Tax Credit Loans For SR&ED Credits In Canada: Finding Your Way In SR ED Financing

FUNDING YOUR REFUNDABLE TAX CREDIT SR ED CLAIM IN CANADA

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SR&ED FINANCING FOR R&D PROJECTS IN CANADA

SR&ED Debt Finance Loans In Canada for SR&ED Tax Credits - Canada's R &D refundable credit system seems to pose challenges for some clients looking to monetize, via SR ED financing, their SR ED claims.

Does there have to be a problem? We don't think so. Want to learn more about how you can fund your r&d and how sr&ed financing can revolutionize your r&d spending? Then let’s dig in!

UNDERSTANDING THE GOVERNMENT OF CANADA'S SR&ED PROGRAM - HOW CAN SR&ED FINANCING HELP YOUR BUSINESS

Of course, SR&ED credits are available via the government's Scientific Research and Experimental Development Tax Credit program. Although federal budgets in recent years have changed the program significantly from the viewpoint of streamlining the process, certain portions of the allowable refund were also cut back, i.e. capital expenditures relating to the actual R&D capital investments your company makes.

STRUGGLING TO FIND FUNDING FOR YOUR R&D

The goal of Industry Canada's SR&ED program is to reinforce the commitment of the government to support and motivate Canadian businesses to conduct r&d . That r&d can come from many areas, including improving or inventing new products and processes or solving technical challenges in new or old technologies.

IS A SR&ED LOAN REALLY DEBT FINANCE?

The term debt finance is really a misnomer, as no debt comes on the balance sheet when you monetize your sr ed claim via 7 Park Avenue Financial - in effect you are financing an account receivable, with your client being the federal and provincial government - that receivable is turned into cash loan proceeds.

The irony of SR&ED is that many, in fact almost all banks don't recognize sr&ed receivables - they view your claim as an ' intangible asset ' or an unqualified asset in many cases - that might be partially understandable but certainly less so if your firm regularly files claims or has a claim prepared by a competent consultant - Larger SR&ED preparers are sometimes more than willing to provide opinion letters on the quality of the claim.

HOW CAN SRED FUNDING HELP YOUR BUSINESS

Along the way, in the sr&ed process, your business is accruing sr&ed tax credits as you spend on materials and incur operating expenses on your r&d project/projects. While Canada Revenue Agency has improved its commitment to review and audit ( if necessary) claims the reality is that extended wait time can significantly impact a company's cash flow.

So how does the company secure funding for their claim while they are in the work and waiting process - The answer is sr&ed accrual loans which you can draw down regularly based on your cash flow needs and accrued spending. That ' smoothing process' in your cash flow is a major financial benefit to any business, particularly early-stage firms, some of which are even in the pre-revenue stage.

Naturally monetizing your sred tax credit does not in any way dilute equity ownership - That allows the company to not have to take o more expensive financing that might be in the form of long-term debt or more expensive alternative financing such as short-term working capital loans, also known as merchant cash advances/ 'mca's"

SR&ED FINANCING IS THE LOGICAL SOLUTION TO MORE EQUITY FINANCING - HERE'S WHY

How does sred financing differ from other types of Canadian business financing?

Debt financing is almost always a lower cost of funding a business versus owners having to give up additional equity - Even though loans or credit lines have interest rates and financing costs, new equity holders have a claim on the ownership of the business and all future profits. Payments on loans are tax deductible, and the reality is that many firms working on r&d do not have the financial strength to successfully receive additional business financing - In a red loan the collateral of the loan, which is just a short term loan, is.. the SR&ED claim itself!

Companies do not have to be profitable in order to qualify for sred funding, and no personal guarantees are required. If your firm qualified for sred tax credits you are eligible to finance your claim - SRED financing for international r&d qualifies if the work is performed and funded in Canada under CRA guidelines. Sred financing is different from other grant and loan programs because it is a monetization of an asset and brings no long-term debt to the balance sheet - A common misconception about sred financing is that it is expensive but it is a low-cost business financing in a number of ways - Talk to the 7 Park Avenue Financial team about why sr&ed financing makes sense.

Companies can get 75% of their filed or accrued claim and claims can be funded in a matter of a couple of weeks - Very basic company info is required to apply, including information on your business and the actual claim.

Are there any difference between SR&ED and other governmental funding options? The other similarly large government funding solution is the Canada Small Business Financing Program, which is a lump sum term loan program which funds equipment, leasehold improvements, technology needs, as well as new changes ot the program which includes working capital and lines of credit - Talk to the 7 Park Avenue Financial team about SBL loans.

WHO PREPARES SRED CLAIMS? WHAT IS THE ROLE OF THE SR&ED CONSULTANT?

In Canada, the majority of tax credits/claims are prepared by independent consultants - they are known as ' sr&ed consultants'.These sr ed claims are filed, of course, in conjunction with your year-end tax return. Retaining a good preparer for your claim is one part of the financing process of a claim. In the past couple of years, a lot of focus was placed on the way consultants bill and prepare claims - the majority of which are on a ' contingency' basis, which in hindsight probably caused some bad behaviour by a small few.

There are many advantages to using a sr&ed consultant - they are typically very experienced in your industry and can propose the right strategy on filing a claim and what supporting material and write-up will be required to support the claim approval - Sred claims are typically positioned uniquely to each firm and its work in research and development and claims will reflect payroll records and purchase invoices and proofs of payment from the company accounting records.

