SR&ED vs CDAE: Everything You Need to Know

For innovators in Canada, investments in research and development (R&D) are vital; however, funding innovation often proves challenging, especially for growing companies with limited resources.

The Canadian and Provincial Governments have several programs to help propel investment in R&D in firms across the country. Among them are the Canada Revenue Agency’s Scientific Research and Experimental Development (SR&ED) tax credit and Revenu Quebec’s Tax Credit for the Development of E-Business (TCBE), often referred to as “CDAE,” its French-language abbreviation.

We will explore the key similarities and differences between the two programs so that you can get a better idea of whether the programs are the right fit for your firm. Keep in mind that CDAE and SR&ED are not necessarily mutually exclusive—we will explore this later.

Nature of funding

Both the SR&ED and CDAE programs are tax credits.

A tax credit is an amount of money that a firm can subtract from the taxes they owe the CRA and their provincial agency or it can be a direct refund regardless of taxes paid or owing.

In the case of a refundable tax credit, a firm will receive a cash reimbursement at the end of the year, deducting any taxes due. Meanwhile, non-refundable tax credits are capped at the firm’s tax liability—even if the credit exceeds the owed taxes, the firm will not receive any additional reimbursements and the full value of the credit will not be used. Having said that, non-refundable tax credits can often be carried forward or back.

SR&ED is generally a refundable tax credit for Canadian-controlled Private Corporations (CCPCs). When claimed by non-CCPCs, the program generally offers a 15% non-refundable tax credit. On the other hand, CDAE offers a combination of refundable and non-refundable tax credits.

Eligibility Criteria

Eligible Firms

Most significantly, SR&ED supports firms across Canada, while CDAE only offers credits to firms in Quebec.

The CDAE requires that eligible companies are focused on developing and selling software licenses or services. Your company’s gross revenue must be at least 75% derived from IT sector activities; 50% of these activities must be related to a core subset of the IT sector, as defined here.

Additionally, to qualify for CDAE credits, your company must have at least 6 full-time, eligible technical employees for the entire fiscal year of the claim.

This minimum requirement is more flexible for startups that have existed for less than 2 years. For these firms are eligible once they have 6 eligible technical employees.

The SR&ED credit does not have revenue requirements, nor does it require a minimum number of employees.

Beyond the eligibility of the firm, there is a second level of eligibility for CDAE: the eligibility of employees and their salaries.

Eligible Activities

SR&ED supports R&D activities in any industry. R&D activities must demonstrate a systematic approach, an attempt at technological advancement, and technological uncertainty. As such, projects related to technology that have already been validated and for which there is readily accessible information cannot be claimed.

Contrarily, the CDAE covers innovation activities in E-business, SaaS, and B2B software companies. While CDAE’s revenue requirements are more restrictive, its eligible activities are less rigid and can include routine development.

It is important to note that CDAE does not cover programs that involve software that controls hardware or is built into hardware. As such, projects in the IoT or robotics are essentially ineligible because they involve software that controls mechanical elements.

Additionally, projects that rely on external data sets, such as AI or AI-adjacent projects, are ineligible for CDAE as well. To be eligible, data used in the project must be internally owned and generated—for instance, inventory data would be permitted under CDAE.

Interested in learning more about SR&ED Eligibility? Read our guide here.

Eligible Expenses and Amounts

Both tax credits cover salaries; however, they have different requirements and credit amounts.

CDAE covers only the salary of employees in technical roles—mostly front-end or back-end developers. The CDAE offers a refundable tax credit of up to 24% and a non-refundable tax credit of up to 6% of each eligible employee’s salary. These credits are applied to the total salary, regardless of the portion that is directly related to the CDAE activities.

Note, however, that the CDAE only covers salaries up to $83,333, meaning that firms can only receive up to $20,000 in refundable credit and up to $5,000 in a non-refundable credit per employee salary. There are no restrictions on the number of employees that can be covered by CDAE; however, a fee must be paid to Invest Quebec for each eligibility certificate requested.

Unlike CDAE, companies applying to SR&ED can only claim tax credits on expenses related to R&D activities—salaries, wages, materials consumed or transformed, subcontractor expenses, and overhead.

The SR&ED tax credit covers only the portion of employee salaries and subcontractor expenses that are related to the eligible R&D activities. In other words, the SR&ED refundable tax credit is based on the percentage of time spent on R&D activities relative to the employee’s salary. However, there is a tradeoff: this program also covers the salaries and wages of support employees, such as HR or payroll employees who specifically spend time recruiting engineers for the SR&ED project or handling payroll for project employees. This is known as indirect SR&ED and is claimed in different manners federal and provincially.

Note that unlike CDAE, SR&ED tax credits are not restricted by a maximum eligible salary amount for non-owners.

Application Process

The CDAE’s application process is done in two levels: first, you must apply to Invest Quebec within 15 months of the fiscal year-end in which the expenses were incurred to receive an eligibility certificate for each employee for which a tax credit is being requested. Then, you must submit an application to Revenue Quebec within 18 months of the same fiscal year. These CDAE applications automatically get reviewed—the process is standardized and systematic.

Meanwhile, SR&ED applications are only reviewed by the CRA and do not always get audited, but there should be at least a first-year visit.

SR&ED vs CDAE

So, we’ve discussed the two programs and their differences. Now, which one will be more beneficial to your firm?

CDAE can help firms that are more advanced and are looking to scale up. Many firms receive more SR&ED tax credits in the early days of their innovation projects, and then move towards increasing their CDAE funding amounts as SR&ED covers fewer of their activities.

Because routine development activities are covered under CDAE, firms that are looking to maintain or improve existing technology will benefit. Meanwhile, these activities are not covered under SR&ED.

CDAE is also more beneficial to large or foreign companies, since its tax credits are fixed, unlike SR&ED which offers lower, non-refundable credits to non-CCPC.

Stacking SR&ED and CDAE

If both programs seem like they’d benefit your firm, how do you choose which one to claim? There’s good news: it is possible to claim both SR&ED and CDAE.

A few options exist if you want to benefit from both programs. Claiming federal SR&ED tax credits and provincial CDAE tax credits is a great combination. It is also possible to optimize both CDAE and SR&ED on the provincial level to maximize the tax credit amount, but this is tricky.

If you like to learn more about how to stack SR&ED and CDAE or need some help, speak with our experts to find the best option for your firm’s specific needs.

