Are you in search of information regarding SR&ED Financing? If yes, then you have landed at the right place. Here in this guide, we will provide you with complete details that you need to know regarding SR&ED Financing and how it can be beneficial for you. So, stay tuned to us and let’s get started.
What is SR&ED/SRED financing?
SR&ED tax credit loan is a kind of financial strategy that uses a company’s future SR&ED tax refund as a hostage for a debt facility.
The SR&ED Investment Tax Credit (ITC) is a type of predictable cash flow for most of the Canadian companies, but the major problem with this is that it is prolonged to materialize.
If a company has to access the payments that it is eligible for then it must fulfil the following conditions:
- Invest a significant amount of money R&D in the current financial year
- Wait until the company’s financial year comes around.
- Get the accounts ready.
- File the SR&ED tax credit claim as a part of their T4
- Wait for about 4-10 additional weeks for the SR&ED refund to be processed until it is paid out by the CRA.
The company can access the funds in the year in which the R&D spending occurs using an SR&ED tax credit loan. They can access it many months before their earliest possible CRA refund date.
The idea behind SRED loan is factoring for expected “invoices” from the government, which in this case is from CRA.
For a person to be able to access an SR&ED tax credit loan, the first and most crucial step is that he should qualify for Canada SR&ED ITC program.
Which Companies Qualify for SR&ED ITC in Canada?
Canadian Controlled Private Corporations (CCPC) usually receive a refundable tax on qualified SR&ED expenditures. The percentage set for federal refund sits at 35%, plus the provinces kick in at 8-15%. So, when you combine all these things, the refund can reach as high as 55% or sometimes even more. It depends on where your company is doing business.
The SR&ED credits are initially applied against other taxes payable and then the remaining balance is returned in the form of cash.
On the other hand, ITC is 20% for publicly listed companies. This amount can be applied against other taxes payable and is non-refundable.
What is Eligible Expenditure for the SR&ED ITC?
The costs that can be claimed under SR&ED are:
- Salaries & Wages
- Materials
- Contracts
- Equipment Lease costs
- Overheads & third-party payments
These costs must be directly attributed to the projects you are claiming for. These are backed by timesheets and documents and should be defendable in audits.
How does the SRED Financing Process Work?
The benefit of SR&ED Advanced funding is that it can begin as early as six months into your financial year, which means you don’t have to wait until you have filed your claim like a traditional bridge loan.
Adopt the following procedure to complete your SR&ED financing loan application.
The Application
At this step, the lender has a look at both, i.e. the company’s history with the SR&ED tax credit (provided the company has a history) and at a few other essential documents. That’s how the lender understands the company’s status quo and its business trajectory.
Term Sheet & Due Diligence
The future borrower is granted a term-sheet which contains the:
- Headline terms of the loan
- Size of the facility
- Interest
- Any other fees
- Term and list of any other document
As soon as the term sheet gets signed, the application fee is paid, and the credit review process starts. At this point, some more documents and clarifications might also be demanded.
Legal Docs and Financing
The legal documents are sent to the client, signed and returned. Security is registered, and the loan is refunded.
Monitoring and Repayment
At this point, the lender and the client come in regular contact and share information through the loan period. Finally, the loan principal plus the interest and the fees are repaid on the CRA SR&ED refund receipt.
