The National Research Council has operated the Industrial Research Assistance Program (IRAP) for a number of years. When companies which are eligible for the Scientific Research & Experimental Development (SR&ED) income tax credits have also received IRAP funding, the amount of the IRAP funding has usually reduced the amount of the SR&ED credit. IRAP’s new Small Project Accelerated Review Process combined with some eligibility changes offers some companies the opportunity to obtain support from both programs.
The SPA program can fund up to $50,000 of small project expenses including:
• up to 100% of internal labour costs (and 65% of overhead), and
• 75% of external contractor costs (and 65% overhead if T4A’s are issued).
The overall limit is 75% of the project’s total costs.
The most important change is that IRAP’s SPA program now covers a wide variety of activities beyond those eligible for SR&ED. These include costs related to patents, financial restructuring, competitive market intelligence studies and many other activities. This change has important implications for companies wanting to take advantage of both programs.
There is also a salary subsidy program operated by IRAP on behalf of HRSDC, which pays up to $30,000 to hire a new college or university graduate, who is at most 30 years old. The college or university does not need to be Canadian.
Each program has its advantages:
SR&ED
• If successful, the taxpayer is eligible for a credit of up to 70% of labour costs, and smaller percentages of capital equipment, materials and contractor fees.
• The company can perform the work without obtaining prior approval and apply for the credit up to 30 months after the work has been completed.
IRAP/HRSDC
• Once the company has been approved for the grant, the funding is virtually guaranteed as long as the company does the work as approved, or continues to employ the new graduate that was approved.
• In the past funds were usually received 15 days after the end of each month. When the number of applicants increased after Ontario’s IRAP budget was increased 300% in April 2009, payments were delayed significantly. We’ve recently learned from our clients that payments are now received in 30 to 40 days.
• Another advantage of IRAP is that IRAP approvals can have a positive impact on the SR&ED approval process.
• In addition, the documentation required when submitting monthly IRAP claims can be very useful when preparing a SR&ED claim.
Each program also has its disadvantages:
SR&ED
• These claims require careful temporaneous documentation.
• Even more resources are required to facilitate the review process.
• Unfortunately it is difficult to predict which claims will be successful.
• Even if successful, credits may not be received for 12 to 40 months after the work has been completed, causing a drain on the company’s cash flow.
IRAP/HRSDC
• Funded project work cannot begin until the project is approved. Approval is usually quick but at certain times, such as during the spring and summer of 2009, it can be slow. Unfortunately this sometimes delays time-sensitive projects.
• The funds available for new projects tend to become depleted sometime between August and October every (government) fiscal year.
• Employees cannot be hired until the HRSDC grant has been approved. Companies run the risk of losing their best candidates to competitors while waiting for grant approvals.
• If the company holds an IRAP or HRDSC grant, its SR&ED tax credit claim is reduced to the extent that the grant was applied to the R&D work.
In order to optimize the three programs, companies should apply for IRAP funding for non-SR&ED eligible activities, such as marketing or IP protection and/or use the HRSDC grant to subsidize the salary of a new employee working in these areas. This approach will free some of the company’s cash to fund SR&ED-eligible activities. If the claim is deemed technically eligible, the SR&ED credits will not then be reduced by the IRAP and/or HRSDC funding.
Kevin Gohee, PhD, PEng is the director of SRED tax services at McLarty & Co
Professional Corporation, a local public accounting company. McLarty & Co offers a wide range of integrated financial services to successful owner-managers and professionals. To learn more about Kevin, McLarty & Co and its SRED services, please visit their new website at www.mclartyco.ca