Still Have Questions?

Read what our experts have to say in our SR&ED FAQ and CDAE FAQ articles.

If you’re considering submitting a CDAE claim or combining credits, don’t hesitate to contact R&D Partners at 1-800-500-7733 for more information or to schedule a meeting with one of our expert consultants.

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific SR&ED or e-business tax credit claim by a dedicated professional.

5 Funding Opportunities for Robotics & Advanced Manufacturing Companies

Advanced manufacturing is at the core of the Canadian economy—without it, creating better products and services and improving productivity would be difficult, if not impossible. Robotics, additive manufacturing, and big data analytics are key to developing innovative and efficient manufacturing processes. 

Canada has been seriously investing in robots since the 1990s. According to Statistics Canada, Canadian firms were using over $1.5 billion worth of robots by 2017. The majority of this technology was used in manufacturing. Invest in Canada reports that the manufacturing industry contributed to 9.5% of the Canadian GDP in 2021. 

However, there are still many efforts to make greater strides in the industry and to increase Canada’s competitiveness and global prominence in the development of cutting-edge technologies. Several not-for-profits and government agencies across Canada have programs and initiatives that promote the advancement of the manufacturing industry.  

Below are some key sponsors interested in fueling robotics and manufacturing innovation, as well as several major programs to look out for. 

NGen  

In 2018, the Government of Canada established five Innovation Superclusters, each representing a key industry sector in the Canadian economy: artificial intelligence, digital technology, plant protein development, marine technology, and advanced manufacturing. This initiative exists to foster innovation, collaboration between researchers and the private sector, and job creation, ultimately, strengthening Canada’s competitive edge in emerging technologies.  

Next Generation Manufacturing Canada, or NGen, is the not-for-profit organization spearheading Canada’s Innovation Cluster for Advanced Manufacturing. NGen strives to build world-leading advanced manufacturing capabilities in Canada, delivering better products and creating more jobs. As of October 2022, NGen has supported 167 projects, with a total value of $605M, and has helped create 1,030 jobs.   

NGen’s Pilot Projects & Feasibility Studies support collaborative projects, involving at least one Canadian SME and a partner organization, that seek to implement, develop, and/or de-risk the adoption of an advanced manufacturing technology or process.  

Innovation, Science and Economic Development Canada  

Innovation, Science and Economic Development Canada (ISED) is a department of the federal government with a mandate to build a competitive, growing Canadian economy. Through a variety of funds and programs, ISED fosters trade and investment, promotes science and innovation, and supports enterprise growth.   

One such initiative is the Strategic Innovation Fund (SIF). This fund’s Business Innovation and Growth streams promote research and development projects that will accelerate the implementation and commercialization of innovative products, processes and services. The Collaborations and Networks streams support research and development through industry collaboration between private sector organizations, not-for-profits, and researchers. The SIF strengthens the competitive advantage of Canadian industries through technological advancement and collaboration.  

Funding opportunities for Robotics and Advanced Manufacturing firms also exist through ISED’s Innovative Solutions Canada (ISC) program. ISC is a competitive research and development program stream that seeks pre-commercial innovations that respond to challenges issued by federal departments or agencies. These challenges are updated frequently and require high-tech solutions in various industries. Past challenges have included a call for prototypes in autonomous systems and robotics and request for proximity sensor systems for space robotics.  

The National Research Council of Canada 

The National Research Council of Canada (NRC) is the country’s largest federal research and development organization. The NRC partners with Canadian industry to bring innovation from lab to market, collaborating with over 1,000 companies each year. 

The NRC is best known for its Industrial Research Assistance Program (IRAP), an initiative that helps Canadian SMEs develop and adopt new technologies, conduct research and development, and drive business growth through financial assistance, advisory services, and networking. In 2018-2019, IRAP increased its funding limit to $10 million; however, assistance typically ranges from $50,000 to $500,000.  

Quebec’s Innovation Program 

In Quebec, the Innovation Program supports innovation projects that are either conducted in-province or with partners in other provinces or countries. This government initiative, funded by the Quebec Ministery of Economy, Innovation and Energy (MEI), is administered by Investissement Québec, a business development corporation that aims to help businesses establish subsidiaries in Quebec and to strengthen the Quebec business ecosystem.  

The program has two components: Support for Innovation Projects and Support for Mobilizing Projects. Both support for-profit corporations and groups of corporations, and social economy organizations including cooperatives and not-for-profit organizations. For robotics and advanced manufacturing organizations that thrive off of efficiency and cutting-edge technologies, the first component offers funding for the development or improvement of a product or process. Applicants must demonstrate a need for new innovation and for research and development efforts, and show a potential for commercializing the innovation. 

Business Scale-up and Productivity Program 

The Business Scale-up and Productivity (BSP) program helps high-growth firms adopt and commercialize leading-edge technologies and processes in advanced manufacturing, clean resources and technology, digital industries, health sciences, natural resources value-added processing, ocean technology, and value-added agriculture. The program accepts applications on an ongoing basis with no submission deadlines. 

The BSP program operates across Canada under different Federal Economic Development Agencies. In Quebec, the program is led by Canada Economic Development for Quebec Regions (CED) and offers SMEs interest-free, repayable contributions equivalent to up to 50% of eligible project costs. It focuses on firms operating in manufacturing, food processing, information, communications and multimedia technologies, and life sciences, but other sectors may also be eligible. 

The FedNor BSP program, which operates in Northern Ontario, offers the same.  

The FedDev Ontario BSP program provides between $500,000 and $10 million in interest-free, repayable contributions supporting up to 35% of eligible project costs. 

The Atlantic Canada Opportunities Agency BSP program serves businesses in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island, offering unsecured, interest-free, repayable contributions. Additional funding may be available to Indigenous businesses. 

Finally, the PrairiesCan BSP serves Alberta, Manitoba, and Saskatchewan and funds up to 50% of eligible project costs, offering interest-free repayable contributions between $200,000 and $5 million. Preference will be given to applicants that are operating in food and ingredients processing, zero-emission heavy equipment vehicles, and critical minerals processing. 

How R&D Partners Can Help 

If you have any questions about the above programs or other funding opportunities, please reach out to Veronica Campbell at vcampbell@partenairesrd.com. 

