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To technology entrepreneurs, the 2012 federal budget, tabled in May, is conspicuous in not meddling with the Scientific Research and Experimental Development rebate program (SR&ED).  This despite numerous signals sent by the federal Conservatives throughout 2011 that, in their view, SR&ED is the object of rampant abuse and in need of reform.  However, as often happens in politics, a gentle ripple on the surface of the water can signify a massive shift in the current just beneath.

For the uninitiated, SR&ED exists to provide an incentive for Canadian companies to innovate in many aspects of doing business, whether that’s creating new technology-based products and services, or optimizing business process through the utilization of new or improved technologies.  Via SR&ED, which is administered by the Canada Revenue Agency (CRA), qualifying Canadian companies can seek partial reimbursement of labour, technology and even overhead expenses related to “eligible technological innovation.”  In the case of profitable companies, the reimbursement comes in the form of credit against taxes owed (up to 35%); for unprofitable companies, cash rebates apply. It’s not chump change, and the federal government doled out roughly $3.6 billion in SR&ED credits and rebates in 2011.

Read: How Canada’s Fastest-Growing Companies have used SR&ED to compete.

SR&ED is “sectorized” into multiple camps, and a substantial number, if not most of Canada’s startups, are associated with the information and communications technology (ICT) sector. Mysteriously, with relatively minor tweaks in the SR&ED program design in the 2012 budget, the Harper Government expects to reduce the outflow of SR&ED rebates to ICT companies this year by as much as $400 million.  How will they do it?

Before we get to that issue, let’s talk about what SR&ED means to startups.  Starting a company anywhere is difficult, but in Canada entrepreneurs face the added challenge of highly limited sources of early-stage financing.  Raising the money it takes to build your first product or prototype, or to test design theories and perform experimentation, is almost impossible from a cold start in Canada.  However, if you can scrape together a paltry sum from friends and family, that could be matched by an IRAP grant from the National Research Council or from Telefilm Canada’s New Media Fund (CNMF).  Then, at the end of your fiscal year, you could apply for your SR&ED rebate, which might provide the cash you need to conquer Year Two.  The first two sources of funding are pre-qualified (i.e., you know whether you’re going to get it before you start).  In contrast, the SR&ED program is retrospective—you spend the money, file your claim, and hope for the best.

Read: Five keys to getting startup cash

This is all Greek to anyone from Silicon Valley, where I developed my first tech startup, and where public research grant programs and tax rebates are a largely irrelevant afterthought.  Silicon Valley is, of course, blessed with a very healthy ecosystem of investors hungrily gobbling up investment opportunities at every point of the spectrum and affording companies favourable valuations.  It is literally easier to meet an angel investor for an omelette at Buck’s of Woodside, walk through your six PowerPoint slides to glory, and hammer out a term sheet on your MacBook than it is to fill out grant applications and tax rebate claims.  So that’s what entrepreneurs in the Valley do.

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