Getting the Most out of SR&ED and IRAP for Canadian Companies.
The government is a great resource to find funding for businesses of all sizes, and two of the most popular programs that technology startups consider are the Canada Revenue Agency’s Scientific Research and Experimental Development Program (SR&ED) and the National Research Council Canada’s Industrial Research Assistance Program (IRAP). All the information you need to apply can be found for free at their respective sites, and anyone who meets the criteria will be awarded funding.
Often mentioned in consultations, presentations, and at networking events, the world of SR&ED and IRAP for Canadian SMEs can seem like a complex, exclusive club from the outside. Understanding these programs and their slightly different applications can substantially improve a company’s R&D development scope and scale, as well as accelerate their timeline, by maximizing their funding potential. Many consultants and consulting firms offer help with the application process in exchange for a small fee, when in reality it is a relatively straightforward process, and your chances of success are no different so long as you pay close attention to what exactly is and is not covered by these programs, which we’ll talk about below.
Tax Credits vs. Research Grants
One of the key differences between the two programs is when you get the money. For SR&ED, it comes in the form of a tax credit or refund at the end of the year when you do your annual filings. IRAP, on the other hand, works on a grant approval system where you are given in the money ahead of performing any research or development.
This means that you can use SR&ED to get a percentage of costs already incurred from R&D work back, though consequently it is subject to a level of uncertainty, since it relies on the business having enough operating capital to undertake the work with no guarantee of a rebate at the end of the year. On average, the time it takes to get the rebate can be anywhere from four to ten months. Depending on your status as a Canadian-controlled private corporation (CCPC), other corporation, individual or trust, or a partnership, the amount you will receive as a refundable investment tax credit (ITC) will vary. The exact amounts and conditions can be found on this page of the CRA website. Generally, one can expect SR&ED to cover between 30–45% of an eligible project’s costs.
IRAP, however, requires more planning, as companies are required to submit a proposal to the National Research Council detailing how they plan to spend the money they are requesting, and what the benefits of the project will be if undertaken. While it requires more documentation and work upfront, there is no risk of financing a project just to have the government reject a credit afterward, as approved projects will be awarded a set amount of funding before any R&D costs are incurred. As opposed to a lump sum at the end of the year, successful IRAP applicants are given monthly reimbursements based on the original budget proposal, further reducing strain on cash flows when undertaking a large project with technical risks. Better yet, it will cover anywhere from 40–80% of eligible expenses — quite a bit more than SR&ED.
Eligibility and Scope
The three categories that fall under the scope of SR&ED, as defined by the CRA, are:
- Basic research, “is work undertaken for the advancement of scientific knowledge without a specific practical application in view”
- Applied research, “is also work undertaken for the advancement of scientific knowledge, but with a specific practical application in view”
- Experimental development, “is work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products, or processes, including incremental improvements”
In order to determine whether a project meets the criteria, the CRA will ask the following five questions, all of which must be answered with a yes to qualify:
1. “Was there a scientific or a technological uncertainty?”
2. “Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?”
3. “Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?”
4. “Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?”
5. “Was a record of the hypotheses tested and the results kept as the work progressed?”
The five questions are considered jointly, as 1 and 4 are related to why the work was done, whereas 2, 3, and 5 cover how it was done. In essence, the government is looking to fund R&D into novel solutions for needs currently unmet or inefficiently met in your industry, along with proper documentation of your process and findings. Should you not succeed, you may still qualify for SR&ED credit on the basis of advancing technical knowledge in confirming that the method you chose was not suitable for finding a solution. Full breakdowns of each question and the definitions of their terminology can be found directly from the CRA. Remember to keep records of who worked on each piece of the project, how many hours they spent, and why that piece was integral to your goals, as the CRA may ask for a breakdown before releasing your credits or refund.
If you are still unsure of whether or not you qualify, the CRA has provided a self-assessment interactive PDF to help you determine your eligibility. It’s a quick and easy way to see if you meet all the requirements.
IRAP offers four main services, which are technical and business advisory services, financial assistance, networking and linkage services, and the Youth Employment Program (YEP). We will just be focusing on their financial assistance and Youth Employment Program for now.
IRAP has several broad base criteria to determine funding eligibility. Because it is geared toward small and medium-sized businesses, the program is restricted to for-profit corporations of 500 or fewer full-time employees, and those whose objective is develop and commercialize innovative, technology-driven new or improved products, services, or processes. Again, they require a detailed business plan with a breakdown of how you plan to spend the grant money, if awarded, what you will be developing, and why your development qualifies for the program.
For the Youth Employment Program under IRAP, the base requirements are similar to their funding assistance, but the YEP focuses on hiring a new graduate into a position for the research, development, or commercialization of an innovative project within the company. The program can cover up to $30,000 of the annual wages of a new graduate, defined as a person with a post-secondary education and between the ages of 15 and 30, inclusive. The major caveat is that both the applicant and employer must go through eligibility screening, and the graduate’s contract must be for between six and twelve months. Therefore, the YEP will not cover any portion of the new graduate’s salary beyond the first year.
Double Dipping
SR&ED will cover salaries, Canadian subcontractor fees, and general overhead costs related to an R&D project, whereas IRAP focuses only on salaries and Canadian subcontractor fees, but offers a larger percentage of those costs back. Both programs cannot be fully stacked, but that does not mean you can’t utilize both for their individual strengths to maximize your funding allocation. It is generally possible to use IRAP’s larger percentage coverage to help with a company’s labor costs (both employees and contractors), while applying for SR&ED solely for the long-term overhead cost refund. Each must be listed as a funding source when applying for the other, or any other federal or provincial government funding program.
Direct Resources
Need detailed answers to specific questions? Instead of paying a consultant to answer them, call in or book an appointment for free with an official government SR&ED service office representative here or an IRAP Industrial Technology Advisor here.
When we started hearing about these programs at Macromeasures, we were quickly overwhelmed with the amount of raw information available and disappointed at the lack of a concise summary of what they were from a startup’s point of view, all while being chastised for not taking advantage of it earlier which didn’t help either. We hope this helps you avoid the countless hours of poring over government documentation and the pressure from consulting firms looking to capitalize on a false sense of urgency that we dealt with!
Photo by Jared Grove, 2004
