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Canada’s SRED PROGRAM - Cash Flow via Tax Credit Financing

Guest post by: Stan Prokop

Article Overview: Information on how Canadian business can finance their SRED ( SR&ED ) tax credits under Canada’s sred program . Cash flow and Working Capital Financing via the monetizing of your tax credit

Canada’s SRED PROGRAM - Cash Flow via Tax Credit Financing

The Sred program for tax credits is one of a small handful of government programs in Canada that in a very direct fashion turn credits into real cash flow and working capital that is non repayable . When business owners find out that they don't have to wait anywhere from 3-12 months for their refund, and that they can discount, or monetize that tax credit now they are pleasantly surprised.

The question then becomes simply understanding the mechanics and benefits of such a financing - i.e... answers to the basic questions -

-How much can I get?

-What does it Cost?

-What is involved?

-What are the benefits of financing my tax credit now versus waiting for the cheque from the federal and provincial governments in Canada

Let's cover off some of the answers and the basics you need to know to make an informed decision in this regard.

Business owners that either have prepared SRED claims in the past , or who are preparing them for the first time are always advised by their accountants and sred consultants as to how much the claim will be for . The reality is that this claim is filed at the same time you file your corporate tax return. If you have highly confident that you will receive the full amount of your claim we see many clients actually booking this future cheque as an ' account receivable ' - i.e. money that is due their firm just as if it was a sale to a customer .

So when you finance that claim you are dealing with an absolute amount. But the one thing to understand is that generally advances under the SRED tend to be in the 70% range based on the total value of the claim. So for example $ 300,000 dollar claim filed by your firm has the potential to net you 210,000.00 as a working capital loan should you choose to cash flow or monetize that claim now.

Although we see some claims as much as a million dollars from clients, the reality is that most claims tend to be in the 200 - 500k range, some smaller, some larger .

On to costs. Generally the overall size and quality of your claim, coupled with the amount will dictate the costs of financing the claim. A few key points should be kept in mind, and they clearly are in the category of 'benefits '. That is to say that when you undertake a SRED loan you receive 70% of the claim immediately - there are no payments made unlike a regular loan, and you receive the final 30% of the claim when the refund is made by CRA, or, if you choose, when they indicate in writing or via their technical audit that the claim has been approved. The financing costs are deducted out of this final 30%. So clearly the overall benefit of financing your SRED claim revolves around taking that cash and working capital and putting it to work in your business right away. Putting those funds to work might mean acquiring new equipment, reducing payables, investing in sales and marketing of your product services, etc.

A tax credit sred financing loan is not unlike any business financing. An application with typical business background data is completed , one of the key additional pieces being of course the actual sred claim you have filed, and , in some cases, proof of your success in previous years . We advise clients the whole application and diligence process takes about 2- 3 weeks, so if you are focused on financing your sred claim you should undertake your sred financing negotiations as soon as you have made up your mind to finance the claim.

Everyone agrees the SRED program is the government's way of encouraging in a measurable way (their cash back to your firm!) research and development. If you have filed claims in the past, or are filing for the first time you should also investigate the benefits of financing your claims. Its non repayable money - why not put it work as early as possible to grow sales and profits and improve you overall financial picture. That's a solid business financing strategy.

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Article Tags: sred program, tax credit, tax credit financing Canada, working capital



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