SR&ED AUDITS: THE 10 STEP SURVIVAL GUIDE

If you file SR&ED claims, you know all too well that audits are now a common occurrence. In my early days as a SR&ED practitioner, defending claims chewed up a mere 15% of my billable time. In recent years that number has shot up to 40%.

Filing a claim that is defendable and will survive an audit has become a significant part of my job. Based on my experience, here are ten tips that will help you navigate a potential SR&ED audit.

Respond ASAP: Immediately acknowledge the Request for Information (RFI) letter by calling CRA. Estimate the timeline involved and the associated deliverables. Let CRA know if their standard 30-day response time interferes with a major release or busy period. They can usually extend the deadline for an additional 2 weeks.

Understand the Scope: Examine the RFI letter carefully to determine if the audit is a financial review, a technical review, or both? Does the letter hint at specific issues? If multiple SR&ED projects are filed, the review will usually be limited to just some of the projects. While most letters are “form letters” (particularly on the financial side) some letters from technical auditors are often specific to their domain. Note that most auditors do not know the reason you were selected — they were assigned your case by their manager via automated CRA screening.

Assign a Project Manager: Treat the SR&ED audit as you would any other company project. Map out the deliverables, scope, timeline, and budget. Assign the task to a Project Manager – that person will lead the project and manage any additional contributors. As with other projects, your internal bandwidth and resources will depend on the business case of the claim and the dollars at stake. You may consider hiring an external consultant. Either way, I’ve seen the best results come from clients who assigned someone to support the audit as a “project”.

Present Your Case Logically & Concisely: Your response should address each requested item directly. Since the review can be quite voluminous, it’s best to organize all responses accordingly, using indexed binders or an organized file/folder system referencing each question specifically. Considering that your auditor may be reviewing 20 different cases at any one time, it’s in your best interest to make the process easy for them – essentially helping them help you. Presenting the initial RFI package correctly also helps CRA hone in on potential issues for further (on-site) investigation.

Quantity and Quality: When presenting your technical materials do not expect that providing technical specs, a white paper or a design document will suffice. Nor should you expect that overloading CRA with technical documentation is going to win them over. SR&ED is about the HOW, not the WHAT. The key is to focus on specific pieces of evidence that highlight technological uncertainty and experimental work performed — NOT specs of the final product, marketing or sales collateral. You need to show this “smoking gun”, emphasizing your strongest pieces of evidence. It’s good practice to correlate all data directly to the specific technological uncertainties and work performed that were originally presented in your claim.

Prepare: The next step is usually an on-site review by CRA where you meet the reviewers and discuss the merits of the project. It’s important that any individual directly involved in the project is present. Do you know what SR&ED really is? Do you believe the work is SR&ED eligible? Everyone involved should understand what SR&ED work is or isn’t. Have all your documentation and evidence organized so you can demonstrate and communicate the SR&ED work efficiently.

Find Your Star Witnesses: The review is primarily about communication, so you need to decide which one of your team members can communicate your position most effectively. If your CTO is more of a high-level, business minded individual, you may want to rely on the project’s R&D lead instead. In my experience, the CEO is usually not the best person in reviews. Find the hands-on “doers” who can communicate your SR&ED position with the best technical fluency.

Know thy Customer: This classic commandment also holds true for CRA audits. Like all your important meetings, understanding your audience is key. Are they younger or older? What is their background? Do some research and tailor your presentation accordingly. For example, if I know a certain auditor is visually inclined, I will be prepared to whiteboard things out. If an auditor possesses a specific scientific background, I will use relevant analogies that help them understand the case in the most familiar terms. A quick pre-meeting call to CRA may reveal areas they want highlighted during the meeting. In general, treat CRA like you would your banker — keep it professional and productive.

Question Assumptions: If your auditor starts the meeting with certain assumptions such as “this is routine engineering”, ask them why they feel this is the case. Do they have examples to back up their beliefs? Make sure all your talking points and documentation are accessible. Never assume the positive audit experience you had a few years ago will be replicated. Do not even assume your auditor has read your claim. Each claim needs to stand on its own, with each auditor having their own way of interpreting and applying SR&ED policy.