Changes to the Tax Holiday Program for Foreign Researchers and Foreign Experts

The Ministère de l’Économie et de l’Innovation (MEI) recently announced changes to the eligibility criteria for the Tax Holiday Program for Foreign Researchers (FR) and Foreign Experts (FE). This program is designed to facilitate the recruitment of foreign researchers or foreign experts capable of aiding in the commercialization of innovation activities or the advancement of technology, respectively, within private companies in Quebec. Quebec companies remain competitive by attracting highly qualified researchers/experts to perform scientific research and experimental development (SR&ED).

What’s New?

1. The tax holiday is applicable as of the date of hire on contract.

The tax holiday is now based on the hiring date and the number of months that pass after this date, rather than in calendar years following the year in which the hiring date fell – making it much more beneficial.  If a candidate is hired October 9, 2021, the tax holiday begins on October 9, 2021, and lasts for 60 months, i.e., October 9, 2026.

2. Applications must be submitted prior to moving to Quebec.

The rules also state that candidates now need to apply before their arrival to Québec. This means that employers should apply prior to the candidate’s hiring date and arrival into Québec. Those who are already in Québec and that have not yet applied should move forward with applications as soon as possible to avoid any issues. These changes are on-going and may be further refined in the next couple months.

3. The comparative evaluation requirement has been updated.

Previously, the approval of the tax holiday depended on the receipt of the comparative evaluation certificate. Going forward, the comparative evaluation may not be required for approval. However, it may be requested during the review process on a case-by-case basis; it is therefore recommended to apply in advance to minimize the processing time as the comparative evaluation issuance process is the longest part.

One of the following documents must now be submitted with the tax holiday application:

  1. Copies of post-secondary diplomas with a list of courses taken for each diploma and a certified copy of the applicant’s last relevant diploma, OR;
  2. Comparative evaluation of studies completed outside Quebec issued by the Ministry of Immigration, Francisation and Integration (MIFI) and sent directly to MEI

4. No annual renewal is required for FRs, but it is still required for FEs.

Foreign researchers only need to submit one application to receive the full tax holiday, no longer needing to submit annual follow-ups. For foreign experts, annual renewal applications are still required for the five-year duration of the tax holiday. Once the initial expert certificate has been issued and the candidate is employed in Québec, the employer must submit an annual application for the expert certificate annually before March 1 of the calendar year following the tax year for which the applicant is taking the tax holiday.

Additional information on the comparative evaluation

Along with the comparative evaluation document, the candidate should include certified copies of all post-secondary diplomas they wish to have evaluated by the Ministry, noting that the minimum education requirement for the tax holiday is a graduate degree for foreign researchers and a first cycle university degree (bachelor’s) for foreign experts. If you would like to learn more about the tax holiday program requirements, please read our previous article.

To find recognized authorities to certify your degree as a true copy please see the List of authorities recognized by the Ministère for certifying documents. It explains how to obtain a certified copy of your diploma depending on the country or territory where your documents were issued. A copy certified by the issuer of the document (your university) is always the preferred format.

Further reading

If you have any questions about the Tax Holiday Program that this blog post left unanswered, or if you are considering submitting a claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.102.

 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific tax credit claim by a dedicated consultant.

Your Questions About CDAE, Answered by an R&D Partners Expert

Introduction

The Tax Credit for the Development of E-Business, commonly referred to as “CDAE” – its French-language abbreviation – is a provincial tax credit available in Quebec for businesses developing e-business software solutions in the province.

To be eligible, a business must have a minimum of 6 eligible employees spending 75% or more of their time on technical activities, and 75% of the company’s gross revenue must be coming from IT sector activities.

The funding is structured as a maximum 24% refundable and 6% non-refundable tax credit for each eligible employee’s salary.

This quick overview does not cover every detail of the CDAE tax credit. For more information on the program, read our dedicated blog post.

We often get questions about CDAE, so we’ve asked a member of our team of experts to answer the most common ones for you below.

The expert

Sahar Ansary, M. Eng.

Sahar has assisted hundreds of small to large-sized organizations across Canada with SR&ED and E-business tax credit programs for over ten years and has led work on over $50M in related claims.

She specializes in identifying and optimizing the technical and financial aspects of various funding programs, maximizing overall tax credits, and managing major accounts. Sahar has significant experience in the aerospace, medical device, and software industries.

The questions

What is meant by “e-business” when it comes to the CDAE credit?

The CDAE Tax Credit criteria defines “e-business” much more broadly than just e-commerce.  It is not limited to the transactional side of e-commerce that we traditionally think of; the program guidelines state that it “concerns the organization of work in a company as well as how the company communicates and exchanges data with its customers, subcontractors, suppliers and partners.”

Eligible companies are therefore those who develop software for other businesses to evolve in that direction and digitize their operations at various levels – HR, procurement, accounting, and more. Traditional e-commerce is also eligible if a company is developing a software solution allowing monetary transactions, but the program includes a lot more than this under the umbrella of “e-business.”

Who can be considered an eligible employee?

Eligible employees for the CDAE tax credit are full-time indeterminate salaried employees in Quebec that work a minimum of 26 hours per week and spend over 75% of their time on technical activities.

When an individual is temporarily absent from his or her work for grounds considered to be reasonable (e.g. temporary illness, maternity leave, paternal etc.), Investissement Québec (IQ) may deem that the employee continued to work throughout the period of absence for the purpose of determining tax credit eligibility. For instance, someone who worked  20 weeks during the fiscal year because they were on sick leave during the rest will still be considered as an eligible full-time employee.

What counts as a “technical activity”?  

The CDAE eligibility guidelines stipulate that an employee must be devoting at least 75% of his/her time to carrying out, supervising, or directly supporting eligible activities to be eligible. Those activities must be technical and some examples include the following:

  • Design and development of e-business solutions
  • Quality control (testing, 2nd and 3rd level support)
  • Maintenance and evolution of e-business solution
  • IT consulting services for e-solution (customization, integration, deployment)
  • Technical coaching and supervision of technical employees/team.

If an employee spends more than 25% of their time on non-eligible activities during the fiscal year, then that employee will not be eligible for the CDAE tax credit because they won’t respect the 75% rule (ex. an HR employee or a CEO would not be eligible, because they spend a lot of time on administrative tasks and very likely do not spend 75% of their time on eligible technical work).

