If your company is located in Canada and has research and development (R&D) aims, then you’ll be pleased to know that the government of Canada provides very generous support for research and innovation. The Scientific Research and Experimental Development (SR&ED) program is run by the Canada Revenue Agency (CRA) and offers support to Canadian companies that want to achieve technological advancement.
How does it work? The SR&ED Investment Tax Credit (ITC) is one of the CRA’s most accessible funding programs. It allows you to invest in your business future, and receive refunds on the money you spend on R&D.
The catch is that this government funding program is centered on providing tax credits for work your company has already carried out. That means that you’ll still need to pre-finance the effort with no guarantee that you will actually get a refund from the government. If you’re low on cash flow, you may need a bridging strategy to provide you with the needed capital to start the process.
An SR&ED refund can be a predictable cash injection for many businesses, but to get started, many need support. This is where SR&ED financing loans can help.
Which Companies Qualify for SR&ED ITC in Canada?
ITCs are readily available to all qualified Canadian Controlled Private Corporations (CCPCs). A CRA federal tax refund of 35%, combined with an additional 8-15% refund on provincial taxes, is offered to CCPCs who are working on innovative R&D in the fields of scientific research and experimental development.
If there are outstanding taxes owed by CCPCs who qualify, SR&ED credits are applied to these first, and remaining ITC monies are provided as a tax refund. For publicly listed corporations, the ITC amount is 15% and is only applicable against taxes owed; no refunds are available.
What is Eligible Expenditure for the SR&ED ITC?
Within the SR&ED program, any company who qualifies can count project-related salaries, wages, materials, and equipment leases towards their expenses, as well as a percentage of corporate overhead. Non-project-related costs cannot be expensed.
SR&ED refunds are processed between four to ten weeks after paperwork is filed and evaluated by the CRA, and eligibility is approved. Once a company passes their first evaluation, the process becomes easier and is more quickly achieved year over year.
How Does the SRED Financing Process Work?
With SR&ED financing, the process starts with a loan application. The organization’s financial history will be vetted, and its plans for SR&ED work will be evaluated. The size and term of the loan requested will be determined by the ability of the company to pay it back, based on outcomes of a credit review.
Once the loan components have been determined, representatives of the company will sign legal documents to register their loan, and receive a disbursement from their lending agency. The company will pay the loan principal, fees, and interest when they receive their SR&ED refund.
A couple points to consider:
It is possible to finance your current, historic *as well as* your one-year forward tax credits.
In the current environment, financing SR&ED and other tax credits is becoming an even more critical tool for managing balance sheets.
– Equity markets have tightened, extending nearly any capital raising process by months;
– Credit has never been easy for entrepreneurs in Canada, but a shrinking number of banks will even entertain conversations;
– Increasingly demanding investors (if you have them) are establishing cash thresholds for existing portfolio companies, as well as new companies they’re considering; and
– a slowing CRA refund process, and increasing SR&ED review rate is delaying the receipt of funds.
Who Offers SR&ED Financing?
Financial support is offered by a number of types of lenders, such as: the Business Development Canada (BDC), RBC-KBI (knowledge based industries) and loan companies like MuckerFi. Contact Anne at MuckerFi via email, or at 415-505-1489.
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