Learn: Audits present the best opportunity to learn about eligible work, refine your SR&ED process and improve your documentation. Do not assume you are now “safe” in the near term, as CRA can audit you as many times as they want. If you were given formal written guidance to improve your documentation, you must comply in the future or risk denial of your claim.

For further reading, I would suggest CRA’s own Claim Review Manual. It outlines the process CRA should follow in taxpayer reviews. I hope these tips have provided you with helpful strategies on how to survive a SR&ED audit.

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Ryan Pernia is Partner at ENTAX Consulting and is based in Vancouver, BC. He is also the founder of SREDScore; which helps claimants to easily, securely and effectively write quality SR&ED reports. He can be found on twitter @getSRED.

FINANCIAL REPORTING DIAGNOSTIC

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The following are some diagnostic questions to gauge the quality of your financial reporting:

  1. On what basis are financial statements prepared?

Accrual basis accounting matches the revenues to the expenses incurred to generate the same revenues in order to provide a more accurate view of profitability, whereas cash basis accounting essentially mirrors the cash flows of the business as they occur, potentially distorting profitability and failing to account for future obligations. It’s better to use cash flow statements to understand cash flows than an income statement using the cash basis accounting method.

  1. How/when is revenue recognized?

When contracted? When paid? If revenues are subscription based, then they should be recognized over the life of the subscription period. Professional services are typically recognized using either percentage of completion or milestone completion method. In conjunction with the appropriate accrual accounting methodology, the revenue recognition policy should match the revenue earning cycle and take into account any contractual obligations for the “completion” of the sale and acceptance of the “purchase.”

  1. Are variable gross margins clearly (and accurately) segregated from fixed overheads?

Identifying and allocating all direct variable costs that are incurred in producing revenue is essential to understanding product or service profitability. Companies should be careful in delineating non-variable costs from gross margin metrics.

  1. Do you track the cost of customer acquisition, churn, and payback period?

Companies that are investing aggressively for growth need to have a good grasp of their unit economics to determine if growth is profitable, and if it is profitable, exactly how profitable it is. They should also be able to identify which revenue segments are more and less profitable, in order to optimize allocation of growth investments.

  1. Have all appropriate and likely expenses been accrued? How timely is the accounts payable recorded?

Not only do expenses need to be recorded accurately and in a timely fashion, businesses must also “accrue” for expenses that are known and likely, but not yet billed or realized. This can be through a general “catch-all” accrual, or a specific expense accrual. Knowing what expenses will be incurred in the future is critical to understanding the company’s financial position, and projected cash flow requirements.

  1. Have expenses been categorized and allocated well enough to understand total cost of customer acquisition, R&D vs. service delivery COGS, etc.?

Allocating salaries departmentally should be easy enough when one individual has a dedicated role, however in smaller companies certain individuals may wear multiple hats, and therefore allocation of time by function is important to get at a more accurate sense of functional costs. Another area where time tracking is critical is in situations where the company is claiming tax credits, as time sheet review often forms a key part of the tax credit claim review process. Equally important is ensuring appropriate expense classification around General & Administrative expenses – knowing which expenses are discretionary vs. not is helpful in managing business finances, particularly when cuts need to be made.

  1. Do you produce cash flow analysis and 12 month projection?

If a business is strong but has little or no cash in the bank, it is almost ALWAYS due to poor planning and financial management. Cash flow statements and projections are an essential part of the survival of a growth business.

  1. Do you dynamically adjust cash flow (and other) forecasts based on actual results and how often?

Projections get stale eventually and need to be revised regularly to reflect actual experience. This in turn leads to better planning in future cycles.

  1. Are you tracking performance by segment, be it by customer size, product version, pricing model, vertical market, geography, etc.?

Segmentation analysis can yield valuable insights, identifying opportunities for operational improvement and investment prioritization.

10.  Do you present reporting with comparison to prior periods?

In order to fully understand your financial position at the end of any given period, it is important to review it in the context of the change (or trends) in key metrics as compared to relevant prior periods.

11.  How long does it take to produce month end statements?

Timeliness is essential in the production of financial information as most monthly statements can have a “half-life” of two weeks or less. The longer it takes to produce, the less valuable this essential information becomes.

12.  Are non-cash items such as depreciation and amortization clearly delineated or understood?

Understanding what items are non-cash and corresponding balance sheet implications is critical in analyzing the cash that is generated (or consumed) by the business.

