Startups are a vital source of innovation, job creation and economic growth in Canada. But this growth is only as strong as our collective ability to support it. While Canada has a flourishing startup community, accounting for over 60% of new job creation in the country, only about 50% of new businesses survive beyond their first five years, with many struggling to manage cash flow.
Fortunately, there are many federal and provincial tax credits, grants and incentives available to companies to help them overcome these challenges. However, very few founders have firsthand experience navigating the system to optimize, or even just identify the various funding opportunities available.
By rethinking their approach to R&D tax credits and other incentives, startups can free up cash for innovation which, in turn, translates to more meaningful solutions, products and services that help to propel Canada into the future innovation economy. Here we present some leading considerations for businesses to obtain the capital they need to secure long-term growth.
Think strategically with SR&ED
Managing cash flow is challenging for a growing business. If you’re investing in R&D, you may be able to offset some of those costs by claiming the Scientific Research & Experimental Development (SR&ED) tax credit. SR&ED is Canada’s flagship R&D tax credit program, providing over $3b of funding to Canadian businesses each year.
Most companies only leverage SR&ED annually, but in many cases you may be able to use SR&ED financing as capital on demand to obtain the growth capital you need to reinvest in the business at any point during the year. Funds can be available in as little as two weeks after applying. And, in some scenarios, interest only accrues on withdrawals, enabling optimized cash flows while reducing the cost of borrowing. This allows claimants to manage the timing of their SR&ED refund, decoupling it from the CRA’s annual review processes.
Technology tools are also now available to help automate some of the SR&ED process, ensure project details are collected throughout the full year, and dramatically simplify the review process.
Making the most of your incentives
SR&ED is often the anchor of a good incentives strategy, but there are many other non-dilutive sources of funding you should consider. Like any new funding, it takes an investment of time and effort to secure those incentives, but typically much less effort than you put into securing an equivalent equity investment or new customer. To make SR&ED and grants an integral part of growing your business, consider the following points:
Extend your runway
Early-stage companies can delay equity dilution by taking advantage of government incentives. This allows them to extend their financial runway and increase valuations before seeking additional capital.
Secure more grants
Many of the best government grants are focused on startups, specifically on technology development, job creation, manufacturing, and market expansion. However, like any good partner, governments have their own criteria to determine whether they want to do business with you. Invest in this process the same way you would commit time and effort to a new investor or customer.
Do it right the first time
The federal and provincial governments are important partners in funding innovation, and they expect a reasonable level of tracking and accountability for those publicly funded programs. Use modern SR&ED technology tools and trusted advisors to build your claim throughout the year and assist in supporting it in a detailed review.
Reinvest in R&D
Use SR&ED and other incentives to fund additional research and development that might otherwise be out of reach. This can lead to accelerated project timelines, giving your company a competitive edge in the eyes of customers and investors.
Investors look for companies that can amplify their investments through non-dilutive sources of funding. Understanding federal and provincial funding opportunities can empower startups to identify and tap into legislative and discretionary sources of government funding to fuel their innovation programs. Working with a group whose comprehensive approach enables practitioners to provide integrated support across a broad spectrum of areas, from compliance and assurance to tax advisory services, would bring expansive skills to that mix.
About the authors
Matt Pearson and Dharmesh Gandhi help lead a national team dedicated to guiding companies from all sectors in using government grants and tax incentives to help accelerate their investments in R&D and business expansion. You can find out more here.
