2011-Q1

Welcome to TSI's Q1 2011 newsletter, a quarterly publication distributed to our valued clients, strategic partners, and colleagues.  Highlights of this issue include:

Feature Article: Improving Your Cash Flow - The Basics of SR&ED Financing

• Learn about how companies with cash flow issues can leverage their SR&ED claims to quickly obtain financing

Company News: TSI on AM640 and Upcoming Financial Planning Seminar

• Financial planner Tom Terzis hosted TSI on AM640 for a discussion about SR&ED and other funding programs.  Stay tuned for news of an upcoming joint seminar.

Funding Program Profile: OIDMTC

• We present a profile of the Ontario Interactive Digital Media Tax Credit (OIDMTC) program designed to provide incentives to develop interactive digital media products such as training and educational systems as well as games

Industry News:

SMART funding renewal announced for existing applicants

• IRAP funding sharply reduced for 2011

Best regards,
Jason Schwandt, Vice President, Business Development

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FEATURE ARTICLE: Improving Your Cash Flow - The Basics of SR&ED Financing

The Federal Government’s Scientific Research & Experimental Developmental tax credit program, more commonly referred to as SR&ED, has been a boon to Canadian businesses whose developmental initiatives have enabled them to qualify for this lucrative incentive.  The program provides a tax credit or cash refund, and is important to businesses to further their developmental work, whether it be to create a new (or improve an existing) product, process or material.  Businesses whose SR&ED claims are approved and who are entitled to a refund, however, face one major challenge - waiting anywhere from several months up to a year after their claim is filed before they are actually in receipt of the funds.

This delay can impact available cash flow for many businesses which would benefit greatly by having these funds available to them sooner rather than later.  For these businesses, SR&ED financing can be a valuable option to inject a virtually immediate infusion of working capital into R&D or other activities, by enabling the monetization of a filed SR&ED claim.  Here’s how SR&ED financing works.
To apply for SR&ED financing, which is typically available through specialized market lenders and some banks, you’ll need:

1. An eligible SR&ED project that stands a good chance of success, preferably prepared by a third party consultant.
2. A track record of one to two years of successful SR&ED claims, although exceptions may be made for first-time filers under certain circumstances.
3. Financial statements and tax returns for the previous year.
Assuming the business’ loan application and SR&ED claim are in order, the approval process and receipt of the funds generally takes from 2 – 4 weeks and, in certain conditions, can even deliver financing prior to the formal filing of the SR&ED claim with the CRA.

How much can you expect to receive through the SR&ED financing process?  Businesses typically apply for 50-70% of the total SR&ED claim amount, with the remainder held in reserve by the lender.  For example, a $100,000 claim can provide up to $70,000 in working capital using the traditional financing model.  For many businesses, this injection of cash enables them to conduct additional developmental projects or expand more rapidly in other areas of their business which can most benefit in the short-term.

Despite the obvious benefit that some businesses could achieve through SR&ED financing, this form of support is often overlooked by many eligible business owners.  In many cases, businesses are simply not aware that SR&ED financing is available or are unsure how to secure a SR&ED loan.  Yet monetizing a SR&ED claim now, instead of waiting several months for a cheque from the government, can be a great option for many organizations.

How much will SR&ED financing cost you?  Rates vary, based on a number of criteria specific to each SR&ED lender, and generally range from 1.5% to 3% for each 30-day period.  A typical financing term is 4-6 months, during which time the majority of approved SR&ED claims are paid by the CRA, although loans can be obtained for a minimum period of 60 days and do not generally exceed 1 year.  In addition to the financing fees, businesses must also be prepared to pay legal fees of approximately $500 and 3rd party SR&ED reviewer fees, which most lenders use to confirm the validity and value of the SR&ED claim, which can range from $1,500 to $2,500.
Part of the lending process includes assigning the SR&ED refund to the lender.  While the SR&ED claim is in process, loan payments are generally waived, and financing fees are deducted by the lender from the reserve amount once the claim is approved by the CRA and the refund is issued.  Businesses should note that, regardless of the outcome of the SR&ED claim, all principal, fees and interest for the SR&ED loan must be repaid.

