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

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

#31

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.…

My opinion of SRED is mostly negative based on some experience (albeit out of date, from the late 90s and early 00s) and talking to people I know who were trying to get SRED money.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.

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

#32
post #22

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…

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…

I think banks face big risks with software projects through project management, but that's less tied to SR&ED ;)

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

#33
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/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/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.

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

#34

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-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 c…

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.

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

#35

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/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…

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?

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

#36

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/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…

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 r…

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?

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

#37

Earlier quoted context omitted.

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 r…

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…

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.

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

#39

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.…

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.

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

#40

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.…

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.
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