Exploring how to optimize the Scientific Research & Experimental Development (SR&ED) Tax Credit Program with ventureLAB Partner, Easly.
For Canadian businesses engaged in research and development activities, the SR&ED program is likely familiar. If it's new to you, it's worth exploring further, given the substantial financial support it offers - you can learn more about it here. The SR&ED program awards tax credits to companies that conduct R&D work that meets the program's eligibility criteria. Throughout the fiscal year, companies accumulate tax credits for their qualifying expenditures, which they can then claim when filing their annual tax returns.
Annually, the SR&ED program disburses over $3 billion in tax credits, nearly 50% of which are refundable, allowing companies to receive a cash refund after tax filing, even if they aren't generating revenue. Additionally, some provinces and territories offer their own supplementary R&D tax credits. To find out what regional R&D tax credits are available to you, check out this resource.
While the SR&ED program is undeniably beneficial, it has room for improvement to make the cash refund more actionable to the companies that receive it. A one-time annual refund is helpful but doesn't address the ongoing cash burn companies need to fund to sustain their growth. This is where SR&ED financing becomes a game-changer.
Why SR&ED Financing?
SR&ED financing allows you to convert your earned SR&ED tax credits into immediate cash advances. This means you don't have to wait for the Canada Revenue Agency (CRA) to disburse your annual refund. By transforming your annual SR&ED refund into regular cash inflows, you gain control over your funding timeline.
In today's challenging capital environment, where conventional debt is becoming costlier and venture capital funding is harder to come by, SR&ED financing is emerging as a critical strategy to stabilize cash flow, expedite initiatives, lengthen runway, and strengthen balance sheets.
How Does It Work?
Imagine a company based in Ontario engaged in R&D activities that are eligible for refundable SR&ED tax credits. For their ongoing eligible expenditures, they earn a 35% refundable tax credit federally and an 8% refundable tax credit provincially.
In this example, let's assume the company's SR&ED spending is evenly distributed throughout the year. The company's refundable SR&ED tax credit accrual and refund timeline would look something like this:
In the SR&ED status quo, the company has cash outflows throughout the year and receives their refund as an annual lump-sum disbursement sometime the following year, after they’ve submitted their claim.
With SR&ED financing, the company can receive advances on 75% of its earned tax credits at any time throughout the year. This approach offers more flexible and timely access to capital, aligning with the cash flow needs of a growing company.
Below is an example of the same company utilizing SR&ED financing on a quarterly basis. In this example, we assume a 2% disbursement fee on each advance and a 14% annual interest rate.
The company leverages its earned SR&ED tax credits to receive periodic cash flow on a schedule that suits its needs rather than in an annual lump-sum disbursement. The company can use that cash throughout the year to continue funding its growth. Check out this Cash Flow Calculator made by Easly, a premier SR&ED financing provider, and discover the cash flow potential currently locked up in your earned SR&ED credits.
SR&ED Financing: Key Features to Consider
If you're interested in leveraging your earned SR&ED tax credits to improve your cash position, you'll need to work with a trusted SR&ED financing provider. There are a few key features you should look for when selecting your SR&ED financing partner:
- No Application Fees: SR&ED financing should be a cash flow boost. You shouldn't need to spend money just to apply.
- Transparent Terms: Securing funding can get complicated fast. A good SR&ED financing provider will have simple and transparent terms that don't require a legal team to understand.
- Cash Flow Positive Process: Monthly debt servicing can be burdensome to a growing company. Find an SR&ED financing provider that recoups all principal and fees when the CRA disburses the refund, so it doesn't require regular servicing.
- Quick Access to Capital: Opt for a provider that can get you funded within two weeks of applying.
- Founder-Friendly Policies: Look for providers that offer flexibility in fund usage and don't require personal guarantees.
Conclusion
SR&ED financing is more than just a funding option; it's a strategic financial tool that empowers you to take control of your cash flow and funding timeline. By choosing the right SR&ED financing partner, you can unlock new growth opportunities and set your business on the path to long-term sustainability and success.
If you’re interested in learning more about SR&ED financing opportunities, reach out to the SR&ED financing experts at Easly to learn more.
About Easly
Easly supports innovation across Canada by providing non-dilutive capital to companies that earn refundable investment tax credits, such as those awarded through the Scientific Research & Experimental Development Program (SR&ED). We enable our customers to control their funding timeline, turning their annual lump-sum refund from a distant receivable into cash in their bank account.
About ventureLAB
ventureLAB is a leading global founder community for hardware technology and enterprise software companies in Canada. ventureLAB’s initiatives focused on raising capital, talent retention, commercializing technology and IP, and customer acquisition have enabled thousands of companies to create over 5,000 jobs and raise more than $340 million in investment capital. At ventureLAB, we grow globally competitive tech titans that build-to-scale in Canada, for global markets.
