SR&ED vs IRAP: What Are the Differences?
The Canadian government has two programs in place that are used to fund research and development (R&D) activities: the Scientific Research & Experimental Development (SR&ED) and the Industrial Research Assistance Program (IRAP) program. As each one of these programs has its own unique advantages, Canadian SMEs need to know how and when each can be used. This article looks at how the tax credits and research grants differ, and how any project may be eligible to use both SR&ED and IRAP.
What Is SR&ED and IRAP?
SR&ED is an entitlement tax credit program that may be provided during or after innovative research projects. Expenditures claimed may include as much as 69% of overhead and labour costs, 45% of material costs, and 36% of contractor costs. The program does not have any limits on funding.
The IRAP is a funding program designed by the Canadian government to accelerate research and development projects innovators in Canada. The program contributes as much as 60% to 80% of subcontractor and internal technical labour expenses and it does not have a maximum funding amount. Applicants that have been approved receive funding throughout the approved project’s duration.
SR&ED Tax Credits Overview
The SR&ED program provides tax credits to businesses incorporated in Canada that are currently or have previously conducted innovative research projects. The program is one of the biggest tax credit programs ever introduced by Canada’s federal government.
- Contribution: Tax credits will cover up to 69% of overhead and labour costs for eligible projects, as well as 45% of material costs and 36% of contractor costs.
- Eligibility: The guidelines on the eligibility of work for SR&ED tax incentives policy are now broken into two sections: Why and How SR&ED is conducted. They are the two key requirements that must both be met for work to be eligible as SR&ED.
- Timeline: Once an SR&ED claim has been submitted, a tax repayment is normally given relatively fast, although some applications can take up to 12 months.
IRAP Research Grants Overview
Run by the National Research Council of Canada, IRAP offers government funding grants for businesses in Canada that adopt new technology internally to improve processes and/or production or develop innovative services or products.
- Contribution: Up to 50% to 80% of subcontractor expenses and internal technical labour will be paid.
- Eligibility: R&D projects that are both innovative and technical, and have a level of technical uncertainty.
- Timeline: Projects are to be done between April 1 and March 31 of each year. Although one-year projects must fall within this timeline, bigger projects may last longer than 12 months.
SR&ED and IRAP – The Differences
SR&ED is a tax credit that will cover the costs mentioned retroactively. Applicants may however receive lower amounts toward the overall costs of a project.
IRAP is proactive and specifically focuses on covering between 50% and 80% of eligible Canadian salary costs and subcontractor fees relating to an R&D project.
It is highly recommended that SR&ED and IRAP funding are combined for R&D projects, although doing so isn’t always as straightforward as it may seem.
Can IRAP and SR&ED Funding Be Combined?
Yes, they can! As the federal government offers both programs, projects that qualify for funding via both programs must carefully select what will be funded by one program, and what will be funded through the other.
As IRAP funding is proactive and the business needs to apply and be approved for funding before a project starts, the following needs to be taken into account:
What expenses make the most sense to include in the SR&ED retroactive funding application, submitted after the expenses have already been incurred.
Which expenses need to be included in your IRAP application, submitted before a project has started.
Which Program Will Be Most Suitable for You?
The Scientific Research & Experimental Development (SR&ED) and the Industrial Research Assistance Program (IRAP) programs are intricate applications, especially if you decide to stack them for one project. Which program is right for you will depend on the eligibility of your project for each program. If you need to choose between the two, we generally recommend you apply for the program you can receive the most money from.
Find Out How Much Money You Can Recover From The CRA
Book a free consultation with one of our SR&ED tax credit experts.
Fill out the form to schedule a conversation, where we can help identify:
- What projects qualify and which R&D expenditures are eligible
- An estimate of the total return you can expect
- How to maximize the size of a claim & and to optimize for the success of that claim
- Potential eligibility for additional Government funding programs
- If you are already claiming, we will analyze your past claims to determine if anything was missed
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Claims accepted as filed