Flow Ventures recently ran a workshop for startup CEOs who were participants in Founder Fuel, the startup accelerator from Real Ventures. The workshop covered the basics of the SR&ED financing program tailored for entrepreneurs. The top 10 questions from that workshops are reprinted here.
1. Is my project eligible for SRED?
It depends. SR&ED does not finance software development or product development. The program finances well-structured research and development activities undertaken by you to solve difficult problems. Most people mistakenly assume that a great product idea or lengthy engineering process means they will get a refund. This is not the case. That said, most technology companies, especially startups, have many legitimate R&D projects. They have to be described and documented properly.
2. What types of employees can be claimed?
Job functions that are directly involved in R&D can be claimed. The amount of their salary you can claim depends on how much of their time was devoted to R&D. Eg a developer can be claimed at 100% if they spent all their time on an eligible SR&ED project. Some supporting activities, like management or QA, can be claimed if they directly support R&D and again, you can prove that time was spent on the project(s) you are claiming. Non R&D employees, like graphic designers, copywriters, customer support and marketing people are not-eligible .
3. What types of expenses can we claim?
For the most part, you’ll be claiming the salaries of employees engaged in R&D. This includes outside contractors, though at a lower rate. Materials used/consumed in the course of R&D can be claimed. If you’re a software company, that might apply to dedicated hardware or software you require for testing. The program also allows you to claim an overhead amount (65% of eligible salaries). This benefits startups with little overhead and saves you from having to itemize every lightbulb in your office. See our post on a detailed discussion on the proxy method versus the traditional method and which method you should choose to maximize your claim.
4. How much can we get back?
The amount of your refund will vary depending on several factors, such as how many eligible employees you have (and what percentage of their time was on SR&ED activites), whether you have taxes owing from current or past years (SR&ED refunds are first applied to any taxes owing), your company’s structure, the province where your company is located or how much taxable income your company has. In Quebec, it is possible to get over 80% of your R&D labour expenses refunded. In Ontario, it is slightly less.
5. How much do consultants charge?
Different consultant charge different fees, though most if not all are structured as a success fee. If you don’t get your refund, the consultant doesn’t get paid. Generally, if your consultant is charging more than 20% you’re probably being overcharged. A good consultant will not just write your claim, but work with you throughout the year to gather documentation and help you prepare.
6. If we keep timesheets and use a code repository like subversion or git, is this good for backup documentation?
Yes, this is a good start. Keep in mind that since you are claiming research and development, you should also be documenting details regarding the challenges you have along the way, what worked, what didn’t work (this is valuable to SR&ED because it demonstrates that you had to experiment and that it wasn’t easy to arrive at a solution to your problem) and any relevant statistics. For example, if your SR&ED project involves trying to reduce page load latency, then you should also be documenting the statistic of how many seconds page loads are taking for each experimentation. Documenting bug fixes and features is not sufficient documentation.
7. How long does it take before we get our money?
It can take between 3 – 6 months after you file your tax return to get your refund cheque. If you’re claiming a large refund, it is advisable to file your corporate taxes as soon as possible. CRA normally processes files within 90 days. In Quebec, the provincial government has its own processing which can add months even after you’ve been accepted.
8. How can we finance our tax credits?
First ask yourself if it is advisable to finance your tax credits. Doing so may put you under pressure as you aren’t guaranteed to get your refund, and it may take much longer than you expect. The ideal lender is your bank as their fees will be reasonable. Specialized lenders can be another option but be prepared to pay up-front fees as well as monthly interest than can be as high as 2.5% per month. Your investors may also be willing to finance your SRED refund. Talk to your SRED consultant about your options.
9. What if I outsource work to a non-Canadian contractor?
Unfortunately, that expense would not be eligible for SR&ED.
10. What if I get audited?
First off, a technical audit of your SR&ED claim is not a full audit of your company. If you’re well prepared, an audit can be a routine meeting during which you answer questions and present documentation. It can add months to the process but if you have a strong claim you have nothing to fear.