The most common way to repay a SR&ED loan is upon the refund of your SR&ED tax credit. There are a few key areas to consider:
Interest payments – Most SR&ED lenders will accrue the interest until the SR&ED credit is refunded. What that means is that you don’t have monthly interest payments. Some SR&ED lenders will hold back a portion of the interest. The hold back is usually expressed as a multiple of the monthly interest rate times the principal. Therefore, if you have a $100,000 loan at 20% per year interest, and the lender holds back 6 months of interest, the cash you will receive is $100,000 – (20% x 6 ÷ 12) = $90,000. Additionally, the effective interest rate increases. The effective rate is 20% ÷ $90,000 x $100,000 = 22.2%. The hold back effectively increases the cost of the loan and reduces the amount of cash available to you to run your business. You want to avoid interest holdback.
Balloon payment – A balloon payment is a repayment of the outstanding loan balance made at the end of a loan period. For most SR&ED lenders, this is the typical method for repaying a SR&ED loan. When the CRA issues the SR&ED refund, the borrower pays the lender the principal plus interest andany fees. Any funds left over at this point are retained by the borrower. This makes the accounting very simple as there are no monthly payments and you can utilize the entire amount of the loan until full repayment.
Pay to a trust account, to lender, to borrower – Lenders will have the CRA refund cheque directed to a lawyer, the borrower, or the lender.
- A trust account is a special bank account that a lawyer must maintain when the lawyer receives and holds money on behalf of clients or third parties. The CRA will send the cheque to the lawyer who will deposit it in their trust account. The lawyer will observe a ‘direction to pay’ and a reconciliation initially sent by the lender, which means the lawyer will take care of sending funds to repay the loan to the lender and informing the borrower of the updated balance.
- The CRA may send the cheque to the borrower who, upon receipt of the funds, repays the loan
- Some larger lenders, who often have bank status, can receipt the funds directly from the CRA. After paying the loan balance, the lender will send the remaining funds to the borrower.
Maximum term of loan – The maximum term of the loan can be an important feature. Some loans may not have a maximum term and therefore, if the SR&ED refund is insufficient to repay the loan, you may have an unlimited time to repay the facility. Most lenders add a maximum term of the loan which will adequately account for circumstances in which the CRA selects the claim for review. At this point, if the SR&ED claim is insufficient to repay the loan, there may be a balloon payment or a negotiation of how to repay the lender.
Minimum term of loan – Some lenders have a minimum loan duration. This is effectively a minimum amount of interest. The CRA may issue a refund cheque very shortly after the loan is disbursed. If this happens, and there is a minimum loan duration, the loan will be repaid and the lender will charge the interest based on the minimum term of the loan.
Partial payment – There are multiple scenarios in which partial payment of the loan may be acceptable. A good lender will allow you to repay all or some of the loan without penalty. This is important as your fundraising activities may allow you to repay the loan, in which case you may be able to avoid paying extra fees.
SR&ED refund does not repay the facility – The SR&ED refund may be less than the amount owed to the borrower. In these circumstances, some lenders allow you to repay the loan from the next year’s SR&ED claim, some want the loan repaid immediately, and others will negotiate a settlement.