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.
My opinion of SRED is mostly negative based on some experience (albeit out of date, from the late 90s and early 00s) and talking to people I know who were trying to get SRED money.
In one instance, a company I worked for hired a consultant to do the application. This consultant basically interviewed everyone on the technical team and tried to coax us into saying every piece of functionality was novel and innovative, whether it was true or not. I came out of that meeting feeling so dirty that I wanted to shower for a couple of hours.
My other experiences were working in companies (or knowing of other people in other companies) who were applying for and getting SRED money where the R&D innovations were at best questionable.
As someone who works in tech, I want programs like SRED to work. On the other hand, being a taxpayer and seeing how some companies are getting SRED money for arguably undeserving R&D work makes me think SRED is a complete waste of taxpayer money.
Every technology company I have worked for claims and receives the SRED. None of them have deserved it - not even remotely close. Each of my companies have made millions in profit each year. We have never done anything innovative that required actual research or risking anything by developing new technologies. My teams have used linux, mysql, memcached, redis, and a couple of programming languages. 100% of the work is just writing normal code for web applications. How much of that $4 billion dollars being handed out is for fraudulent claims of R&D? I would bet more than $3 billion. There are supposed requirements to meet to be eligible for the benefit, but everyday programming work is being rephrased to sound innovative and difficult.
This benefit needs to be abolished, as the number of tax dollars being sunk into it is ridiculous. For the few percent of businesses that might actual merit such a benefit, oh well. Compete in the market like everyone else without assistance. The difference between a deserving business and a business that will lie and twist words to save 15-35% on salaries is impossible to determine accurately. Too many liars and fraudsters have destroyed the system, so kill the program and nobody benefits.
Would love to have access to anonymized SR&ED claims data. I'll also bet that while 75% of the claimant's are small businesses, they only get < 10% of the $4B (remind you of anything)?
It's why I advocate for a lower hard cap as well. With a hard cap, it's likely that the total amount paid out is well under $4B, which means we can then go on and address how we can better distribute funding and change the evaluation process to not be as restrictive.
I had a decent experience with it. We got $24k for using Haskell for a project. All I had to do was a couple writeups here and there explaining why Haskell was a technical uncertainty for the given task. SR&ED funds Haskell dev!
The company I worked for which did SR&ED would encourage us to log as many hours as possible (up to 80/week) on fake tickets on a regular basis. They used as many dirty tactics for government money as possible.
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.
I agree that there are many other issues with SR&ED (including the one you mentioned above). I actually point out a few at the bottom of my post. :) I just chose to tackle one that I could put clear numbers and examples to and viable solutions.
This describes my experience exactly. When I worked at an ad-tech startup a few years ago we wasted so many hours dealing with SRED consultants, writing things up, writing specifications... flowery language. IMHO big company stuff when we needed to be writing code and iterating fast to produce product, instead.
And in many cases there are web development or design agencies claiming and getting SRED, achieved purely by hiring consultants who know how to spin things.
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.
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?
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?
> Regarding Claim 1, you are advocating that company will sacrifice its growth in order to live off of SRED.
SRED zombies are a real thing. Companies that should otherwise fold keep living on. It's not that they are sacrificing growth, they are tying up productive resources.
Yes, it happens a LOT. I can't point fingers (it's not polite, and I'm Canadian), but it's what prompted me to write the article.
And yes, it does matter who owns the IP. If a sale happens, the proceeds to to the residing country's tax base. If it's not in Canada, we lose out on those gains.
Agreed, this post is nonsense. The author should consider doing research before forming & posting such opinions.
Executive compensation is not included in SR&ED. Even if you're a CEO who codes, only the time you spend coding can be claimed. The salary claimable is capped at $100K (I believe) for any major shareholders (or family members).
It is also well established that whoever owns the IP gets the SR&ED credits and foreign companies are not eligible for SR&ED.
The article isn't saying you can claim executive compensation for SR&ED. He's saying that the SR&ED tiers are tied to net profits, which executive compensation counts against. So you can increase CEO pay to push more of your profits into higher SR&ED tiers.
And what the rest of us are saying is that executive compensation is excluded from the computation of net profits (when calculating net profits for SRED purposes) except to the extent that the executive's compensation directly relates to SRED activities (i.e., R&D, etc.). The idea behind the exception being not to penalize small companies where the major R&D driver may also be an executive.
Any evidence for that? The link he provided simply says that executive compensation doesn't count as SR&ED expenditures for the purpose of determining the amount of R&D expenditure that qualifies for reimbursement. So far as I can tell, it says nothing about the definition of net income, and the definition of net income for the purpose of the qualifying income limit is simply the normal taxation one that allows you to deduct executive pay.
I agree, bhouston. I thought this post was wrong so I sent it to my Canadian counterparts, and they confirmed that the OP definitely misstated how SRED works. Flagged as inaccurate since this article risks spreading woefully incorrect information.
Your Canadian counterparts are incorrect, or they must not have read the post clearly. You are in fact able to deduct executive compensation against net income. You CANNOT claim excessive executive compensation for your SR&ED expenditures, but that is NOT what I'm indicating. If your counterparts still claim that this is not the case, they are pretty sh*tty accountants.
Yeah, we agree. My statement is that only the portion of executive comp that can be allocable to SRED expenditures can be deducted, which is what you're also saying. The key term is "excessive"--for SRED purposes, executive comp is excessive to the extent it does not relate to SRED expenditures.
But go ahead and call people names on the internet. It makes you seem like a true authority on the matter.
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.
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.
> 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).
Ok...
> 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.
This is a wildly different standard. It certainly was known at the outset that facial recognition from photographs is possible to do in software, because people do it all the time. They just didn't know how.
> It's pretty difficult to get software development to qualify for SR&D.
Every Canadian software company I've worked for in my 15 year career has used SR&ED.
Every single one. Most were small (ie. sub-25 people employed, most of those also making virtually no profit at all), a couple are large. Some tried to do it in house with only a lawyer to do late-stage massaging of the reports, others hired full on consultants for quite a lot of money to do it.
And they all got money out of SR&ED.
This is anecdata, but I don't think the idea that it's pretty difficult washes.
you wouldn't qualify for SR&ED because you were successful, so there was obviously no risk involved,
There are all kinds of risks you face that have nothing to do with SR&ED.
I'm not surprised you had a difficult audit if you were talking about things like "explaining polymorphism and encapulation" - sounds a description of activities in software development that are clearly not SR&ED-able.
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. :)
>"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.
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.
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.
You fundamentally misunderstand SR&ED: it has nothing to do with "helping Canadian companies" and everything to do with encouraging companies to do R&D work in Canada. That Joyent Canada is a fully owned subsidiary of a US corporation is immaterial (indeed, SR&ED is designed to attract R&D investment from multinationals not based in Canada!), and as a I learned as part of the audit, the audit that we received is considered "routine" for the first year that a company applies for SR&ED credits. Our consultants didn't think it was a big deal, and Revenue Canada was very polite about it; they (apparently) just wanted to make sure that we employed everyone that we said we employed and that they were engaged in eligible activity (which we did and they were -- it was all fine). But the audit was expensive for us in terms of time, and we made the decision that SR&ED wasn't worth it. That's not nonsense; that's a business decision.
> 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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.