Do you need to continuously have 6 technical employees or more to remain eligible for the CDAE credit?

Yes, and no. What you need are 6 eligible positions maintained throughout the year. The requirement is not tied to any individual employee because you obviously do not control if someone leaves the company during the year.

For example – if one back-end developer leaves, and you fall below the 6 required eligible employees, you do not suddenly become ineligible. As long as you have the intention to replace this employee with another back-end developer (i.e. someone in the same position) and do so within around 6 months, everything should work out fine. You will essentially have had two employees in one role in the year, and both will be eligible.

Past the 6 month timeline, you may need to provide stronger arguments to explain why a replacement could not be found. However, note that none of this applies if you “lay off” an employee (i.e. ROE indicates code A in box 16 ) as no replacement can be justified in this case.

Can employees join during the year and still be eligible?

If an employee was hired towards the end of the fiscal year and, as such, worked for less than 40 weeks, they are eligible if they still hold the same position at the company beyond the fiscal year end. If an employee worked less than 40 weeks and quit during the fiscal year, they will only be eligible for the tax credit if the company found a replacement or if the company is still actively looking for one. The rule stating that they must have spent 75% of their time on eligible technical activities also still applies, of course.

How is the CDAE calculated if an employee joins during the year?

When employees join during the year and they meet the 75% rule, their maximum eligible salary cap of $83,333 is prorated based on the number of days they worked in that fiscal year.

For example, if an employee is hired at the beginning of Q3 and worked 100 days before the end of the fiscal year, their salary cap will be prorated by the following ratio:  Once we apply it to the maximum cap offered by the program, we get 100/365 x $83,333 = $22,830.

 

If you have any questions about CDAE that this blog post left unanswered, or if you are considering submitting a claim, don’t hesitate to contact our team at:  1-800-500-7733, ext.102.

 

Disclaimer: The views expressed in this article are provided for informational purposes only. It is not intended to nor can it replace the evaluation of your specific e-business tax credit claim by a dedicated consultant.

SR&ED vs IRAP: Everything You Need to Know

The National Research Council of Canada Industrial Research Assistance Program (NRC-IRAP) and the CRA’s scientific research and experimental development tax credit (SR&ED) are two programs of major importance for Canadian innovators.  

In this article, we will examine the key similarities and differences between SR&ED and IRAP and how these programs can work together to maximize your government funding for your innovative technology project.   

Nature & Timing of Funding 

The first fundamental difference between SR&ED and IRAP is that the former is a tax credit, while the latter is a grant. This mainly affects when the funding is received from each program, but also the administrative overhead necessary to access funds, as well as the reporting requirements that come with the funding.  

A tax credit – like SR&ED – provides funding after the expenses are incurred. For Canadian Controlled Private Corporations, the SR&ED program offers a refundable tax credit disbursed after the CRA receives the claim. Therefore, SR&ED is typically less useful in cases when a business is looking to sustain their cash flow as they undertake a project.  

This is especially true when a business submits their first SR&ED claim, since the retroactive funding will not arrive until after the end of the fiscal year. However, when claiming SR&ED every year, the refund from the previous year helps sustain the cash flow for the next period.   

IRAP, on the other hand, requires monthly refund requests after the initial application is received and accepted. This means that a grant program such as IRAP is naturally more apt at sustaining a business’ cash flow while a specific project requires it. This is especially true for first-time applicants.  

Funding Amounts 

Once the federal and provincial tax credits are combined, SR&ED typically offers a refundable tax credit ranging from 54% (no provincial tax credit) to 74% (Quebec, beyond the threshold) of eligible salary expenditures to Canadian controlled private corporations. The exact tax credit rate depends on the size of the claimant company and a few other factors.  

IRAP on the other hand is a grant and its funding is allocated on a discretionary basis. A certain amount is approved with the initial application when a budget is submitted. Therefore, the final funding amount will vary depending on  the project, but typically goes up to 80% of salaries expenditures.  

Eligible Expenses 

IRAP and SR&ED share salaries as eligible expenditures, but treat them very differently. Since IRAP is a grant program and must be applied for before the project starts, applicants submit a budget which will end up dictating the amounts of funding they are entitled to receive, if accepted into the program.  

For example, ABC Corp plans to assign 2 employees to work on a project they wish to fund through IRAP. They include this in their application, and the NRC agrees to fund up to 50% of those 2 employees’ salaries. Three months later, they realize they will need an additional team member to complete the project. The additional employee who ends up working on the project will, in this example, not be covered by the initial agreement, and therefore, their salary will have to be paid by ABC Corp, with no additional support from the NRC.  

Since SR&ED is a refundable tax credit, it is able to account for all the actual costs incurred for a given project for the past fiscal year. Those costs are eligible salaries, subcontracting expenses, and other eligible expenditures related to eligible R&D activities for the SR&ED project. This may also include certain overhead expenses. 

This level of specificity is why time tracking is important for a company planning to claim SR&ED.  

Let’s consider ABC Corp again. Say they decide to forego IRAP funding altogether for simplicity’s sake – we will return to stacking IRAP & SR&ED later. They decide to attempt to claim SR&ED for their project at the end of the year instead and are tracking their employees’ time as it is spent on different tasks and projects.  

We will assume, for simplicity sake, that ABC Corp is eligible for the maximum 74% refundable credit and have 5 employees in total. 2 of them begin working on the SR&ED project, but at some point during the year a third employee joins the project. When the time comes to submit the SR&ED claim, their eligible expenses would be as follows, assuming they did not receive any other overlapping funding for the project:  

First, because they did not work on the R&D project at all, 0% of the salary of the 2 employees who did not do any experimental development work would be eligible for SR&ED.  

For the 3 remaining employees who did do eligible experimental development work, the amount of time spent on the project needs to be taken into account in order to determine which portion of their salary is eligible for SR&ED. 

According to their timesheets, at the end of the year it can be concluded that: 

  • Employee #1 worked on eligible experimental development work 75% of their time.  
  • Employee #2 worked on eligible experimental development work 50% of their time. 
  • Employee #3, who joined the project much later, worked on eligible experimental development work 25% of their time. 

Therefore: 

  • 75% of Employee #1’s salary for the claim year is eligible for a 74% refundable tax credit.  
  • 50% of Employee #2’s salary for the claim year is eligible for a 74% refundable tax credit. 
  • 25% of Employee #3’s salary for the claim year is eligible for a 74% refundable tax credit. 

