IRAP and SR&ED: Which Government Incentive is Right for Your Tech Business?
At Elevate, it’s our mission to foster the growth of the tech and innovation ecosystem in Canada. Mentor Works shares that goal and is helping Canadian companies navigate pathways to government funding for their projects. In this three part series, Mentor Works will break down some of the ways entrepreneurs can get their ideas funded and scale their business.
When performing research projects that involve technical risk or uncertainty, Canadian innovators should use government funding programs. These offset project costs and reduce risk, making exploratory innovations more achievable for technology-driven SMEs.
To innovate as efficiently as possible, companies should be aware of the Industrial Research Assistance Program (IRAP) and the Scientific Research and Experimental Development (SR&ED) tax credit.
Although there is a significant amount of information available online that reviews research funding programs, it can be difficult to understand exactly how the programs work.
Fortunately, this article introduces each program and contrasts them in a way that will help you understand which type of support is better-oriented towards your business or types of innovative projects. It will also guide you to finding more resources to continue learning about how government funding can support research and development.
Introduction to IRAP and SR&ED Funding
If your business is new or relatively inexperienced when it comes to accessing government funding, it’s important to understand these incentives in greater detail. While there are some similarities between IRAP and SR&ED funding, there are also several differences.
Industrial Research Assistance Program (IRAP)
The Industrial Research Assistance Program (IRAP) is a Canadian government grant designed to accelerate the research and development projects of Canadian innovators.
IRAP grants can offset eligible project costs up to 50-80% to a maximum $10 million.
Businesses who are developing and implementing process improvements are the primary targets to receive research grants through IRAP, however, large-scale technology adoption projects that lead to new capabilities are also considered.
Scientific Research & Experimental Development (SR&ED)
The Scientific Research & Experimental Development (SR&ED) tax credit is also designed to support research projects but does so in a retroactive way. Instead of offering upfront grants to support research, it credits the business for eligible research activities and provides tax reductions as a result.
SR&ED tax credits offer Canadian-controlled private corporations (CCPCs) up to 35% of eligible project costs to a maximum $3 million. Costs beyond $3 million are offset at a rate of 15%.
Applicants can use SR&ED tax credits for a wide range of projects, including experimental, basic, or applied research. These projects must include experimentation where a hypothesis is tested, and results are recorded.
Research Requirements: Advancing the Available Knowledge Base
The main objective of IRAP and SR&ED funding is to help Canadian innovators perform
exploratory research that advances the current technological knowledge base. Ideally,
innovators should be confronting issues that will lead to improved features, functionality, or
capabilities, for either products or processes.
IRAP and SR&ED both use similar language when referring to the types of projects that are
eligible to receive funding. Typically, if your project meets the following definitions, it will be
considered a good fit for the programs:
- Technical Uncertainty or Risk (IRAP): Technical uncertainties exist when innovators
view a product- or process-related challenge with an end goal in mind. Typically, this
will be an enhanced version of previous technology, and there are roadblocks
preventing the transition to its upgraded state. Uncertainties and risks are often
resource-driven (either time, talent, or money), and IRAP can help by providing
companies with the cash flow necessary to overcome them.
- Experimental Development (SR&ED): Experimental development is all about
undertaking work to achieve technological advancement. It assumes that there is an
upper level of knowledge available in a field, and the company seeks to expand on
that understanding. Experimental development may or may not have an end goal in
mind, which is ideal for SR&ED where companies can claim funding for research costs
without having to achieve with tangible results.
While both the Industrial Research Assistance Program (IRAP) and the Scientific Research and
Experimental Development (SR&ED) tax credit provide funding for innovative research, their
focus is slightly different. Experimental development projects can also maintain technical
uncertainties and risks, but will not have the same commercialization focus of projects well-
suited for IRAP.
Additional Eligibility Criteria for SR&ED and NRC-IRAP Research Incentives
In addition to innovation requirements, IRAP and SR&ED funding maintain eligibility criteria unique to each program. These rules are more focused through the Industrial Research Assistance Program, which awards non-repayable funding contributions (grants) on merit. IRAP funding is competitive in nature where businesses must work to secure project funding. Scientific Research and Experimental Development tax credits are an entitlement to Canadian businesses with qualifying projects, so more businesses will qualify.
NRC-IRAP Research Grants
To qualify for the Industrial Research Assistance Program (IRAP) grant, applicants must:
- Maintain 1-500 payroll employees
- Be incorporated for two years or longer
- Be committed to internal research and development.
SR&ED Research Tax Credits
To qualify for the Scientific Research and Experimental Development (SR&ED) tax credit,
applicants must be able to answer “yes” to five standard questions:
- 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 consistent with a systematic investigation or search,
including formulating and testing the hypotheses by means of experiment or analysis?
- Was the overall approach undertaken to achieve a scientific or a technological
- Was a record of the hypotheses tested and the results kept as work progressed?
Innovation Funding Timelines and Application Process
One of the key differences between SR&ED and IRAP funding is the timeline for eligible projects. SR&ED allows companies to consider previous allocated spends of R&D activities, while IRAP is very pre-planning focused.
SR&ED Research Tax Credits
Companies who have already carried out R&D activities and expenses can apply for SR&ED to obtain a percentage of their already incurred expenses. Special tax forms and documentation to back-up claimed expenses is often a requirement to successfully trigger a tax credit. Companies apply when they submit their annual federal taxes, and are typically reimbursed a few months afterwards.
NRC-IRAP Research Grants
IRAP is different; by applying for and receiving confirmation of funding before carrying out the outlined R&D activities, IRAP helps companies expand cash flow and inflate project budgets. Companies start the process by meeting with an IRAP Industrial Technology Advisor (ITA) to discuss the project. If the project is a good fit for funding, the ITA releases application forms for the business to complete.
Once submitted, applications are subject to internal department review and can either be accepted or rejected. Receiving IRAP application forms from your ITA does not guarantee funding approval, but it is the first step. Applications typically take five to eight weeks in review, at which point the company is informed of their funding status.
This article compares eligibility criteria for IRAP and SR&ED, two popular research funding programs for Canadian innovators. While this information will help you understand the overall purpose and requirements of each program, there is still more to consider before your company commits to either funding program. Much of your decision also depends on the amount of funding available, expenses that can be included, and when funding is awarded.
To compare more elements of the IRAP and SR&ED programs, including funding potential and how to apply, please download Mentor Works’ IRAP vs. SR&ED slide deck.