Blog Post by Enio Lazzer, BrightIron.

HOW TO GET GREATER INSIGHT ON YOUR REVENUE PERFORMANCE

In the never-ending quest to obtain greater insight into business performance, companies routinely spend considerable time and resources in identifying the key performance indicators (“KPIs”) for organizational health and performance. Best in class companies religiously track their KPIs, often creating dashboards and leveraging real-time reporting tools, in order to provide management with a real time view on how the business is performing and highlighting areas that need attention.

One such KPI is revenue performance. As a business owner, entrepreneur, or finance leader, being able to break down your revenue by product or service type, market segment, sales channel, geography, and whether revenue is coming from new or existing customers is invaluable information in helping understand business performance. Even entry level accounting packages can provide these insights, provided you do some upfront planning as to what type of revenue information you would like to report.

Typical Revenue Reporting

As an illustration, below is what many companies typically report as their revenue detail:

test figure 1

The reporting shows that revenue doubled, with subscription revenue growing 125% and other revenue flat. This level of information while appropriate for external and summarized reporting, provides very little information for internal management analysis. Additional revenue information must be obtained by other means and analysis.

Customized Revenue Reporting

In order to drive greater insight into revenue performance, you will need to customize your chart of accounts. The chart of accounts provides the structure for how information will be stored and reported from your accounting system and will impact the quality of information that you can obtain as your company grows over the years. Do it right, and you will capture meaningful data within your accounting system for monthly reporting. Do it wrong, and you will spend more time trying to compensate for the limited reporting data available in your accounting system by gathering data from other sources.

In the example below, the chart of accounts has been customized to report revenue by sales channel, product type, new vs. renewing customers and geography:

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Some additional insights from this level of revenue visibility based on this illustration:

  • Subscription revenue from new business grew from $800,000 to $1.35 million.
  • However, subscription revenue from renewing customers was only $450,000, which compared to prior sales, represents a renewal rate of 56%. Drilling deeper, the data indicates that renewal rates for online sales was only 25% vs. a renewal rate of 75% for inside sales, highlighting a serious issue that needs further investigation and resolution.
  • The fastest growing revenue segment was the inside sales team targeting the Canadian market, which grew by 400%. This performance disparity compared to the rest of the sales segments is worth investigating for potential insights and learning that can be applied across the rest of the inside sales organization.

Summary

Improved insight on revenue performance or most other financial KPIs can be achieved by customizing the chart of accounts in your accounting system. Setting up the right chart of accounts early in a company’s lifecycle allows KPI data to be captured and measured on a consistent basis month after month, providing a rich set of trended financial data to monitor the progress of the business.

About the Author

Wilson Lee has over 20 years of experience operating and scaling technology companies and is the founding partner of BrightIron www.brightiron.com. BrightIron was created to fill a void for founders and CEOs of growth technology companies by providing access to a team of seasoned C-level finance and sales executives, on a fractional, on-demand basis to help drive growth in enterprise value.

Wilson can be reached by email at wilson.lee@brightiron.com.

MONTHLY FINANCIAL REPORTING – DO YOUR STATEMENTS MAKE THE GRADE?

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As a very active lender to early stage and growing technology companies, we receive hundreds of loan applications every year. The quality of the financial reporting provided to us varies greatly, and unsurprisingly, correlates highly to the seniority and experience of the company’s lead finance executive. When we review loan applications, we are not only assessing the borrower’s financial and operational health, but also whether the company’s financial and operational reporting provides management with the insights necessary to make informed operational and investment decisions. Take the following illustrative example:

A company sells its software as an annual subscription priced at $100 and experiences 4% monthly churn, which equates to customer lifetime value of two years. Unless the company has good data on the total cost to serve, net revenue churn, total cost of customer acquisition and weighted average cost of capital, it is nearly impossible to tell if each incremental dollar invested in acquiring new customers is profitable or not. If the company is selling multiple products or selling into multiple customer segments with different revenue, margin, churn and customer acquisition cost dynamics, determining investment payback becomes even more challenging.

Based on the loan applications we review, the financial reporting of many post-revenue companies fails to make the grade. Far too often, companies supplement their monthly reporting with manually maintained Excel spreadsheets, which is not only error prone, but also an unnecessary duplication of effort that can usually be fixed for a relatively modest cost.