Of course, SR&ED claims are never this straightforward, but this example seeks to illustrate the basic principles that guide how the eligible salaries are determined.  

SR&ED can also fund materials necessary for the project, something IRAP does not do.  

Evaluation Criteria 

While there is some overlap when it comes to the eligibility criteria of SR&ED and IRAP, there are some important differences to note. 

First, neither SR&ED nor IRAP have industry specific criteria – therefore, any company could theoretically be eligible as long as they are conducting eligible experimental development activities. 

Experimental development can look drastically different depending on the industry. Find out how to determine if your project is eligible in our blog post all about the topic here.   

This does not mean either program funds anything or everything. For example, IRAP excludes any clinical trial activities from their eligible project costs. This does not exclude pharmaceutical companies altogether but is still important to keep in mind when applying for funding.  

Furthermore, neither program formally requires a minimum number of employees or years in business in order to be eligible. That said, while SR&ED can be claimed by an individual – there is no incorporation requirement – IRAP does require the company to be incorporated, and the company generally needs to be revenue-generating as well. Businesses with more than 500 employees are not eligible for IRAP, as the program is purposed to support small and medium businesses.  

While IRAP does not require a minimum number of employees, the program’s monthly reporting requirements make it more complicated to handle for small businesses with little administrative staff. A business entirely run by its two co-founders or an otherwise very small, specialized technical staff are rarely awarded IRAP funding. Therefore, the size of the team does have an impact on the usefulness of IRAP to a specific company.  

SR&ED is usually more advantageous for such smaller teams because, while it requires diligent time tracking of all activities related to the project throughout the year, the claim is only submitted once for the whole year. 

A key difference to note between SR&ED and IRAP’s evaluation criteria is that the CRA has no return-on-investment considerations when they fund a SR&ED project. On the other hand, IRAP’s mission is to advance technology in Canada and stimulate Canada’s growth as a science and technology leader on the world stage. Therefore, eligible projects are selected much like investments. Only those with the greatest commercialization potential and that advance science and technology in a way that the NRC considers significant enough will receive funding. In this way, NRC IRAP is a competitive program – not all applicants, even if they may be eligible, receive funding.  

SR&ED is not subjective. As long as a project and related corporation/individual meet the criteria according to the lawit will be accepted – assuming the claim is submitted correctly and on time.  

Stacking  

It is perfectly possible for a company to benefit from both SR&ED and IRAP for the same project. However, a few things must be kept in mind.  

Since some eligible expenses could both be covered by SR&ED and IRAP, having received IRAP funds throughout the project would necessarily reduce the amount of the future SR&ED refund. Of course, the difference here is the timing of when the funds are received. As mentioned earlier, IRAP is better designed for supporting cash flow because of its monthly reimbursement structure, so it makes sense to apply for IRAP if increasing cash flow during the project is a primary concern. It will still be possible to submit a SR&ED claim and receive the refundable tax credit amount, but it will almost certainly be reduced by the amounts that overlap with NRC IRAP funded activities.  

Want to find out more about the best practices related to stacking funding programs? Read our dedicated blog post here.   

Stacking funding programs requires paying extra attention to the stacking limits of each program and how they interact with each other. Double-dipping – covering the same expense twice – can come with its fair share of trouble.  

This is particularly true when using IRAP as the NRC conducts a systematic audit of every application, whereas SR&ED claims do not automatically get audited.  

Have questions about the SR&ED audit process and how to prepare for it? Find out more here.  

Whether you get audited or not, you should always be ready by preparing your claim carefully and having all the necessary documentation. 

 

Disclaimer: This article is intended for informational purposes only and does not constitute professional advice.

To know more about SR&ED, IRAP and any other funding program and how your business can benefit from it, contact Mike Lee at:  1-800-500-7733, 110 mlee@rdpartners.com.  

Federal Budget 2022: Key Measures and New Funding for Canadian Innovators

Deputy Prime Minister and Finance Minister Chrystia Freeland unveiled the 2022 Federal budget on April 7, 2022. Titled “A Plan to Grow Our Economy and Make Life More Affordable,” the budget announces a number of changes to existing programs and new initiatives to fund the development of green energy, the circular economy and Canadian innovation.

The following article offers a brief overview of some of the highlights of the 2022 Federal budget and the impact these new measures may have on innovative Canadian companies in the years to come.

Updates to the SR&ED Tax Credit 

After nearly three years of no major changes to the federal Scientific Research & Experimental Development tax credit program – the last significant modifications date back to 2019 – Budget 2022 officially announced that the program will be undergoing a formal review to find out if changes to the eligibility criteria are necessary. The review will also consider the possibility of implementing a “patent box” regime to encourage the development of innovative IP in Canada. A “patent box” essentially allows income earned from IP to be taxed at a lower rate than other business income, encouraging innovation.

This review was just announced, so we cannot be sure of its impact on the program at present. However, there are reasons to believe that any changes may expand access to the program and program funding, rather than restricting it. This is because expanding access to SR&ED was part of the Liberals platform for the 2021 election.

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Creation of an Innovation and Investment Agency

Budget 2022 announces the creation of an operationally independent federal innovation and investment agency, with a planned budget of $1 billion for its first five years of operation – starting in 2022-3. Additional details have yet to be announced, but the agency’s mandate will generally be to work with existing and new businesses in crucial industries and help them make investments necessary for their growth and increase their competitiveness.

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Creation of the Canada Growth Fund

This brand-new investment fund aims to attract private capital to Canada to encourage growth in strategic sectors and fund initiatives related to key economic goals like emissions reduction, low carbon technology development, supply chain restructuring, the development of the primary resource sector, and more. Funding will take a variety of forms, including equity, debt financing, and loan guarantees.

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Introduction of a new Investment Tax Credit for Carbon Capture, Utilization and Storage

A new refundable tax credit, effective for projects starting on or after January 1, 2022, will be introduced to offset the cost of carbon dioxide capture and storage equipment purchases. This new credit’s rates will vary between 37.5% and 60% until 2030.

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Additional Funding for the Development of Semiconductors

Innovation, Science and Economic Development Canada will receive $45 million over 4 years to engage in various activities aiming to support semiconductor projects and strengthen Canada’s place in the sector.

