The Ottawa company was looking to automate the process for checking in clothing at its four locations, with an eye to using the money saved for eventual expansion. It also sought software that could track consignment shop purchases and credits.
With $35,000 in IRAP funding from the federal government in February 2011, Ms. Meek said the technology – developed by fellow Ottawa company LavaBlast – has already gone a long way towards helping the business.
“We know we can compete with growing American (consignment) chains if we can get these tools in place faster,” she said.
“Having the IRAP grant expedited the process of having the right tools and the right process and getting cost down for stores, so it’s more attractive to potential franchisees.”
With more money allocated for IRAP in the recent federal budget, and reductions to the Scientific Research and Experimental Development tax credit, commonly known as SR&ED, there’s a ground shift occurring in how the federal government supports high-tech companies.
For businesses able to receive the funding, it’s a boon. But some organizations are raising concerns about the government picking “winners” and “losers” with direct funding programs such as IRAP.
IRAP’S NEW SUPPORT
In budget documents, the federal government stated that it chose to shift to direct funding programs following a recommendation from a report authored by OpenText chairman Tom Jenkins.
That 2011 missive, which focused on stimulating innovation in Canada, said the reliance of firms on SR&ED credits “implies that federal support for innovation may be overweighted toward subsidizing the cost of business R&D rather than other important aspects of innovation.”
The report recommended rebalancing direct and indirect funding by decreasing SR&ED support and redirecting the money to “complementary initiatives” such as IRAP, which is intended to commercialize technology in development.
The Conservatives allocated an additional $110 million annually to IRAP in last month’s budget. With SR&ED, the Tories removed capital expenditures from the list of eligible expenses and reduced the investment tax credit portion of the program, among other alterations.
These changes worry the Canadian Federation of Independent Business, as fewer of its members will benefit, said Corinne Pohlmann, CFIB’s vice-president of national affairs.
“Who is to say that company that doesn’t get (IRAP) is going to be more successful down the road?” she asked.
Companies are also concerned that IRAP gives an unfair advantage if a competing firm is bestowed with the money in favour of others, she said.
“The government chooses the winners, rather than having all the businesses investing in innovation benefit.”
NRC’S PUSH FOR ACCELERATION
The National Research Council, which administers IRAP, counters that the program is not about finding a winning firm.
The Crown corporation provides financial and services support to around 2,500 companies annually to accelerate innovation projects, but another 5,500 receive assistance in the form of services only.
This can range from advice on how to attract investors, to defining business opportunities, to structuring a project or building a research team.
NRC advisers tend to have technical or scientific graduate degrees and at least 20 years’ experience managing small and medium-sized businesses.
“What we really want to see is a company that has a business opportunity, and the capacity and the willingness to provide new services, technologies or products to take advantage of this business opportunity,” said Bogdan Ciobanu, the director general of the IRAP program at NRC.
In a few words, the NRC says it seeks growth of some kind when looking at IRAP applications. The point is to accelerate an idea to commercialization; it’s most famously helped companies such as Research In Motion and Mitel when they were young.
As an agency with a mandate to help emerging firms, many of which can’t stand on their own two feet financially yet, NRC sees itself as filling a need for companies with little support, Mr. Ciobanu said.
“This is a territory that is of interest to nobody except IRAP. Before the first sale, investors are not too keen on risking money. They want a client or two to make sales and show the potential. We are very often there before this.”
The $110 million NRC received effectively doubles its annual IRAP budget. This means it will be able to support more companies financially and also to provide more services, including a new “concierge” service recommended by the Jenkins report and implemented in the budget.
The exact amount being determined for each of these items is still under review, but will be determined later this year.
IRAP drew praise in the Jenkins report for its approach, as the last five-year review for the program showed $12 in economic generation for every $1 invested by IRAP, Mr. Ciobanu said. (The next five-year review is expected to be finished later this year.)
SR&ED UNHAPPINESS
Meanwhile, the changes to SR&ED are not fixing the fundamental challenge with the program – its limitations for larger companies, according to Deloitte & Touche LLP partner David Mason.
