The Globe and Mail recently reported on a shifting trend in Canadian government funding: changing rules to the popular Scientific Research and Experimental Development (SR&ED) tax incentive program have resulted in declining claims. According to the Globe and Mail, SR&ED payouts have reduced by over $1 billion since 2008. At the same time we’re seeing a rise Government grants and loans at both the federal and provincial level. It’s important for businesses to understand the differences between these government funding mechanisms and when to utilize each program.
Government Grants and Loans: How are they Different from SR&ED?
Many companies currently take advantage of SR&ED tax credits but may not be aware of the differences between SR&ED and other government funding mechanisms (e.g. grants and loans).
- SR&ED: SR&ED tax credits are tax credits that businesses file with their general tax filings. These credits are generated based on conducting internal scientific research and development projects. Companies are able to deduct eligible SR&ED expenditures for income tax purposes. Filing for this credit occurs after the research activities have completed and the related expenses have been paid for (e.g. internal wages), companies are also reimbursed as a credit on their corporate income tax filing.
- Government Grants: Canadian government grants offer businesses a non-repayable contribution towards a project. Grants are typically tied to a specific project related to either business expansion, capital investment, R&D, or hiring/training. Typically, a business must apply and be approved for a grant prior to completing the project spend.
- Government Loans: Unlike a government grant, a loan is a repayable contribution towards a project. Canadian government loan programs are typically for larger and more complex projects than grants. Businesses benefit from no, low, or competitive interest rates with these loans.
Each funding mechanism has its own merits and can be utilized in different scenarios. In general, grants and loans should be used to help fund isolated projects while SR&ED tax credits can be used to help offset the cost of on-going R&D expenditures. It’s important for businesses to plan ahead and understand how to distinguish their costs. It’s also important to note that most of these programs have thorough application and reporting processes to ensure compliance and transparency.
How Can a Business Optimize Funding Strategies?
Understanding when it is most beneficial to utilize SR&ED vs. a grant vs. a loan can be difficult. Businesses can partner with a firm like Mentor Works to help optimize their cash flow spending. We offer a range of free webinars and Canadian government funding events to help businesses understand how to plan ahead. If you’d like to learn more about our services or have a project in mind, please contact us to get in touch with one of our Canadian government funding experts.