SRED Tax Credit Financing : Your Backup Cash Flow Plan For Your R&D Capital Investment
SRED Tax Credit Financing – 3 Things you need to Know
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Canadian business owners and financial managers who are not as conversant with Canada’s SRED program as much as they would like to be pose three major questions when we sit down with them and talk about SRED (aka SR&ED) financing. Typical questions include:
- What is the program – am I eligible?
- How long will I have to wait for the money?
- How can I monetize of cash flow my SRED claim for immediate working capital now?
Let’s examine the basic thing you need to know around those key areas.
- Canada’s SRED program is without a doubt the most powerful program when the business owner asks themselves – ‘What assistance is available in the form of government loans and grants' – A typical question often asked by every Canadian business owner. And the good news is that not only is the SRED program available to virtually every type of industry in Canada, but the funds coming to you under that program are also non-repayable. The program basics are simply that SRED was set up to encourage innovation in products, technology, and business processes
- A very heft ‘rebate ‘comes back to your firm in the form of a large percentage of the actual expenses you have incurred in the research and development area. Naturally for many businesses R&D is the key driver that allows your firm to stay competitive and ahead of the pack, so the ability to recover a large part of those expenses at the government's cost is a huge benefit to Canadian business. And when you are able to both file an SRED claim and be armed with the knowledge that it is financeable is clearly a powerful win-win strategy.
Many business owners are also not aware that the credit can be claimed for the previous two years, so this is one case where playing catch up is a good thing. To determine eligibility for an SRED speak to your accountant or what is known as an SRED consultant.
- ‘So when does our firm get the actual money?’ is one of the next major questions customers pose. Here are the basics of that issue. Naturally do receive funds you have to file your claim – this is done at the time you and your accountants submit your year-end corporate tax filings. In fact the SRED claim must in fact be filed at this time to maintain your eligibility. The key issues you have to know about are that you want to ensure you have a claim that is filed in a timely fashion, as per above. At the same time focus on the quality of your claim – by now you should be working closely with your accountant or SRED consultant to ensure your claim is properly documented.
- The recent new process at Canada Revenue Agency is clearly, in our opinion, focusing on weeding out the ‘wheat from the chaff’, so to speak. You want to ensure your claim has been filled out with the proper form – there is even an online process you can utilize. Your ability to succinctly make your claim, and, as importantly, back it up with the proper documentation will ensure a much higher probability of approval. In some cases the claim might be partially disallowed if rationale, submission style, and back up info don’t conform to what the SRED folks want to see.
- Now, let's focus on what is to most of our clients the most important aspect of the SRED program process – which is ‘getting the money ‘! Here we advised clients you have two options, you can wait for the cheque which may take months and in some cases a year, or you also have the option to finance your claim immediately. We are all familiar with consumer programs that provide immediate cash for their personal tax credit rebates – essentially we are talking about the same thing. Select a trusted business financing advisor who is credible and experienced in SRED financing.
- That will allow you to complete a basic financing application, undergo the standard due diligence that any business financing might entail, and then proceed to documentation of the SRED financing, in essence you ‘sell’ your tax credit in return for immediate cash now. Clients ask ‘how much can we get' and the rule of thumb in SRED financing is generally 70% - the balance is held back and remitted to your firm on final approval of your claim by CRA. No payments are made in the interim (that’s a good thing) and you receive the remaining 30%, less financing costs at final closure on the claim.
So now you have taken a double advantage of one of Canada’s best programs for business – you have filed and received approval for a non-repayable grant for a significant portion of your R&D expenses, and, as importantly you have monetized or cash flowed that claim. That’s great Canadian business follow through.
' Canadian Business Financing With The Intelligent Use Of Experience '
7 Park Avenue Financial/Copyright/2021
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