Cash Flow Your SRED Tax Credits Today Under The Canada Sred Program

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SR&ED FINANCING 101

The SRED program and sr&ed tax credit eligibility is one of a small handful of government programs in Canada that in a very direct fashion turn credits into real cash flow and working capital that is non-repayable. When business owners find out that they don’t have to wait anywhere from 3-12 months for their refund, and that they can discount, or monetize that tax credit for their basic research now they are pleasantly surprised.

WHAT ARE SR&ED TAX CREDIT INCENTIVES AROUND RESEARCH AND DEVELOPMENT COSTS

Canada's Scientific Research and Experimental Development (SR&ED) is a refundable tax Credit program and the 2nd most popular and utilized federal program - It is under the auspices of the CANADA REVENUE AGENCY / CRA and allows Canadian businesses of all sizes to focus on improvement of products and process via an r&d approach.

Companies are eligible for deductions on qualified spending, allowing Canadian firms to focus on innovation and growth - By funding a substantial portion of business research an offset is provided to spending by the company.

Qualifying work under SRED includes essential research in the company's industry around scientific areas or the development of new products, services, and methods - prototype development is also encouraged.

WHAT IS SR&ED FINANCING

SR&ED financing is the funding of refundable take credits under the scientific research and experimental development program. A company's ability to both cover the costs associated with the tax credit and accelerate the cash refund without the waiting process involved in filing claims and waiting for adjudication, or potential sr&ed audits. Attractive financing terms come with SR&ED loans - including no payments during the term of the loan, and no requirements for personal guarantees of owners, - The Sred credit is the collateral for the loan! Traditional financial institutions such as banks do not typically directly provide SR ED financing.

BASIC SR&ED FINANCE QUESTIONS

The question then becomes simply understanding the mechanics and benefits of such financing – i.e. answers to the basic questions:

KEY BENEFITS OF SRED FINANCING

The ability of a business to receive direct assistance in the overall r&d costs under the claim is substantial, being able to immediately cash flow claims either when filed, or prior to filing provides critical cash flow to the business. That allows the company to conserve owner equity and limit additional external borrowing or drawing down on any existing credit facilities.

Funds financed under a Sred claim can be directly deployed into additional research and development.

Companies can choose to draw down on sr&ed refunds as needed, so payments under the Sred loan can be a part of general business operations, ensuring more stable cash flow confidence.

SOME SRED FINANCE BASICS

Let’s cover some of the answers and the basics you need to know to make an informed decision in this regard.

Business owners who either have prepared SRED claims in the past or who are preparing them for the first time are always advised by their accountants and SRED consultants as to how much the claim will be for.

The reality is that this claim is filed at the same time you file your corporate tax return. If you are highly confident that you will receive the full amount of your claim we see many clients actually booking this future ' refund ' as an ‘account receivable' – i.e. money that is due to their firm just as if it was a sale to a customer.

So when you finance that claim you are dealing with an absolute amount. But the one thing to understand is that generally advances under the SRED tend to be in the loan-to-value of a 75% range based on the total value of the claim.

SAMPLE SR&ED LOAN CALCULATION

So for example $ 300,000 dollar claim filed by your firm has the potential to net you $ 225,000 as a working capital loan should you choose to cash flow or monetize that claim now.

Although we see some claims as much as a million dollars from clients, the reality is that most claims tend to be in the 200 – 500k range, some smaller, some larger.

PREPARING SR&ED CLAIMS - WHO PREPARES THE CLAIM?

Companies must of course keep accurate records of their claim details - which typically involves tracking costs and payments to contracts and suppliers under the claim work. A challenge typically occurs when work on r&d is part of a firm's everyday work in their field of activity. SR&ED tax credits accounting treatment should also be reviewed.

The majority of SR&ED claims in Canada are prepared by third-party SRED consultants - they typically have industry expertise and are very familiar with CRA guidelines for approval. These firms are compensated on a contingency basis for the most part, with larger firms charging separate fees for professional work done on the client's behalf via systematic investigation around the r&d.

