SR&ED Program Funding for Startups
Imagine a situation in which you get a return of a third of your investment in a risky innovative business.
Pretty nice perspective, right?
What’s more, such a return on investment is possible before you incur expenditures.
This situation is available to Canadian companies and institutions through the Scientific Research and Experimental Development Tax Incentive Program. As it points out, expenses must be borne by research and development, with certain conditions. However, the SR&ED program itself is considered one of the best public initiatives in the world to support innovation.
Although innovation is associated mainly with corporations, the myth is that the program is only available to large companies. Small and medium-sized startups can make the most of it, even to a greater extent than larger players. As long as they incur development and discovery expenses, they have the opportunity to receive financial support.
What is SR&ED?
Scientific Research and Experimental Development (SR&ED), Tax Incentive Program, is the way the Canadian government supports innovation and development.
Program SR&ED is administered by the Canada Revenue Agency (“CRA”) and is comprised of two main incentives: (1) income tax credits and (2) cash refunds based on eligible SR&ED expenditures.
This program of supporting research and development has been around since 1944.”Each year the SR&ED program provides over $4 billion in investment tax credits (ITCs) to over 18,000 claimants. Of these, about 75% are small businesses.”(source), Which has resulted in many successes i.e. Miovision.
Perhaps this is also a chance for you and your Startup?
Who can apply for SR&ED?
If your business is conducting research and development, you may be able to benefit from tax deductions, credits, and refunds. The possibility of applying is not limited to specific industries. Your business does not need to be focused solely on research and development, and you can only claim reimbursement for expenses incurred in this sphere.
Any company can apply regardless of legal form as far as it relates to specific activities. Small and medium-sized businesses can gain the most.
Canadian-Controlled Private Corporation (“CCPC”) – a private corporation that resides in Canada and is controlled by Canadian shareholders.1 A CCPC qualifies for preferential rates of ITCs.
Qualifying activities include the following:
Link to presentation
It is crucial to bear some degree of risk for technological progress, as the program is designed to reduce the R&D risk to the company. For Startups, it may be of fundamental importance as Josh Shokman emphasizes:
“Currently SR&ED will refund a portion of a startup’s R&D costs based on expenses incurred during the previous year – some of those earliest expenses claimed were incurred 18 months before the claim. For startups, this is an eternity. Today, startups can grow and die violently before they get their first SR&ED claim, which could have helped them to pay one more employee, solve one more problem or help one more customer.”
As Astra.Software we deliver solutions that qualify for SR&ED support. We offer a service package that includes the technical preparation of the project and in the next step the preparation of a detailed documentation for the application. Thanks to such synergy, we increase the chances of our customers qualify for the most support.
The concept of Investment Tax Credits
Investment Tax Credits (“ITCs”), allows the claimant to receive a cash refund or a reduction of taxes payable (or both) for qualifying SR&ED expenditures. The amount of ITCs that can be claimed depending on the company type. The biggest benefactors are Canadian-Controlled Private Corporation (“CCPC”) – a private corporation that resides in Canada and is controlled by Canadian shareholders.
In general, a CCPC with taxable income of $500,000 or less can claim ITCs at a rate of 35% on SR&ED expenditures up to a maximum of $3 million. Apart from that, your business can apply for additional provincial credits dependent on where the claimant’s headquarter is located.
Non-CCPCs are eligible for ITCs, but they may only recoup 15% of qualifying SR&ED expenditure as credits that can be carried back three years, or carried forward 20 years. This carrying back or forward can help to reduce past tax liabilities or offset future taxes payable when a company is not currently profitable. Moreover, if the total value of ITCs exceeds the taxable income limit in a given year, allocating the excess to other years can also help to capture value from the ITCs that would otherwise be lost.
How to claim credit?
Obtaining ITC involves the need to fill multiple documents.
In our province of British Colmbia this involves the following:
“You can claim the credit by completing the British Columbia Scientific Research and Experimental Development Tax Credit (T666) form and submitting it with your T2 Corporation Income Tax Return. Enter the amount of the non-refundable credit on line 659 and the refundable credit you are claiming on line 674 of Schedule 5, Tax Calculation Supplementary – Corporations.”
You can handle these formalities. However, if you are short on time, then you can get help from an outside company that will do it for you. Besides, you are more likely to do everything correctly.
How to choose a consultant?
Because the SR&ED program is available to many industries, a large number of companies are seeking to fund this way. For this reason, the experience of people helping with SR&ED varies.
You should get help or hire a company that knows your project and your size. Therefore, Astra.Software helps small and medium-sized startups obtain the funding.
We combine software development with the SR&ED claim for that project. You must be aware that you need to provide a lot of technical information when completing your application. And who knows better than the company who did it?
If you would like to create software and then get SR&ED funding for it, then we encourage you to have a no-obligation conference call meeting with us during which we can learn and talk about your current situation and the possibility of its optimal funding.