Canada supports business research through the SR&ED tax credit and IRAP funding for incorporated SMEs with up to 500 employees. The USA supports it through the R&D tax credit on Form 6765 and the SBIR/STTR award programs. How the four doors differ, and which one fits your business.
Applies in: across Canada
Canada and the USA both pay businesses to do research, but they pay through different doors, and the doors do not interchange. Canada's SR&ED program is a federal tax credit of 15% or 35% of qualifying research expenditures, claimed through the Canada Revenue Agency, with the 35% rate applying within a $6 million expenditure limit. Canada's IRAP program, run by the National Research Council, gives incorporated Canadian SMEs with up to 500 employees advice, connections, and in some cases project funding. The USA's research credit is claimed on IRS Form 6765 at up to 20% of qualified expenses above a base amount, with a payroll-tax election of up to $500,000 for qualified small businesses. The USA's SBIR and STTR programs award federal funding in phases, with Phase I normally capped at $150,000 and Phase II normally capped at $1,000,000. The first question is always where the work happens and where the business is based, because that decides which country's doors are open at all.
This guide compares public programs as a process matter only. It is not tax advice, and it does not tell any business whether its work qualifies. Eligibility turns on technical facts that only the business and its advisers can assess.
A tax credit and a funding award are different instruments, and confusing them is the most common error in this area. SR&ED and the US R&D credit are tax credits. The business does the work, spends the money, documents the activity, and then claims a credit that reduces tax payable, or in some cases is refunded. The money arrives after the work, through the tax return, and the claim can be reviewed.
IRAP and SBIR/STTR are funding programs. The business proposes a project, the agency assesses it, and funding is tied to the project and its costs. IRAP describes its help as customized advice, valuable connections, and in some cases funding, to build innovation capacity and bring new products or services to market faster. SBIR/STTR describes its funding as non-dilutive, meaning the government takes no equity, and as a path from proof of concept through technology development to commercialization. The funding decision comes before or during the work, not only at tax time, and the business must report against the project as it goes.
The CRA administers the SR&ED Program as a federal tax incentive that fosters technological advancement. The program is open to businesses of all sizes, in all sectors, that invest in research and development in Canada. It is not limited to high-technology companies, and the CRA's own description stresses that any business doing qualifying research and development can apply for the incentives.
The benefits, as the CRA states them, are a deduction against net income for qualifying expenditures, and an investment tax credit that can be non-refundable or refundable. The credit is at least 15% and can be 35% of qualifying expenditures, the maximum annual expenditure limit that earns the credit at the 35% rate is $6 million, and unused credits can be carried back 3 years or forward 20 years. The CRA also gives an example in which a Canadian-controlled private corporation claiming $5 million in qualified expenditures could receive a substantial refundable credit plus a non-refundable credit, but this guide does not repeat that example as a promise, because the amount any business receives depends on its own expenditure mix, its tax position, and whether the work qualifies.
What qualifies is a technical question. The work must involve research and experimental development, not routine engineering, routine product improvement, or work that simply applies known methods. The CRA expects contemporaneous records that show what was tried, what was uncertain, and what was spent. A business that cannot show the work as it happened will struggle to support the claim, however real the research felt at the time.
IRAP works with businesses that meet a clear minimum test. The business must be incorporated, for-profit, and operating in Canada, employ up to 500 people on a full-time equivalent basis, develop and commercialize innovative, technology-driven products or services, and be ready to create economic benefits in Canada such as new jobs or increased innovation capacity. The business will need to provide its CRA business number, a business plan, recent financial statements, details on ownership structure, and resumes or profiles for its management and technical team.
Two limits in IRAP's own description deserve emphasis. First, IRAP does not support sole proprietorships or partnerships, cooperatives, or unlimited or limited liability corporations, meaning LLCs and ULCs. A business in one of those forms must change form or look elsewhere; IRAP will not simply waive the entity gate. Second, meeting the minimum requirements is only the first step and does not guarantee support or funding. NRC IRAP states that point explicitly.
IRAP does not publish a single funding cap, and this guide does not invent one. Secondary sources quote percentages of salary and subcontractor costs and ranges of project amounts, but none of those figures appears on the NRC's own program page opened for this guide, and the amounts vary by project. Treat IRAP funding as set case by case with an Industrial Technology Advisor, against the project's eligible costs, and confirm the funding terms for your own project in writing before you commit spending in reliance on them.
The US research credit is claimed on Form 6765, Credit for Increasing Research Activities. The IRS describes the credit as up to 20% of qualified expenses above a base amount. The claim must be supported by contemporaneous documentation: the taxpayer must evaluate and document research activities over the period in which the research occurs, to establish the amount of qualified research expenses for each qualified research activity. Estimates are permitted only where there is a factual basis for the assumptions behind them, and unsupported claims may attract penalties.
The payroll-tax election is the part of the US credit that matters most to a young business with little or no income tax to pay. A qualified small business may elect to claim a portion of the research credit against payroll tax instead of income tax. The election amount increased from $250,000 to $500,000 for tax years beginning after December 31, 2022, under the Inflation Reduction Act of 2022. The election is made on Form 6765, and the amount is reported on Form 8974, Qualified Small Business Payroll Tax Credit for Increasing Research Activities. The credit is first used to reduce the employer share of social security tax, with any remainder reducing the employer share of Medicare tax, and any remaining credit is carried forward to the next quarter.
