R&D tax credit revamp a 'step in the right direction' : Ian Harvey, Backbone Magazine
February 19, 2010

Five years ago, Alex Berlin’s networking company Afore Solutions in Ottawa employed 15 people and was struggling to grow its research and development program.

“We were growing organically and with no venture capital financing,” Berlin said. “We needed a way to fund our R&D and pay the bills.” While the Scientific Research and Experimental Development Tax Incentive program (SR&ED, pronounced “shred” in the vernacular) offered tax credits and refunds, money was issued only once a year and even after applying it still took several months to see any dollars, Berlin added.

R&D tax credit revamp a “step in the right direction”

“Credits or refunds are great if you’re making money,” he said. “In the meantime, you still have to pay the bills to keep the company going and pay for the research.”

Berlin had a relationship with RBC’s Technology Banking arm, a unit set up to work with start-ups. That led to Export Development Canada (EDC) and in 2005 Afore became the guinea pig in a pilot program that linked future exports to much-needed cash flow. EDC would underwrite loans because Afore would qualify for future SR&ED refunds. This satisfied the bank’s risk parameters, put money into the hands of the business immediately and drove exports, which fulfilled EDC’s mandate.

This EDC guarantee is now a full-fledged program and has helped Berlin grow his company to 50 people with offices in Canada, the U.S. and Europe: “SR&ED was a major factor in our growth.”

Work in progress
Even with recent improvements, SR&ED could use more tweaking, according to the Canadian Advanced Technology Alliance (CATAAlliance). It wants a way to carry forward credits and to sell them, thereby generating immediate revenues. It also wants changes to the rules governing the way private and public corporations are treated, and is asking that associated companies, such as subsidiaries, be treated as separate entities.

Overall, though, things are looking up. Until recently the administrative gauntlet was the biggest challenge and that scared off a lot of businesses, said Russ Roberts, CATAAlliance vice-president, tax and finance, a SR&ED advisor formerly with Deloitte & Touche. The government has since added $10 million to the administration budget while aligning Canada Revenue Agency (CRA) policies and streamlining the process. It’s an important “step in the right direction,” he said, but added what often isn’t clear with SR&ED are the shifting sands at the CRA, where focus and definitions change, as do the parameters of qualified R&D.

Persevere, however, and the rewards are substantial. Vicky Brouillard, a sector advisor at EDC, said the fund will also now underwrite up to 90 per cent of a loan of less than $500,000 and up to 75 per cent of a figure $500,000 to $10 million.

“So far we’ve closed 30 files,” she said, noting the EDC program works with those qualified for refunds, not tax credits. “This is not a subsidy: we’re looking for companies with solid business plans.”

$4 billion handed out in 2008
The Scientific Research and Experimental Development Tax Incentive (SR&ED) program is the largest single program driving industrial research and natural science in Canada. It saw $4 billion distributed to 18,000 companies in 2008, though computer and related equipment makers are the biggest users of the program, along with transportation and chemical makers.

To qualify, an enterprise must be a revenue-producing Canadian-controlled private corporation (CCPC). It can earn an investment tax credit (ITC) of 35 per cent, up to the first $3 million of qualified expenditures for SR&ED in Canada, and 20 per cent on any excess amount. Other Canadian corporations, proprietorships, partnerships and trusts can earn an ITC of 20 per cent of qualified expenditures for SR&ED carried out in Canada.

For the EDC guarantee, sector advisor Vicky Brouillard said companies must have two years’ minimum positive claims and collection with SR&EDs. They must also meet minimum export sales thresholds and the R&D in question must be linked to export.

The key to hooking a SR&ED is to have good documentation before initiating a tax credit claim, said CATAAlliance’s Russ Roberts. “If you don’t have good documentation, the cost of defending the claim can exceed the value of the credits themselves.”