Job Creation: The Real Intent Of The SR&ED Program

Written by Raj Phalpher.

It is well known that Federal and Provincial governments provide direct support to the auto industry, and the benefits of these hundreds of millions of dollars support are readily visible in Oakville, Brampton and Oshawa in terms of the manufacturing jobs in the auto industry.  Benefits of the support to the large assembly plants trickle down the supply chain to the small and medium parts suppliers.

In addition to this direct support, we also have the Scientific Research and Experimental Development [SR&ED] program, the real intent of this is to create more high paying skilled jobs in Canada.  Instead of paying workers ten dollars an hour unloading products made in Mexico. China and Vietnam, the program is designed to encourage creation of skilled jobs at higher wage levels. Similarly, the program encourages software development in Canada, instead of outsourcing to Bangalore. 

The key difference between the two programs is that SR&ED is bottom-up, instead of top-down.  The program provides over four billion in tax credits to over 22,000 businesses, mostly small Canadian Controlled Private Corporations (CCPC’s).  The program, however, is not limited to small companies – Research in Motion, now BlackBerry, is also one of the beneficiaries of this program.

Of note is that software development by itself does not constitute SR&ED and software development firms are not automatically entitled to SR&ED tax credits.  For the tax credit claim to be eligible, the organization has to prove that it stretched the technology envelope – overcame technological obstacles, achieved some technological advancements through systematic investigation. 

Typically, R&D in the conventional sense is usually a sub-set of the total product development effort, and R&D, in turn, may have some slivers of SR&ED.  It is these slivers that are eligible for the tax credits.  As any experienced programmer knows, a substantial portion of the development effort is spent on these slivers – in pushing the technology envelope, and it is these slivers that provide the edge in the competitive market place.  The onus is on the development organization to identify these slivers and claim their fair share of the SR&ED tax credits.

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