When looking through dozens of different funding options available to businesses in Canada, our clients often ask us – what is the difference between a grant and a tax credit? How do I know which fund is right for my project? Companies that have been claiming SR&ED tax credits for years may be quite familiar with the ins and outs of tax credit filing. However, they may not realize how vastly different the world of grants can be. While we encourage our clients to apply for both types of funding, each funding has its pros and cons. Therefore, it is important for businesses to know the differences to ensure potential opportunities are not lost. When comparing the most common tax incentives and government grants, one finds the following key differences.
The timing of Applications and Payout
A tax credit claim is typically filed with or following a company’s corporate tax return, at the end of the fiscal year in which the eligible activity took place. This means most tax credits are applied once a year after the project or eligible work has been completed with its respective eligible expenditures.
Depending on how quickly a company files its tax claims, it may take between four months and two years for it receives its tax credits, with the size of the company (large vs. SME) and a possibility of a detailed CRA audit as other key factors. In some cases, depending on the location, upon completion of a multi-year project, by the time the tax credits are received, it can take up to five years from the project start date.
Conversely, grant applications must be filed and approved before the eligible activities begin and before expenses are incurred. They cannot be applied retroactively or cover any costs incurred before the grant is approved. To capture multiple small projects, it may be possible to apply for the same grant more than once per year.
Some grant programs may have fixed deadlines, which may not correspond with a company’s fiscal year or project timeline. A company must be mindful of grant program deadlines and processing times and allow itself plenty of lead time to complete and submit the application. It may also need to be prepared to delay the start of their project until application assessment is completed or risk forfeiting their chance at funding. Once approved, funding is paid out in regular installments throughout the duration of the project to offset costs as they incur. This makes grant funding preferable for cash flow purposes but requires much more advanced planning.
Approval Rates and Entitlement
A tax credit is known as ‘entitlement’ program. This means that any company that meets CRA SR&ED guidelines, completes the eligible work, and follows the application procedures correctly, must be approved for funding. As a result, the government cannot place a cap on the total amount of funding they give out in the year. They must approve all qualified applications that they receive. If the CRA denies all or part of a tax credit claim, and the client believes this ruling is incorrect or unjust, the client may dispute the decision by filing an objection, or by escalating the matter to tax court.
Grant programs, on the other hand, are more rigid and competitive. Each program has a fixed budget for funding that they may give out in each application period, and so the number of applications they can approve of is limited by what they can afford. Funds may be awarded on a first-come-first-served, or merit basis, whereby they are ranked against all other applications with high scoring projects being approved for funding. Programs often run out of funding before the year-end are closed without warning. Therefore, even if a company fits all the eligibility criteria and applies correctly, it is not guaranteed funding approval. There is no option to dispute the granting body’s ruling, though the applicant may receive feedback that it can take as advisement if it chooses to apply again in the future. So while grant programs may be more lucrative for your project, they cannot be counted on as a certainty for financial planning until you receive approval from the granting body.
Type and Amount of Compensation
A tax credit is a reduction of tax owing, and maybe ‘refundable’ or ‘non-refundable.’ If you have already paid all of your taxes, or the credit reduces your tax owing to zero, a refundable credit would issue you a cash refund for the remaining credit balance. A non-refundable credit can only be applied to tax owing, and any remaining amount is lost. Tax credits typically reimburse between 5% and 40% of eligible expenditures, on any number of eligible projects that meet program criteria.
A grant is a cash payment to a business which is counted as revenue. Grants can cover anywhere from 15% to 100% of a project’s eligible costs, usually hovering around 50%. However, grant programs will only fund one project for a company at a time, and the amount of funding is capped at a maximum dollar amount per project. Depending on the size and number of projects your organization undertakes in a year, a grant could be more lucrative for a particular project, but not so lucrative for the company overall.
You may need to combine both sources of funding to maximize your cost coverage. Grants are netted against eligible expenditures prior to calculating tax credits, in cases where both sources are combined on a particular set of project activities. It is sometimes possible to organize your projects so that a grant covers different expenditures and activities than those included in a tax credit claim, For example, for the same project, a company receives a grant for marketing activities and a tax credit for R&D activities.
Selection and Consistency
Compared to grants, tax credit programs are generally larger in size and long laster. They can be reliably available year-after-year. The CRA may release changes or updates to program guidelines every few years, but the complete elimination or creation of programs is not a common practice. All tax credits are administered by the CRA and claimed through a company’s corporate tax return.
Grant programs, in comparison, are not offered on a consistent basis with fixed dates and deadlines. They are more heavily shaped by the political and policy climate. Every year we see new programs created, old programs eliminated, and existing programs undergoing alterations for some of their criteria. Grants typically run for a maximum of 3 to 5 years of funding commitment, after which they may be renewed or eliminated based on their performance in their respective business sector. There is no single entity that administers all grants. With unique application processes and selection criteria of their own, various ministries, municipal and provincial governments, nonprofit entities, and community organizations offer a suite of funding programs to their specific local area or target groups. As a result, grants are more numerous than tax credits, cover a wider variety of activities and expenditures—marketing, hiring, training—and vary by location and industry. Whereas tax credits can become a consistent part of a company’s annual financial planning, grant opportunities must be re-examined on an annual basis, or even quarterly basis, to remain current with the changes.
Given the above dynamics, when it comes to planning their funding strategy, businesses should carefully consider both avenues. By understanding the key differences between grants and tax credits, and by identifying eligible projects consistently, funding from both sources can become a significant part of your revenue stream.
Greta Bianchi is a government grants manager at RDP Associates .
To learn more how your business can navigate the world of government grants, contact RDPGrantsTeam@rdpassociates.com (416) 368-9341