Technology companies play an essential role in Canada’s economy, with the tech sector representing nearly 5% of its total. The success of these companies often depends on costly research and development (R&D) work, which in 2019 commanded a $19.5 billion annual gross domestic expenditure in the business sector alone. Due to the vital importance of this work, the Canadian government offers several programs to support it. These include the Scientific Research and Experimental Development (SR&ED) tax incentive program and the National Research Council of Canada Industrial Research Assistance Program (NRC IRAP).
Taking advantage of these programs is a smart way to maximize R&D funding. However, you’ll need to know how each works and the best way to utilize them. With a clear understanding of both programs, your company can prepare to make the most of SR&ED tax credits and NRC IRAP funding.
SR&ED Tax Credits
The SR&ED program is open to all Canadian companies that participate in eligible R&D work. As part of this program, companies accrue SR&ED tax credits throughout the year as they spend on SR&ED eligible work. Those credits provide reimbursement from the CRA when claimed.
Not all R&D activities are considered SR&ED activities. Eligible activities include basic and applied research and experimental development and activities that support SR&ED work. These include wages and third-party contractor services, materials, select research, and more. To confirm SR&ED claim eligibility, activities must meet the following criteria:
- Conducted due to a technological or scientific uncertainty
- Involved in formulating a hypothesis to eliminate or reduce this uncertainty
- Undertaken with an approach that is consistent with systematic investigation or search, including testing the hypothesis via analysis or experimentation
- Documented the hypothesis tested and the outcome of R&D work
Expenses related to these activities may be claimed on CRA Form T661 and, if determined eligible, can result in a tax credit and/or refund of 35% to 65% of your total qualified expenditure.
NRC IRAP Funding
Unlike SR&ED tax credits, NRC IRAP funding offers grants to support R&D before expenses are incurred. The program encourages Canadian technology companies to innovate and generate greater wealth within the country by reducing the financial and technical risk associated with R&D work. Along with grant funding, the program also provides advisory services and access to R&D and business insights to help businesses grow.
NRC IRAP funding is available to the following entities:
- Profit-oriented small and medium-sized enterprises (SMEs) operating within Canada
- Entities with 500 or fewer full-time employees
- Companies that seek to develop and commercialize products, processes, or services to generate revenue
Applicants may seek grant funding for new offerings or the improvement of existing offerings. If successful, companies receive funding for 50% of eligible contractors’ costs to 80% of eligible salaries.
How SR&ED Tax Credits and NRC IRAP Funding Benefit Tech Companies
While these government programs support companies across diverse industries, they are particularly valuable to tech-focused firms dependent on R&D to fuel growth. Note that while companies may apply for both programs, funding is not stackable, and any NRC IRAP grants received must be deducted from your SR&ED claim. Additionally, you must report NRC IRAP funding when applying for most other programs.
It is possible, however, to use both programs strategically to maximize funding. Just a few of the ways tech companies can take advantage of these programs include:
Balancing Project Costs
Both SR&ED tax credits and NRC IRAP funding may be used to cover costs associated with wages and subcontracts. However, the NRC IRAP program’s higher reimbursement rate makes it ideal for funding projects with large payrolls or a high volume of services provided by subcontractors. Try to cover these projects with NRC IRAP funding. You can claim the remaining SR&ED eligible expenditure associated with the project after deducting the funding received from NRC IRAP. Also keep in mind that certain expenditure, like employee overhead, isn’t covered by IRAP grants, but are eligible for SR&ED.
Outpacing Industry Peers
Companies operating within the tech industry must keep pace with new advancements or be left behind. Doing so requires adequate funding for the development of new offerings without acquiring excessive debt or sacrificing equity in your company. Taking advantage of government programs, such as the SR&ED tax credit and NRC IRAP funding, provides a reliable source of funding that won’t dilute equity or result in costly interest fees.
Looking Toward the Future
Selling the company one day is a common goal for many tech businesses. This is especially true as they leave the start-up phase and enter the scale-up process. Preparing for sale requires careful long-term planning to balance your capital structure and retain the maximum degree of equity possible while acquiring the funding needed to operate.
Government programs, like the SR&ED tax credit and NRC IRAP grants, are an essential part of the capital stack for any tech company focused on selling in the near future. Neither requires repayment or costly interest and as non-dilutive sources of funding, they make it possible to retain a greater share of equity in your company for a more profitable sale.
Fast Access to Predictable Capital
Rapid, consistent reimbursement is one of the top benefits associated with NRC IRAP funding. Grants are based on proposed expenses and, after approval, reimbursement is provided monthly. This makes it far easier for tech companies, who often face cash-flow challenges, to receive vital funds on a predictable schedule.
In contrast, SR&ED refunds cannot be processed until the end of a company’s tax year and can take up to 180 days for payment after submitting a claim. Fortunately, it is still possible to receive your refund quickly with assistance from an SR&ED refund financing company, such as Easly.
Learn More About SR&ED Tax Credits
Can your tech company afford to wait for the funds provided by your SR&ED tax credit? With Easly’s Capital-as-a-Service (CaaS) platform, you can receive quarterly advances on your SR&ED refund to provide a predictable stream of capital when it’s needed most. Most clients receive their first advance within 72 hours after approval, and repayment is made directly from your refund keeping the process cash flow positive. To learn more about how it works, contact us today.