In Canada, government funds are awarded to small- and medium-sized enterprises (SMEs) to help them enhance their research and development capabilities. Two such programs include IRAP (Industrial Research Assistance Program) and SR&ED (Scientific Research and Experimental Development). Both provide funding to SMEs striving for excellence in business innovation and growth.
IRAP -Industrial Research Assistance Program
The IRAP is regarded as one of the best business funding programs in Canada because the funding is non-repayable. If you are an entrepreneur and you would like to apply for IRAP, your project or undertaking must fall under the following subprograms:
4. Funds for Investment in Businesses Innovation (BIAP)
SR&ED – Scientific Research and Experimental Development
On the other hand, to be eligible for SR&ED, your projects must meet the criteria of technological advancement, systematic investigation and technological obstacles. Projects falling under the gamut of experimental research, applied research and basic research are qualify for SR&ED program. You may be eligible for up to 70% of coverage for your expenditure, depending on your location within Canada, ownership (Canadian vs. Foreign, Private vs. Public), taxable income in the prior fiscal year, and size of business in terms of amount of capital employed.
Differences between IRAP and SR&ED Programs
SR&ED is governed by Canadian Revenue Agency (CRA) and encourages private, public, partnerships and individuals to advance research and development capabilities in Canada. Businesses receive incentives through tax refund or tax credits. IRAP is an innovation assistance program which focuses on technological innovation and production and commercialization of products. The program provides financial, technical and strategic support to eligible companies. IRAP provides funding upfront before the launch of research and development project. To distinguish eligible projects under each funding program read more …
Can you apply for both IRAP and SR&ED?
In a word, YES!
There are certain misconceptions associated with claims for IRAP and SR&ED:
1. Many business owners are of the opinion that if their project qualifies for IRAP, they may not qualify for SR&ED. This is not true. IRAP covers only between 50% and 80% of the expenses, the remaining amount has to be shouldered by the business. SR&ED can help to recover the remaining amount.
2. Many view IRAP as an advance to a SR&ED claim, which is true to some extent. However, what is usually unaccounted is the proxy overhead amount added to salaries for an SR&ED claim. This is the reason why there can be staggering differences between amounts for SR&ED and IRAP claims.
Let’s assume you have a project which qualifies for $50,000 in total labour expenses. You submit an IRAP application before the commencement of the project which covers $40,000 of expenses. This amount will be deducted from the gross project expenses to arrive at the net eligible expense for SR&ED. Therefore, you now have $10,000 in expenditure. Now with proper filing your SR&ED tax credit for the $10k labour expenses there will be $6,600 tax credit.