Is my SR&ED claim too small to finance?

Declined. A single small SR&ED claim is too small to borrow against. If your first claim is under $100k, prepare the next year's claim too and look at financing both together.

The situation

A Canadian tech company, a few years old, came to us to borrow against its SR&ED refund. It was the company's first claim.

Its fiscal year had just ended, but it was going back to file the prior year's claim first. That claim came to under $100k of refundable credit. The year that had just finished would have its own claim, but no one had prepared it yet, so its size was unknown.

This is a common path. A young company learns about SR&ED, goes back for the year it missed, and wants to put that refund to work.

How we looked at it

Three things stood out.

The loan would be too small. Our program advances 75% to 100% of the refundable credit. On a claim under $100k, the loan comes in under $100k even at the top of that range, and often well under it. We very rarely make a loan where the whole amount is under $100k.

Small amounts on their own aren't the problem. We're happy to advance $50k or less in a quarterly draw on an existing loan. That's one piece of a larger loan. Here, the entire loan would have been that small.

It was a first claim. CRA had never paid this company an SR&ED refund, so there was no history to lean on. We apply additional criteria to first-time filers, and one of them is a claim prepared by an experienced, top-tier claim preparer.

The second year couldn't count. We can only lend against a claim we can measure. The year that had just ended might have added meaningfully to the asset. With no claim prepared, it was a blank, so it played no part in our decision.

The decision

We declined.

Each of those points made the case harder. Together, they left a small loan against a single first claim, with nothing else we could count.

What would have changed it was how the claims were put together, not the company. If both years had been prepared and ready to file by a top-tier claim preparer, and together came to a substantive number, say above $150k, we would have considered the company for an SR&ED loan.

What to do instead

1. Before you file a small first claim on its own, check whether the next year can go with it. Each tax year has its own filing deadline. For corporations, the Canada Revenue Agency (CRA) SR&ED reporting deadline is generally 18 months after the tax year end. Confirm the dates for both years with your accountant or claim preparer.
2. Have both claims prepared by an experienced claim preparer. For a first-time filer, the quality of the claim is part of what a lender weighs. A well-built claim gives the lender something to rely on when there's no refund history.
3. Work out the loan, not just the claim. Add up the refundable credit across both years. Assume a lender advances less than all of it. If the result still clears $100k with room to spare, you're in a range a lender can work with.

Related reading

• Declined: an internally prepared SR&ED claim
• See what your SR&ED claim could support