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Additional Funding for Canada’s Superclusters

The budget plans for an additional $750 million in funding over 6 years for the 5 innovation superclusters to support projects and foster public-private collaboration in key economic sectors. The superclusters have also been officially renamed Global Innovation Clusters moving forward.

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Read our article dedicated to the Supercluster initiative to find out more about each cluster and their programs.

Making the SME lower tax rate more accessible

Canadian small businesses already benefit from the reduced federal tax rate of 9% on their first $500,000 of taxable income, a 6% tax cut from the general 15% federal corporate tax rate. The current rule only allows businesses to access this lower corporate tax rate as long as their level of capital employed in Canada stays under $15 million.

For taxation years beginning on or after April 7, 2022 – budget day – access to the reduced tax rate will instead be phased out gradually, and only businesses with $50 million or more in employed capital in Canada will be fully excluded from the reduced rate.

The goal of this measure is to incentivize small businesses to grow and make capital investments without drastically increasing their tax burden.

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How R&D Partners can help

If you have any questions about this or other tax credit programs, do not hesitate to contact Jacob Ma at jma@rdpartners.com

Other Resources

Federal Budget Summary

Full Budget PDF

This article is intended for general informational purposes only and does not constitute professional accounting or tax advice.

2022-3 Quebec Budget: Key Takeaways for Quebec Innovators

Finance minister Eric Girard tabled budget 2022-2023 on March 22nd, 2022. The budget includes several measures to address the rise of the cost of living for Quebec taxpayers, but also many interesting updates that innovative businesses headquartered in or with operations in the province of Quebec will want to be aware of.  

The largest spending envelope identified in this year’s budget is the $8.9 billion earmarked for the restoration and the enhancement of Quebec social services and healthcare system by 2026-2027. A $4.2 billion spending package dedicated to fueling economic growth in the province comes second. 

This article will mainly focus on identifying new or modified tax measures and how they will benefit Quebec businesses. We will also discuss some measures that have yet to be precisely defined, but are likely to lead to funding or opportunities for Quebec science and technology innovators.  

General Research and Development Investments for 2022-2027  

Within the $1.3 billion set aside by the Quebec government for the continuation of R&D efforts in the province, $500 million will be allocated to private equity funds and $100 million directly to the Impulsion PME Program. Both of these spending envelopes seek to encourage the development of even more innovative businesses in the province. (E.11) 

Find the Impulsion PME Program in our funding search engine 

C3i Tax Credit Bonified Rates Further Extended Until December 31st 2023 

The 2021-2022 Quebec budget introduced doubled base rates for the C3i tax credit, which were initially going to apply to eligible equipment purchased between March 25, 2021 and December 31st 2022. These doubled rates are now available until December 31st 2023. This gives eligible businesses another full year to make equipment and software package purchases and benefit from the doubled tax credit rates. (E.28 

Read our full article on the C3i tax credit to learn more about the eligibility criteria and the types of expenses that qualify here 

Launch of a New Cybersecurity Enhancement Program  

While the budget states that details will be communicated by the appropriate bodies at a later date, we know that a total of $100 million – $30 million in 2022-3 and $70 million in 2023-4 – have been set aside for the creation of a new program to fund initiatives aiming to strengthen cybersecurity in Quebec. (E.25) 

Projects will be deployed in public bodies with the goal of helping the government ensure its digital transformation, protect citizens’ information and ready themselves in the case of cyberattacks.  

Supporting the Bio Food and Forestry Sectors 

The Financière Agricole du Québec (FADQ) will receive an additional $50 million over the next two years to continue funding eligible projects through its Growth Investment Program. Its strategic investment subsidiary known as Capital Financière Agricole will also receive $10 million more in capitalization to continue to support a variety of food processing and agri-food related innovative projects. (E.47) 

Innovation Bois, a program created to support innovation in the forestry sector, will also receive an additional $75 million in funding to increase productivity and support the sector’s diversification.  

New Biofuel and Pyrolisis Oil Production Tax Credits 

Two brand new biofuel and pyrolisis oil production tax credits will replace three previous refundable tax credits: one for the production of ethanol in Quebec, one for the production of cellulosic ethanol in Quebec, and one for the production of biodiesel fuel in Quebec. All three will expire on March 31, 2023. (F.14) 

The new tax credits’ assistance amounts will be calculated based on the carbon intensity reduction offered by the biofuel, ethanol or pyrolysis oil produced compared to the use of an equivalent quantity of regular fossil fuels. Additional details have yet to be released.  

 

How R&D Partners can help 

If you have any questions about funding for innovative companies in Quebec, do not hesitate to contact Jacob Ma at

 

Other Resources 

Ministère des finances du Québec 

2022 Quebec Budget: Province to Keep Spending Taps Open (TD)   

 

This article is intended for general informational purposes only and does not constitute professional accounting or tax advice.    

Funding Opportunities for Women Founders

March 8th marks International Women’s Day, and we thought this would be a fantastic opportunity to take a closer look at a few funding opportunities from government entities, not-for-profit organizations and accelerators focused on supporting women business founders nationwide.  This article provides a summary of some significant funders and support organizations in Canada that women-owned businesses should be aware of, as well as a few specific details on some of the opportunities they offer.  

Canada-wide 

BDC: Women in Technology (WIT) Fund 

The Business Development Bank of Canada (BDC) is a crown corporation that offers various resources for entrepreneurs looking to innovate in new and existing markets. It works with small and medium-sized businesses in various stages of growth with a focus on flexible financing, advisory services, and capital. 

The BDC Capital Women in Technology (WIT) Fund is a venture capital fund entirely dedicated to investing in Canadian, women-led technology companies and helping to build a robust ecosystem to support women in tech today and in the future. This fund offers seed to series B investments to eligible businesses and provides venture partner networking and international growth opportunities. Applications are accepted on a continuous basis. 

Export Development Canada (EDC): Women in Trade Investment Program 

Export Development Canada (EDC) is a crown corporation that assists companies of all sizes with trade knowledge, financial solutions, equity, insurance, and developing connections. Its mission is to help Canadian businesses achieve success by offering financial solutions and international expertise.   

The Women in Trade Investment Program offers export support to women-led and owned companies seeking to explore  or already in international markets. This program provides resources for every stage of the exporting journey and helps participants manage risks and cashflow. EDC also offers Select Credit Insurance and access to expert advice to help exporting businesses stay competitive on the global market. Applications are accepted on a continuous basis. 

