SR&ED Tax Credit Financing - The Only Two Things You Need to Know About SR&ED Finance

SR&ED Tax Credit Financing is somewhat misunderstood or not considered by many Canadian business owners and financial managers in Canada. We use the word ‘thought ‘simply because many SRED claimants are unaware that their SR&ED claims can be financed as soon as they are filed – in some cases, before filing! So, let’s return to our topic – what are the two things you need to know about financing your SRED tax credit? We’ll keep it simple –

1. You must have an SR&ED claim to obtain financing for the claim!

2. An SRED financing claim is, in fact, similar to any business financing application – frankly, it’s quite simpler and more focused!

Is that it? Yes, it’s as simple as that. SR&ED tax credit financing is one of the unique ways to bring valuable cash flow and working capital back into your firm. Moreover, the nature of SRED suggests that your firm relies heavily on credit to recover the money you have spent under the government’s generous, non-repayable grant.

So, let’s return to point # 1 – you need a claim to finance a suit. The SRED program in Canada is the government’s rebate; in effect, it’s a grant back to Canadian businesses for any investment you make in research and development. Unfortunately, more and more information is coming out every day from government and private sources, which suggests that many firms who are eligible for the program either aren’t aware of it or, even more disappointing, don’t know how to prepare and file a claim. We are often amazed when some clients infer that it’s ‘too much trouble ‘to design an SRED suit.

A couple of points can be made on this subject. First, we have met a small handful and repeat a small handful! Of clients over the years who prepare their filings. This, of course, is possible, legal, and cost-effective in some business owners’ minds. Unfortunately, the hard reality is that most firms don’t have the technical and financial know-how to complete a claim independently. (Apologies to the firms that successfully prepare a file of their claims – you know who you are!)

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Most claims in the SRED area are prepared by what is known as SRED consultants. We tell clients that these consultants are highly specialized, are up to date on current government SRED and accounting matters, and, in most cases, work on contingency – meaning that they prepare the claim at their own risk and time and charge a fee that is based on the success of the final claim approval. If Canadian business owners and financial managers don’t choose to pay a contingency fee, they can play a flat rate based on the SRED consultant’s time on the claim and filing. But, naturally, more often than not, the SRED fee has to be paid as soon as the claim is completed, even if you still have to wait several months to a year to get your funds.

More importantly, regarding the financing of the SRED claim, a claim tends to be more financeable when a reputable consultant in this area prepares it. When your claim is financed, either at the time of filing or prior, the SRED consultant can also be paid in full or partially out of the financing. So the bottom line on our point # 1 is – to make yourself aware of the program. If you are not, prepare a solid claim with a reputable consultant, and we know the share can be financed during preparation or at tweening Web list Posting.

Let’s move on to point # 2- Clients ask if financing an SR&ED tax credit is really simple. There is only one answer, which is, of course, yes. It would help to treat your SRED tax credit financing as any other basic financing. Because this area of Canadian business financing is somewhat of a boutique, you should ensure you work with a credible, trusted, and experienced advisor. Let’s cover some of the straightforward key basics around the financing of your claim. Under the program, most firms can receive anywhere from 20-50% of their expenses in the R&D area. Your SRED claim will ultimately have a final value comprising the combined federal and provincial portions. Let’s assume it’s 200,000.00 as an example. You and your accountant have filed your year-end financials, including an SRED claim of 200k. What happens now if you want to finance that claim?

You have to fill out a standard business financing application – just as if you were borrowing for any other matter. In our case, the ‘collateral, ‘if we can call it that, it’s the SRED claim. It is important to note here that you are not incurring debt or creating a ‘ loan ‘ on the SRED – Your balance sheet stays intact; you are simply ‘ monetizing ‘ the SRED claim to generate working capital and cash flow now. Generally, you receive approximately 70% of the claim as an advance, with the 30% held back and payable to yourself in full when your final assertion is audited and approved. That cheque from the government is ‘in the mail ‘!

The financing associated with the tax credit financing is deducted from that final 30% holdback. You can generally create an SRED loan for a minimum of 60 days. Still, most SRED financing lasts typically 3-12 months, depending on the size of your claim, its eligibility with CRA, and whether you are a first-time filer.

So what is our bottom line – it couldn’t be simpler:

– Make yourself aware of this great program – prepare a proper claim with someone who is experienced
– If you are focused on cash flow and working capital needs, consider financing your claim and directly monetizing this great program.