To understand Scientific Research and Experimental Development (SR&ED) and Industrial Research Assistance Program (IRAP), businesses must realize each program has structural differences.
SR&ED is a tax incentive program. This program allows you to claim tax credits on R&D project costs that have already been incurred.
IRAP is a grants program. This program allows you to obtain funding in advance of incurring R&D project costs & helps you mitigate technical & financial risks in a project.
The timeline for eligible projects varies significantly for SR&ED and IRAP funding. SR&ED allows companies to get reimbursed for expenditures previously spent on R&D activities, while IRAP provides a grant ahead-of expenditures incurred for R&D activities. Thus, SR&ED is after-the-fact funding, whereas, IRAP is before-the-fact funding.
Another key difference is the eligibility criteria for each program. To qualify for SR&ED, a project must satisfy the following:
- Was there a scientific or a technological uncertainty?
- Did the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Was the overall approach adopted consistent with a systematic investigation or search, including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken for the purpose of achieving a scientific or a technological advancement?
- Were the record of the hypotheses tested and the results kept as the work progressed?
To qualify for IRAP;
- You must be profit-oriented and incorporated as a Small or Medium Enterprise (SME) in Canada.
- You must have 500 or fewer full-time equivalent employees.
- Your objective is to grow and generate profits through the development and commercialization of innovative, technology-driven new or improved products, services, or processes in Canada.
Eligible Costs and Contributions
These programs also vary in terms of eligible expenses and the percentage claimable. SR&ED reimburses 35-65% of eligible expenses for Canadian Controlled Private Corporations (CCPCs)
IRAP funds 50-80% of eligible expenses, making IRAP advantageous in terms of funding when having large amounts of salary and subcontracts. SR&ED will cover both these expenses, as well as overhead and material costs. Since IRAP contributes a higher rate on salary and subcontractors, this program would provide maximum benefits to your business should your project involve extensive quantities of these two costs.
SR&ED funding can take up to 1-30 months to be reimbursed after the R&D activities are completed. IRAP is much quicker due to pre-planning; a successful IRAP application is compensated monthly as the expenses are based on the budget already established. This alleviates the impact of R&D activities on the company’s fiscal matters as you know what to expect. IRAP is recommended for large projects consisting of large quantities of payroll and subcontractors.
No SR&ED and IRAP Stacking
Conflict often arises between both programs when a client wants to utilize SR&ED and IRAP for the same project. You cannot claim due diligence activities in SR&ED, but only experimental development can be claimed. Meanwhile, IRAP contributes for R&D activities that are not necessarily SR&ED eligible. Therefore, both programs can be utilized effectively based on what expenses your company has or will incur the most of.
For example, for certain projects, that may not be completely SR&ED eligible, businesses could choose IRAP for a project involving large quantities of salaries and/or subcontractor costs as this program offers a higher contribution for these expenses. Meanwhile, SR&ED can be utilized for material and overhead costs for a relevant project. This allows your business to plan effectively and improve the certainty of cash flow for projects.
It is important to note that if you use IRAP for any project, it must be noted in any other funding you apply for.
Both programs, if used effectively allow for the growth of your business and Canada as a whole. Time and time again Canadians are sought to be late adopters of innovative technologies, it’s time to be at the forefront of research and development!