Fixing poor reporting is not rocket science, but it does require a reasonable level of finance and operational sophistication. If your budget does not allow for an experienced full-time CFO, consider engaging one on a fractional basis. Depending on your company’s needs, the cost can be nominal — as little as $60,000 per annum.

Poor quality financial and operational reporting (and the underlying business processes) can be real impediments to securing growth. We routinely refer clients and prospective clients to CFO resources, and I recently reviewed a dozen such referrals made during the past year. Of the dozen companies, nine companies adopted our recommendation with impressive payback – three quarters are already reporting material improvement in business performance (improved margins, reduced churn and improved cash flow), and half have secured incremental financing.

While there is no “one-size-fits-all” approach to preparing financial statements, there are some common elements that are universal, and understanding users’ needs and requirements is critical. Secondly, “cash is king” when it comes to early stage companies. The ability to fund growth, pay employees, creditors, and generally “keep the lights on” is paramount. We’ve prepared this list of diagnostic questions to help you assess the quality of your financial reporting, and if you’d like a professional opinion, one of the many fractional CFOs working with our portfolio companies would be pleased to provide a complementary, no-obligations review of your financial reporting package.

Blog post by Alkarim Jivraj, Managing Partner at Espresso Capital.

SR&ED AUDIT NIGHTMARE – A TRUE STORY

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A company with a ten-year track record of successful SR&ED tax credit claims and government audits suddenly finds its status as a Canadian Controlled Private Corporation (“CCPC”) revoked by the CRA, rendering the company ineligible to receive  SR&ED tax credit refunds.

The company was shocked: its corporate structure had not changed since inception and had been clearly disclosed to CRA in each of its tax returns.

So what happened? This time around, the CRA determined that the Canadian operating company was not a CCPC because it is indirectly, “simultaneously” controlled by a US parent company.  This was a surprising blow since the US parent is itself controlled by Canadians and the company did a tremendous amount of due diligence work from day one to ensure its structure complied with the CCPC status requirements.

At inception, the original Canadian investors wanted the operating company to have a US parent, presumably in order to better attract US investment and/or make it more attractive to future buyers. The company and its lead investors entrusted two large, reputable Canadian law firms to formulate a corporate structure that would meet the CRA’s definition of a CCPC. The lawyers agreed on a corporate structure with a US parent at its head controlled by Canadian shareholders and with a majority of Canadian directors. The US parent would have a wholly owned subsidiary in Canada that would hold a third wholly owned Canadian operating entity that would file the SR&ED claims.  This structure was reviewed by numerous CMAs, CAs and CPAs. All parties agreed the structure met the definition of a CCPC as specified by the Income Tax Act.

Unfortunately, after ten years of CRA reviews and audits, CRA suddenly viewed things differently and gave the company 30 days to comment. The company responded promptly with a letter of objection and is now waiting for a reply a month and a half later.  Management expects the appeal process to take anywhere from 9-12 months. The long back and forth process will no doubt weigh heavily on the company, even if it is ultimately vindicated.

The issue will hopefully be resolved in the company’s favour, but this story is a stark reminder that tax law is riddled with ambiguous “grey” areas, and that the CRA always reserves the right to change its mind each time a company undergoes an audit. More importantly, complicated corporate structures can increase the risk of a negative audit outcome, even if the structure has been conceived and vetted by the nation’s top legal and financial minds. Has your company’s CCPC status been called into question because of its corporate structure? If you have a cautionary tale to share, please contact us.

Blog post by Stephanie Andrew, Associate Partner at Espresso Capital.

SUCCEEDING UNDER THE NEW SR&ED REGIME

Do changes to the SR&ED program make it more difficult to obtain funding for industrial research and development? We take a look at the revised criteria and its potential impact on your tax credits.

In many of my conversations involving SR&ED tax credits, I get questions regarding the eligibility rules that have evolved over recent years. In my view, there has been no fundamental change to the eligibility criteria. The original criteria of technological uncertainty, experimental development and technological advancement remain central to eligibility.

