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.
