Small Business

The Credit You Deserve

How PROFIT 200 firms tap Ottawa's R&D tax-credit program for millions of dollars each year

Written by Deborah Aarts

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.

Jamie Opalchuk, CEO of Burlington, Ont.-based online marketing agency Opie Marketing Group Inc. (No. 130), went the consultant route because he recognized gaps in his own firm’s ability to understand the often complex SR&ED application process. “I know our consultants make sure we’re following the rules of engagement with the government,” he says.

But Opalchuk has learned that not all SR&ED consultants are created equally. Having found one supplier whose work has helped to deliver returns sufficient to save jobs that were going to be offshored to India, Opalchuk believes that diligence before hiring is crucial. He recommends asking for examples of successful claims the consultant has filed on behalf of other companies in your industry, complete with contact information. He also suggests you look for evidence the consultant will get to know your business, which helps the advisor make the most viable claims in the most efficient manner.

Document it all

PROFIT 200 CEOs say accurate and continual documentation of R&D efforts dramatically reduces any headaches associated with SR&ED filings. Claims can be submitted only with your annual tax return and, as any tax slouch can tell you, rounding up minute details of hours worked and equipment used months after the fact is a mug’s game.

Toronto-based IT and engineering staffing firm Tundra Technical Solutions (No. 116) digitized its documentation process to increase the accuracy of its SR&ED claims. The company uses software that helps employees and contractors to log the time they devote to SR&ED-eligible projects, plus other important details. Getting the right data is so important that Tundra gives staff a cash incentive to make SR&ED-related entries weekly. “Come the end of the year, it’s very easy, quick and clean,” says president Jonathan Prothero. “If there are any questions, I have a week-to-week document that tells me exactly what we did that classifies as a SR&ED claim.”

At Toronto-based medical imaging firm Claron Technology Inc. (No. 191), meticulous documentation eased the pain of two SR&ED audits the CRA performed on the firm. “An audit is an audit, so it’s never fun, but we found them very fair in both cases,” says co-CEO Claudio Gatti. “The auditors were able to see all the evidence. They could check all our files. That made it very smooth.”

Spend it wisely

Colligo Networks Inc. (No. 160) could be the poster child for SR&ED savviness. The Vancouver-based content-management software developer, which has filed SR&ED claims since its launch in 2000, not only educates all employees on the value of the program and the importance of proper documentation but has hired finance staff with SR&ED experience to prepare applications in-house.

What’s more, Colligo’s policy is to plow SR&ED refunds into more R&D activities and resources. Over the past decade, the 27-person firm has even hired several full-time engineers with SR&ED monies, which, says president and CEO Barry Jinks, “has allowed us to grow much faster.”

If you’re educated about the program and able to manage the work it entails in an organized fashion, Jinks sees no reason any eligible company should not apply. “The government is providing an incentive to companies to hire more staff and do more innovative work,” he reasons. “I don’t know why you wouldn’t want to take advantage of that.”

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