SR&ED or IRAP? Two ways to fund research and development

SR&ED and IRAP both help Canadian businesses pay for research and development, but they work in opposite directions. SR&ED is a federal tax incentive you claim through your tax return after the work is done, while NRC IRAP gives advice and, in some cases, funding that is approved before a project starts. Many companies use both, but the support from one can affect what you claim from the other, so check the rules.

What is SR&ED?

The Scientific Research and Experimental Development (SR&ED) tax incentives are a federal tax credit for research and development done in Canada. You do the work, track what it cost, and then claim the credit with your income tax return.

A few things to know:

• It's claimed after the fact. There's no application to approve your project in advance. You claim for work you've already done in a tax year.
• It's about solving technical problems. SR&ED is for work that tries to overcome a scientific or technological uncertainty through a systematic process: hypotheses, tests and analysis. Routine development, cosmetic changes or market research don't qualify on their own.
• It can be refundable for some companies. Depending on the type of company, part of the credit may be paid out even if you owe no tax. That's a refundable tax credit. Check the program page for who qualifies for which rate.
• There are filing deadlines. A claim has to be filed within a set time after your tax year ends. Check the program page so you don't miss it.

What is IRAP?

NRC IRAP, the National Research Council's Industrial Research Assistance Program, supports technology innovation at Canadian small and medium-sized businesses. It starts with a conversation: you talk to an industrial technology advisor, who learns about your company and your project.

What to know about IRAP:

• It starts with advice. The advisor relationship is the heart of the program. Funding may follow, in some cases, but it isn't automatic.
• It's approved before you start. If IRAP funds a project, the terms are agreed before the work, usually in a contribution agreement. Costs you take on before approval usually aren't covered.
• It has eligibility rules. The program page explains which businesses qualify, including rules about being incorporated, for-profit and below a size limit.
• There's no fixed deadline. You start by getting in touch, not by waiting for an intake.

How are they different?

• Timing. SR&ED: claim after the work. IRAP: talk and get approval before the work.
• Type of support. SR&ED: a tax credit. IRAP: advice plus, sometimes, funding toward project costs.
• Who decides. SR&ED: you claim, and the tax authority reviews your claim. IRAP: an advisor and the program decide whether to fund your project.
• Scope. SR&ED covers eligible R&D work across many fields. IRAP focuses on developing new or improved technology products, services or processes with commercial potential.

Our post on grants, loans and tax credits explains how a tax credit differs from a grant in more detail.

Can a company use both?

Often, yes. A business might get IRAP support for one project and claim SR&ED on its R&D work in the same year. But they interact.

Funding from IRAP, or from other government programs, is usually treated as government assistance. That can reduce the costs you're allowed to claim under SR&ED for the same work. The rules on combining funding are called stacking, and they can be detailed.

Before you count on both, check each program page and talk to your accountant. Our post on whether you can combine grants explains the general idea.

Which should I start with?

It depends on where you are:

• You've already done R&D this year. Look at SR&ED. You can't get IRAP funding for work already done, but you may be able to claim it.
• You're planning a technology project and want guidance. Contact IRAP early, before you commit to spending.
• You need cash during the project. SR&ED only pays after you file, so you'll need a way to fund the work first. IRAP funding, a loan, or a mix may help.
• You're hiring researchers. Look at wage subsidy and internship programs too. Our guide to wage subsidies and hiring programs covers them.

Use the funding check to see programs that fit, or browse innovation programs.

What records should I keep?

Good records help with both programs, and they're essential for SR&ED.

• Project notes as you go. What problem you were trying to solve, what you tried, what failed and what you learned.
• Time tracking. Who worked on which project, and for how long.
• Costs. Invoices for materials, contractors and equipment, linked to the project.
• Funding received. Every grant, contribution or other support for the same work, so stacking can be worked out correctly.

For IRAP, you'll also need to track spending and progress for your claims and reports. Our post on getting paid: claims and reports covers that step.

If you're thinking of paying someone to prepare a claim, our post on whether to hire a grant writer has questions worth asking. For more options, see our guide to small business funding in Canada.

Frequently asked questions

Do I have to apply for SR&ED before I do the work?

No. SR&ED is claimed with your tax return after the work is done. But you should keep records while the work happens, because you'll need them to support your claim.

Does IRAP pay for work I've already finished?

Usually not. IRAP support is agreed before the project starts. If you've already done the work, look at whether it could be claimed under SR&ED.

Does IRAP funding reduce my SR&ED claim?

It can. Government assistance for the same work usually reduces the costs you can claim under SR&ED. Check the program page and ask your accountant before you plan around both.