How do you select the one for you ?

Is your technology innovative? You are surely looking for financing sources. Do you do research and development? You have probably already studied many government funding programs and tax credits. How can you evaluate the program that suits you, the one that offers the best return for your investment in time and for your efforts? SR&ED or IRAP ?

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

Important Notice: This information is presented briefly for presentation purposes only. Before evaluating or submitting a claim you should contact a tax specialist and such programs, such as R&D Action, to validate the calculations in your specific situation. We also suggest you consult the relevant policies available on the Canada Revenue Agency (CRA) and the National Research Council of Canada (NRC) websites.

1- THE IRAP

IRAP is a federal program administered by the National Research Council of Canada. It provides research and development grants to innovative and qualified small and medium-sized businesses in Canada. The IRAP budget is limited (approximately $ 400 million in 2019/20). It receives hundreds of submissions each year, making it a very popular financing option.

IRAP is a large program of the federal government (after SR&ED) to help innovative businesses. This program manages a network of resources across the country. This approach aims at supporting the rapid progression of companies by developing new products in all kinds of technological fields, including mechanical engineering, chemical, software, etc. The fairly fast processing of their files is unmatched by any other government program.

The “hands-on” approach with IRAP’s Industrial Technology Advisors and their influence in project management can be a welcome source of value for some companies. To our knowledge, however, better strategic, business and operational advice can be found elsewhere. Government representatives are not always the best coaches and mentors for entrepreneurs.

IRAP can fund up to 75% of certain costs in the form of a repayable loan based on future results, or a grant, or a combination of both.

2- THE SR&ED

2.1 Federal

The SR&ED program is administered by the Canada Revenue Agency (CRA) and provides a tax credit for eligible R&D expenditures. This tax credit is refundable (a check) for most SMEs. The rate of tax credits for SMEs is 35% for eligible expenses.

• Eligible salary expenses are increased by 55% overhead (overhead), so that $ 100 of federal salary is calculated as $ 155 of expenses.
• For subcontractor expenses, the federal credit is 28% (80% * 35%) of the eligible invoices. For the materials consumed, the rate is 35%

Since the SR&ED program does not have a fixed budget, each eligible application is approved. In 2016-17, the program processed approximately 21,000 credit applications representing approximately $ 2.7 billion in federal tax credits. This is more than 6.5 times the budget of the IRAP program

Also, any IRAP funding reduces your federal eligible expenses for SR&ED claims.

The federal SR&ED program is duplicated by a similar program in several provinces:

2.2 In Quebec

In addition, Quebec’s supplementary SR&ED credit is always refundable. For SMEs, the higher rate of tax credits is 30% for eligible expenses exceeding $ 50,000. This means that the federal + Quebec combined credit rate is 54% on the salary of the first $ 50,000 of eligible expenses and 73.75% on salaries exceeding the first $ 50,000 of expenses.

For subcontractor expenses, the combined rate above the initial $ 50,000 is 37.75%. Material expenses are not eligible in Quebec, so the combined rate is 35%.

2.3 In Ontario

In Ontario, the additional non-refundable SR&ED credit is 3.5%. Non-refundable means the credit is deducted from payable taxes.

Ontario Innovation Tax Credit (OITC)

The CIIO is a refundable tax credit of 8% for small and medium-sized businesses on eligible R&D expenditures. The following table illustrates how it is possible to increase the rate of the CIIO.

R&D Expenses/Gross Revenues	OITC Rate
< 10 %	8 %
Between 10 % and 20 %	Raises linearly between 8 % and 12 %
> 20 %	12 %

3- Differences IRAP vs SR & ED

IRAP and SR&ED differ in many ways:

• The agreement with IRAP may be partially or fully refundable. You will not be requested to refund the SR&ED tax credit;
• IRAP is limited to businesses with fewer than 500 employees. SR&ED has no limit on the size of the business;
• IRAP considers only future research and development projects. SR&ED covers eligible expenditures already incurred;
• IRAP benefits are usually paid in installments as you report project progress. SR&ED tax credits are paid in lump sum and approved once your end-of-year tax return has been accepted by the CRA;
• SR&ED accepts more extensive categories of expenditures than IRAP;
• IRAP provides a network of advisors across the country who can:
• Guide some companies;
• Deliver timely approvals to businesses seeking funds, contrary to the lengthy waiting period for SR&ED approvals;
• IRAP uses an additional “criterion”: sales potential, SR&ED does not take into account this potential

4- Final verdict:

In conclusion, R&D Action advisors, experienced experts, recommend SR&ED credits for three main reasons:

• SR&ED provides more financial return;
• SR&ED is available to any eligible business; and
• IRAP funding will be deducted from your SR ED claims.

On the other hand, if you have cash restrictions, you may be interested in IRAP. In fact, IRAP quarterly payments are made as you report the progress of the project, whereas the SR&ED credit is approved once your end-of-year return has been accepted by the CRA, which can take several months.

Thank you for visiting the R&D Action blog. Look at the index on the right of this page. It contains several other categories of practical and applicable solutions which are also for you.

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