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Shredding tax credits? Why Canada’s biggest R&D program may be funding the wrong innovation

There comes a time in the life of any Canadian entrepreneur when they have to decide whether to “shred” or not to “shred.”

The federal government’s scientific research and experimental development (SR&ED) tax credit distributes upwards of $5 billion to companies every year.

Founders credit “shred,” as it’s colloquially known, with getting their companies through the tough early years, when money is scarce. “That check at the end of the year can be a make-or-break-it,” says Joseph Fung, CEO of Waterloo-based scale-up Kiite, who says, starting out, SR&ED was a “windfall” for his company.

But entrepreneurs—including those who have received credits—and experts have long expressed concerns that the program disproportionately benefits large corporations and foreign subsidiaries, while at the same time keeping companies alive that ought to fail.

Their claims about the distribution of the credits are borne out by an analysis of data from the Canada Revenue Agency (CRA) conducted by The Logic, which shows that the lion’s share of the value of SR&ED goes to large firms, including domestic subsidiaries of foreign firms, even though many more small companies receive them.

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