At a recent tech event in Ottawa, he told delegates the program’s emphasis on greater tax breaks for small companies encourages firms to stay small. SR&ED includes a 35-per-cent tax credit for small and medium-sized, Canadian-controlled private corporations on the first $3 million of eligible expenditures.
“Why do you punish businesses for being successful?” he asked.
One recommendation of the Jenkins report not adopted by the Conservatives is a call to decrease the refundable parts of the credit that allows unprofitable companies to recoup a portion of eligible costs.
The government said in budget documents that SR&ED provided more than $3.6 billion in tax assistance in 2011.
INNOVATION HEADACHES
For all that money put into SR&ED, there is little return in terms of competitiveness with other countries, according to the Canadian Advanced Technology Alliance, an Ottawa-based industry association.
“We have emphasized tax credits as the fundamental mechanism to support business innovation, and the economists say we aren’t getting what we should have,” said Russ Roberts, CATA’s senior vice-president of finance and taxation.
The coalition is calling for a better balance of direct and indirect funding, with an eye to helping small companies by letting them know what’s available.
“You have so many programs right now, and so few companies know what’s out there,” Mr. Roberts said.
“There’s a crying need (for) there to be co-ordination across the program, and that companies have the right system of getting to the program efficiently.”
FINDING THE BALANCE
Pythian, an Ottawa firm that specializes in global database and application infrastructure services as well as consulting for Oracle, MySQL and others, has received both SR&ED and IRAP funding in recent years.
The IRAP funding will help kick-start a new project that is intended to change how computer security is performed – details are under wraps for the time being. Two small projects were approved related to that, for $30,000 and $50,000.
However, a $900,000 request has been left in limbo. That is the one that is really needed to commercialize the technology, said Paul Vallée, a founder of the firm.
To combat the perception that it is unduly favouring some firms over others, the NRC will allocate smaller amounts to more companies rather than larger amounts to bigger ones, he said.
“The biggest challenge that is posed to IRAP now is how do they move the needle without compromising that mandate of having fair treatment and good coverage,” he said.
With $110 million more for the program every year, he is calling for more money to be allocated to each project, rather than increasing the number of projects funded, to make each contribution more meaningful.
Pythian – which has appeared on the Profit 200 list for revenue growth – is experiencing increases in revenues and personnel, but profitability is still thin due to the expense of training and maintaining more employees each year, Mr. Vallée said. The firm added 50 in the past year to its current base of 181 workers right now.
Only 10 per cent of its revenues go to research and development, he added.
“We are not an extremely profitable company, and we are constrained in our R&D budget because of that.”
- With a report from Courtney Symons
SR&ED changes
- Capital expenditures incurred in 2014 and subsequent years will no longer be eligible for SR&ED credits, affecting companies that spend a large part of their eligible expenses on land, buildings or machinery.
- The investment tax credit portion of the program will decrease by five percentage points to 15 per cent, starting Jan. 1, 2014. But an “enhanced rate” of 35 per cent will remain for small and medium-sized, Canadian-controlled private corporations on their first $3 million of eligible expenditures.
- In cases where more tax credits are provided under the rules than the actual costs incurred, the government plans to reduce a “prescribed proxy amount” used to calculate overhead expenditures to 55 per cent from 65 per cent of direct labour costs. This will also take effect Jan. 1, 2014.
- In an attempt to strip the markup on third-party contracts from eligible expenses, only 80 per cent of contract payments can be used to calculate SR&ED tax credits, as of Jan. 1, 2013.
IRAP changes
- The National Research Council, which administers IRAP, receives an additional $110 million annually to focus on creating “high-value jobs,” and to broaden services offered by industrial technology advisers to small business.
- A “concierge” service is being added for NRC to help businesses determine how they can best benefit from IRAP.
- As part of these changes, the Conservatives promise to “refocus the National Research Council on demand-driven business-oriented research, that will help Canadian businesses develop innovative products and services.”
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