Businesses encountering difficulties in obtaining financial resources contend with funding acquisition most particularly when they invest in research and development (R&D), technology, and innovation. Two main forms of Canadian government funding include tax credits as well as grants.
When choosing between government tax credits and grants for funding assistance what option should business owners select? Let’s find out.
Understanding Tax Credits vs. Grants
What are Government Tax Credits?
Tax credits reduce the amount of tax a business owes to the government. Some tax credits, like SR&ED, are refundable, meaning businesses can receive a cash refund if they don’t owe taxes. Others are non-refundable, meaning they can only be used to lower the tax liability of a company.
The Scientific Research and Experimental Development (SR&ED) tax credit is designed to encourage Canadian businesses to invest in R&D by refunding a portion of eligible expenses.
- Refundable for Canadian-controlled private corporations (CCPCs)
- Covers wages, materials, and subcontractor costs related to R&D
- Up to 35% refundable credit for small businesses, and 15% non-refundable for larger corporations
What are Government Grants?
Grants are direct funding from the government that businesses do not have to pay back. Unlike tax credits, grants are awarded upfront, often through an application process where businesses must meet specific eligibility criteria.
Pros and Cons of Tax Credits vs. Grants
| Feature | Tax Credits (SR&ED, etc.) | Grants (IRAP, etc.) |
| Funding Timing | Claimed after expenses are incurred | Awarded before expenses are incurred |
| Approval Process | Automatically received if eligible | Competitive application process |
| Repayment Requirement | No repayment required | No repayment required |
| Flexibility | No restrictions on how funds are used | Often tied to specific projects |
| Certainty | Businesses meeting eligibility criteria get tax credits | No guarantee of approval |
| Compliance & Reporting | Requires tracking expenses and filing claims | Requires detailed project proposals and reporting |
How Businesses Can Combine Tax Credits and Grants
Rather than choosing between tax credits and grants, businesses can strategically use both to maximize funding.
1. Apply for Grants First, Then Use Tax Credits
- Since grants like IRAP provide upfront funding, businesses can apply for them to cover initial R&D costs. Once R&D expenses are incurred, they can claim SR&ED tax credits on the remaining eligible expenses.
2. Use Grants for Specific Projects and Tax Credits for Ongoing R&D
- Many grants are project-specific, meaning they can only be used for a particular initiative. Tax credits, like SR&ED, cover all eligible R&D activities, making them a great complement to grants.
3. Plan Financially to Optimize Refunds
- If a business receives grant funding, it may reduce the amount of eligible SR&ED tax credits. Working with tax advisors ensures that funding is structured to maximize both sources without unintended reductions.
Final Thoughts
Both tax credits and grants provide valuable funding opportunities, but they serve different purposes. SR&ED tax credits are great for ongoing R&D activities and provide businesses with a reliable funding source, while grants like IRAP offer upfront capital for specific innovation projects.
For most businesses, combining both tax credits and grants is the best approach. By leveraging multiple funding sources strategically, companies can reduce financial risks, increase cash flow, and accelerate growth.
