Government Support Doesn’t Mean Less Government Funding
No, government support doesn’t mean you will get less government funding!
We are often asked by clients if accepting government support means that their scientific research and experimental development (SR&ED) investment tax credit (ITC) will automatically be lower. The answer is no!
Government support means that you are getting money now, which can be critical for companies who are just starting out. Waiting until their SR&ED ITC is returned is not always feasible. Many companies are concerned that if they accept government support (i.e. Industrial Research Assistance Program (IRAP) and similar programs) that they will lose out on SR&ED ITC and therefore less money from the government. Below is an example of why government support does not mean less government funding.
IRAP vs SR&ED
You have one engineer, doing 100% SR&ED work, and they are paid $100,000.
IRAP usually covers 80% of their salary, or $80,000.
The way the calculation works is that your expenses will be $155,000 (base salary + 55% proxy*).
When IRAP is deducted, this amount becomes $75,000.
Provincial amounts are then deducted (just the way the calculation works) which moves the total amount on which the tax credit is calculated down, to ~$66,500.
Your tax credits are then calculated on the ~$66,500.
The refund (in Ontario) will be $31,720 (refundable + non refundable).
So the total value of IRAP ($80,000) + SRED ($31,720) is $111,720. (Yes, the math is correct.)
| SR&ED Expenditures | |
|---|---|
| Employee Salaries | $100,000 |
| Materials Consumed or Transformed | |
| Contactor Expenditures | |
| Total Allowable SR&ED Expenditures (Line 400) | $100,000 |
| Subtotal - Additions | $55,000 |
| Deductions | |
| Government Assistance (ex. IRAP) | $80,000 |
| Contracts for SR&ED (non-government assistance and contract payments) | |
| (subtract) Total Provincial Assistance (automatically calculated) | $8,415 |
| (equals) Qualified expenditures for ITC purposes (Line 570) | $66,585 |
| ORDTC (Ontario Only) Not waived | |
| Breakdown of Tax Credits | |
| Federal ITC - Refundable | $23,305 |
| Federal ITC - Non-Refundable | 0 |
| Provincial Assistance - Refundable | $6,000 |
| Provincial Assistance - Non-Refundable | $2,415 |
| Estimated Refund | |
| Total Tax Credits - Refundable | $29,305 |
| Total Tax Credits - Non-Refundable | $2,415 |
| Total Tax Credits including Non-Refundable | $31,720 |
| Total Government Funding (IRAP+ITC) | $111,720 |
If you didn’t take IRAP, your refund would be $65,554 (refundable + non-refundable).
So, that’s $65,554 (SRED only) vs. $111,720 (IRAP + SR&ED).
(*This does assume, of course, that there are no issues with the PPA cap.)
This example shows that yes, your SR&ED ITC will be lower but the overall amount of funding from the government will be higher if government support is accepted.
| SR&ED Expenditures | |
|---|---|
| Employee Salaries | $100,000 |
| Materials Consumed or Transformed | |
| Contactor Expenditures | |
| Total Allowable SR&ED Expenditures (Line 400) | $100,000 |
| Subtotal - Additions | $55,000 |
| Deductions | |
| Government Assistance (ex. IRAP) | 0 |
| Contracts for SR&ED (non-government assistance and contract payments) | |
| (subtract) Total Provincial Assistance (automatically calculated) | $17,391 |
| (equals) Qualified expenditures for ITC purposes (Line 570) | $137,609 |
| ORDTC (Ontario Only) Not waived | |
| Breakdown of Tax Credits | |
| Federal ITC - Refundable | $48,163 |
| Federal ITC - Non-Refundable | 0 |
| Provincial Assistance - Refundable | $12,400 |
| Provincial Assistance - Non-Refundable | $4,991 |
| Estimated Refund | |
| Total Tax Credits - Refundable | $60,563 |
| Total Tax Credits - Non-Refundable | $4,991 |
| Total Tax Credits including Non-Refundable | $65,554 |
| Total Government Funding (ITC) | $65,554 |
Conclusion
Many believe that government support means less government funding, but this is not the case. If you have any questions about accepting government support and how it could potentially impact your SR&ED claim, please ask your tax advisor or use our calculator.