While a business could technically prepare and file a SR&ED claim on its own, it is generally recommended by financing companies to work with an experienced and reputable SR&ED consultant with a proven track record. The right consultant can help to remove uncertainty from the process, relieve pressure on internal resources, and help accelerate the preparation of the claim.
COMPANY NEWS

On February 27, TSI participated in a radio show hosted by Tom Terzis, Financial Consultant with Investment Planning Counsel, on AM640.  Topics discussed included a background about the various government grant/loan/tax credit programs available, how to ensure you are tracking time and documentation correctly for a successful SR&ED claim, how to select the right consulting partner, and more.  For an MP3 copy of the program, please contact TSI.

TSI will be planning a joint seminar with Tom in upcoming months that will combine sessions on various government funding programs as well as strategic tips for personal investment planning.  Check TSI's web site for details over the next several weeks.
FUNDING PROGRAM PROFILE: ONTARIO INTERACTIVE DIGITAL MEDIA TAX CREDIT (OIDMTC)

Each quarter we profile a new funding program.  This quarter, we present a summarized profile of the OIDMTC program.

Description:
• If you have developed an interactive digital media product in the past, or are considering developing one in the future, consider this program as a method to recover some of the labour, contractor, and marketing/distribution costs associated with development.  Ideal candidates for the program include, but are not limited to, games, educational software, and training systems.  Although the program is a tax credit program, it is refundable in certain circumstances, meaning you can receive the credit back in the form of a cash refund.

Eligibility Requirements:
• The product is a digital and interactive product that was developed primarily in Ontario by the applicant
• The product’s primary purpose is to educate, inform, or entertain, and it achieves that purpose by presenting information in the form of at least two of text, sound, or images
• The product is not primarily used for interpersonal communication, or used to promote or sell the products/services of the applicant
• The product must be either developed by the applicant for sale to arms-length parties, or be developed by the applicant under a fee-for-service arrangement between the applicant and an arm’s length purchaser corporation for sale/license to an arm’s length third party.

Valuation:
• Depending on the date of completion of the product, recovery rates can be as high as 40% of labour, contractor, and marketing/distribution costs.
Submission requirements:
• A completed application form, project plan, costing summary, financial statements, and a copy of the final product media are needed.
Application Acceptance Criteria:
• The program is non-competitive, with acceptance based on meeting project criteria
For more information about the OIDMTC program or other funding programs, please contact TSI.

INDUSTRY NEWS

SMART FUNDING RENEWAL ANNOUNCED
On February 22, 2011, the SMART program (which provides up to $50K in grant funding for productivity improvements to Ontario manufacturers), announced $4.2M of new funding that can fund up to 90 projects.  This funding will help support a portion of the more than 450 applications that were received prior to Dec 1, 2010 but were awaiting funding availability.  No new applications are being accepted at this time, although it is anticipated that the program will renew funding again later in 2011 pending federal budget and/or election announcements.

IRAP FUNDING DIMINISHED FOR 2011
Although not publically announced, recent contact with IRAP technology advisors has suggested that funding for the IRAP program (including the IRAP Small Project Accelerated Review and Youth Employment Strategy programs) for 2011 has been sharply reduced by up to two orders of magnitude.   Funding from the federal stimulus package which had infused the program in 2010 has been largely exhausted, limiting the program to supporting a very small pool of companies in 2011. Applicants interested in these programs are cautioned to check with their regional technology advisors prior to application submission.  It is anticipated that the program will increase funding again in the future pending federal budget announcements.

CONTACT US

For more information about any of the content in this newsletter, or to arrange a complimentary consultation, please contact Jason Schwandt, VP Business Development, at 905-738-6770 x2010 or via [email protected].