The Scientific Research and Experimental Development (SR&ED) program was created to encourage Canadian innovation by providing tax incentives to conduct business research and development in Canada.All eligible businesses can earn a non-refundable investment tax credit (ITC) at the basic rate of 15% on qualified SR&ED expenditures. The program offers additional support to Canadian-controlled private corporations (CCPCs)—with a refundable ITC at an enhanced rate of 35% on qualified SR&ED expenditures up to $3 million.
Prior to 2019
Prior to 2019, the $3 million expenditure limit on the enhanced refundable tax credit was reduced depending on a corporation’s (or associated group’s) taxable income and taxable capital. The limit was reduced if a company’s taxable income exceeded $500,000, and was completely eliminated if their taxable income exceeded $800,000. Similarly, a company’s expenditure limit was reduced if taxable capital* exceeded $10 million, and eliminated if taxable capital exceeded $50 million.
*Taxable capital is essentially the total equity and debt used by the corporation, less any investments and loans to other corporations, subject to other adjustments.
Under the 2019 Federal Budget, the taxable capital threshold will continue to apply, but the use of taxable income as a measure to reduce access to the enhanced tax credit will be removed. The result is that small to medium-sized businesses with rapid growth—or variable levels of income year over year—can still benefit from the enhanced rate.
Assuming taxable capital is less than $10 million in both examples:
A Canadian-controlled private corporation with taxable income up to $500,000 dollars would receive the 35% enhanced rate on up to $3 million in spending, qualifying for refundable tax credits up to $1,050,000.
A corporation with taxable income of $650,000 dollars would have previously received the 35% enhanced rate on only $1.5 million in spending (half of the $3 million limit, as $650,000 is half way between $800,000 and $500,000), qualifying for refundable tax credits up to $525,000.
Given the 2019 changes, the corporation in example 2 will also now qualify to earn tax credits up to $1,050,000.
Your company may be eligible for increased tax credits in connection with its annual SR&ED claim. Contact the tax team at S+C Partners to review how these changes impact you.