Get an advance against your SRED Tax Credit
Thanks to an innovative new use of EDC’s Export Guarantee Program, exporters now have the opportunity to receive an advance against their Scientific Research and Experimental Development (SRED) tax credits. Experts say that means exporters will be able to invest more money in critical research and development without sacrificing cash flow, particularly at a time when credit is increasingly hard to obtain. In the Winter 2009 ExportWise newsletter from EDC, Bruce Gillespie outlines how the Export Guarantee Program can be used to turn a SRED tax credit into cash.
In the past, many small- and medium-sized businesses were reluctant to apply for SRED tax credits because of the work involved and the time it took to receive the payout. “Companies often incurred a cost related to R&D months before they actually got the refund based on their investment since the waiting period is four to six months after the fiscal year end,” explains Vicky Brouillard, EDC Sector Advisor, Light Manufacturing. “For most Canadian companies, there is a federal rebate of 35 per cent in addition to add-ons that vary by province.”
So, four years ago, with that in mind, EDC started to work on a way to help exporters reduce that lag time and encourage investment in R&D. The result is an innovative application of the Export Guarantee Program that sees companies doing eligible work receive an advance against their SRED tax refund in a fraction of the time it normally takes.
Essentially, with a guarantee from EDC that reduces their risk exposure, banks agree to establish R&D operating facilities for companies doing work that is eligible for SRED tax credits. To qualify for an EDC guarantee, Brouillard says an exporter must have been involved with the SRED program for at least two years.
At that point, the company engages the services of an external consultant who provides an expert opinion as to whether their current work would qualify for SRED tax credits and how much of a refund they could expect to receive. Based on those findings, the bank advances the exporter a percentage of the costs that are deemed eligible, usually between 60 and 75 per cent.
“It’s a working capital solution that provides a kind of real-time R&D financing,” says Brouillard. “It’s a type of bridge financing until they receive that cheque from the government in 18 months.” She says the shorter wait time makes a big difference to exporters. “I’ve talked to some companies that say, ‘If I’m concerned about payroll, I might retract on the research I’m doing,’ so I think this will encourage companies to invest as they see fit in R&D and not hold back because of working capital restraints.”