Are you considering claiming the Scientific Research and Experimental Development (SR&ED) tax credit? As one of the Government of Canada’s largest tax incentive programs, SR&ED offers over $3 billion in tax credits to more than 20,000 Canadian businesses each year. Despite the large amount of capital distributed through the SR&ED program, not all companies with eligible projects realize that they qualify and can therefore receive substantial financial support due to common misconceptions and confusion.
At Easly, we know that having healthy cash flow is crucial when it comes to supporting your Research and Development (R&D) needs. Many companies leverage their accruing SR&ED tax credits to access capital throughout the year using Easly Advances. If you claim SR&ED, consider Easly Advances to extend your runway to hit the next big milestone and boost your value before a dilutive raise. Below, we’ll take a close look at some of the most common misconceptions about SR&ED, as well as offer a quick refresher on the program as a whole. Read on to learn more!
What is the SR&ED Program?
The SR&ED program is designed to stimulate, and support continued Canadian-based innovation across a wide variety of sectors. Under SR&ED guidelines, businesses that qualify for SR&ED can either earn refundable tax credits or reduce their tax liability for the current annum or a future year through non-refundable tax credits.
SR&ED is a broad-reaching program that presents thousands of Canadian businesses with the opportunity to receive funding annually. If you’re considering claiming it this year, it’s important to be aware of the following common points of confusion:
1. Filing for SR&ED incentives will get my company audited
When you file an SR&ED claim, The Canada Revenue Agency (CRA) is only interested in SR&ED-related technical content and related expenses. This information is available without the need for a full audit, meaning that proper documentation will generally keep you in the clear and avoid headaches. You can, however, expect to have specifically your SR&ED claim audited if you claim for a number of years. It may seem worrisome but don’t fret, the right preparation can minimize the risk of an audit not going in your favour. If you’re interested in learning more about this subject specifically, watch this webinar we hosted with our partners at Welch LLP all about how you can minimize the risks of an SR&ED audit.
2. My project must be successful to be eligible
SR&ED claimants don’t need to have their project succeed to receive incentives. The purpose of the program is to support dedicated research aimed at solving essential challenges faced both domestically and internationally, regardless of if the project is deemed a success. While successful projects are ideal, the failure of a project still adds to the scientific knowledge base and is, therefore, valuable. Failure presents the opportunity for further refinement and future development.
3. You can only receive one government incentive at a time
This is one of the most common points of confusion when it comes to claiming SR&ED. Fortunately, for entrepreneurs and companies across Canada, you can claim SR&ED credits, even if you’ve received other incentives from programs such as IRAP. The programs may interact in different ways and reduce funding from individual programs but raise the total funding received. We cover this subject, specifically between SR&ED and IRAP, in more detail in another blog post.
4. Qualification Parameters
People tend to have preconceived notions as to what qualifies for SR&ED. The main focus is that projects aim to address technological uncertainty. In other words, if you are dealing with prototypes, testing or the development of new products/processes, you may very well qualify.
5. I must complete my project this calendar year to qualify
Another common misconception is that businesses cannot claim expenses relating to a project if the project is not likely to finish within the current calendar year. While you do have to file your claim in your year-end corporate taxes, you are able to claim eligible costs incurred that year, even if the project has not finished. The government recognizes that new development and exploration take time, and thus, this is not a limiting factor for utilizing the SR&ED program.
6. I am not eligible if my start-up has yet to generate revenue
SR&ED is a particularly vital resource for start-ups as it is primarily concerned with the value you offer to the scientific knowledge base as a whole instead of the revenue you bring in. If you’re pre-revenue and working on projects that align with the mandate of the SR&ED program, then you can submit a claim.
7. The maximum refund I can receive is 35% of eligible expenses
While the federal government offers credits for 35% of eligible expenses, there is a high likelihood you’ll be able to earn additional provincial credits as well, depending on which province or territory you operate in. Quebec, Ontario, and British Columbia, for example, have robust programs designed to help small businesses looking to cover some of their R&D costs. Learn more about provincial R&D tax credit programs here. Our SR&ED Refund Calculator takes into account the differences in provincial credit rates as well as the different credit rates for types of expenditure. Try it out to get a good estimation of the size of your SR&ED refund.
8. SR&ED is limited to the “hi-tech” sector
It’s easy to think of R&D incentives as being limited to many of the hi-tech companies based in Vancouver, Toronto, and Montreal. While many of the companies in the area do qualifying work, the reality is that companies across the country are eligible for SR&ED. From coast to coast to coast, if the work you’re conducting meets the qualifying criteria of the program, you can claim SR&ED.
9. Sales Vs. Expenditures
As mentioned above, SR&ED is less focused on revenue in comparison to the technological advancement generated by your company. Even if you lack direct sales or are pre-revenue (making funding even more essential), if you can suitably justify your expenditures qualify for SR&ED tax credits, you can submit a claim.
10. What happens if I have market competition?
Having a market competitor isn’t a direct disqualifying factor for businesses, so long as you can prove that your product and/or service is unique enough to stand apart. If your competitor’s work is already publicly accessible, however, you may have to make a stronger case for your innovation and differential approach to receive funding.
Financing Your SR&ED Refund With Easly
The unfortunate reality is that it can take weeks or even months to receive your refund after you’ve submitted your SR&ED claim, even if your claim does not go to audit. Also, you only have the opportunity to claim once per year, meaning you’re spending on eligible expenditures all year long but need to wait to be reimbursed. Easly Advances remove the burden of having to wait, allowing you to proceed with R&D with minimal interruptions. Easly has deployed over $130 million in advances for SR&ED claimants Canada-wide. Easly Advances are based on accrual, so you can apply any time throughout the year to receive an advance on the accrued value of your refund. Our streamlined process can see you funded within two weeks of applying.
To learn more about the role of SR&ED refund financing in your company’s capital-raising efforts, contact Easly today!