How Does SR&ED Financing Work?

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Canada’s single largest R&D tax incentive is the Scientific Research and Experimental Development (SR&ED) Tax Credit program. Canadian companies (CCPC’s) get a tax federal credit of 35% on the first $3 million in qualifying expenses, such as salaries, materials, consulting, etc. For anything over $3 million, the tax credit is 15%.  Add to this the provincial incentive which can be over 30%, and the total recovery can be closer to 80% of qualifying expenses.

The simplest way to think about SR&ED financing is to think of your SR&ED credit as collateral for a loan.  Funders look at your SR&ED claim as an asset just as a bank looks at a car as an asset. If you would like to borrow money against it, financing companies will consider many factors before proposing a suitable loan.

SR&ED financing companies typically consider:

  • Historical SR&ED claim success
  • When was the most recent CRA review of the SR&ED claim and was there an adjustment to the claim
  • Who prepared the claim
  • How long before you will file your claim with the CRA
  • The company’s historical financial and forecast financial performance
  • The current amount of debt

You can typically get financing for 70% to 80% of your refund. The interest rate varies but is designed to be manageable, and the typical length of repayment is less than a year. Of course, all of this is negotiable.

The finance company typically sends a written term sheet or proposal to outline the loan.  If you agree to the terms, due diligence will take between 5 and 20 business days. The finance company will have a credit committee meeting, approve the loan, and deposit the funds into your account.

You’ll most likely be required to submit your financial statements on a regular basis as the financier monitors your progress.

After you file your SR&ED claim, you will receive your SR&ED refund a few months later.  It is at this point the financier is repaid in full.

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