Companies can combine SR&ED with other funding programs.
Though venture funding has mostly slowed down for the technology sector, there are other channels available for Canadians to fund their innovation projects.
A report published by Vancouver-founded startup Boast.ai, which offers R&D tax credits, maps the tax and grant programs available for Canadian companies.
SR&ED tax credits
The Scientific Research & Experimental Development (S&ED) tax credits, administered by the Canada Revenue Agency, is among the largest research and development incentives in Canada.
SR&ED gives Canadian businesses of all sizes and from across sectors access to both refundable and non-refundable tax credits, which are meant to help cover the costs of research and development (R&D).
Through SR&ED, Canadian companies can earn an investment tax credit of 35 percent on the first $3 million in qualifying expenses, which would include salaries, capital, consulting fees, and materials. For amounts above $3 million, the tax credit becomes 15 percent. According to Boast.ai, claimants can recover up to 64 percent of their R&D expenses.
The SR&ED program provides more than $3 billion in tax incentives to over 20,000 claimants annually, making it the single largest federal program that supports business R&D in Canada.
Eligibility for SR&ED requires projects to make some sort of technological advancement and directly address technological obstacles that currently can’t be solved by existing techniques. Claimants must also provide proof that their project went through a “systematic investigation” to assess if it met the requirements.
The Government of Canada comitted to undertaking a review of SR&ED in Budget 2022, which was particularly heavy on innovation policy.
The status of that review is unkown as the 2023 federal budget failed to provide an update. Tech lobby group Council of Canadian Innovators has previously lamented the lack of available detail on this review, and as BetaKit has previously reported, some Canadian innovators have wondered what this SR&ED review will accomplish while noting a need to make it more efficient.
The National Research Council of Canada’s Industrial Research Assistance Program (IRAP) provides grants and mentorship to projects to help accelerate the commercialization of innovative technologies.
To qualify for the grant, applicants must be a small to medium Canadian business with 500 or fewer employees and have an objective to generate profit through the development of innovative, technology-driven products, services, or processes, in Canada.
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Historically, IRAP is divided into three subprograms. One is Technology Innovation Projects, which provides $30,000 to $300,000 to fund R&D for technology projects and help to commercialize them. By working with an industry technology advisor, the project can have 50 to 80 percent of the total project cost matched.
There are also the Youth Employment Strategy Programs for businesses to hire post-secondary graduates in the fields of science, engineering, technology, business, and liberal arts; as well as the Business Innovation Access Program, which helps companies access business services or technical assistance at Canada’s academic and research organizations.
As noted by Boast.ai, there’s potential for significant changes coming to IRAP as it will be moved under the federal government’s newly-formed innovation agency, the Canada Innovation Corporation (CIC). IRAP has traditionally been part of the National Research Council.
The combination with IRAP is meant “to establish a large-scale platform of business R&D support” and minimize duplication of federal programs, per a blueprint document provided to BetaKit in February.
Details surrounding CIC’s leader and whether there will be material changes to IRAP remain unclear.
Interactive Digital Media Credit
The Interactive Digital Media Tax Credit (IDMTC) is focused on innovating entertainment and educational media for companies based in British Columbia, Manitoba, Nova Scotia, Ontario, Québec, Manitoba, as well as Newfoundland and Labrador.
Boast.ai noted these are the provinces with the largest population centres and closest ties to the global media hubs. Though each province has its own guidelines, the qualifying criteria remains the same. The program requires claimants to have projects that aim to educate or entertain the users, use multimedia, and are interactive by design.
Examples of qualifying projects include video games, educational software, and augmented reality (AR) and virtual reality (VR) products.
Tax Credit for the Development of E-Business
The Tax Credit for the Development of E-Business (CDAE) is administered by Revenu Québec and is only available to projects based in the province.
Specifically, CDAE is focused on businesses developing and selling software licences. To determine their eligibility, 75 percent of their gross revenue must come from IT sector activities.
Further, the company must have at least six full-time technical employees for the entire fiscal year of their claim. CDAE covers only the salary of employees in technical roles, delivered in the form of an up to 24 percent refundable tax credit of each eligible employee’s salary.
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CDAE does not offer tax credits for any programs that involve hardware, including software that controls hardware or is built into hardware. Projects that rely on external datasets, such as artificial intelligence models, are also not eligible, as the data used must be internally owned and generated by the company’s clients.
Combining tax credits and grant programs
Boast.ai noted in its report that the SR&ED program can also be combined with other funding programs to help companies extend their runway for R&D.
SR&ED can be stacked with IRAP, CDAE, and IDMTC, depending on the individual project’s eligibility with each specific program. Boast.ai’s report offers more detail on navigating what this process would look like.
Founded in 2017, Boast.ai’s helps businesses in Canada and the United States access R&D tax incentives. Its platform can automatically sync all the data relevant to a project’s scope into a single dashboard, making sure the details are aligned with the eligibility requirements.
Featured image courtesy Unsplash.