While some consultants charge regular fees for their time and work many works on a contingency basis at competitive rates which furhter enhances their belief around the approval and credibility of your claim - Canada revenue agency reviewers are aware of the role of sr&ed consultants.

Because of the nature of the breadth of r&d in the Canadian economy, many consultants specialize in certain industries such as software development, agriculture, manufacturing, oil and gas and multimedia/

We encourage all clients to consider whether they are eligible for the SR&ED refundable tax credit and focus on filing the claim promptly as there are some deadlines in place under the program.

BILLIONS OF DOLLARS ARE REFUNDED TO CANADIAN BUSINESSES ANNUALLY UNDER SRED

Refundable credits return billions of dollars to Canadian corporations each year. Your ability to cash flow or monetize your claim makes the program complete in some way. Your company is in effect ' fast-tracking ' the cash flow return to your company by filing and financing your claim.

WHAT TYPE OF COMPANIES CAN APPLY FOR SR&ED

The majority of businesses in Canada that apply for s&ed are private firms, aka ' Canadian-controlled private corporations (CCPCs)", but even foreign-owned firms that do the r&d in Canada are eligible - Applicants can also be proprietorships and partnerships.

HOW DOES A SR&ED BRIDGE LOAN WORK?

How then are the claims financed? It certainly doesn't have to be problematic if you have some expertise backing the process. A simple business application starts the whole process - typical info needed here is a copy of your claim, information on who prepared it, as well as your business financials.

As you are accruing your spending and qualifying for sr&ed tax credits you have the ability to accelerate funding of your claim, smoothing out the cash flow process and continuing to not have to consider alternative equity or long-term debt finance solutions. Business owners and financial manager can plan their accrual loan advances as they forecast their cash flow needs - as an example, a company can choose to access funding on a quarterly basis for example.

WHAT IS THE COLLATERAL REQUIRED FOR A SR&ED BRIDGE LOAN? SPOILER ALERT - IT'S YOUR SR&ED CLAIM!

We note here that many firms that complete claims range from start-ups to firms that are still in the early stages of revenue. So it's important to understand that the key collateral under SR&ED financing is in fact, just the claim itself. In effect, you've created a (government) account receivable and are only financing /monetizing that specific A/R.

CONSIDER A SR&ED CREDIT LINE TO PRE-FUND YOUR CLAIM

The newest trend in tax loans for SR&ED financing is the ability of your business to, in effect, pre-finance your claim - you are reimbursed for funds you are spending during your spending. That fast tracks the return of R&D capital even faster. Talk to the 7 Park Avenue Financial team about how the process to get sred funding has never been faster

KEY TAKEAWAYS IN SR&ED LOAN FINANCING

Any business spending in r&d is eligible to apply for sr&ed financing for their sr ed expenditures

Small businesses can apply for sr&ed refund also

Many firms applying for sred are startups or in pre-revenue, although medium size and larger firms also qualify for sr ed tax incentives

SR&ED loans are a financing option for the refundable tax credit

Almost every industry in Canada can qualify for r&d, including IT and software development areas of the economy, biotech, manufacturing, oil and gas, and those focused on the new economy such as carbon credits

CONCLUSION

Take your company to the next level by accessing sr&ed funding for r&d projects - Keep growing the value of your business and unlocking the full potential of your business's value!

Does your firm qualify for sr&ed finance? If your firm makes investments in research and development and if you're looking to avoid any ' problems ' associated with financing SRED CREDITS, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor at 7 Park Avenue Financial and let us help. Our specialty is helping you fund refundable tax credits - The probable result is - Problems gone!

FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

What is the SR&ED Program In Canada

Formally called the Scientific Research and Experimental Development (SR&ED) tax credit sr ed tax incentive for work done in the area of scientific or technological uncertainty delivers a refundable investment tax credit for companies who conduct research and perform basic research and systematic investigation for the purpose of scientific or technological advancement. In some cases, this might mean products for new or improved material during the tax year at which point eligible expenditures are filed by Canadian businesses under the reporting deadline. SR ED eligibility criteria are determined as set out by Canada Revenue Agency and there is income tax payable on the sr&ed claim.

Most companies will have third-party technical consultants called ' sred consultants' who determine eligible material costs as well as eligible salaries and subcontractor fees and overhead costs related specifically to the R&D project. There is a reporting deadline that is the same as the fiscal year tax filing. Canadian businesses can take advantage of SRED as well as other corporations that are foreign-owned.

Federal and provincial tax credits are combined under the Sr ed program to encourage Canadian businesses to perform r&d for innovation and advance scientific knowledge - Companies claiming Sr&ed must ensure their market research qualified for this tax incentive program and work is reviewed by financial reviewers at CRA under the income tax act in Canada. Companies that wish to finance sr&ed claims through commercial finance companies take advantage of non dilutive funding.

HOW CAN A BUSINESS BENEFIT FROM SR&ED CREDITS

Companies performing r&d can claim a refundable investment tax credit for qualified sr ed projects and expenditures set out in the program via their sr ed project, regardless of whether the r&d was successful as a final outcome around the scientific knowledge the company was pursuing.

Sunday, January 15, 2023