The Rise of SaaS

Canadian SaaS companies are having their moment. L-Spark’s recently released annual report revealed that capital invested in Canadian SaaS companies increased by 213% between 2018 and 2019. That means $5.13 billion was invested this past year alone. What’s more, where users are concerned, a survey of almost 2,000 companies conducted by BetterCloud revealed that 75% of small and medium sized businesses (SMBs) and 69% of small to medium sized enterprises (SMEs) expect nearly all their applications to be SaaS by 2020. Think Slack, Mailchimp, Microsoft, and Atlassian. And it’s not just businesses that are selling and using the Cloud; in 2017, the Government of Canada announced its own Cloud Adoption Strategy.

For those who need a refresher, SaaS—or software-as-a-service— companies deliver “software-based business tools via the Internet as an alternative to traditional on-premise installations” (Informatica). Generally speaking, SaaS users purchase a subscription in exchange for a cloud-based service that is quick to install and easy to access.

Despite the present popularity of the SaaS business model, companies in this industry—like companies in all industries—may need financial support. Where government funding is concerned, they have three main options. In order of accessibility, they are R&D, hiring, and, export programs. In the interest of providing a digestible overview of what’s available, we’ve emphasized programs that are nation-wide rather than province specific. For more info about the latter of these two program types, please contact our team.

R&D Programs

Research and development is a crucial for anyone working in tech, but it is especially important for SaaS companies, which are constantly “[b]uilding out, maintaining, and upgrading” (Blossom Street Ventures) their technology stacks. In an analysis of 73 successful, public SaaS businesses, one report found that the average amount of revenue spent on R&D was 23%.

With all this spending comes the potential to claim government funding. SaaS businesses have a nearly limitless number of opportunities to pursue technological advancement, and plenty of government programs will make funding available to support these opportunities. While the eligibility criteria of these programs may differ where innovative activity or product development is concerned, SaaS companies have the potential to tap into multiple grants and tax credits across Canada.

SR&ED

15% – 35% Tax Credit

SR&ED is the largest source of federal government support available to businesses in Canada, and ICT industries are the largest performers of R&D in the Canadian private sector (Government of Canada). To be eligible for SR&ED, a company must either be involved in experimental development, applied research, or basic research. Eligible, Canadian-controlled corporation can claim a SR&ED credit of up to 35%, while foreign controlled corporations can claim up to 15%.

As is always the case, companies looking to claim this credit must have sufficient documentation of the ways in which they are advancing their scientific domain. The clients we work with that are both developing SaaS products and claiming SRED are truly progressive, working with either cutting-edge artificial intelligence or novel underlying architectures to enhance the performance of their products.

Industrial Research Assistance Program (IRAP)

Max $10,000,000

IRAP is the other major funding mechanism available to innovative SaaS companies. Whereas SR&ED is a tax credit that can only be claimed after a company’s financial year-end, IRAP approves projects before they begin, processing monthly claims and refunding companies based on an agreed upon percentage, thus creating useful cashflow. Additionally, IRAP’s application procedure tends to be more flexible than SR&ED where the scope of the innovation project is concerned.

Alliance Grants

Max $1,000,000

The NSERC offers grants between $20,000 to $1 million (per year) to university researchers developing new technology in tandem with private, public, or not-for-profit organizations. SaaS companies working in a field within which academic research is being conducted are therefore eligible to benefit from this program’s financial support if they are affiliated with a university. The IP resulting from projects conducted within such a partnership is generally shared between research partners, including the corporations involved.

Hiring Grants

Unless your SaaS company is a one man show, hiring grants offer an arguably more accessible source of funding. A couple nationally available options include:

Mitacs Accelerate

Max $7,500

Mitacs bridges the gap between academia and industry, offering a means of finding talent and connecting with researchers and covering up to 50% of expenses related to new graduate student hires (bachelor students are not eligible). One of their programs, Accelerate, offers a $7,500 grant to companies hiring students for 4-month periods. Companies can apply for this program repeatedly and without limit. Like most academic collaboration grants, however, technically funding is not distributed directly to the company. Instead, the company is expected to match Mitacs’ $7,500 contribution, cumulatively creating $15,000 to go towards the hired student’s salary.

Student Work-Integrated Learning Program

Max $5,000

SaaS businesses applying to this program are eligible to receive up to $5,000 from either the International Technology Associate of Canada (ITAC) or Information and Communications Technology Council (ICTC) for the purposing of hiring interns for tech roles.

Youth Employment Program

Max $30,000

Through the YEP, companies receive funding to cover the cost of hiring young talent to help work on R&D, engineering, multimedia, or market analysis projects “financial assistance to offset the cost of hiring young talent to work on projects with R&D, engineering, multimedia or market analysis components or to help develop a new product or process” (Government of Canada). YEP offers up to $30,000 per hired graduate but expects that the internship will last 6 to 12 months and ideally transition into a full-time job upon completion. The position can be technical or non-technical but, given that YEP is an offshoot of IRAP, the project must be R&D-related.

Export Programs

The last major set of programs that SaaS companies have the potential to be eligible for are export programs. Though SaaS companies are unlikely to export in the same respect as a product-based company, they are still eligible for multiple programs that seek to develop or increase businesses’ international activity.

CanExport

Max $75,000

CanExport is Canada’s federal export grant program and relatively sector agnostic to boot. SaaS companies with $100,000 or more in annual revenue can apply for financial support if they are travelling abroad to meet with key contacts (such as potential clients), participating in trade events, creating marketing tools and or translating marketing materials for target markets, or applying for IP protection or other certification before they enter a new target market.

Tax Credit for the Development of E-Business (CDAE)

Though not federal, we’ve included this Quebec-specific, e-business tax credit because it is by far the most generous program targeted at SaaS companies. If you’re interested in learning more, we have an article devoted to this program available here.

How R&D Partners Can Help

Funding for SaaS companies is manifold and ever-increasing. Even if your company is not R&D eligible, there are many avenues to explore where financing is concerned. That said, locating the best options within your industry and province can be tricky. We encourage you to use our free funding tool to locate the best programs for you, or reach out to our team to determine your eligibility for funding.