Each year the Canadian government provides billions of dollars to businesses for developing new or improving existing technologies, products, and materials under the Scientific Research and Experimental Development (SR&ED) tax credit program.
There is a common misconception that the SR&ED program only applies to companies with scientists performing research work in a lab, when in reality, the program was designed to support research and experimentation in all industries, from life science and manufacturing to software development, oil and gas, agriculture and beyond. Companies large and small as well as privately-owned and foreign-owned can claim SR&ED.
The SR&ED program is complex and requires a technical and financial justification of your R&D efforts to the Canada Revenue Agency (CRA).
About 25% of the SR&ED claims get audited and your claim stands to get denied or reduced if you have inadequate documentation and time tracking.
Additionally, it takes 18+ months from the start of your fiscal year until you receive your SR&ED refund.
In this guide, we’ll share how to increase your SR&ED claims, reduce audit risk, and get your refunds before they’re filed.
What is SR&ED Financing?
Our SR&ED financing enables you to get a quarterly cash advance against your company’s accrued SR&ED tax credits as collateral, instead of having to wait until you submit your tax returns and get a response from the CRA.
As your company performs research and development activities over the course of the year, you are accumulating SR&ED tax credits and building up an asset. The problem is that you’re not able to unlock that asset until you submit your taxes and get your refund check from the CRA, which typically ends up being 9+ months from the end of your fiscal year.
Even the most efficient and organized financial teams do not typically have their books in order until mid to end of February following the end of the tax year, so you’re looking at February/ March by the time you file your taxes at the earliest and another 3-4 months by the time the CRA approves it.
SR&ED Financing comes in various flavors. Traditionally, lenders that provide SRED financing, provide a bridge loan from the time you file your SR&ED claim until you receive the refund check from the CRA. Our SR&ED financing, on the other hand, enables you to get a cash advance on your accrued SR&ED as early as 3 months into your tax year i.e. more than a year before you file your SR&ED claim.
What are the benefits of SR&ED Financing?
A quarterly cash advance against your accrued SR&ED gives you quick access to capital to invest back into your company for R&D, sales, marketing, operations, or anything else you prefer as early as 3 months into your tax year. This is means you get predictable and frequent cash advances at reasonable terms.
Our SR&ED financing enables you to quickly unlock an asset that you are already building to get a cash injection to grow your business without giving up equity. You don’t want to wait until you’ve run out of money and then look for that next cash runway.
What do I need to qualify for SR&ED Financing?
- You must qualify for an SR&ED refund based on the eligibility described below.
- You must meet a minimum SR&ED tax credit criteria determined based on your financial history and current liquidity.
What do I need to qualify for SR&ED?
Your research and development efforts must meet three criteria in order to be eligible for SR&ED:
- Technological Advancement – furthered technical knowledge.
- Technological Uncertainty – faced technical challenges or uncertainties.
- Technical Content – went through an iterative process to try and overcome those challenges or uncertainties.
According to the CRA’s Eligibility of Work for SR&ED Investment Tax Credits Policy, they determine whether a project meets the criteria by asking the following five questions:
- Was there a scientific or technological uncertainty that could not be removed by standard practice/engineering?
- Did the effort involve formulating a hypothesis specifically aimed at reducing or eliminating the uncertainty?
- Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypothesis?
- Did the process result in a scientific or technological advancement?
You’ve advanced the current state of technology by enhancing a characteristic or extending a capability. In your research and experimentation efforts, did you find an existing solution that solved your challenges? If that’s the case, then your project most likely does not qualify for SR&ED.
- Was a record of the hypothesis tested and results kept as the work progressed?
How much of my R&D costs can I recover?
- Small-medium sized (SME) Canadian controlled private corporations (CCPCs) can get a refund of up to ~64% of eligible salaries, up to ~32% of eligible sub-contractor fees and up to ~42% of materials consumed or transformed.
- Public or foreign-owned companies (or CCPCs over the SME limit) can get a tax credit of up to ~36% of eligible salaries, up to 18% of eligible sub-contractor fees, and up to 24% of materials consumed or transformed.
How do I calculate my potential SR&ED return?
- The federal portion of returns is 35% and the provincial range from 0-15%, depending on the province.
- Additionally, for every dollar spent on qualified R&D employee salaries, you can apply a 55% proxy to account for overhead. That means if have $100,000 in SR&ED eligible salaries, you would file a claim for $155,000.
- We break down the calculations step by step in our Ultimate Guide to Claiming SR&ED.
What are the documentation requirements for SR&ED?
- Documentation must be dated, highlight technical obstacles or challenges, and must be recorded at the time the work was completed.
- SR&ED requires this technical documentation, employee time tracking, as well as proof of payments such as T4s and invoices.
How long does it take to process my SR&ED claim?
- The deadline to file SR&ED is 18 months past your fiscal year-end. If you file within 6 months of your fiscal year-end and you’re a CCPC, the CRA will typically process your claim within 4 months. If you’re a non-CCPC, your claim can take up to 12 months to process.
How does the CRA review SR&ED claims?
- A CRA Review is not a tax audit of your entire company.
- The CRA performs multiple types of reviews: Desktop, Financial, Technical & Financial as well as a First Time Claimant Advisory Services (FTCAS) meeting.
What should I consider when claiming?
- Pay yourself and staff – you can only claim what you spend as it is a cost-recovery program.
- Start time tracking and proper documentation now.
- Incorporate your company and ensure clear IP ownership.
What should I avoid?
- Don’t leave your SR&ED claim until the last minute – it’s a lot of work. Additionally, if you proactively track your SR&ED activities, you also have the option to get a cash advance on accrued SR&ED on a quarterly basis instead of waiting to your submit taxes and get your refund check from the CRA, which typically ends up being 18+ months from the start of your fiscal year and 9+ months from the end of your fiscal year.
- Don’t underestimate the importance of documentation – documentation is what will support your claim during a CRA Review.
- Don’t focus solely on the business opportunity – SR&ED is a technology-first program.
I’m ready to claim. Now what?
You can choose to handle your SR&ED claim in-house or you can outsource the process to Boast.AI. The SR&ED claim process is cumbersome and can be a distraction from running your business as it requires you to identify eligible projects and expenses per the CRA’s guidelines, write technical narratives for the projects, prepare project financials, compile supporting documentation and evidence, and fill out the associated tax forms.
Boast.AI combines proprietary software with SR&ED experts. Over 500 companies have switched to Boast.AI to increase claim size and get faster access to refunds for less time and audit risk.
- Full-service SR&ED – our in-house SR&ED experts handle your entire claim process, from identifying qualifying work to preparing technical and financial reports to filing and audit defense.
- Quicker access to refunds (12-15 months pre-filing) – use our option to finance 75% of your accrued SR&ED pre-filing at preferred interest rates.
- Access to our TractionConf.io community – including an annual conference, monthly Founder-Investor dinners across the US and Canada, and weekly webinars with Silicon Valley CEOs and VCs.