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.

The technological advancement is a critical component of your SR&ED technical report. You state what technological advancement(s) you were attempting to achieve on line 240 of the T661 SR&ED form.

In this post, we’ll look at the factors that make up a strong technological advancement statement that conforms to the SR&ED program’s eligibility criteria and then look at an example.

Keep in mind this isn’t a guide to guarantee that your project will pass. That’s dependent on the actual R&D you’re doing as well as the CRA’s judgement. The goal here is to help you avoid explaining aspects of your technology that may be great for your customers and your business, but not eligible for SR&ED.

1. Focus on the technology behind your product.
While it’s alright to mention your product and some business features in the introductory paragraph to give your reader context, it’s important not to focus on the features when you state what your planned technological advancement is. Most features are solutions to business problems, not technological problems.
2. What problem are you trying to solve?
Speaking of problems, if you’re having trouble isolating and describing the technology you’ve created, look at the problems you had to solve during development. Were there any problems that required you to experiment with different approaches? Was the solution not just applying standard practice to solve it?
3. Compare what the industry’s standard practice is and what limitations there are with it.
This will help the reader understand what the existing industry knowledge base is and provide them with a comparison to measure the advancement you’ve made. If you show you’re advancing the state of technology not only for yourself, but for your industry, that’s a good thing (for everyone).
4. State how you will measure success.
Include any concrete metrics (estimates are acceptable) such as time (e.g., we sought to achieve page rendering in 25 ms), percentages (e.g., performance was improved by 30%), or any other units of measurement (e.g., we reduced total application size by 500MB). This type of information strengthens the claim and demonstrates that a “systematic approach” was followed as you measured progress through each experimental iteration. This also allows you to show failures (assuming you had some). You’ll have data that shows the outcome was uncertain because some of the time you didn’t get the result you wanted.

Let’s see how we can apply these tips to improve a poorly stated technological advancement. CAVEAT: we’re assuming here that the 2nd statement is what you actually did, and the 1st statement just doesn’t properly capture it. We aren’t suggesting you make it up.

First, here’s the bad example:

We developed a mobile game called Car Racing that allows users to race against each other on different phones.

Now, here’s a better way to describe your work:

We sought a technological advancement that allows bi-directional communications in real-time ( < 1 second latency) on 3G networks by developing ways to minimize memory usage on the limited 256 MB memory available on mobile devices. The current practice is to compress graphics but the available tools add metadata to graphics thereby causing our high resolution graphics to be too large and memory intensive.

Again, we’re not saying the improved description is perfect. But it does focus on the technological advancement at play in your application, not the features. If your project descriptions don’t sound like your product, that’s ok. Your product is trying to solve a business problem. Your SRED claim is trying to find out which aspects of your work are eligible for tax credits.

Learning how to craft a technological advancement statement correctly will demonstrate to your reader – the auditor – that you understand the SR&ED program’s criteria and that you are only claiming what is eligible. If you try to keep these 4 tips in mind as you formulate your technological advancement statement, you’ll strengthen your claim by focusing on the eligible components of your project.

Timesheets are always a contentious subject especially when it comes to smaller businesses who do not have the same documentation resources of larger enterprises. Companies often ask if having timesheets will significantly bolster their chances of passing a SRED audit.

First of all, you do not need to submit timesheets with your T661 form. If you are not audited, no one will look at your record keeping. However, there is a new checklist (currently lines 270 – lines 282) that asks you to check off all the evidence you have to support your claim. Many unwary companies check all of the boxes in an effort to make their claim look better. This immediately sets off a red flag to reviewers and may result in an audit. If there is an audit and you are unable to produce the evidence, eg timesheets, you will have a problem.

The bottom line is: don’t check off items unless you are prepared to back it up.

With respect to timesheets, where they can help is proving that the employees you are claiming for R&D tax credits actually worked on the projects you claimed. This is especially important when the employees were not 100% dedicated to R&D. You need to show that you had a method of tracking their R&D and non-R&D time.

There are many commercial, Open Source and Web-based timesheet systems out there. Whichever one you choose, make sure that the time of each employee is properly categorized and labelled so it’s easy to tell which R&D project they worked on. The more detail you have the better, so breakdowns of work within a project are even better, eg analysis, architecture design, testing. There is no particular timesheet format that is SRED eligible so use your judgement. Auditors understand that smaller companies will not have the same level of documentation as larger companies (though don’t use this as an excuse to present shoddy documentation).