However, part of the criteria underwent refinement in the December 2012 release of CRA’s consolidated policy document. This document introduced two distinct sets of tests for experimental development, and also reiterated CRA’s expectation for contemporaneous evidence in support of experimental work performed. This led to a “new” five-point evaluation criteria, enumerated below, and taken verbatim from the CRA document:

1. Was there a scientific or a technological uncertainty—an uncertainty that could not be removed by standard practice?

2. Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?

3. Was the adopted procedure consistent with the total discipline of the scientific method, including formulating, testing, and modifying the hypotheses?

4. Did the process result in a scientific or a technological advancement? 5. Was a record of the hypotheses tested and the results kept as the work progressed?

The tests implied by questions 2 and 3 are probably the most intimidating since most industrial R&D departments do not formally structure their experimental development with the formulation of a hypothesis. Such formalism exists primarily in research laboratories and academic research environments.

However, in our interviews with industrial R&D personnel we often discern fragments of information that can form the basis of a hypothesis. After all, a hypothesis is defined as: “A statement that explains or makes generalizations about a set of facts or principles, usually forming a basis for possible experiments to confirm its viability”. Many who engage in R&D work, intuitively begin with a set of assumptions that may pave the way towards resolving or understanding a problem. Thus, it is both possible and worthwhile to construct a formal hypothesis by intelligently dissecting the larger thought process.

Technical reports accompanying a claim should demonstrate the hypothesis guiding the experimental work. A good report will narrate the process in line with the sequence of activities imposed by the scientific method of; formulation, development, observation & testing. Each cycle should provide the feedback loop that informs the next formulation stage.With tests 2 and 3, the CRA is effectively attempting to exclude activities that lie outside of experimentation by scientific method. The intent is to exclude trial and error or successive iterations of a solution that are not guided by the scientific method. As an aside, it should be noted that for every formal hypothesis that is eliminated through the scientific method, the elimination of a hypothesis can be claimed as a technological advancement.

Test 5 is also relevant as it involves collecting evidence related to your hypothesis. Companies should treat the CRA as they would a client. Just as a client will not sign a check until all of a deliverable’s requirements are met, the CRA requires contemporaneous evidence before they “pay” the R&D expenditure.

Collecting all this relevant evidence without weighing down your development team with excessive record keeping can be a challenge. Here are some practices that require minimal time.

• Keep track of technological uncertainties and obstacles with emails to internal staff or documentation in project management tools. This is a simple way to establish a basic timeline;

• Since a timeline is insufficient for CRA purposes, support the above with other information records such as activity logs and time keeping;

• Leverage software development tools, from issue tracking to source version control; • In non-IT environments, chronicle prototype development with photo, video or data capture. This evidence tends to be well received by the CRA.

In conclusion, companies involved in eligible SR&ED activities should heed the evidentiary demands of the CRA. They should also formulate their R&D narratives to align with the structure expected by CRA. The SR&ED program remains a thriving and valuable source of funding, and no company should forgo their rightful claim due to an inadequate presentation of the facts.

Author: Kegham Redjebian, Eng.

Kegham is an engineer with over twenty years in software development industry experience and over seven years as a consultant in SR&ED and related technology development tax incentives

Copyright – MNP.

IRAP VS SR&ED?

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If your company conducts research and development, you most likely have or will consider a number of government funding and tax credit programs. How do you assess which program is right for you? How do you determine which program offers the greater expected return for your time and effort?

This article will compare two of the oldest and most popular federal programs: the Industrial Research Assistance Program (IRAP) and the Scientific Research & Experimental Development program (SR&ED).

IRAP is a federal program administered by the National Research Council that providesR&D grants to qualified innovative small and medium sized enterprises in Canada. The program has a limited budget (about $270 million in 2014/15) and receives hundreds of submissions annually, making it a very competitive funding option.

To apply you will need to submit a comprehensive business plan outlining your go to market plan as well as revenue and profit projections. IRAP evaluates these projections as part of their approval process. Subsequent to funding, IRAP will periodically measure your company’s progress relative to your projections, and will make recommendations as needed, occasionally mandating changes that you may not agree to.

For some companies, IRAP’s ‘hands on’ approach and influence in project management may be a welcome source of value add. In our experience, however, government officials do not make the best entrepreneurial coaches and mentors. We believe better strategic, commercial and operational advice can be found elsewhere.