This guide does not state an alternative simplified credit rate or a carryforward period for the US credit, because those figures were not verified on an IRS page opened for this guide. The regular credit rate, the payroll-tax election amount, and the form numbers are the figures the IRS pages support, and they are the figures to plan around until a tax adviser confirms anything further.
SBIR and STTR run in three phases, and the phases are sequential. Phase I establishes technical merit, feasibility, and commercial potential, and determines the quality of the small business's performance before further federal support is provided. SBIR Phase I awards normally do not exceed $150,000 and have a six-month period of performance, while STTR Phase I awards normally do not exceed $150,000 total costs for one year. Phase II continues the research started in Phase I, based on Phase I results and on the scientific and technical merit and commercial potential of the Phase II project. Generally, only Phase I awardees are eligible for a Phase II award, and Phase II awards normally do not exceed $1,000,000, with a two-year period of performance for SBIR. Phase III pursues commercialization objectives, and STTR does not fund Phase III awards.
The distinction between the two programs is the partner. SBIR awards are made to a small business alone. STTR awards are made to a small business in partnership with a non-profit research institution. A business that has no research partner, and no way to form one, is an SBIR candidate, not an STTR candidate. Individual agencies set their own solicitation amounts and periods within the normal ceilings, so the solicitation for the agency and topic that fits your technology governs the actual award, not the general figures in this guide.
| SR&ED, federal investment tax credit | 15% or 35% of qualifying expenditures |
|---|---|
| SR&ED, expenditure limit for the 35% rate | $6 million |
| SR&ED, unused credits | Carry back 3 years, carry forward 20 years |
| IRAP, employee limit | Up to 500 full-time equivalent employees |
| US R&D credit, regular credit | Up to 20% of qualified expenses above a base amount |
| US R&D credit, payroll tax election | Up to $500,000 for tax years beginning after December 31, 2022 |
| SBIR and STTR Phase I, normal ceiling | Normally do not exceed $150,000 |
| SBIR and STTR Phase II, normal ceiling | Normally do not exceed $1,000,000 |
SR&ED figures are Canadian. US figures are US dollars. SBIR/STTR ceilings are the normal ceilings stated in the SBIR FAQ; individual agency solicitations set their own amounts and periods, so confirm the solicitation before applying.
SR&ED is the Scientific Research and Experimental Development Tax Incentive Program, administered by the Canada Revenue Agency. It is a federal tax incentive for businesses in Canada that invest in research and development, and it is open to businesses of all sizes and sectors, not only high-technology companies. Claimants can deduct qualifying expenditures against income and can earn an investment tax credit of 15% or 35% of qualifying expenditures, with the maximum annual expenditure limit for the 35% rate set at $6 million. Unused credits can be carried back 3 years or forward 20 years. Whether particular work qualifies depends on the technical facts, so this guide describes the process only and is not tax advice.
IRAP is the Industrial Research Assistance Program of the National Research Council of Canada. Where SR&ED is a tax credit claimed after the work, IRAP provides advice, connections, and in some cases funding to help a business build innovation capacity and bring products or services to market. To work with IRAP, a business must be incorporated, for-profit, and operating in Canada, employ up to 500 people on a full-time equivalent basis, and be developing innovative, technology-driven products or services. IRAP does not support sole proprietorships, partnerships, cooperatives, or LLCs. Meeting the minimum requirements does not guarantee support or funding, and IRAP does not publish a single fixed funding cap: amounts are set case by case with an advisor.
They address the same work from different sides, and the interaction between them is a matter for your accountant. IRAP provides funding tied to a project, while SR&ED provides a tax credit on qualifying expenditures, and government assistance generally reduces the expenditure base available for a tax credit. Do not assume the two amounts simply add together. If you receive IRAP funding and also plan a SR&ED claim, raise the overlap with your accountant before you file, so the claim reflects the assistance correctly.
The US research credit is claimed on [IRS Form 6765](https://www.irs.gov/forms-pubs/about-form-6765), Credit for Increasing Research Activities, attached to the tax return. Eligible taxpayers may claim up to 20% of qualified expenses above a base amount. Qualified small businesses may elect to use a portion of the credit as a payroll tax credit instead of against income tax: the election amount rose from $250,000 to $500,000 for tax years beginning after December 31, 2022, and the election is made on Form 6765 with the amount reported on [Form 8974](https://www.irs.gov/forms-pubs/about-form-8974). The IRS requires research activities and expenses to be evaluated and documented as the research occurs, and unsupported claims can attract penalties. This is a process summary, not tax advice.
SBIR is the Small Business Innovation Research program and STTR is the Small Business Technology Transfer program, together described as America's Seed Fund and powered by the Small Business Administration. Federal agencies award non-dilutive funding to small businesses to develop technology and chart a path toward commercialization, in three phases. Phase I establishes technical merit, feasibility, and commercial potential, and Phase I awards normally do not exceed $150,000. Phase II continues the work started in Phase I, generally only for Phase I awardees, and normally does not exceed $1,000,000. Phase III pursues commercialization and is not funded by STTR. STTR awards are made to a small business in partnership with a non-profit research institution, while SBIR awards are made to the small business alone.
The location of the work and the location of the business decide the answer, and the two countries' programs do not substitute for each other. SR&ED and IRAP support Canadian businesses and work in Canada, while the US R&D credit and SBIR/STTR support US businesses and work in the United States. A business operating in both countries needs to separate the work by location and check each country's program for the work done there. Cross-border research support is an area where professional tax and grant advice pays for itself, because the eligibility, documentation, and filing rules do not carry over.