SheEO 

The SheEO Canada Fund is a federally incorporated Canadian not-for-profit. The fund is also present in Australia, the United Kingdom and New Zealand. Their business model brings together women and non-binary individuals from different backgrounds and ages (called SheEO Activators), who contribute to a Perpetual Fund that is then in turn loaned out at zero percent interest to women or non-binary individual led ventures. The program also provides networking, coaching and mentoring to the selected ventures. SheEO is not currently seeking new applicants for its portfolio at this time, but there is at least one application round per year.  

DMZ: Women Founders Bootcamp  

Based in Toronto, The DMZ is an incubator that supports innovative tech startups by connecting them with customers, capital, experts, and a community of entrepreneurs and influencers.  

The Women Founder Bootcamp is a six-week program that helps early-stage tech founders validate their business idea, establish a minimum viable product, and build a roadmap for implementation to launch a startup. The goal of the program is to help these founders increase their businesses potential and meet eligibility requirements for DMZ’s core programming. 

Quebec 

McGill Dobson: McGill Dobson Entrepreneurial Women Lean Startup 

The Dobson Centre is the hub for entrepreneurship at McGill University and brings together members of all faculties to create innovative startups in a variety of domains. Its accelerator programs are intended for McGill affiliated individuals that are currently students, alumni, faculty, or staff.  

The McGill Dobson Entrepreneurial Women Lean Startup Program is a new version of Dobson’s existing Lean Startup Program specially designed for women innovators and aspiring business founders. The 8-week program offers participants the opportunity to learn from the experiences of successful female founders, training workshops, and coaching. The goal of the program is to equip aspiring founders with frameworks that will help them develop a business plan and set realistic goals for their projects.  

At the time of publication, the deadline to apply for the next cohort of Women Lean Startup program is April 17, 2022.  

Groupe 3737: Fempreneures 

Founded in 2012, Groupe 3737 assists entrepreneurs from all backgrounds start and grow profitable business. Their services are mainly intended for immigrants and underrepresented entrepreneur groups.  

The Fempreneures program is a continuation of the Elevation program, with an emphasis on female entrepreneurship. 3737 created this program specifically for women entrepreneurs in response to the many studies showing that women remain underrepresented in entrepreneurship and face distinct challenges.  

This accelerator program mainly offers training and peer support.  

EVOL: Business Startup Loan 

Evol is supported by the Quebec Ministry of Economic Development and the Government of Canada. It supports the development, acquisition, and growth of diversified and inclusive businesses with positive impacts on society in accordance with the UN’s Sustainable Development Goals (SDGs) and seeks to contribute to the development of more diverse and sustainable businesses led by members of underrepresented groups in entrepreneurship. EVOL defines these underrepresented groups as those who identify as one or more of the following: women, racialized people, immigrants, First Nations, Inuit, LGBTQ2+ community members and people with disabilities.    

EVOL offers business startups loans  ranging from $20,000 to $75,000. Entrepreneurs applying for funding will have the opportunity to finance the acquisition of tangible and intangible assets, working capital, development and marketing of products, and more.  

Alberta 

Alberta Women Entrepreneurs (AWE)  

In 1995, Western Economic Diversification Canada (WD) identified critical gaps in access to financing and services for women entrepreneurs. To fill these gaps, WD committed funds to create Women’s Enterprise Initiatives (WEI’s) in the four western provinces, including Alberta Women Entrepreneurs (AWE). 

Alberta Women Entrepreneurs (AWE) is a not-for-profit organization that enables women to develop successful businesses. Founded in 1995, it provides advising, financing, mentoring, and networking services to women at all stages of their business ventures. 

AWE offers business loans for women-owned businesses in Alberta. It offers financing between $30 000 and $150 000 to start or grow a business, as well as business advising and access to networking with like-minded entrepreneurs. Applications are accepted on a continuous basis. 

British Columbia 

WeBC 

Similar to the Alberta Women Entrepreneurs (AWE), WeBC is also part of the Women’s Enterprise Initiatives (WEI’s). It is a not-for-profit organization that has supported women business owners across British Columbia for over 25 years. WeBC offers financing, as well as mentoring, webinars, business skills development, and advisory services. 

WeBC offers business loans for women small business owners.  It provides funding of up to $150 000 with various repayment options and terms of up to 5 years. Loans can be used for leasehold improvements, equipment, operating capital, and more. Applications are accepted on a continuous basis. 

Funding Opportunities for Black-Owned Businesses

To celebrate Black History month in Canada, we took a closer look at a few funding opportunities from government organization, public-private partnerships and non-profits specifically intended for black and other minority business owners across the country. This article offers an overview of some key funders and support organizations Black business founders in Canada should know about as well as some details on some of the opportunities they offer.  

Futurpreneur Canada: Black Entrepreneur Startup Program  

Futurpreneur is a non-profit organization that offers financing, mentoring and support tools to business owners aged between 18 to 39 years old. 

The Black Entrepreneur Startup program provides startup loan financing from $5,000 to $60,000 and up to two years of one-on-one expert mentorship. Recipients also have access to resources and the opportunity to engage with a national network of Black entrepreneurs, leaders and Black-led community organizations at a variety of entrepreneurship events.  

This program is funded by the Royal Bank of Canada (RBC) and BDC.  

The FACE Coalition: Entrepreneurship Loan Fund 

The FACE coalition is a Black-led non-profit organization focused on providing resources and information to the Black community across Canada. They support sustainable economic initiatives and help develop strategic partnerships to accelerate the creation of generational wealth in Canada’s Black communities. The Black Entrepreneurship Loan Fund was created to provide funding for Black business owners seeking investments, working capital, or additional resources to expand their businesses.  

The fund offers micro and macro loans to eligible entrepreneurs. The micro loans are administered by Vancity Credit Union and Alterna Savings and are available in Ontario and British Columbia. Their macro loans, on the other hand, are funded by BDC and the Government of Canada and are available across the country. Macro loan amounts range from $25,000 to $250,000 and principal payments can be deferred for up to a year. 

