Don’t Let Your Next Fundraise Cost You Millions in SR&ED Benefits
Originally published by Boast, this article summarizes our webinar on protecting non-dilutive funding during capital raises. It is republished here with permission and includes additional commentary from Smythe LLP.
When Canadian tech companies raise capital, they’re often so focused on term sheets and valuations that they overlook a critical question: What will this fundraise cost us in SR&ED benefits?
We partnered with Boast and hosted a webinar exploring this exact challenge. The message was clear: With Canada’s enhanced SR&ED program set to start offering up to $6M* in refundable credits annually, the importance of understanding the impact to your CCPC status as part of your overall fundraising strategy has never been higher.
With Budget 2025, the federal government has proposed to further expand the SR&ED program, increasing the annual expenditure limit eligible for the enhanced credit from $4.5 million (as previously announced) to $6 million.
The $530K Mistake You Can’t Afford to Make
Here’s a sobering statistic from the webinar: Companies routinely lose $200K-$2M annually in non-dilutive funding due to poor capital planning around SR&ED eligibility.
The math is straightforward but brutal. When you lose CCPC status:
- Federal tax credit rates drop from 35% to 15% and become non-refundable
- Various provincial tax credits also decrease and / or become non-refundable
- On $1M in R&D spending, that’s a $530K difference, equivalent to 8-10 months of runway
As Smythe Partner, Camellia Ho, emphasized during the session:
“These aren’t just one-time losses. The compounding effect over multiple years can fundamentally alter your growth trajectory and fundraising strategy.”
Understanding What Triggers CCPC Loss
The webinar covered four common scenarios where companies inadvertently lose their CCPC status:
Case 1: Series A Board Structure A company raised $5M from a U.S. lead investor. The board seat provisions triggered non-resident control, resulting in $800K in lost annual SR&ED benefits. The fix? Pre-closing CCPC analysis and alternative board structures.
Case 2: Founder Tax Residency Change When a key founder relocated and triggered a change in tax residency without proper planning, the company lost CCPC status retroactively, creating both immediate cash flow issues and historical compliance concerns.
Case 3: Share Purchase Agreement Oversight Signing an SPA giving non-residents the legal right to purchase control of the company led to an unexpected CCPC status loss mid-year, creating complex partial-year calculations and unexpected tax bills.
Case 4: Aggressive Claims During Due Diligence A company claiming SR&ED benefits based on an aggressive CCPC position faced serious scrutiny during acquisition due diligence, nearly derailing the transaction.
The pattern? The best decision-making uses a holistic approach. You should consider both the impact on tax credits and your long-term goals.
These decisions often come with a hidden cost. When refundable SR&ED credits disappear, your runway shrinks, and every dollar of lost support has to be replaced with investor capital. That capital rarely comes cheap. Whether through interest or dilution, the real cost is time and control, two things founders can’t afford to lose.
The Future of the SR&ED Program
Canada’s proposed 2025 SR&ED enhancements make protecting your eligibility even more critical:
- Enhanced credit limit increased from $3M to $4.5M
- Capital expenditures are back in the program
- Canadian public companies now have refundable eligibility
- Higher phase-out thresholds for growing companies
As Mat Rutishauser from Boast explained during the webinar:
“These enhancements make Canada significantly more competitive globally. SR&ED benefits can now represent 30-50% of your R&D budget – potentially worth more than the equity you’re giving up in your fundraising round.”
Your Three-Phase Protection Strategy
The webinar outlined a clear framework for protecting your SR&ED benefits:
Next 30 Days
- Review current structure with advisors
- Model SR&ED impact of planned raises
Before your Next Raise
- Integrate SR&Ed into fundraising strategy
- Educate fundraising team on implications
- Involve finance & tax advisors proactively
Common Questions From the Webinar
Our live Q&A session covered numerous practical scenarios. Here are some highlights:
Q: Can CCPC status be restored after it’s lost?
Yes, but not retroactively. A non-CCPC can become a CCPC, but you can’t replace the time you’ve lost. Additionally, every time a Canadian company changes status from CCPC or non-CCPC or vice versa, it has a deemed tax year end, triggering an additional tax return filing.
Q: How do employee stock option pools affect control calculations?
For CCPC status, the definition of control considers a person’s right to acquire control. This means that unexercised options in the hands of non-residents can impact CCPC status.
Q: What about convertible instruments – when do they count for control?
Similar to the above, if a non-resident holds debt that converts into voting shares, this can impact CCPC status, even prior to conversion.
Watch the full Q&A session for detailed answers to these questions and many more
The Bottom Line
As the webinar concluded: Planning costs < Mistake costs.
But we’re not saying you should preserve refundable SR&ED at all costs. There are legitimate reasons to move beyond it, expanding internationally, preparing for acquisition, and simplifying ownership. Just make that choice with eyes wide open. Understand what you’re giving up, what you’ll need to replace it with, and whether that trade truly serves your long-term strategy.
With Canada’s enhanced SR&ED program offering unprecedented benefits to innovative companies, protecting your eligibility during fundraising isn’t just good tax planning: It’s fundamental growth strategy.
The most expensive mistake you can make is learning about CCPC status requirements after you’ve closed your funding round.
Watch the Full Recording
This recap covers the highlights, but the full 60-minute webinar includes:
- Detailed case study walkthroughs with specific scenarios
- Technical documentation best practices
- Extended Q&A addressing specific company situations
- Practical templates and frameworks you can implement immediately
Ready to Protect Your SR&ED Benefits?
Our tax advisors at Smythe can help you protect and optimize your SR&ED claims. We also collaborate with trusted SR&ED specialists to provide complimentary eligibility assessments. Reach out to learn more.
