startup cfo + flow sred presentation 032409
DESCRIPTION
A presentation on the R & D tax credit program for Canadian technology companiesTRANSCRIPT
Montreal StartupTax Credit Workshop
March 24, 2009
Tax Credits for Startups
www.startupcfo.ca www.flowventures.com
AGENDA1. Part I:
Money Red Tape Pitfalls How the Government Sees It
2. Part II: Being Eligible Financial Strategies Bad Behaviours Good Behaviours
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An illustration
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The Facts…Raised $ 500KSpent $ 200K on “eligible salaries” $100K of salaries are for founders / specified
employees$ 40K of salaries for front end (not “eligible”)$20K subcontractors$ 10K capital expenditures$ 5K materials consumedNo IRAP or other grants
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Our filing strategy1st claim, so go for maximum (assuming real
advancement taking place)Claim SRED for everyone except front end
developerClaim proxy methodClaim E-biz tax credit for the front end guy
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The Maximum RefundSummary:
Bottom Line: Spent $225k, refunded $186,583 (68%)
$ out
Salaries 240,000$ Subcontractors 20,000$ Materials 5,000$ Capex 10,000$
275,000$
$ in
SRED (173,250)$
E-biz (13,333)$ (186,583)$
Net $ out 88,417$
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SREDFederal Quebec
Salaries
employees other than specif ied employees 100,000 100,000
specif ied employees 100,000 100,000
Costs of material consumed 5,000
Arm's length contracts 20,000 10,000
225,000 210,000
Capital expenditures 10,000
235,000 210,000
Proxy 113,750
Quebec credit for SR&ED (78,750)
Other government and non-government assistance
SR&ED expenditures for ITC purposes 270,000 210,000
ITCs refundable @ 37.5% (after April 21, 2005) 78,750
ITCs refundable @ 35% 94,500
Current expenditures 270,000 x 35 % =
Total ITCs calculated 94,500 78,750
173,250
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QC E-Biz Tax CreditE-biz credit: 1/3 salary up to $20K
$ 40K * 1/3 = $ 13.3K
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Red Tape
And lots of it…
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SRED: Project descriptionTechnical description
o Factual, non-salesy, jargon-free description of o Goals for your experimental development, applied
research, etc – what technological advancements were you trying to achieve?
o Obstacles you had to overcome to achieve those advancements?
o Work performed – “how” did you overcome…o Results: Advancements in technical knowledge,
functionality, etc (don’t need positive results in order to claim credits)
o Do these for each projectNew simplified T661
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SRED: Forms to fill outFederalT2 (Federal Income tax return for
corporations)T 661 – Claim for SRED, with SchedulesSchedule 31 – Investment Tax Credits
QuebecCO-17 (Quebec tax return)RD-222V (SRED claim)RD-1029.7-V (tax credit on salaries)
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SRED: Back-up documentation
Technical: Project descriptions and plansTimeline and/or timesheetsTest results, QA logs, source codeDetailed records of problems encountered
(should be compiled throughout the year)Financial
Detailed records of money spent (in Canada) on salaries, subcontractors, materials, capital equipment and eligible support expenses
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Timeline….CRA service standard:
120 days from filing to refund
Reality:Filed - Month 1Selected for an audit – 4 months laterFinancial audit – - 2 months laterTechnical audit – sameAsked for backupWrite new report – 2 months later9 months from filing: Still waiting…
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Tax Credit TimelineYour fiscal year
Jan Dec Mar
Do your taxes
Document R&D Prepare claim
Apr Jul
Wait… Audit $$
Sep
21 Months
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QC E-Biz Tax CreditAnnual application for eligibility
CorporateEmployees
Includes:Financial statementsOrg chart & job descriptionsBreakdown of revenues
Timing: TBD
You can’t double dip!
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Pitfalls
Why you might not get the refund you deserve
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Basic SRED Eligibilitysystematic investigation or search carried out in a field of science or technology by means of experiment or analysis . . . to advance scientific knowledge or to achieve technological
advancement
Experimental development to achieve technological advancement to create new materials, devices, products, or processes, or improve existing ones;
applied research to advance scientific knowledge with a specific practical application in view;
basic research to advance scientific knowledge without a specific practical application in view; and
support work in engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, etc that directly supports, the eligible experimental development, or applied or basic research.
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SRED in Real Life
You have to have legitimate R&D according to their rules
You have to speak their languageYes, there is a grey area
What you didWhat auditors
understand
Your SREDclaim
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SRED is Getting TougherYour claim is competing with all other claims
they’ve seen (now and in the past)Standard for “innovation” – Could you present
your R&D at a conference of industry peers?What did you learn (that wasn’t obvious)?Can you describe (in detail) the activities you
did to support your R&D? Do they make sense?