This loan fund was created as a part of the Government of Canada’s Black Entrepreneurship Program 

EVOL: Business Financing

Evol is an organization financially supported by the Quebec Ministry of Economic Development and the Government of Canada. It supports the development, acquisition, and growth of diversified and inclusive businesses with positive impacts in accordance with the UN’s Sustainable Development Goals (SDGs) and seeks to contribute to the development of more diverse and sustainable businesses. With a combination of financing and personalized guidance, as well as adapted complementary services, EVOL supports under-represented groups in entrepreneurship and their businesses. EVOL defines these underrepresented groups as those who identify as one or more of the following: women, racialized people, immigrants, First Nations, Inuit, LGBTQ2+ community and people with disabilities.  

EVOL offers two business lending options: startup loans ranging from $20,000 to $75,000, and growth and acquisition project loans offering between $20,000 and $450,000 in repayable financing.  

Afro Caribbean Business Network Foundation: Micro Loan Fund

The Afro Caribbean Business Network Foundation supports African and Caribbean entrepreneurs with their business projects. They develop funding programs and compile tools and resources to help all kinds of entrepreneurs. Their network of experts also provides assistance for all stages of business planning and development. 

Their Microloan Fund offers low interest loans to African and Caribbean. The program offers micro-loans ranging between $500 and $2,500.   

DMZ: Black innovation fellowship

DMZ supports several technology incubator and accelerator programs around the world. Their programs support tech startups by offering them expert mentoring, access to capital and a community of entrepreneurs and influencers. 

Their incubator program supports early-stage tech startups by helping them start their business in earnest. Startups join with a minimum viable product and some form of market validation, and over the course of 8 to 12 months receive the hands-on support needed to further develop their product, build their team and create a sales strategy.  

The Black Innovation Fellowship offers a number of added benefits and opportunities in addition to the incubator’s regular programming and is specifically destined for black tech startup founders. These opportunities include tailored workshops, exclusive marketing and networking opportunities and dedicated support from DMZ’s Black Innovation Programs staff.  

Overview of Quebec’s C3i Tax Credit for Investment and Innovation

The Quebec provincial government first introduced the Tax Credit for Investment and Innovation – or C3i for short – in its March 2020 budget. It was initially intended as a replacement for prior investment and innovation tax credits, with more advantageous rates and broader eligibility.  

This article offers an overview of the tax credit’s criteria, reimbursement rates and other relevant details. It will also examine the changes the 2021-2 Budget introduced to the tax credit in response to the COVID-19 pandemic to further support economic revitalization and recovery.  

Company Eligibility 

The C3i tax credit is not restricted by industry – with a few notable exceptions we will touch on later. Its first stated goal is to encourage the purchase of manufacturing and processing equipment. It can also be used to purchase enterprise resource management software packages – ERP for short – and computers. The broader goal is to help Quebec businesses digitize their operations and modernize their equipment, and accelerate these investment projects by reducing the financial burden on the corporations that undertake them.   

Quebec “qualified corporations” – that is corporations carrying business and with an establishment in the province – are eligible for this credit. A few exceptions apply to certain aluminum producers and oil companies. Additionally, certain businesses engaged in partnerships that operate aluminum production sites or oil refineries may not qualify either.  

All businesses in Quebec are eligible regardless of location, but the economic vitality index for each region affects tax credit rates under this program. This means that businesses in more economically developed areas will have lower tax credit rates, and those in economically underdeveloped areas will have higher tax credit rates. We will examine these different rates in detail below.  

Tax Credit Rates 

Businesses with assets and gross income below $50 million can benefit from a fully refundable tax credit. Those with assets and gross income exceeding $100 million are instead eligible for a non-refundable tax credit. Finally, the C3i tax credit is partially refundable for businesses that fall in between the $50 and $100 million thresholds.  

As mentioned earlier, businesses located in areas considered to have “low economic vitality” are eligible for higher tax credit rates. Those areas are those with an economic vitality index amongst the lowest 25% in the province. The complete list of regions eligible for the highest tax credit rate, as well as a map showing the original tax credit rate for each administrative region of Quebec can be found in section C-42-43 of Budget 2020. Three new territories can also qualify as having low economic vitality for eligible purchases made after June 2021: Le Domaine-du-Roy, Maskinongé and Papineau. 

It is important to note the difference between the original tax credit rates that came with the tax credit’s original 2020 Budget announcement, and the temporarily bonified rates announced in the 2021 budget in response to the COVID-19 pandemic. The bonified rate is simply double the original rate.  

All eligible equipment purchased outside of the bonified tax credit rate period (March 25, 2021 to January 1, 2023 exclusively) will still be eligible for the tax credit at its original nonbonified rates – as long as it is purchased before January 1, 2025, the current final end date for this tax credit. At the time of publication, eligible businesses have a little bit less than a year to purchase equipment and software that will qualify for the bonified rates. 

Expenses 

All eligible equipment must have been purchased after March 2020, but before January 2025 in order to qualify for the tax credit.  

However, two exclusion thresholds apply. For manufacturing and processing equipment, only expenses in excess of $12,500 are eligible for the tax credit. A lower minimum $5,000 expense threshold applies to computer hardware and management software packages purchases.  

Businesses claiming the C3i credit are also subject to an overall $100,000 cap on eligible expenses over five years.  

C3i’s Interaction with Other Tax Credits  

First, the new C3i fully replaces the tax credit for the integration of IT in SMBs. This older tax credit was retired because ERP software packages are covered under the C3i. Expenses incurred on or after January 1st, 2021, are no longer eligible for the integration of IT in SMBs tax credit.  

The other tax credit that the C3i partially or fully replaces, depending on a business’s situation, is the tax credit for investments relating to manufacturing and processing equipment – ITC for short. Unlike the tax credit for the integration of IT in SMBs, however, the ITC tax credit remains available to businesses in specific resource regions at rates ranging from 4% to 24%. The businesses that are still eligible for the ITC will have the choice to continue using that tax credit for the time being or switch over to the new C3i credit. Businesses that are eligible for both will need to examine their specific circumstances and identify which credit maximizes their government funding.  

 

To find the C3i tax credit on our free, AI-powered funding search engine, click here.  

 

How R&D Partners can help

If you have any questions about this or other tax credit programs, do not hesitate to contact Dominik Klein at dklein@rdpartners.com, or at 1-800-500-7733 ext. 103.

Further Reading: 

2020-1 budget PDF  

2021-2 budget PDF  

 

This article is intended for general informational purposes only and does not constitute professional accounting or tax advice.