First of all lets get the name calling out of the way, you can call it SR&ED, or you can call it SRED ; whatever you call it you can finance your research tax credit !
Canadian business owners and financial managers in a variety of industries have the ability to of course file sred claims, and at the same time, if they choose, they can finance their claim and generate immediate cash flow and working capital from this valuable government grant program. And it is of course a grant because those funds are non repayable.
You can’t take advantage of the program if you do not file a claim, so understanding the basic around a claim, as well as the characteristics that claim needs to be financed is valuable information for Canadian business owners and financial managers. You essentially want to ensure you are getting your piece of the multi billion dollar ‘pie; that is held out to Canadian business for this program.
As we stated, your claim must be filed and substantiated under the normal program guidelines. Canadian firms recoup, as we said, billions of dollars each year for research and development and experimental work for their products and services. One of the misnomers around the program is that your R&D has to be successful in nature, and that’s actually not correct, you just have to be in a position to document what you did and how you did or tried it.
With the information we are sharing here we want to be able to ensure you understand how the quality and size of your claim affect its overall financeability. SRED claims are applied for in all sorts of amounts, we have seen clients file as low as 20,000 – 30,000$ per annum, and as high as 1.5 million dollars, and we are sure there have been higher claims
The actual claim preparation has an effect on your claims financeability – as your goal, should you need the cash flow and working capital, is to monetize that claim into a short term sred loan – with the sred itself being the collateral for the loan. Although claims prepared by owners and management can be considered for financing, the reality is that if you are applying for sr&ed financing it makes a lot more sense to have your claim prepared by one of two parties, either your accountant , or what is known as a ‘ Sred Consultant ‘. Claims require special documentation and wording, and the reality is that just very recently the government introduced paperwork and online processes in their effort to ‘streamline ‘the program. We tell clients that we are all for the government streamlining things, but if you don’t understand the ground rules things can get confusing.
Depending on the type of expenditures and the exact nature of your claim you should be in a position to get as much as 40% and in some cases the 60% range of your funds back. When you choose to finance a claim the general advance is made at 70% – so let’s do some rough arithmetic around a sample claim and it’s financing.
Let’s say your firm, in tandem with your accountant or sred consultant file a claim for expenditures of $ 575,000.00 – Lets further pick the mid range of our estimate on what your final tax credit rebate will be, so lets assume 50% – That’s a sred tax credit rebate of almost 280,000.00$ .
As a business owner you can wait anywhere from 1-12 months to get your cheque in from the government, which is reimbursed at the federal and provincial levels. Or, if you choose to utilize those funds now under a sred loan, you can get an immediate advance of 70% of that claim, or in our example: 200,000.00$. Could your firm put 200k to go use for either working capital purposes, equipment purchases, or even more on going sred activity?
Furthermore, if you have successfully financed sred claims in the past you could be very eligible for sred accrual financing – which is a special program that reimburses your for your sred expenses as you go along during the year.
Traditional financing institutions such as banks and business credit unions are poorly equipped to understand and finance sred tax credits .As a result we recommend you work with a trusted and credible business financing advisor to ensure your claim can be financed quickly and with a modest amount of preparation. Quite frankly we tell clients that as esoteric as a sred claim might be they should view as simply as any other Canadian business financing – i.e. complete an application, provide back up on your sred claim itself and of course you’re firm, and to be prepared to collateralize the sred for your sred loan funding.
If you feel you are in a position to file a sred claim of any significance then think what the discounting, or cash flowing of that claim could do to your firms working capital .Oh, and by the way, no payments are made on your sred loan, financing costs are calculated at the back end of the claim when you receive your funds, including the previously mentioned 30% that was held back on the financing.
So our bottom line is simply that you should apply for sred tax credits if you qualify, and, as importantly, consider cash flowing those claims if you need funds now.