Wednesday, December 03, 2008

SR&ED changes don't seem as dramatic as feared

Lots of discussion lately about changes made by the Canada Revenue Agency to the federal scientific research and experimental development (SR&ED) tax credit. The Canadian Advanced Technology Alliance (CATA) is concerned about the impact of the changes on the high-tech industry, and I think all the national accounting firms have published reports on the modifications to the program.

I read the reports and the information released by CRA and reached two conclusions: 1) most of the changes just make it easier for companies applying for SR&ED to give CRA the information it always wanted (which I'll focus on in just a second), and 2) the SR&ED application process is -- and apparently always has been -- tied to chiched notions of science and discovery having little to do with how companies conduct R&D (particularly in the ICT world), making the application process both burdensome and artificial.

That's been an eye-onener. While I've worked with companies for the last 10 years that received SR&ED refunds, the process was always just some black box to me since I've never been the one filling out the forms. I've filled out applications for government funding that felt like I was playing a game of "let's pretend" but I never realized how much I had in common with the folks doing the SR&ED forms.

Having said that, I have a hard time seeing how CRA's changes to SR&ED make things any worse. In fact, at least provisionally, I'll have to agree with their claim that these changes could be considered an improvement. (The one exception would be for those few companies that submit more than 20 projects a year. Previously, they were given a break and were only required to detail their top 20 projects. Now they have to fill in applications for every project. That doesn't seem unreasonable to me, and it's not something that will have an effect on startups.)

Changes to the form, not to the law

The first thing to keep in mind is that there has been no change to the legislation underlying the SR&ED tax credit. Whatever money you were entitled to in the past, you're entitled to now.

What has changed is the form and, for the most part, the form has been changed so that 1) there are explicit sections for information CRA had already been asking for and 2) companies have to be as concise in their descriptions as CRA had already been asking them to be (CRA had already been saying that most projects could be described within four pages, so the new word limits just enforce direction that CRA had already been providing).

For example, you now have to specify on the form whether your project was scientific research or experimental development. But CRA had always distinguished between them, and even said right on the form in previous years that there were different eligibility requirements between the two. There's nothing new about projects being classified as either scientific research or experimental development, the only change is that there's now a box on the form.

One more example: now you're required to specify (from a long list) the area of science that your project involves. But CRA had already asked applicants "To what field of science or technology would the advance contribute?" so, again, it's hard to see this as a big change.

And there are a lot of examples like that.

Obstacles vs. uncertainties

The new form also refers to technical "obstacles" instead of "uncertainties." Somehow, CATA reached the conclusion that this is less precise. It's not. Obstacles is a better word, but I don't think that a bit of wordsmithing -- even to make an improvement -- was worth throwing people into a panic over what the change really means. The new guide even refers to "technological obstacles/uncertainties" and, from looking at the term in the context CRA uses it, I think it's really grasping at straws to stir up FUD around the change.

Too early to know effect on audits

I think the real concern, though, is about audits. Nobody likes to be audited, obviously, and the form is what CRA has in its hands when it decides which applicants to audit. It sounds like some companies are concerned that they won't be able to avoid audits without being able to submit 15-page project descriptions -- which CRA had already said it didn't want.

Right now, we don't know if the new form will lead to more or fewer questions from CRA examiners. We know that CRA is hiring more auditors, so you could interpret that as a effort to speed up the process or as an ominous sign that there will be more audits in the future. We'll see.

But, overall, I don't see the changes to the SR&ED program having any significant impact on startups. The process won't be any less of a pain, but to me, the new form looks like a very small improvement.