Many entrepreneurs are wary of the Canada Revenue Agency, associating it with taxes, audits and dry, time-consuming bureaucracy. But what of the CRA's kinder, gentler wing — the one that exists solely to give money to businesses? Based on the experiences of many of Canada's Fastest-Growing Companies, the Scientific Research and Experimental Development (SR&ED) tax incentive program is worth cozying up to — even if you think SR&ED and your firm would make strange bedfellows.
Started in 1986, the SR&ED program is intended to encourage corporate investment in research and development in Canada — big time. In a typical year, about 18,000 businesses receive more than $4 billion in the form of SR&ED tax credits and refunds; three-quarters of those recipients are small and medium-sized businesses. It's one of the most generous programs of its type in the world, says James Ro, vice-president at Cambridge, Ont.-based SR&ED consultancy NorthBridge Consulting Services: "Companies are at a significant competitive disadvantage from the outset if they invest in new technologies but do not take advantage of SR&ED."
It's a vital yet, it seems, underappreciated source of capital for Canadian entrepreneurs: only half of eligible companies file SR&ED claims. In many instances, firms don't realize that they qualify, believing the program applies only to the kind of intensive product development you'd find in biotech or aerospace firms. In reality, it pertains to a broad range of commercial innovation.
"It basically has to be a project that demonstrates technological advancement or a technological uncertainty you've solved," says Eugene Ng, president of NCI (No. 161 on this year's PROFIT 200 ranking), a Mississauga, Ont.-based IT security firm and SR&ED recipient. So, in addition to R&D related to a product for future sale, SR&ED can apply to the creation or improvement of both goods and processes — even if they're intended for internal use.
Applicants can accrue substantial returns. For the typical private company, the program delivers an investment tax credit worth up to 35% of the first $3 million in eligible expenses, such as wages, materials and machinery used in the R&D effort; past the $3 million mark, coverage drops to 20%. And the credit is refundable, meaning companies get cash if they have no taxes to pay. (Some forms of corporate entity, such as trusts and partnerships, qualify only for a non-refundable credit of 20% across the board.)
Read: Free Government Money! about why you shouldn't let common misconceptions about the SR&ED program stop you from getting your share
Fully 43% of this year's PROFIT 200 have obtained SR&ED refunds in the past five years, and many of them count on the program for credits amounting to more than $100,000 annually. Still, many Canadian entrepreneurs who know of the program and believe they qualify don't bother to file SR&ED claims. While a few would rather let sleeping taxmen lie, many find the application process too cumbersome, confusing and costly.
If you're in the latter camp, consider the following approaches of Canada's Fastest-Growing Companies — and SR&ED applicants. Their techniques maximize their SR&ED returns while minimizing the uncertainty, cost and administrative tedium of accessing this lucrative source of capital.
Get the right people for the job
Ng thought he knew SR&ED, having applied successfully at a past company. Still, he hired a consultant to help him through his first crack at SR&ED claims at NCI. The move paid off, as the consultant slashed a multitude of initiatives Ng believed were SR&ED-worthy to a much shorter list of projects that would pass CRA muster — saving NCI the significant effort involved in filing claims that wouldn't fly.