The SR&ED program is administered by the Canada Revenue Agency (CRA) and offers tax credit for eligible R&D expenditures. The SR&ED program has no fixed budget, so every eligible claim is approved. In 2012, the program processed 25,000 claims worth approximately $3.6 billion in tax credits.

It’s worth noting that any IRAP funding will reduce your eligible expenditures for SR&ED claims. Additional differences between IRAP and SR&ED include:

  •  IRAP only considers applications for future R&D projects. SR&ED approves eligible expenses already incurred;
  • IRAP benefits are usually paid in instalments as you report on your project’s progress. SR&ED tax credits are approved in a lump sum after your year-end tax filing has been accepted by the CRA;
  • IRAP funding is restricted to companies with fewer than 500 employees. SR&ED has no limits on company size; and
  • SR&ED includes a broader category of expenses than IRAP.

Final Verdict:

We believe SR&ED is the better option for the majority of companies, delivering greater results both in financial return and time invested. Our advice, based on over a decade of experience, revolves around three key reasons:

  • SR&ED is not based on a prior selection process;
  • SR&ED is available to any company that qualifies; and
  • IRAP funding will be deducted from SR&ED claims.

Guest post by Mike Evans, Emergex SR&ED Subsidies Inc.

Emergex has become one of Canada’s most successful tax credit consulting practices over the past decade. Our professionals have degrees and experience in computer science, engineering and tax law. They specialize in software and information technology, along with other technology sectors. Because of our experience, professional credentials and reputation with the CRA, we enjoy an overall 98% claim approval rate. Mike Evans can be reached at +1 (416) 697-4110.

VENTURE CAPITAL DEBATE NEEDS TO GROW UP

Two recent articles, I’m Glad I Did Not Take VC Funding and Canada’s Tech Start-up Scene Needs ‘Aggressiveness and Boldness’, illustrate how the conversation on how to fund your business has become way too polarized. It’s a dialogue that deserves much greater nuance than a simple and binary, pro and con judgment. The decision to raise outside capital should encompass a multitude of factors including:

  • the founders’ growth aspirations;
  • the company’s funding needs relative to internal funding capacity; and
  • the willingness to give outsiders a voice in the company’s future direction.

In my view, the prominence venture capital commands in this conversation does everyone a disservice. Venture capital is generally attracted to a particular type of company. It seeks a very high return on investment, and is willing to tolerate great risk in pursuit of that aim. Not all companies will fit the bill, which is why institutional venture capital funded companies account for less than 5% of all technology businesses today.

How aggressively you choose to pursue growth is entirely your prerogative. Don’t be goaded by those who claim you are not “aggressive” or “bold” enough. While it’s perfectly okay for a venture capital fund to swing for the fences, the default expectation of failure is unpalatable for most entrepreneurs. In an economy with shrinking corporate employment, entrepreneurship is increasingly becoming an alternative source of livelihood for many. Seeking or obtaining venture capital should not be the default measure of success for all entrepreneurs.

Getting back to the funding debate. Most companies eventually seek outside funding of one type or another to support growth. Venture capital is one source, but there are many other options including friends, family, angels, strategic investors, government assistance, bank debt, venture debt, and in certain circumstances, going public.

All outside investors deserve a duty of care, and some may wish input into the future direction of your business. While having more people at the table increases the potential for dissenting perspectives, I believe the benefits outsiders bring to the table typically outweigh any potential loss of control.

As for venture capital (or other outside investors) being evil, keep in mind that positive outcomes get very little media attention. Just like you don’t see newspapers report on planes that land successfully, you are way more likely to hear about bad experiences than good ones.

SOLVE YOUR #1 PROBLEM AND HIRE RIGHT

Who

To help improve your hiring effectiveness, we’re giving away 200 hardcover copies of the bestselling classic Who: The A Method for Hiring by Geoff Smart and Randy Street.

The authors have advised CEOs and executive teams for over 15 years and the book’s research is based on 1,300 hours of interviews with more than 20 billionaires and 300 CEOs. The book offers simple steps for finding the right talent at the right time for the right job. You’ll learn how to navigate the four areas where hiring failure often occurs:

  • Lack of clarity on the job requirements;
  • Weak flow of suitable candidates;
  • Inability to identify the best candidate from a group of similar looking candidates; and
  • Inability to convince the desired candidate to join your firm.