Auditors are starting to reject claims or offer only 50%
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SRED: What you can doHave excellent backup documentationWrite the claim throughout the year, not at
year-endBe very careful with how the claim is
writtenBe prepared for an auditDon’t be too greedyDo not have amounts you owe to the gov’t
(e.g. GST/QST)
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QC E-Biz Tax Credit75% of revenues have to be in an eligible
industry:Computer Systems Design and Related Services
(NAICS 541510)Software Publishers (NAICS 511210)Data Processing, Hosting and Related Services
(NAICS 51821)You have to re-apply each year
This is a new program so expect the unexpected
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The Government’s View
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What the gov’t cares aboutJob creation is the #1 priorityThey care that your projects “fit” not that
they’re “good”Once your file is on their desk their priority
is to get it OFF their desk
They want to give you the money
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Who are these people?Technical auditors (CRA)Fiscal reviewers (CRA, Revenu Quebec)Investissement Quebec
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Being Eligible
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Good SRED ProjectsAdvancements from an established baseline:
Applying new linguistic research into software that improves search results
Creating a new architecture that solves security & synch problems in AJAX
Creating a faster, smaller runtime environment for interpreted applications on mobile device
We took the current state of technology (X) and advanced it (Y) by doing (Z)
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Bad SRED ProjectsBuilding features, doing “routine”
developmentI built a content management systemWe fixed bugs and improved the speed of our
Web siteTwitter doesn’t work on my TV remote, so I
built an appWe made our application multi-lingual
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How bad projects can become good
Bad GoodWe built a Twitter client for my TV remote
We discovered a method for bi-directional communication via infrared to allow remote control devices to communicate with Web services via the Internet
We implemented Soundex to improve search results
We improved the efficacy of Soundex by extending it to include semantically similar concepts
We built a MMORPG We solved a major problem in distributed computing by creating a new predictive algorithm for minimizing out-of-synch errors among clients
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SRED Eligibility: Bottom LineNothing qualifies “automatically”,
everything has to be documented and defended
Auditor subjectivity plays a big role (unfortunately)
The rules change
Monthly internal R&D audits ensure you don’t forget what you did which = better backup and bigger claims
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Financial EligibilitySpecified vs Regular employeesCdn (eligible) vs foreign contractors
(ineligible)Only one person can claim (i.e. you or your
sub-contractor)Double-dipping: effect of other tax credits
on SREDWhat if I’m profitable? When do I love CCPC
status?
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Optimizing the financial result
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Optimizing your claim…How aggressive should you be?
Early years – claim 100% salaries (assuming all of those salaries are being spent on real advancements)
Later on – lower the % (because the work mix changes, less real ED)
Can shift staff from claiming as SRED to e-biz over time
Remember – the program is being strictly enforced (especially for web software)
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Optimizing your claim…(cont.)What records do I need?
See the list from our financial audit (above)Timesheets or loose time recordsADP, payroll registerSIN #s & addresses for all subcontractorsDescription of work with above credentials on
all subcontractor invoices
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Optimizing your claim… (cont.)Hiring vs. outsourcing?
Hiring Considerations:Pros:
Full time committed team memberAdvance skill set & capabilities of your companyShould be core to your bizFully eligible for SRED
Cons:More expensive (full time cost, benefits, severance,
computers, etc)Don’t hire in non-core areas
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Optimizing your claim… (cont.)Hiring vs. outsourcing?
Outsourcing Considerations:Pros:
Cheaper – pay only for what you need, when you need it
1/2 eligible for SREDCons:
Lose knowledge and skillsCan loose time coordinating
From a SRED perspective: Goal is to promote employment. Salaries 2x more eligible than subcontractor $.
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Optimizing your claim… (Cont).Financing your credits
Options to finance both filed & accrued creditsBank (RBC, Banque Nationale) with Investissement Qc
guaranteeSeveral private sources (RD Cap, Accorn, Stanley
Finance, Lawrence Group…)Finance up to 75% of filed. Lower % on accrued
(usually)All in cost – about 10% (interest & fees)Banks – focus on balance sheet, covenants,
historyPrivate – focus on claim quality. More flexible on
financial position
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Bad behaviours
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Bad behavioursHiring too many people / overspending /
high salaries:Don’t assume you will get the creditsDon’t forget it takes a long time to get your refundNever spend $1 just to get 60 – 75 cents in creditsHire based on clear, strategic need
Doing too much:This issue is way beyond tax creditsIn most markets winner takes all (or most)Best solution does not always winSpeed matters. Get into market as early as possible
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Good behaviours
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Good behavioursSRED encourages you to…
Have disciplined development practicesHave good documentation (Wiki, specs,
requirements etc)Understand where you need real R&D and
where you can be “good enough”SRED allows you to…
Invest in better qualityRewards people via SRED bonuses
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Links and resources
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http://www.cra-arc.gc.ca/sred/ (The Feds)http://www.revenu.gouv.qc.ca/eng/entreprise/impot/
societes/credits/rd/ (Quebec)http://irap-pari.nrc-cnrc.gc.ca/main_e.html(Grants)http://www.cra-arc.gc.ca/E/pub/tg/rc4472/rc4472-
e.html(program overview)http://www.cra-arc.gc.ca/E/pub/tg/t4088/README.html(guide to filling out the T661)http://www.investquebec.com/en/index.aspx?
page=1281
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THANK YOU!
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SRED: Financial documentation example
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SRED: Financial documentation example
Copyright © 2009 – StartupCFO Enterprises Inc., Flow Ventures