Are you a tech start-up? Here’s how to minimize tax and maximize tax credits.

17 Jan 2017 12:59 PM | Editor (Administrator)


ACCOUNTANTS CENTRAL MEMBER: Raffael Mazze, right

Technology companies are thriving in the GTA. From Toronto's King Street West to Milton, there are new technology businesses sprouting all over. 

It takes one idea and talented, qualified entrepreneurs to see an idea through to becoming the next big App that everyone is talking about. At MP Accountants, we see first-hand the issues that tech companies face from accounting, finance and tax standpoints.

As they should be, entrepreneurs are focused on generating revenues and business development. Meanwhile, the accounting and tax considerations are put on the back burner until the business starts to grow and generate revenues. There are many things to track to ensure that you minimize taxes and maximize your tax credits:

1) Consider Incorporating

It may be great idea to incorporate your tech business early on and ensure that your intangible or tangible assets are held in the company. For tech companies, having a good corporate structure is needed when it's time to raise financing, especially when you have an Angel investor who may be interested in your venture.

It is also helpful to incorporate early on, to avoid having to transfer your assets held as a sole proprietor to the new corporation set up as a Section 85 rollover, to avoid triggering capital gains.

2) Loss Carry Forwards

Tracking your expenditures properly is important, as any business losses incurred for the taxation year can be carried forward to future years when the company starts becoming profitable. This is a great way to save taxes in the long run and ensure you can use the tax savings toward growing the business further.

3) Scientific Research and Experimental Development (SR&ED) Tax Incentive Credits

SR&ED tax credits represent a significant financial incentive for undertaking eligible activities and filing a corresponding SR&ED claim with the Canada Revenue Agency (CRA). The tax credits may be used to reduce your income tax liability with CRA or instead paid directly to your organization, subject to some restrictions.

For Canadian-controlled private corporations, the SR&ED tax credit is a refundable tax credit which means the company will receive a cheque from the government for the amount of the tax credit. Generally, expenditures that can be considered innovative and related to the research or enhancing the development of a product or processes can be claimed for the SR&ED credit.

4) Financial Modelling and Pitch Book

Before getting to the stage of raising capital via the Series A round, a tech company would need to create a presentation deck and financial models to support their business opportunity. A sound financial model is something that investors look for when considering investing in your tech company.

Essentially, there are 3 things that an investor will consider when investing: 1) the idea and business concept; 2) the management team and their competence; and the 3) the numbers.

For more information, contact Raffael Mazze at MP Group.

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We encourage owners and managers of small and medium businesses to better understand the use of numbers in business management, and encourage them to hire accountants as part time Chief Financial Officers, and as advisers on overall business management.


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