The authors demonstrate how achieving success with their method depends on breaking bad habits they term “voodoo hiring”, and maintaining a laser focus to find “A” players using the “A Method.” The “A Method” is comprised of:

  • A hiring scorecard that sets out the outcomes and competencies of a job well done;
  • Strategies for sourcing suitable candidates;
  • How to gather the relevant facts needed to make an informed decision in accordance with the hiring scorecard; and
  • Advice on how to persuade suitable candidates to join your team.

The book is well written, and includes many anecdotes of the “A Method” in action. One of my favourites is an excerpt of an interview with a sales executive who was let go by a former employer for what the sales executive initially described as “philosophical disagreement.” By repeatedly asking the question “tell me more,” the interviewer discovers that the candidate was actually fired for insulting the CEO in front of the company’s board of directors. But the story does not end there. The interviewer’s continued probing reveals that upon hearing that he was being fired, the sales executive physically abused the CEO, resulting in termination for cause and the loss of $3 million in options!

At Espresso, we regularly hand out copies of Who to visiting customers and prospects – generally to rave reviews. One recent prospect (now a customer) read it cover to cover over a weekend and immediately ordered copies for her entire staff of 30!

Summer is a great time to sink your teeth into a great book and we stocked up on 200 copies of Who just for the occasion. To receive your complementary copy, please email Andrea Russell at andrea@archive.espressocapital.com with your full name, company name and mailing address. Be warned – she might attempt to extract explicit consent to add you to our electronic communication list (if you haven’t already consented).

Happy future hiring!

Kerri Henneberry is an expert in media finance strategy and partnerships. She works as a consultant for Espresso Capital. 

FIVE REASONS WHY USING SOURCE DEDUCTIONS TO FINANCE YOUR BUSINESS IS A VERY BAD IDEA

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Legal and ethical breach of trust

Employers are required to withhold deductions from employees’ wages to pay income tax, CPP/QPP and employment insurance premiums. The funds are deemed to be held in trust for Government of Canada. Abusing these funds is both a legal and ethical breach which may raise some eyebrows.  Breach this fundamental obligation, and you might cause your employees, shareholders, lenders and other stakeholders to question your commitment to meet other obligations.

Incur significant penalties and increases risk of a CRA audit

The penalties for late remittance of source deductions are punitive:

  • 3% if the amount is one to three days late;
  • 5% if it is four or five days late;
  • 7% if it is six or seven days late;
  • 10% if it is more than seven days late, or if no amount is remitted; and
  • 20% penalty if it happens more than once in a calendar year.

If your business is chosen for a full or partial audit, then your costs will escalate. Audits will also distract your finance and management team, consuming resources better applied to growing your business.

Finally, CRA will withhold any tax refunds including your SR&ED refunds until the audit is satisfactorily resolved, further crimping your cash flow.

Exposes directors to personal liability

In Canada, directors are personally liable for unpaid source deductions. In addition, an officer or another person who has control over the collection and remittance of source deductions is also personally liable. Not knowing that source deductions were being diverted does not get the directors off the hook because it is their duty to ensure that these deductions are being remitted to CRA on a timely basis. We prefer to invest in companies with bona fide outside directors because we know that no competent director would allow this conduct to manifest itself on their watch. It’s also worth noting the liability is not limited to the amount of the source deductions but also includes interest and penalties.

Reflects poorly on management’s judgement and acumen

Your CRA remittance history is one of the most important inputs in a lending decision. CRA delinquencies reveal a great deal about a company’s people, processes and financial health. Using source deductions as a source of bridge funding calls into question management’s cash forecasting ability. Repeatedly using source deductions as bridge financing is a sure sign that the business is severely undercapitalized.

Could put you out of business

CRA can garnish bank accounts, and can escalate its recourse to freezing or seizing your assets. Since CRA ranks ahead of your lenders and shareholders, a track record of remittance delinquency result in other funders deeming you too risky for continued support.

Conclusion

Avoid exposing your business to the consequences of not remitting source deductions. If you foresee a cash flow problem, it’s much better (and cheaper) to arrange for some type of bridge financing in advance than to use CRA to solve any funding gap.