At 7 Park Avenue Financial, we have observed that most clients like the contingency work done by consultants created a vested interest in the consultant preparing a successful claim! Their knowledge can of course help maximize a claim and they are familiar with the work of CRA audit representatives if clarification is required on a claim.

It's safe to say that the majority of work done by an industry sred consultant will save time in many aspects of claim preparation and help for speedy efficient claim approval and refund. Your cheque is in the mail!!

SR&ED FINANCING COSTS

On to costs. Generally, the overall size and quality of your claim, coupled with the amount will dictate the costs of financing the claim. A few key points should be kept in mind, and they clearly are in the category of ‘benefits'. That is to say that when you undertake an SRED loan you receive 75% of the claim immediately -there are no payments made unlike a regular loan, and you receive the final 30% of the claim when the refund is made by CRA, or, if you choose, when they indicate in writing or via their technical audit that the claim has been approved.

The financing costs are deducted from this final 30% due your firm when the refund is processed. So clearly the overall benefit of financing your SRED claim revolves around taking that cash and working capital and putting it to work in your business right away.

A tax credit SRED financing loan is not unlike any business financing. An application with typical business background data is completed, one of the key additional pieces being, of course, the actual SRED claim you have filed, and, in some cases, proof of your success in previous years.

We advise clients the whole application and diligence process takes about 2-3 weeks, so if you are focused on financing your SRED claim you should undertake your SRED financing negotiations as soon as you have made up your mind to finance the claim. This just in - Sr&ed loans can be approved prior to filing our claim if a company so desires.

Everyone agrees the SRED program is the government’s way of encouraging in a measurable way (their cash back to your firm!) research and development. If you have filed claims in the past, or are filing for the first time you should also investigate the benefits of financing your claims.

SR&ED is non-repayable money – why not put it to work as early as possible to grow sales and profits and improve your overall financial picture? That’s a solid business financing strategy around your sr&ed tax credit calculation.

DOES YOUR COMPANY QUALIFY FOR A SR&ED CLAIM / SR&ED TAX CREDIT FINANCING

If your business is commercializing products or services you are probably eligible for a sr&ed tax credit refund under a properly filed claim. Any privately controlled corporation, and even partnerships and sole proprietors and non-profit businesses can file a claim.

Companies are encouraged to talk to CRA or a good SRED consultant to confirm general eligibility and you typically can file for the past two years of r&d. Your business is ' sr&ed eligible if you are focused on advancing technologically and have the ability to prove scientific uncertainties while documenting content and processes in your work. Software development is a large area of SRED in Canada and qualified often for eligible expenditures.

CONCLUSION - FINANCING SR&ED TAX CREDITS CANADA

Talk to the 7 Park Avenue Financial team about financing your claim and covering questions around the bridge loan structure of sred loans - Having a qualified sr&ed consultant prepare and validate your claim always helps, including maximizing the full amount your firm is eligible for.

There are several options for finding SR&ED financing, including banks and other financial institutions. It’s important to research and compare the different loan terms and conditions to find the best fit for your business. Grant financing is also available for many grant programs in Canada.

Funding options under the SR&ED program are one of the most flexible and beneficial areas of alternative financing in Canada.

FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

How much is the SRED tax credit?

Is Sred a government grant?

The Scientific Research & Experimental Development (SR&ED) tax incentive program is not a grant per se but instead provides refundable tax credits/tax incentives to Canadian controlled private corporations involved in r&d around products, services, and processes around basic applied research in scientific or technological uncertainty. This investment tax credit program for technological advancement is administered by the Canada Revenue Agency and is one of the most widely used programs second only to the Canadian Small Business Financing Loan Program that is under Industry Canada.

The Scientific Research & Experimental Development (SR&ED) tax incentive program is not a grant per se, but instead provides refundable tax credits to Canadian companies involved in r&d around products, services, and processes. The program is administered by Canada Revenue Agency and is one of the most widely used programs second only to the Canadian Small Business Financing Loan Program that is under Industry Canada.

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Canada SRED Program Cash Flow Tax Credit Finance | 7 Park Avenue Financial

FINANCING SR&ED TAX CREDITS CANADA