A Tax Credit For Technology Firms On The Horizon?

A number of organizations in Alberta are pushing for some kind of tax credit from the province to help grow the technology sector. Alberta’s economy is still largely dominated by oil and gas. As a result, if you want money to start a new junior oil company, there is a lot available. The people with money to invest got their money in the energy sector, so it seems natural that they would invest in an area where they feel most comfortable. What that means, though, is that for non-energy businesses, raising money in Alberta is a challenge. Some kind of tax incentive from the province would be a step in the right direction, but I would caution others to not view this as a panacea.

There Are Government Options Out There Today

There are options for any business in Alberta to get federal government dollars. The Scientific Research and Experiment Development (SR&ED) program is an excellent way to get money back in the form of tax credits. They have gone a long way to streamline the application process, and apparently funds are being dispersed as quickly as 45 days after an application is submitted and approved (and they have sped up the approval process substantially).

Other programs include the Industrial Research Assistance Program (IRAP), but that one requires a fair bit more effort on the part of the companies getting IRAP funding. There is some amount of ceremony in the form of regular meetings and updates with government staff to monitor progress. It isn’t onerous, but it does add a level of bureaucracy on top of regular communication with your own investors.

There is also the Western Economic Diversification program, but from my brief involvement with it, the program can be rather onerous. It really doesn’t seem geared toward smaller businesses and startups, which is unfortunate, because that is where real diversification begins. Now, I haven’t looked at the program in quite a while. I saw it when it first started up. Their web site acknowledges that small and medium businesses are important, but they do seem to announce a lot more around bigger projects. The ceremony and artifacts needed to get into the program aren’t trivial.

Grants vs. Credits

A couple of concerns I have with any sort of government grant or investment program (like IRAP or Western Diversification) is the level of government involvement, and the tendency to try to only invest in “winners”. They do require that you show some kind of viability for the business, which is reasonable. But at times they appear to set an expectation that failure is simply not acceptable, and appear to prefer putting money in “sure things”. As any angel or VC investor will tell you, sometimes there will be more failures than successes in your portfolio. It’s part of the game, and it’s a game of numbers. Good investors will invest in the team more than the product idea. A failed idea may not be a failure of the team, and a good team can generally get funding (in places where funding is available). Ultimately, it is about the investor being willing to take a risk.

But governments, like large banks, don’t like taking risks. Naturally, the government has an incentive to avoid risk, because it is spending taxpayer’s money. Because of that, they are expected to be very careful with it, and minimize the probability that a company is simply going to “take the money and run”. That’s understandable. But it also means that the companies that could most use the money sometimes won’t have access to it.

That’s why I prefer a system of tax credits rather than government grants. Certainly, it means you have to find other means to get money to get things started. But it is a lower-risk way for governments to help these businesses out, because the credit is based on documented and proven activities. It isn’t based on “well, we think we need $XXX for YYY years”. It is “I spent $XXX on this, that and the other, here is the evidence” and you get a credit based on that. It also puts the government in a position where they aren’t having to keep looking over your shoulder while you work. Programs like SR&ED can be run without having to send a single government employee out to constantly check up on the various projects. Yes, some checks are still needed, and random reviews and audits need to be done often enough to ensure the system isn’t being abused. But it doesn’t require someone in government payroll (being paid with our tax dollars) to have quarterly meetings with the various companies to see how the project is progressing.

Another Option Always Welcome

While a portion of the SR&ED funds comes from the province, it makes up a fairly modest component of the total. A provincially-run program would be another welcome addition to the options available. But I think a program like this should take a particular form, and have a bit of a fence put around it.

First, it should be in the form of tax credits, rather than grants. A streamlined process, along the lines of SR&ED, would go a long way in making it easier for companies to apply, and easier for the government to review and evaluate.

A provincial program would need to have limits, similar in some ways to SR&ED. It should focus on small and medium businesses, in effect becoming unavailable to the largest corporations. It isn’t that they are less deserving, but the goal here is to build up small business, in particular the technology-based small businesses. Once a company gets past a certain size and a certain revenue, it has access to funding that smaller companies simply do not have.

Any new program should also focus on technology, but not exclusively to particular technology sectors. The role of government isn’t to direct where innovation should occur. They aren’t capable of doing that without spending incredibly large sums of money (think along the lines of the Apollo Program). Long term, that approach may not be viable (as witnessed by the flourishing lunar colonies we currently have in place, oh wait…). These shouldn’t be credits for services, retailers or entertainment. Again, it isn’t that those sectors don’t deserve something (they do provide valuable and important roles in the economy). But a focused program means better likelihood that the money will go some place where it can be put to good use. Cast the net too wide, and you risk tossing too little money at too many activities, and not making enough of a difference in any of them.

A simple way make this happen would be to increase the provincial portion for Alberta companies, taking it from the 10% they offer today to as high as matching the federal government portion. By matching the federal portion, it would double the value of the SR&ED without adding a new program (with new and differing rules, and a separate application process) into the mix. Yes, it means that the Alberta government isn’t “in control”, and that would probably sink this approach. But it would certainly be easier for us in business, because it would add a significant injection of money into the system for no more effort on our part.

Either Way, More Help Is Good

No matter how the program manifests itself (as long as it isn’t too onerous or cumbersome), more help for small technology businesses would certainly be welcome. Broadening the Alberta economy can only be a good thing for the future of the province, and the people who live here. Small businesses are the heart of the economy, and keeping them viable is extremely important. As long as a provincial program is well thought out, and isn’t too onerous, then it would be a good addition to the finance tools available to small companies.