The Government Is All But Giving Away Money To Startups – And You’re Missing Out

Mike C. Evans, one of Emergex’s client managers based in our Toronto office, was asked for an interview by a journalist from Tech & Design. The article written provides an introduction to the government program of tax credits for SR&ED, as well as its challenges, especially for startups. Emergex is mentioned several times, especially for its ability to assist startups and other companies of all sizes in the claims process. Emergex also plays a role of education for startups, which by definition would be the first beneficiaries of SRED, but often do not know the program. Here’s an excerpt of this interview:

If you’re a startup developing experimental technology – and that’s most startups in Canada – the government wants to help you recoup a good chunk of the costs that come with cutting-edge R&D.

Administered by the Canada Revenue Agencythe Scientific Research & Experimental Development program (SR&ED) offers a tax credit for eligible R&D expenses. The program has no fixed budget, so all eligible claims are approved. Mike Evans, Client Manager for SR-ED consulting firm Emergex, says that in 2012 alone the program processed 25,000 claims worth $3.6 billion in tax credits.

“The government is helping innovation in Canada by reimbursing some of the R&D investments that these companies have made,” says Evans. “SR&ED has been around for 25 years and yet, believe it or not, you’d be amazed how many people don’t know about it, and worse, how many think they’re not eligible.”

Emergex, which has been in this business for 20 years, helps tech startups determine their eligibility for SR&ED claims, and as well to put together and file those claims.

There are two parts to a claim. The first contains a 1400-word technical narrative describing why the R&D in question is eligible. The second part consists in a financial data collection that must be carefully right-sized (neither too much nor too little) to make sure the dollars being claimed match and support what’s actually been done. Success means recouping about 68% (for Ontario) of eligible salaries and in some case bonuses. A rejection or mishandled claim could lead to an audit, which Emergex is also well-equipped to defend.

“The biggest mistake startups make is when they try to file a claim themselves,” says Evans. “It’s a skilled, complex, sophisticated process. It’s not like filling out a T1 for your income tax return and 20 minutes later it’s done.”

Both parts are challenging. The technical narrative may seem straightforward, but “it’s where most of the claims are denied,” Evans says. “It’s knowing how to describe the technology in a way that meets some basic criteria: did the company have to overcome any technological uncertainties? Were there obstacles that had to be overcome that couldn’t be fixed by off-the-shelf solutions?”

The next step is to determine the number of eligible hours, a process which can often stall the claim. “What we find is that, especially with the smaller companies, they’re busy building and selling their product, and they’re not always the best administrators and accountants. So when we ask them to extract and compile the numbers – in other words, the efforts invested in hours and how much they pay people – that can be a challenge because they have no records, or poor records.”

A big hurdle Emergex is working to overcome is the 42% of companies that could file for SR&ED just don’t (according to Canada Revenue Agency’s own statistics), for lack of knowledge.

“Just about anybody that is a startup could be eligible,” says Evans. “They’re innovators who believe they have an idea that’s new, or else they wouldn’t be doing it. So by definition that means they could be eligible for SR&ED, and I wouldn’t discourage anybody from giving us a call and inquiring.”

You can reach Mike Evans by e-mail at mevans@emergex.com or by phone at 905-849-3033 #645.

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Alain Déry - Micro-Accès

Alain Déry – Micro-Accès

For the past five years, Emergex has been in charge of preparing our R&D and multimedia claims. This way, we save time and it gives us peace of mind. As software developers, we don’t always know how to approach this kind of thing or how to present our R&D activities in order to meet the requirements of the program….