucrats who invariably favor things that benefit them directly. I managed to get a decent amount of money back from SR&ED, but it required (as expected) an incredible time investment. A time investment that was negative to our business in every way; there's no way to reap a return on that later unless you return to SR&ED in the future. The best thing, as always, would be for the government to simply lower taxes and eliminate these circuitous loops.

cheez 11y ago

I actually had this discussion with my accountant yesterday: it only makes sense if you're so profitable that you're paying taxes. Guess who that favours ;) Not me!

derekja 11y ago
really? It's a refundable tax credit. Meaning if after the tax credit there is a balance it can be paid back out to you. See http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdnvstmnttxcrdt-eng.html#s4_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/srdnvstmnttx...
boonez123 11y ago
Get a new accountant.
- cheez 11y ago
  That's the thought I had for other reasons, but good to know that it was justified.

bhouston 11y ago

This post is a load of shit, serious shit. Claim 1: > Promotes excessive executive compensation You can not claim executive compensation in a SRED claim. If you do it is fraud. It is an excluded expense see here: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxpndtrsfrtcprpss-eng.html#s10_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxp... Claim 2: > We’re paying foreign entities to take IP and profits out of Canada. Not a very good use of taxpayer dollars, is it? Actually that is illegal, see this: http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxpndtrsfrtcprpss-eng.html#s9_0 http://www.cra-arc.gc.ca/txcrdt/sred-rsde/clmng/ttlqlfdsrdxp... Claim 3: > Removes emphasis on sustainable growth It isn't meant to be sustainable, it is mean to fund the initial R&D in something that is risky. As you grow, and you slow down R&D, yes it gets smaller -- by design. This is a really weird post and seems to be spreading FUD. SRED is not a perfect program, but the main faults outlined in this article are complete wrong.

wwhchung 11y ago
Hi there. Claim 1 is not incorrect. I am not stating executive compensation is used to claim SR&ED. I am stating it is used to suppress net profits to qualify for the higher rate. Also, Claim 2, there is no requirement for IP to be owned by the Canadian entity for its development to be qualified for SR&ED (I’ve verified this from multiple accountants and the CRA). As for Claim 3, you realize that this is indefinite right?
- bhouston 11y ago
  If you say these are major issues, how often have you seen these two instances in the real world as a percentage of total SRED claims? Are these theoretical concerns or do you know that these are very serious practical concerns about SRED? Regarding Claim 1, you are advocating that company will sacrifice its growth in order to live off of SRED. The larger one’s SRED claims and the larger they are in respect to total expenditures, the more likely to gain scrutiny and audits. I’ve been SRED audited, it isn’t fun. If a company could make $1M, why couldn’t it make $2M? This seems like a contrived scenario. Regarding Claim 2, if a company is not going to act in its own best interests, it doesn’t matter who owns the IP. The company could license it for nothing to other companies even if it owned the IP. In both scenarios you are outlining companies acting against their own best interests. Maybe it is possible, but it doesn’t seem like a very common case. Do you have numbers to back it up, or just the theoretical possibility that it could technically happen?

mercurial 11y ago

France has something like that as well, and boy, you wouldn't believe the number of software companies which totally do massive amounts of R&D. And they really do, it's just that for them, R stands for Read and D for Debug.

bcantrill 11y ago

In my experience, SR&ED is a system that exists to employ government bureaucrats and their symbiotic ecosystem of consultants and auditors -- everyone else is a loser. And I felt this way before we at Joyent were audited; after we were audited (which came back clean, but was incredibly time consuming and extraordinarily painful) my opinions on SR&ED are much more pointed: we still have a Canadian office and it hasn't affected our hiring there (Joyent is hiring in Vancouver![1]), but I want absolutely nothing to do with SR&ED ever again in my life. (That is, we have not applied for SR&ED credits since and will never do so again.) If Canada wants to do something for startups, they should setup a sovereign wealth fund that does early stage investment in Canadian companies -- and then it should actively help make those companies successful. SR&ED is a transfer payment from Canadian taxpayers to Canadian consultants; it should be scrapped, not fixed. [1] https://news.ycombinator.com/item?id=10312448 https://news.ycombinator.com/item?id=10312448

amackera 11y ago
THIS There's a few other startup grant opportunities out there but they're mostly province dependent and not very accessible. What you're proposing is more of a startup incentive than an R&D incentive though. Not saying it's a bad thing, just different.
benjaminfox 11y ago
> If Canada wants to do something for startups, they should setup a sovereign wealth fund that does early stage investment in Canadian companies -- and then it should actively help make those companies successful. The Business Development Bank of Canada (a financial institution owned by the federal government) actually does this - it has a venture fund that's one of the largest in Canada. http://www.bdc.ca/EN/bdc-capital/venture-capital/strategic-approach/Pages/it-venture-fund.aspx http://www.bdc.ca/EN/bdc-capital/venture-capital/strategic-a...
sintaxi 11y ago
This is nonsense. SR&ED is not a grant you apply for, it is a tax credit that you are ENTITLED to for taking technical risk and venturing into areas of technical uncertainty. SR&ED is a tax credit and a perfectly reasonable one. The problem with SR&ED is that it is a badly abused which leads to painful auditing processes for everyone. Since Joyent Canada is (as far as I'm aware) a 100% wholly owned subsidiary of a US corporation it doesn't surprise me the CRA took a close look at the claims as Canadians ultimately wont see the extent of the benefits that the program hopes to achieve for Canadian corporations. The fact that you call it the "Canadian office" rather than the "Canadian company we own" illustrates a frame of thinking that likely makes the CRA uncomfortable. The program is designed to help Canadian companies. So.. you are an American, working for an American company, managing a team that is receiving Canadian tax breaks for generating I.P. for the American corporation and you are complaining that you received friction from the CRA? Yeah, no shit. > SR&ED is a transfer payment from Canadian taxpayers to Canadian consultants; it should be scrapped, not fixed. No, SR&ED is not funding from Canadian tax payers. Once again it is a tax credit for money spent on salaries for performing tasks that have abnormally high risk. Its critical to understand the difference before voicing an opinion on the matter. edit: wording

bvanvugt 11y ago

It's really important that programs like Canadian SR&ED are being scrutinized in the context of startups, and on that theme I'm really happy to see this discussion. I think it's more interesting to see how Canadian founders can shape these sorts of policies over the next 5-10 years, and this is a great starting point.

mikeklaas 11y ago

For all its faults, Zite/Worio would've surely folded without SR&ED credits. (In the end, we launched and were acquired by CNN.)

wwhchung 11y ago
Or, it could have folded and made something else. Or any number of other scenarios. But debating SR&ED being good or bad is too theoretical and everyone can point to examples on all sides. This is why I chose a very specific issue with SR&ED and proposals on how to fix it. I'm not stating that SR&ED does not have its benefits, but there are some glaring flaws that need fixing. Others include the SR&ED process itself, evaluation of SR&ED claims and more. However this is the first one I could concretely back up with examples and math and give real solutions to.