SR&ED and Its Impact on Small Firms

John Lester, a research fellow with the School of Public Policy at the University of Calgary, argues that the SR&ED benefit for small businesses is far too generous. Lester points out that many small firms can receive up to a 44% tax-based subsidy from SR&ED, in addition to grants, and in addition to other programs such as IRAP. He did not think it was fair that 10% of small firms undertaking R&D (1,600 firms) received government subsidies amounting to more than half of their R&D spending, while larger firms, who already have limited access to grant programs, only received a 20% credit.

Ron Freedman, chief executive of Research Infosource Inc., counters that small firms are unable to fund research from internal cash flow. Companies with revenues of $1-million and a profit of $50K cannot afford to do research, whereas larger companies with revenues of $10-million and profits of $500K can invest in a sizeable R&D department. The investment of public dollars in the R&D programs of small companies will help to grow them into larger firms.

Secondly, Freedman also points out that small companies who receive support from grant programs like IRAP must deduct these payments from the SR&ED program. And while it may be true that small companies receive a “44% tax-based subsidy,” that subsidy only applies to eligible expenses, which are narrowly defined to only constitute a fraction of the actual cost of research.

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